VZCZCXRO9896
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHBS #1892/01 1591331
ZNR UUUUU ZZH
R 081331Z JUN 07
FM AMEMBASSY BRUSSELS
TO RUEHC/SECSTATE WASHDC 5608
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHRB/AMEMBASSY RABAT 2353

UNCLAS SECTION 01 OF 03 BRUSSELS 001892 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EB/IFD, EUR/ERA AND EUR/UBI 
Treasury for OASIA - Atukorala 
USDOC FOR 4212/OECA/JLEVINE 
RABAT for W. Bush 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV BE
SUBJECT:  Belgian Regions and Federal Taxes - Paying 
For Political Devolution In Belgium 
 
Ref: (A) 06 Brussels 3196 (B) Brussels 1201 
 
 (C) Brussels 1882 
 
¶1. (SBU) Summary.  The "good news" story of Belgian 
federal fiscal management is less lustrous than it 
appears.  Ongoing devolution of responsibilities from 
the federal to the regional level since 1993 has 
created growing pressure by the regions for more 
revenue to perform their tasks, but taxing remains 
dominantly a federal purview.  Transfer of 
responsibility for any major component of Belgium's 
social safety net as a result of post-election 
federal-regional negotiations would necessitate a 
major revision of tax apportionment in Belgium. End 
Summary. 
 
Less Healthy Than It Appears? 
----------------------------- 
¶2. (U) As the Belgian federal election on June 10 
nears, review of eight years of Prime Minister Guy 
Verhofstadt?s budgets reveals a tradition of balanced 
budgets that mask long-term indebtedness, delayed 
repayments, and eroding financial balances.  Much of 
this has been driven by fiscal pressure from the three 
regions that comprise Belgium:  Flanders, Wallonia and 
Brussels.  Since the 1988 Constitutional reforms that 
created the Belgian Federal state, the regions have 
gained authority through the devolution of 
considerable responsibilities from the federal 
government to regions, language communities, or lower. 
The revenues to fund these growing responsibilities 
has come largely from transfers from federal tax 
revenues.  How to fund the budgets necessary to 
sustain any further transfer of responsibilities to 
the regions is a crucial question.  The existing tax 
distribution structure may come under increasing 
pressure if devolution is deepened in the post- 
election negotiations, as many expect. 
 
¶3. (SBU) Since 1999, Verhofstadt has made fiscal 
discipline his hallmark, passing a string of balanced, 
or even slightly surplus, budgets.  Facing towering 
public debt of 113 percent of GDP when he entered 
office in 1999, Verhofstadt brought it down to 87 
percent of GDP this year ? an impressive record hailed 
by both the OECD and the IMF.  In eight years 
Verhofstadt worked to cut taxes, keep interest rates 
low, and promote investment; he achieved Belgian GDP 
growth exceeding the EU average in most years.  Aware 
of the aging population and the problem it will pose 
to Belgium's generous welfare state, Verhofstadt also 
structured a surplus to feed a ?Silver Fund? that by 
the end of 2007 is supposed to reach a value of 15 
billion euros.  The low interest rates, courtesy of 
the European Central Bank, which lowered Belgium's 
interest payments, yielded a small primary surplus 
that Verhofstadt could spend on police reforms and 
subsidies for Belgian post, railways and Sabena 
airlines. 
 
¶4. (U) The flip side of this shiny coin is a more 
tarnished reality.  Some years the budget balance was 
achieved through a variety of questionable one-off 
actions:  a fiscal amnesty to repatriate billions in 
capital that had fled the high-tax country; the sale 
and lease-back of hundreds of government properties at 
year-end to create positive cashflow; the absorption 
of pension funds from quasi-public entities to cover 
twelfth hour revenue shortfalls; and pushing payments 
due by the government into the next fiscal year. 
According to Belgium?s Cour des Comptes (GAO 
equivalent), these actions added 800 million Euros to 
the 2007 budget.  Many of these actions imply long- 
term recurrent expenses to the treasury, such as rents 
and pension obligations in outyears.  Most troubling 
to financial analysts, Belgium?s primary balance, the 
surplus of revenues over expenses before interest 
payments - a litmus test of government economic 
health, has declined from 7 percent in 2000 to 4.1 
percent in 2006.  This is reportedly the sharpest 
decline within the Eurozone, during the period when 
most other EU countries realized stable or improving 
primary surpluses.  The government also demanded 
 
BRUSSELS 00001892  002 OF 003 
 
 
"contributions" from the private sector to finance new 
projects or to cover budget shortfalls, the 
pharmaceutical and energy sectors are cases in point. 
 
¶5. (SBU) The watchdog of federal finances, the High 
Finance Council, is slated to present an assessment of 
federal financial management over recent years after 
the June 10 election.  Delayed release is seen as 
political favoritism by opponents of the present 
government.  The High Finance Council is headed by the 
Deputy Governor of the Belgian central bank (BNB), Luc 
Coene(a former Chief of staff of Verhofstadt), and 
consists of previous ministers and academics of party 
affiliations sympathetic to the liberals (VLD and MR). 
 
Regional Responsibilities and Budgets Growing 
--------------------------------------------- 
¶6. (U) Federal government transfers to the regional 
governments are an important reason for the decline in 
the primary balance, the government claims.  Transfers 
to the regions and linguistic communities regularly 
exceed budgeted amounts.  These sub-national entities 
are anxious to take on more responsibilities, arguing 
for the location of public policy decision-making 
closer to the citizens being served.  This shift of 
power may well have kept Belgium a single federated 
country and kept social peace since the wave of 
Flemish nationalism in the 1980s.  Regions are now 
responsible for agricultural policy, environmental 
regulation and oversight, foreign trade promotion, 
export control and licensing, and economic 
development.  The linguistic communities control of 
education, cultural affairs, and family policy.  Post- 
election federal-regional negotiations will consider 
granting the regions authority over employment 
insurance, health care and labor policy, which could 
have deep implications for Belgian federalism. 
 
¶7. (U) In contrast to the devolution trend, however, 
taxing authority is one competence that has not been 
deeply regionalized.  The bulk of tax revenues are 
still paid to the federal government.  Regions and 
communities are permitted specific taxes (inheritance, 
car registration, gambling, media/entertainment) that 
add up to only 12 percent of total Belgian tax 
revenues.  A tax sharing agreement which dates from 
the early 1980s apportions to the regions the rest of 
their operational income.  While constitutional 
reforms in 1993 enhanced the regional share, the 
regions complain they need more resources.  From 2000 
to 2006, Belgian regional and community spending has 
increased from 1.4 to 5.6 percent annually, averaging 
3.5 percent growth each year.  In 2005 this totaled 
34.5 billion Euros, equal to 32 percent of the total 
Federal budget's disbursements. 
 
¶8. (U) The rising demand for regional budgetary 
resources has been met in part by the regions 
themselves.  Strong economic growth in Flanders has 
yielded higher receipts for the region in its narrow 
taxing authority.  As a result, Flemish authorities 
have been able to keep balanced or slightly positive 
budgets, and paid down their regional public debt from 
2.5 billion Euro in 2000 to less than 480 million 
Euros by 2006, and they expect to nearly retire it by 
¶2008.  Brussels Capital region has seen its public 
debt shrink by two-thirds from 2000-2006.  In the less 
economically dynamic Walloon region, however, deficit 
financing has had to cover increasing public 
disbursements, and Walloon public debt rose from 2.1 
to 3.6 billion Euros over the same period. 
 
Take the Job Without the Money? 
------------------------------- 
¶9. (SBU) The differences between the regions in terms 
of economic health, industrial composition, and fiscal 
management have made budget issues a lightning rod for 
regional politicians this election.  A Flemish study 
of 2006 claims Flanders subsidizes Wallonia to the 
tune of 6.5 percent of Flemish regional GDP annually, 
over 10 billion Euros.  This supports sentiment in the 
north of Belgium to ask for further devolution of 
responsibility such as healthcare, childcare 
 
BRUSSELS 00001892  003 OF 003 
 
 
allowances, pensions and unemployment benefits to the 
regions ? and the share of federal budget to pay for 
them.  Walloon politicians, while denying that a 
Flemish subsidy exists, are reluctant to risk losing 
the deep federal pockets that cover the high 
unemployment and social service costs of their region. 
The federal government spent almost 210 billion Euros 
on social security and healthcare in 2005, one-fifth 
of the federal budget.  If transfer of any major 
component of Belgium's social safety net is attempted 
during the post-election federal-regional 
negotiations, it would necessitate a major revision of 
tax apportionment in Belgium. 
 
Comment 
------- 
¶10. (SBU) Revising the federal-regional tax structure 
at the same time as governance competencies are 
redistributed would be logical, but may be less 
popular in Wallonia than in Flanders, despite demands 
by all regional leaders for more revenue.  Comfortable 
with their regional economic strength and fiscal 
management, Flemish politicians would welcome the 
independent authority and funding to execute it.  In 
Wallonia, still buried in public employment scandals 
(Ref C), 18 percent unemployment, and weak budget 
discipline, party leaders may be loathe to take on 
major responsibilities ? and accountability -- without 
the fallback of federal coffers.  Whether the federal 
fiscal problems can fully be blamed on regional 
demands is questionable, since allocation of tax 
revenues to the regions was part and parcel of the 
constitutional reforms of 1988, 1992 and 1993.  What 
is beyond question is that raligning tax revenues 
with the distribution of competencies in Belgium is a 
messy job awaiting the new government. 
FOX