Belgian Court of Audit warns of 'snowball effect' on public debt

As a result of higher interest rates and a marked fall in inflation from 2024, among other things, a "snowball effect" could increase public debt in the coming years. The Court of Audit warns against this in a report on the 2023 state budget.

Based on the draft budget, Belgium's debt ratio will rise from 105.3 per cent of GDP in 2022 to 108.2 per cent in 2023, the Court of Audit writes. For the federal government and social security, an increase from 87.7 per cent in 2024 to 93.5 per cent of GDP in 2027 is assumed under unchanged policies.

The Court of Audit does point out that interest rates were historically low until the beginning of this year, making the implicit interest rate on federal government debt well below inflation. The snowball effect that caused the debt to rise sharply in the 1980s could therefore be avoided, despite a significant primary deficit and slowing economic growth.

For the coming years, the Court of Audit's outlook is bleaker. "The activation of that snowball effect could be facilitated by the combination of a marked fall in inflation, foreseen from 2024 onwards (1.8 per cent), the likely rise in the implicit interest rate due to the increase of almost 200 basis points (or 2 per cent) in financial market reference rates in 2022, and the foreseen maintenance of a large primary deficit," the warning reads.

Moreover, the Court of Auditors recalls that a "general escape clause" is still in force for EU countries this year, allowing for a more flexible approach to European budget rules. But from 2024, that clause will be lifted and strict budget rules will apply again. At that point, "heavily indebted member states like Belgium will be asked to demonstrate that they are making the required efforts to reduce their public debt within a four-year period," the Court of Audit said.

Finally, interest charges for 2022 have also been revised to 6.9 billion euros. But the Court of Audit points out that these forecasts are based on assumptions made in September. Therefore, it cannot be ruled out that appropriations to finance interest charges will have to be increased. A 1 per cent rise in the interest rate curve risks a budgetary cost of 660 million euros next year.

(TOM)

^{The Belgian Court of Audit in Brussels. © BELGA PHOTO THIERRY ROGE}