Fiscal Consolidation in Federal Belgium

Abstract

Fiscal consolidation confronts federal states with a collective action problem, especially in federations with a tightly coupled fiscal regime such as Belgium. However, the Belgian federation has successfully solved this collective action problem even though it lacks the political institutions that the literature on dynamic federalism has identified as the main mechanisms through which federal states achieve cooperation across levels of government. This article argues that the regionalization of the party system, on the one hand, and the rationalization of the deficit problem by the High Council of Finance, on the other, are crucial to understand how Belgium was able to solve the collective action problem despite its tightly coupled fiscal regime and particularly high levels of deficits and debts. The article thus emphasizes the importance of compromise and consensus in reducing deficits and debts in federal states.

Fiscal Federalism in Belgium: Challenges in Restoring Fiscal Sustainability Belgium

“…8 Past episodes of implicit federal bailouts include amendments of the Special Finance Act in 1993 and 2001 to increase federal grants to the communities after the French community repeatedly ran large deficits; in 2003, the Brussels region received unconditional grants from the federal government to balance its budget (Schnabel (2019)). Credit rating agencies appear to assume (e.g., Moody's 2021 credit opinion on the Walloon Region) a high likelihood of extraordinary support from the federal government reflecting considerations such as Article 54 of the Special Financial Act, which allows regions and communities to offset insufficient or delays in payments by contracting loans guaranteed by the federal government.…”