COMMISSION RECOMMENDATION of 22 July 1981 to the Government of the Kingdom of Belgium pursuant to Article 11 of Council Decision 74/120/EEC of 18 February 1974 (Only the Dutch and French texts are authentic) (81/629/EEC)

1. In recent years, the Community guidelines on economic policy for Belgium adopted by the Council of the European Communities have emphasized the need to correct the growing public finance and current balance of payment imbalances.

The Commission acknowledges the efforts made by the competent Belgian authorities in the past few years to improve the situation, but nevertheless finds that it has continued to deteriorate. In particular, the foreseeable gap, for 1981, between the budgetary guideline and the probable out-turn promises to be very wide. In this situation, the Commission, as authorized by Article 11 of Council Decision 74/120/EEC of 18 February 1974, is taking the initiative in sending a recommendation to the Government of the Kingdom of Belgium.

2. The poor economic and social record of the past five years contrasts sharply with the splendid results obtained up to then notably because of Belgium's membership of the Community. This enabled it to realize its rich potential in human resources to the full and to become a cornerstone of Europe through the development of a tight network of industrial and trading relations.

3. It is true that the structural crisis from which all the industrialized countries are suffering, plus the twofold increase in the price of petroleum products, are substantially to blame for the present difficulties. But in Belgium's case the situation has been aggravated by the extreme openness of its economy, which depends heavily for its prosperity on developing external markets and on its own competitive capacity.

4. While the sectoral and geographic pattern of these markets was shifting to its disadvantage, Belgium's production costs rose so high that the expansion of exports slowed down in relative terms, activity flagged in a number of industries and the level of employment fell. The sharpest rise in internal costs (mainly wage costs, tax and parafiscal charges) occurred in a period when the increase in import costs should have encouraged the opposite development. Real incomes increased at a faster rate than in the main competing countries, and this was reflected in an excessive expansion of private und public consumption, at a time when the deterioration in the terms of trade meant that real resources had to be transferred abroad.

5. The consequences of these developments gradually became apparent ; whereas the current account balance, traditionally in surplus, was still close to equilibrium until 1976, the current account deficit will probably be some 7 % of gross domestic product in 1981. In most of the Member States - as well as in the other industrialized countries - this figure is not much above 2 %.

6. This deficit is accompanied by - and partially linked to - a large negative balance for public finance.

For general government, net borrowing (1) will probably stand at 12 % of gross domestic product in 1981, compared with the Community average of close on 4 %. The mid-seventies unquestionably ushered in a period of slow growth holding down the rise in tax receipts, while, at the same time, costs associated with unemployment have soared. Public budgets were not restructured as necessary so as to offset the sluggishness of receipts and the almost obligatory increase in certain categories of expenditure by appropriate restrictions on other types of expenditure. Thus, although taxation and parafiscal charges were increased, pushing up the current resources of general government in the last decade from 35 % of gross domestic product in 1970 to some 45 % in 1980, net borrowing climbed from almost 1 % of GDP in the early seventies to some 9 % in 1980.

Certain crucial thresholds are now liable to be reached ; thus, some 70 % of the increase in central government current resources, in 1982, could well be absorbed solely by the increase in public debt interest charges, which are swollen not only by a series of budget deficits, but also by the steep rise in national and international interest rates. This, plus the danger of an increase in unemployment costs, entirely wipes out the margin for any other increase in public expenditure (including public service wages), unless either the public deficit in 1982 or the tax burden are again increased.

7. If it is correct to state, as in the studies carried out by the Banque Nationale de Belgique and the Bureau du Plan for example, that the Belgian economy requires radical restructuring of its sectors of activity, there is no doubt that the dangers looming on the horizon (if no corrective action is taken the imbalances will reach unmanageable proportions) must first be removed in the two crucial areas of public finance and the balance of payments. The recent analysis by the Conseil Supérieur des Finances, moreover, supports this view.

8. The Commission, therefore, feels that determined action along these lines must be taken without delay. The external situation is more favourable than in the recent past, since 1982 will probably see a recovery in world and Community economic activity.

But this forecast should not be used as a pretext for postponing the necessary action.

9. Before the most fundamental problem - unemployment (2), and particularly youth unemployment - can be solved, improved equilibria must be restored. Investment will have a central role in this strategy. Throughout the upheavals of recent years, Belgium has retained some telling advantages : a limited rate of inflation, the stability of its currency at home and abroad, and remarkable productivity gains. These solid foundations can and must provide the basis for recovery. The lines of action must be : to restore competitive capacity by holding down the level of internal costs ; to stimulate productivity by a deliberate policy of encouraging productive investment ; and lastly, to adapt more successfully to the new facts of international trade. As a result, Belgian exports and economic activity as a whole will again be able to develop at a pace which holds the promise of a reduction in unemployment.

10. It will be necessary to implement a rigorous policy.

On the budgetary side, a very large volume of expenditure will still be needed for employment. It will be appropriate, however, to examine whether the unemployment rules can be applied more selectively, to find more effective methods of using the funds available to reduce unemployment, and to combat abuses and undeclared work. Given the variety of contraints, no category of expenditure can escape examination. It will probably be advisable to examine the destination, in terms of socio-professional and income categories, of "social expenditure" (e.g. expenditure on education and health). The policy must also aim to distribute the cost of recovery fairly.

In the next few years, the growth of incomes will have to take account of the ground lost in terms of competitiveness, and the prospects of very slow growth in these same years. The indexation mechanisms must from this year on be made more flexible in line with the recommendation sent to the Member States on this subject. Although the merits of these mechanisms, as operated in Belgium, have been indisputable, they cannot be applied with the same rigidity if the above objectives are to be pursued. (1) In national accounts terms, i.e. excluding in particular loans, advances and equities. The Belgian forecasts for the general government borrowing requirement, which includes these transactions, are at least 14 75 % of GDP in 1981. The central government borrowing requirement, corresponding to this definition, is projected to be at least 10 75 % of GDP. (2) An average of 11 % of the labour force could well be affected in 1981 (Statistical Office of the European Communities definition) ; this is the highest rate of any of the Community countries.

11. In view of these considerations, the Commission recommends the Government of the Kingdom of Belgium to take the following measures: (a) on the budgetary side: - to adopt the draft central government budget for 1982, ensuring that the current deficit of central government, including the special funds (Fonds des Routes, etc.) is limited to Bfrs 200 000 million, in cash terms ; the other authorities (semi-public institutions, local authorities and social security) would have to contribute their share to achieving this adjustment;

- to attain this objective primarily by holding down expenditure, in all categories, while seeking to improve the ratio of capital expenditure to current expenditure ; to this end, to propose the necessary laws and to adopt the necessary regulations ; to base the evaluation of current receipts for 1982 on a cautious forecast of the increase in the gross national product and then to allocate any additional increase to reducing the deficit;

- to programme public finance so that, from 1984, the borrowing requirement of central government, including the special funds, can be cut from at least 10 75 % in 1981 to the present average level in the Community, i.e. some 5 % of gross domestic product;

- to improve budgetary management by avoiding receipt allocation and debudgetization, and by centralizing information on general government budgetary operations ; to respect and perfect budgetary procedures by making it easier for budgets to be approved within the periods laid down by law, by ceasing to have new appropriations approved by Cabinet discussion and by avoiding the tabling of large supplementary budgets;

- to ensure that the budgetary costs of all new initiatives are financed out of taxation;

(b) on incomes: - to implement the conclusions proposed by the Commission in the communication on the principles of indexation which it sent to Member States on 22 July;

(c) on the monetary side: - the Banque Nationale de Belgique must continue its tight monetary policy : monetary policy is not to be relaxed until parallel concrete and satisfactory progress has been made in the other areas of economic and social policy particularly as regards the external and budgetary equilibria.

12. In conclusion, the Commission is anxious to stress that the proposed measures should be taken as rapidly as possible.

Any further postponement of the inevitable measures of reform would undoubtedly aggravate the situation and make the process of adjustment even more painful, in particular for the poorest members of Belgian society.

Done at Brussels, 22 July 1981.

For the Commission

François-Xavier ORTOLI

Vice-President