National Bank warns of sharply rising budget deficit and politicians failing to take action

In recent months, one ominous report after another about Belgium's budget deficit and poor prospects in coming years has appeared. In its annual report, the NBB puts Belgium’s public finances back in the spotlight a few months before the elections, warning that the budget deficit worsened sharply in 2023 and will continue to grow in the coming years.

Just to keep the budget deficit from growing, the next Belgian and regional governments together will have to save 2.5 billion euros annually. Further important savings will be needed to comply with European rules. In all some 27 billion euros will need to be saved spread over the next few years.

"Our deficit is already one of the largest in Europe and it is not going in the right direction. We cannot get it under control because politicians do not dare to make choices," Pierre Wunsch, the governor of the National Bank says.

Deficit grows despite end of energy and pandemic support measures

The current deficit is no longer the result of support measures during the corona and energy crises and that worries National Bank economists.

Because these measures were largely no longer in place in 2023, the budget deficit should have just decreased, but the opposite is the case.

The spending that is worsening the deficit is structural and will also continue to increase in coming years. One rising cost is the cost of ageing. The rise in the share of elderly people in the population at large is leading to greater spending on health care and pensions.

The increase in the deficit in 2023 is almost entirely the result of federal government spending, as it bears the bulk of the costs of ageing. However, the bank also attributes the fiscal situation to what it calls a "failure of fiscal coordination".

"It is high time for clear and binding agreements on the distribution of budgetary efforts between the different levels of government in Belgium," the annual report reads.

After the years of crisis, it is important to restore order to the budget over the next few years, Wunsch believes. "We now need to build up reserves. If this is not done, the government risks not having the resources to absorb the social and economic cost of the next economic shock."

During the corona and energy crises, the government invested billions to maintain the purchasing power of everyday Belgians and to keep companies afloat.

Bad news: interest rates have also risen

On top of growing structural expenditure comes rising interest charges. That’s because in order to pay for the budget deficit, the government takes on debt. Naturally interest needs to be paid on these debts.

For the first time in years, interest rates have been rising once again.  The government cannot do anything about the higher costs associated to this rise. The extra cost does, however, increase the budget deficit.

Moreover, the NBB issues a warning about what it calls "dangerous debt dynamics". Not only is the interest rate on debt rising, but the size of that debt too is increasing. In 2023, public debt stood at 105.2 per cent of national output, the sum of services and goods produced in the Belgian economy. With unchanged policies, it will rise to 126 per cent of GDP by 2033.

"The reasoning about the budget should be the same as about climate," Wunsch concludes. "There, too, we talk about measures we need to take now, to ensure that we do not saddle future generations with the consequences and costs."