January 8, 2012 5:29 pm

Belgium aims to cut €1bn from spending in 2012

Belgium over the weekend rushed to trim more than €1bn from public spending this year after being told it would otherwise fail to meet new European Union fiscal rules designed to prevent a repeat of the eurozone debt crisis.

The coalition government was given until Monday morning by the European Commission to trim its 2012 budget or face fines worth hundreds of millions of euros.

It is the first time an EU government is forced to take urgent corrective action to avoid large fines for breaching EU budget rules, under a system of semi-automatic sanctions adopted last month to avert the need for future bail-outs.

In a letter sent last Thursday, Olli Rehn, economic and monetary affairs commissioner, demanded immediate budget cuts of 0.3 per cent to 0.5 per cent of gross domestic product, or €1.2bn to €2bn.

To avoid sanctions, the Belgian authorities opted to freeze €1bn of spending by delaying outlay on railway maintenance and defence procurement, according to officials. Permanent cuts across the budget are expected in February.

Officials in the Belgium government hope the freeze ahead of planned cuts will be enough to placate Mr Rehn, who on Wednesday will give a further assessment of which EU countries are in breach of the bloc’s debt limits.

Under sweeping new rules designed in the wake of the Greek debt crisis, national governments are now required to submit their annual budget to Brussels for review, with fines of up to 0.2 per cent of GDP for those who habitually breach debt and deficit limits.

Belgium was among five countries identified by the Commission last November as violating the rules. Poland, Malta, Cyprus and Hungary were also threatened with sanctions if they failed to cut their spending plans. Hungary is seen as most likely to face further action, according to EU officials, with the others having done enough to convince Brussels that their public finances are within the imposed parameters.

Belgium belatedly agreed its 2012 budget after being without a government for much of last year, including cuts of over €11bn compared with 2011.

According to its own calculations, the 2012 budget deficit should come to 2.8 per cent of GDP, below the 3 per cent mark demanded by the EU. But the Commission says Belgium is using unduly optimistic economic assumptions, as well as overestimating how much new planned taxes are likely to raise. It says the Belgian deficit will in fact be closer to 3.25 per cent.

Olivier Chastel, budget minister, over the weekend downplayed the freeze as “purely an administrative measure” ahead of new budgetary proposals planned for next month.

The EU fiscal measures are meant to bolster the enforcement of the Stability and Growth pact, which imposes a 60 per cent ceiling on public debt and limits annual budget deficits to 3 per cent. However, it was widely flouted in the early years of the single currency, with no country facing sanctions under its convoluted rules. The revival of the pact is seen as key to the eurozone’s response to its debt crisis.

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