VZCZCXRO8957
OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHBS #3715/01 3071438
ZNR UUUUU ZZH
O 031438Z NOV 06
FM AMEMBASSY BRUSSELS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3512
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 BRUSSELS 003715 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD, EUR/ERA AND EUR/UBI 
TREASURY FOR OASIA - ATUKORALA 
USDOC FOR 3133/USFCS/OIO/EUR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV BE
SUBJECT: BELGIUM,S 2007 FEDERAL BUDGET: OLD TRICKS HARDER 
TO SELL 
 
REF: A. BRUSSELS 3196 
 
     ¶B. BRUSSELS 1201 
     ¶C. BRUSSELS 3256 
 
--------------------- 
SUMMARY AND COMMENT 
--------------------- 
 
¶1.  (SBU) Belgium,s Federal Budget for FY2007 is a mosaic of 
political compromises, with social benefits for the political 
left and law and order spending and fiscal conservatism for 
the political right, funded with a mix of new revenue 
enhancements.  To ensure balanced books, the budget projects 
2.2 percent GDP growth for 2007 and strong foreign 
investment.  Plans to reduce public debt to 83 percent of GDP 
are impressive, given the 113.6 percent debt level when 
Verhofstadt took office in 1999. 
 
¶2.  (SBU) In his presentation to parliament, Verhofstadt 
painted a glowing portrait of a nation with strong, 
non-inflationary growth and a balanced budget for the eighth 
year running.  Nonetheless, critics found it full of holes 
and unrealistic.  Several of the proposed taxes may not yield 
the revenues anticipated.  The Federal coalition,s reliance 
on one-time fiscal gap fillers has come under increasing 
scrutiny, with 2006-2007 measures challenged under Belgian 
law by the opposition and 2005 by Eurostat, the EU,s 
statistical office. 
 
¶3.  (SBU) The relatively good news for U.S. companies is that 
the current budget pays more than lip service to investors, 
lightening the tax burden somewhat and avoiding most 
last-ditch additional gouges to corporate budgets.  It is 
not, however, clear where the impact of the packaging tax 
would fall. 
 
------------------------ 
Painting a Good Picture 
------------------------ 
 
¶4. (U) Guy Verhofstadt,s 2007 Budget was the centerpiece of 
his State of the Nation address to Parliament October 17. 
Despite a string of financial setbacks that hit the federal 
government in the months and weeks preceding it (refs A and 
B), the Prime Minister claimed Belgium,s FY2007 budget would 
be balanced, offer new benefits to taxpayers, strengthen 
public security and welfare, and stimulate job creation.  He 
painted a bright picture of Belgium,s economic situation: 
over 153,000 jobs created since his second mandate began in 
May 2003 (according to Eurostat), a 0.3 percent budget 
surplus for 2007 due to strong GDP growth, and public debt 
reduced to 83.7 percent of the country,s GDP by the end of 
¶2007.  Verhofstadt admitted a continued fiscal burden in 
Belgium of nearly 45 percent of GDP, and its negative effect 
on competitiveness. 
 
¶5. (U) In keeping with his tradition, Verhofstadt offered new 
benefits for constituents that satisfied the Socialist 
component of his coalition government.  These included: 
 
-- More protection for low-income tenants against rent 
increases; 
-- Higher health insurance reimbursements for the poor; 
-- Higher cost of living allowances (raised by 2.3 percent 
compared to 1 percent in 2005 and 1.8 percent in 2006); and 
-- Lower taxes for social housing beneficiaries. 
 
¶6. (U) Mindful of his own Liberal party and its economic and 
political conservatism, Verhofstadt took action to favor 
their interests as well.  Law and order disbursements 
addressed the recent spate of early release scandals (Ref C) 
that severely tested the coalition government in September. 
For the economic liberal, law and order side, the gifts were: 
 
-- A bigger budget for the Ministry of Justice (up 4.1 
percent); 
-- 139 new prison wards to ease overcrowding; 
-- 172 new judicial assistants and social workers to help 
monitor detainees under electronic surveillance; 
-- 100 new employees for State Security (Surete) to monitor 
extremism and Muslim fundamentalism; 
-- Lower taxes on business for overtime, nighttime and 
teamwork; 
-- More consistent (perhaps lower) corporate tax policy for 
firms benefiting from government assistance (R&D, export 
subsidies, investor aid). 
 
BRUSSELS 00003715  002 OF 003 
 
 
 
¶7. (U) To cover these new commitments and still keep the 
budget balanced, a litany of revenue enhancement measures 
were announced: 
 
-- An undisclosed number of pension funds would be accessed 
and their obligations absorbed by the government; 
-- taxes on cigarettes and cigars would be raised:  tobacco 
by 0.4 Euro/pack, cigarettes by 0.2 Euro/pack, and cigars by 
5 percent, to yield the government 330 million Euro; 
-- over 40 govenment properties would be bundled into a 
sale-leaseback scheme (this action was not completed in time 
for the 2006 tax year); 
-- Companies that fire employees would have to pay the social 
contributions on refunded vacation bonus money rather than 
the government paying; 
-- Taxes on investments made from corporate reserves will be 
marginally lowered, with the goal of stimulating companies to 
use idle funds and create more jobs and output.  (Corporate 
reserves are untaxed until either declared as income or 
invested; the lower tax aims to push companies to invest them 
rather than keep them escrowed.) The budget projects 350 
million euros in revenue from this measure. 
 
¶8. (U) A new tax on certain types of packaging -- drew 
particular attention.  Reportedly, the Prime Minister was 
quite impressed by his meeting with former U.S. Vice 
President Al Gore, who was in Brussels promoting his feature 
movie on climate change, An Inconvenient Truth, when the 
budget was being finalized.  As sketched out by the PM (and 
open for discussions with the private sector, he said), the 
new tax would impose a fee on packaging (0.35 euros per kilo 
of packaging weight) multiplied by a 
coefficient according to environmental friendliness of the 
product (zero for paper, 1 for glass, 3 for steel, 7 for 
plastic, 11 for polystyrene, and 18 for aluminum). 
Verhofstadt said the tax would favor 
low-CO2-emitting packaging industries, and further reduce 
household waste.  According to the GOB, the tax would 
contribute 320 million euros to government coffers in 2007, 
despite the fact it would only take effect halfway through 
the year. 
 
------------------------------ 
Opponents Sharpen Their Knives 
------------------------------ 
 
¶9. (U) Opposition to the budget proposal was immediate and 
strong.  Opposition leader Peter De Crem (CD&V) criticized it 
as quote self-satisfied, non-credible and misleading end 
quote.  He said it lacked real, non-subsidized job creation, 
and the tax on packaging (nicknamed the Al Gore tax by the 
far-right Vlaams Belang) was a shameless grab for cash. 
Consensus among the financial analysts was that the budget 
was too hastily cobbled together and relies on too many 
one-time revenue enhancements.  An economist from the PM,s 
own party questioned the strategy of what he called hiding 
the deficit, noting that taking over pension funds and 
selling government property would help temporarily, but cost 
more later. 
 
¶10. (U) Critics of the container tax find both the timing 
(after the critical May national elections) and the amount 
suspect.  Belgium,s well-ordered recycling system claims to 
recycle over 90 percent of household waste already.  The 
Belgian Federation of Food Industries (FEVIA) claims the tax 
will have no positive ecological impact, and may raise some 
food prices 10 to 15 percent.  Environmental groups say the 
tax fails to address the chief causes of greenhouse gas 
emissions:  transportation and home heating. 
¶11. (SBU) The Prime Minister defended the FY2007 budget as 
relying less on one-time measures (0.4 percent of total 
revenues) than last year,s budget (0.55 percent of 
revenues).  He also claims the container tax will penalize 
neither the producer nor the consumer, because the producer 
can change the choice of packaging to focus on paper-based 
containers (at zero tax rate) or alternative products chosen 
by the buyer.  (Comment:  Post finds this argument facile, in 
that paper alternative or other substitutes may not be 
universally available, timely, or cheap.) 
 
------- 
Comment 
------- 
 
¶12. (SBU) This is the vaguest of all budgets Verhofstadt has 
 
BRUSSELS 00003715  003 OF 003 
 
 
submitted since 1999.  There are so many unknowns, ans so few 
figures, that previous budgets look well-documented and 
clearly laid out by comparison.  There is a widespread 
concern among analysts that the GOB is kicking its financial 
problems down the road, and that the next coalition 
government will be forced to deal with some unpleasant 
realities in terms of emptied private pension funds or bills 
for the expensive sale and lease back of government 
buildings.  The chief of staff of Flemish minister-president 
Leterme confided to Econoff Flanders, concern that the 
Verhofstadt government is leading the country towards 
financial 
bankruptcy.  Indeed, some measures announced to balance 
previous budgets, such as combating fiscal fraud, were not 
fully implemented, did not reap the expected revenues, or 
were subsequently disallowed under European rules.  Further, 
Eurostat recently disallowed improper booking of 7 billion 
euros of railway debt by the GOB, which turned the 2005 0.1 
percent of GDP surplus into a 2.1 percent deficit. 
 
¶13.  (SBU) Nonetheless, for the 2007 budget, some of the 
traditional ritual victims appear to have been spared. 
Banks, energy majors and pharma companies largely escaped the 
strong arm for additional revenues they habitually suffer, 
perhaps in recognition of their increasingly critical 
contribution to the economy and in hopes of salvaging 
Belgium,s attraction to foreign investment. 
 
IMBRIE 
.