Reform and savings plans of the De Wever I government will be insufficient to restore order to Belgium’s budget quickly, National Bank governor Pierre Wunsch says with regard to the coalition agreement reached between the five Arizona parties. Speaking while presenting the annual report of Belgium’s central bank, central banker Pierre Wunsch expressed fears that a new economic shock could put Belgium back in the crosshairs of the financial markets.
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National Bank warning: ‘De Wever government's plans insufficient, Belgium could end up in market’s crosshairs’
Colin Clapson
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The budget deficit and public debt increased last year, the National Bank reports in its annual report. The deficit rose to 4.6 per cent of GDP (gross domestic product or national output). That’s 0.4 percentage points worse than in 2023. Government expenditure was 28 billion euros higher than revenue. However, the deficit was no longer affected by one-off costs linked to the energy crisis or other crises. This means spending continued to show a structural upward trend, partly due to the impact of the ageing of the population on pensions and healthcare.
‘Lots of payback effects’
The new federal government De Wever I has been in office since the beginning of this month. Its ambitious plans on pensions and the labour market, the National Bank believes, will have a positive impact on the Belgian economy. ‘On that front, the De Wever government is courageous,’ says Governor Pierre Wunsch. ‘Some structural challenges facing our country, like the tightness of the labour market and the cost of ageing, are being tackled quite ambitiously. We also notice that people are not always satisfied.’
The deficit will fall, but whether it will quickly fall below the 2024 level is not clear. And how fast the deficit will return to 3 per cent again is also not clear, the National Bank says. ‘We fear it will not be enough, especially compared to what Europe is asking, says Mr Wunsch. ‘The government is counting on a lot of payback effects and at the same time there are not a lot of savings. The 2 per cent growth norm for healthcare, for example, will be maintained.’
Financial markets
The National Bank fears poor public finances could place Belgium back in the crosshairs of the financial markets, if the country faces a new economic shock.
‘I am not sure that the new government's plans are enough to reassure credit rating agencies,’ Mr Wunsch noted. Credit rating agencies closely monitor the performance of governments and major companies and rate them. The rating indicates how reliable the issuer of a debt is.
‘Credit rating agencies used always to focus on Portugal, Ireland, Greece, Italy and Spain,’ says Mr Wunsch. Now some of these countries are doing much better, so the attention of credit rating agencies and financial markets is shifting more and more to France and Belgium. They are now doing poorly. The time when we could hide behind other countries is over.’
At 2 of the 3 major credit rating agencies, Fitch and Moody's, the outlook for Belgium is currently negative. This means, they may lower the credit rating at their next review. If the financial markets then set their sights on Belgium, Belgian state bond yields may need to rise sharply. And it will become much more expensive for Belgium to finance its large public debt.