Annual report of the National Bank: growth in economy, growth in budget deficit

The Belgian economy grew significantly faster than its neighbours last years. However, the situation of Belgian public finances is less favourable, according to the National Bank's annual report.

The economy grew by 1.5 per cent last year, compared with 0.4 per cent for the weighted average of the Netherlands, France and Germany. Robust economic growth was particularly evident in the services sector, where activity increased by 2.5 per cent. However, there was a contraction of 3.1 per cent in industry. Activity in this sector is now even 6 per cent lower than in 2019.

Unusual situation

"This is an unusual situation," said Pierre Wunsch, governor of the National Bank, at the presentation of the annual report. "We have never seen the Belgian economy grow so much while Germany is in recession."

Another notable aspect is the differences between sectors. Wunsch explains the industrial downturn by pointing to energy prices in Europe, which are still much higher than in theUS, creating a competitive disadvantage. "Gas has become cheaper, but it is still six times more expensive in Europe than in the US," he said.

In addition, the automatic wage indexation has a negative impact on Belgian companies; in the short term, their competitiveness has deteriorated compared to their main trading partners.

"We now see that in Europe, the more competitive countries are becoming somewhat less competitive, and vice versa"

The National Bank expects the gap with neighbouring countries to close in the coming years. "We now see that in Europe, the more competitive countries are becoming somewhat less competitive, and vice versa," Wunsch said.

Public finances

The situation is less favourable for Belgian public finances, however. In its annual report, the National Bank has again sounded the alarm. On a no-policy-change basis, government spending is expected to increase by an estimated 0.4 per cent of GDP, or about 2.5 billion euros a year, in the coming years. Wunsch says the next government must make clear policy decisions to reduce the budget deficit and address the long-term challenges.

In 2023, Belgium's budget deficit was 4.2 per cent of gross domestic product (GDP), up from 3.5 per cent in 2022. However, Wunsch said the structural deficit had worsened by 0.8 per cent despite the expected reduction due to the phasing out of energy subsidies and additional revenues, such as windfall taxes. He said no policy decisions are being made due to political fragmentation.

Social spending

The main drivers of government spending are social spending due to an ageing population and personnel costs. Ageing has a greater impact on public finances (+4 per cent of GDP by 2050) than climate change (+0.5 per cent of GDP by 2040). "But there is a lot more talk about the climate."

Belgium's fiscal outlook is not favourable. By 2025, only Slovakia is expected to have a more significant deficit. Wunsch: "This does not mean that there are immediate financing risks, but Belgium is among the countries with the highest risk to the sustainability of public finances in the medium term."

In addition, government debt rose again last year to 105.2 per cent of GDP, compared with 104.3 per cent in 2022. With increasing interest costs, a phenomenon that has not been seen for years, the annual report says a dangerous dynamic is emerging.


National Bank governor Pierre Wunsch © BELGA PHOTO JONAS ROOSENS

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