Belgium's fiscal watchdog has claimed that rising interest rates on government debt will pose "a clear challenge over the coming years" to the sustainability of the country's public finances.
During a federal Finance and Budget Committee on Tuesday, Rudi Moens, an advisor to the Court of Auditors (la Cour des comptes), warned that growing treasury bond yields could even trigger a "snowball effect", whereby rising interest rates cause the government to increase its borrowing which in turn leads to even higher rates.
"After years of decline, interest rates on government debt are rising sharply, from €6.9 billion in 2022 to €8.5 billion in 2023 and €10.1 billion in 2024," Moens said. "According to current projections, they could increase up to €15.2 billion in 2028 as a consequence of both the increase in [European Central Bank] interest rates and large budget deficits."
On the possibility of a snowball effect, Moens added that "the risk will increase" unless the government drastically reduces its budget deficit over the next few years.
Budget (and bond) blues
Moens' claims are not without a ring of plausibility. Belgium's total public debt as a proportion of annual GDP has swelled from 97.60% in 2019 to 106% today. The European Commission also expects Belgium's debt to rise to 106.4% next year before reaching 107.3% in 2025.
Belgium's soaring debt levels are largely a consequence of its surging fiscal deficit, which has risen from 2% of annual GDP in 2019 to 4.1% this year. Worryingly, and despite the significant cuts announced in October's federal budget, the European Commission predicts that Belgium's deficit will rise to 4.9% in 2024 before peaking at 5.0% in 2025.
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Investors' concerns about the sustainability of Belgium's public finances are reflected in government bond yields. Rates on Belgium's ten-year treasury bonds were negative as recently as December 2021 but are now above 3%. Similarly, yields on three-year bonds were negative in March last year but are currently just under 3%.
Adding to the pressure on bond yields are repeated rate hikes over the past year by the European Central Bank, which have brought the bank's benchmark deposit facility rate to a record high of 4.0%. (Government bond yields tend to increase when the central bank increases rates.)
In a recent speech, Prime Minister Alexander De Croo vigorously defended his "Vivaldi" coalition government's high levels of public spending since coming to power in October 2020.
"Protecting our citizens and our companies in times of crisis has cost us more than €20 billion," De Croo said, referring to the Covid-19 pandemic and subsequent energy crisis precipitated by Russia's full-scale invasion of Ukraine last year. "We have not left anyone behind."
