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Viewing cable 08BRUSSELS430, LETERME GOVERNMENT AGREEMENT: THE ECONOMICS

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Reference ID Created Released Classification Origin
08BRUSSELS430 2008-03-20 16:05 2011-08-30 01:44 UNCLASSIFIED Embassy Brussels
VZCZCXYZ0414
RR RUEHWEB

DE RUEHBS #0430/01 0801605
ZNR UUUUU (CCY ADX0071E772 MSI8320)
R 201605Z MAR 08
FM AMEMBASSY BRUSSELS
TO RUEHC/SECSTATE WASHDC 7174
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHZLEUROPEAN POLITICAL COLLECTIVE
UNCLAS BRUSSELS 000430 
 
SIPDIS 
 
SIPDIS 
 
STAE FOR EB/OMA, EUR/ERA, EUR/UBI 
TREASURY FOR OSIA/OIC - ATUKORALA 
 
C O R R E C T E D  C O PY (SIPDIS) 
 
E.O. 12958: N/A 
TAGS: ECON EFI PGOV BE
SUBJECT: LETERME GOVERNMENT AGREEMENT: THE ECONOMICS 
 
Summary 
------- 
 
1. The Leterme government agreement concluded this eek contains 
many good intentions (e.g. a 2009 budget surplus), but very few 
specific policies on how to achieve these goals.  On several issues, 
the coalition partners agree to disagree and kick the issue down the 
road by ordering yet another study (e.g. on the nuclear moratorium). 
 It appears as if after almost nine months of non-stop negotiations, 
the federal government was unable to address pressing economic 
realities such as energy supplies, rising commodity prices, the 
impact of the financial crisis and economic migration.  End 
summary. 
 
Budgetary vagueness 
------------------- 
2. On the budget front, the new government estimates a 1.9 real 
economic growth for this year, but with only on a 1.37 percent 
increase in nominal government spending.  The aim of the Leterme 
government is to achieve a slight surplus in 2009, reaching a 
surplus of 1 percent of GDP by the theoretical end of the government 
in 2011.  However, nowhere does the GOB say how it intends to reach 
this goal, whether through tax increases or budget cuts, or a 
mixture of both. 
 
Increased social security allowances 
------------------------------------ 
3. Several social security allowances (such as unemployment benefits 
and pensions) will be increased, most notably by indexing a number 
of benefits in the social sector (but starting only in 2009) and 
allowing for a thirteenth month in the child benefit program.  These 
family allowances will continue to be tax free and not means-tested. 
 The new coalition partners decided at the last minute to cancel a 
further reduction of the number of current tax scales from five to 
three, a move that would have favoured the low-and middle incomes. 
Allegedly, the cost of this operation (13 billion euros annually) 
could not be recuperated elsewhere (e.g. by cutting the number of 
civil servants, as the liberal parties had suggested.)  Instead, the 
text refers to an agreement to continue reducing taxes, without any 
further specifics. 
 
More jobs for a partly saturated labor market 
--------------------------------------------- 
4. On the labor market front, the Leterme government -like its 
Verhofstadt predecessor - aims to create 200,000 new jobs.  There 
are no specifics on what kind of jobs will be created and in which 
sectors, nor how this relates to the current job shortages already 
noticeable in Flanders.  A regionalisation of the labor market 
policy, a demand of the Flemish political parties, might have 
avoided such apparent contradictions.  Unemployment benefit 
entitlements will continue indefinitely, but decline with the length 
of the unemployment period, a significant change. 
 
Agreeing to disagree 
-------------------- 
5. The most important aspect of the Leterme government agreement are 
the goals and objectives on which no agreement could be found: 
 
- Nuclear moratorium: whereas Verhofstadt III had agreed to keep 
some nuclear power plants open beyond 2015, the new coalition has 
ordered yet another academic feasibility study to buy some extra 
time. 
- Further possible private investment into the Belgian Postal group 
and telecom operator Belgacom: blocked by the francophone socialists 
who fear massive job losses after further privatizations. 
- Notional interest: this generous fiscal policy aimed at attracting 
FDI will remain in place, but a task force will look into possible 
abuses of the measure by Belgian public sector entities 
- The liberal parties had asked to abolish the capital gains tax on 
bonds, but were again blocked in this by the francophone socialists 
- Pensions: instead of increasing the legal pension age from 65 to 
68 (as is the case in Germany), the Leterme government intends to 
discourage early retirements by other unspecified means. 
 
Policy contradictions 
--------------------- 
6. Econoff contacted professor Paul De Grauwe(Catholic University of 
Leuven), a former Flemish liberal senator, who was very critical of 
the Leterme government agreement.  De Grauwe said it is unclear to 
him how the new government will mesh increased social benefits with 
further tax cuts, while simultaneously achieving a budget surplus. 
He also said he feared that on the budget front, the plans to 
generate a surplus and further reduce the federal debt were too 
vague and unambitious and clearly insufficient to cope with the 
future 'graying of Belgium'.  De Grauwe also took issue with the 
wording of the text on FDI, where it said that more FDI should be 
'lured' to Belgium, as opposed to the more neutral 'attracted'. 
 
Comment: 
-------- 
7. The Leterme government agreement makes clear that there are still 
major disagreements among the coalition partners.  This is hardly 
surprising, considering the diverse ideological priorities of these 
five different political parties.  Real tough decisions are likely 
to be postponed until after the regional elections of 2009.  From 
that perspective, the increase of social spending by then is clearly 
aimed at the 2009 election.  The lack of specifics on how key policy 
objectives (budget, taxes, employment) will be achieved seems to be 
a sure recipe for continuous federal infighting.  At the same time, 
the Leterme government seems to be ignoring the impact of pressing 
economic realities from the outside world such as concerns about 
energy and electricity supplies, raising commodity prices, the 
impact of financial crises and the effects of economic migration. 
When it returns from a two week Easter holiday, the GOB will quickly 
need to get to work. End comment. 
Fox 
/ 
 
/ 
/