Greece should take a chapter out of Belgium’s fiscal policy

If you ask a local politician, economist or businessman to name a European country with the best economic policy in place, they will most likely point to Ireland – and may be right. Nevertheless, if Greek politicians and others were looking for a model of fiscal policy, considered by most to be the soft spot of the Greek economy heading into the new year, they should be looking at another small and highly indebted EU country, that is Belgium. Belgium’s success in reducing public debt even in the face of anaemic economic growth over the last few years provides an example of the kind of fiscal policies other countries, such as Greece, should pursue. Perhaps equally important, Belgium offers an example of how the political parties in a country with growing public debt and an aging population should behave. There is no question that Prime Minister Costas Simitis’s recent decision to start the process of his succession in the ruling Socialist party (PASOK) and the government is likely to lead to general elections earlier than some thought even a couple of weeks ago. Foreign Minister George Papandreou, the most likely successor, has not yet revealed his intentions but it is rather unlikely he would choose not to go to the polls early should he be selected by the PASOK faithful. This, in turn, translates into a shorter pre-election period and should be seen as positive for the Greek economy which has been growing faster than any other in the EU but has seen its budget deficit widening further. Although most analysts see downward risks to the official GDP growth projections of 3.7 and 3.6 percent in 2005 and 2006, respectively, most agree that the Greek economy will grow by 4.0 percent or better next year with some fatigue setting in from the fourth quarter. Healthy consumer spending and investment spending, increased tourist receipts and an improving EU economy are behind the rosy GDP projections for 2004. However, the consensus about strong economic growth is also matched by the consensus of a larger budget deficit next year. Already, the combination of overruns in primary spending and shortfalls in tax revenues threatens to send the budget deficit-to-GDP ratio above the government’s latest revised estimate of 1.4 percent for 2003. The final budget deficit figure may turn out to be even worse if the conservative New Democracy (ND) party wins and makes its own calculations. It should be remembered that senior members of the ND party have repeatedly accused the current government of using «creative accounting techniques» to window-dress public finances. If this is the case, the 2003 budget deficit may end up above 2.0 percent of GDP. This, along with the typical budget spending overruns before elections, means the 2004 budget would have to be adjusted accordingly, making it likely that a supplementary budget will be submitted in Parliament by next summer. Of course, using the state apparatus and the power of the budget to win over voters, irrespective of the consequences, is not a strictly Greek phenomenon. On the other hand, Greece, unlike other countries, finds itself with a huge public debt burden and an aging population which should make public debt reduction a national priority. Even more so when robust GDP growth rates, a steep drop in borrowing interest rates and primary budget surplusses in the last few years have been unable to make headway as state loan guarantees given to public corporations are called in and off-balance sheet items are added to the public debt. The latter has gone from 25 percent of GDP in 1980 to 79.6 percent in 1990 and 106.9 percent in 2001 before easing to 104.7 percent in 2002 and falling even further this year. Belgium, the country we referred to as an example of fiscal responsibility, has been able to stick to its guns and drive its public debt-to-GDP ratio lower despite experiencing below 1.0 percent annual GDP growth rates in 2001 and 2002. In 2003, an election year for Belgium, the public debt continued to decline as a percentage of GDP and is projected to have fallen to about 100 percent of GDP by year-end from 138 percent just 10 years earlier. This was accomplished in spite of the fact that the Belgian economy had another year of anaemic growth, around 1.0 percent or less, and it took quite some time for the new government to be formed. Both interestingly and surprisingly, Belgium is seen to be beating its own fiscal forecasts and producing a budget surplus instead of a projected deficit in 2003. It will be the fourth Belgian budget surplus in a row. Of course, Belgium had some special help from an exceptional item. That is, the transfer of some 3.6 billion euros of accumulated reserves plus 1.4 billion euros in cash to be paid to the State by incumbent telecoms operator Belgacom in return for the State continuing to guarantee the pensions of the incumbent staff. Still, the fact that the country was able to go through an election year with its fiscal position strengthened merits more attention. First, it shows that there are certain procedures in place to safeguard attainment of the fiscal goal irrespective of the political cycle. Second, and perhaps more important, no political party espouses an economic program that would allow a budget deficit and thus feed public debt. This attitude by the political parties most likely reflects Belgian citizens’ awareness of the public debt problem and their determination to tackle it. This is also confirmed by figures showing the Belgian household savings rate heading up at the same time the public debt was increasing to make sure they had put enough money aside to pay future taxes. The savings rate began to come down along with the public debt and has stabilized lately. Of course, Greece is not Belgium. There are certainly differences in economic dynamics and cultures as well as similarities such as the high public debt and an aging population. Nevertheless, Belgium’s determined drive to reduce its public debt should be examined very seriously. It shows what public awareness of a problem can do. It can discipline even political parties, accustomed to adopting economic agendas characterized by free spending. In this respect, Greek citizens and politicians should look to Belgium as a model.