VZCZCXYZ0007
PP RUEHWEB

DE RUEHBS #0103 0181548
ZNR UUUUU ZZH
P 181548Z JAN 08
FM AMEMBASSY BRUSSELS
TO RUEHC/SECSTATE WASHDC PRIORITY 6913
INFO RUEHRL/AMEMBASSY BERLIN 1618
RUEHLO/AMEMBASSY LONDON 1692
RUEHLE/AMEMBASSY LUXEMBOURG 8390
RUEHFR/AMEMBASSY PARIS 2058
RUEHTC/AMEMBASSY THE HAGUE 8589
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BRUSSELS 000103 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON BE
SUBJECT: BELGIUM REGISTERS FIRST BUDGET DEFICIT IN EIGHT 
YEARS; 2008 MAY BE WORSE 
 
 
¶1.  (U) Belgium registered its first budget deficit since 
1999 for the year 2007.  The deficit came in at a level of 
0.3% of GDP, or 260 million euros (USD 390 million).  GDP for 
year was 80 billion euros (USD 120 billion), up 2.7 %. 
Economic growth is expected to slow to 2.1 % in 2008 and the 
budget deficit is expected to worsen as the new government 
implements its spending priorities. 
 
¶2.  (U) Vice Prime Minister and Budget Minister Yves Leterme 
stated at the beginning of January that reducing this deficit 
during his current term as minister (which runs until March 
23 pending installation of a permanent government) is his 
number one priority. 
 
¶3. (U) Analysts attribute the first budget deficit in eight 
years to several factors.  High oil prices, uncertainty over 
the exposure of Belgian banks and investors to the subprime 
crisis, and the strong euro helped depress expected economic 
growth.  Belgium's tax authorities collected 900 million 
euros (USD 1350) in tax revenues less than in 2006.  In 
addition, the lack of a government for much of the year 
prevented the final sale of a number of government assets 
which would have helped increase revenues. Ironically, other 
analysts believe the lack of a central government helped 
reduce the deficit because the provisional government was 
working under the equivalent of a continuing resolution. 
 
¶4.  (U) One well-informed academic observer of the 
government's finances admitted noted that the small size of 
the deficit was more worrisome than at first analysis.  This 
was because the government had planned to continue with a 
series of budget surpluses in order to prepare for the aging 
of the Belgium population and strengthen the social safety 
net.  He also attributed much of the deficit to the notional 
tax facility put in place by the Belgian government in 2007. 
Under this scheme, an investor is allowed a tax deduction for 
risk capital equal to a certain percentage of their net 
equity (capital and reserves) located in Belgium. (NOTE: The 
notional tax deduction has helped Belgium attract subtract 
inflows of foreign investment in 2007.  END NOTE). 
 
¶5.  (U) Belgium's three regions and its communities continued 
to register surpluses in 2007, especially in Flanders.  The 
deficit, therefore, was due solely to the federal government. 
 
 
¶6.  (SBU) COMMENT:  For the moment it does not appear that 
Belgium's on-going government formation crisis affected 
economic growth or foreign direct investment in 2007. 
Indeed, the notional interest deduction appears to be more 
than sufficient to continue to attract foreign investment to 
Belgium.  However, the notional interest deduction certainly 
hit the government's tax revenues. 
 
¶7.  (SBU)  COMMENT (Cont.): As for reducing the budget 
deficit in 2008, the government will be hard-pressed. 
Economic growth is expected to continue to slow and no one is 
talking about ending the notional interest deduction. 
Furthermore, many of the easy moves have already been made 
and there are no more opportunities to take over pension 
funds or sell government buildings, moves which papered over 
cracks in the fiscal picture over the previous eight years. 
The government, or its successor, will continue to confront 
critical decisions on the roles of the federal government and 
the regions in Belgium as well as looming regional elections 
in 2009.   Making the difficult decisions needed to reduce 
the deficit, let alone register a surplus, will be a supreme 
challenge. 
.