Country Report Belgium November 2009

Outlook for 2010-11

• The Economist Intelligence Unit expects the government, consisting of the Flemish and francophone Christian Democrats and Liberals and the francophone Socialists, to serve its full term until 2011.
• The success of two right-wing, populist parties in Flanders in the regional elections in June 2009 will cause the mainstream Flemish parties to adopt a hardline stance on devolution, making a compromise agreement difficult.
• The electorate is more concerned about economic issues, but tensions between Flanders and Wallonia might be stoked over the issue of the budget deficit or the Brussels-Halle-Vilvoorde (BHV) voter constituency.
• The government has implemented a recovery package agreed in early 2009, but we expect the fiscal stimulus element of the package to go partly into reverse in 2010 as the government focuses instead on fiscal consolidation.
• After rising sharply to an estimated 6% of GDP in 2009, we expect the budget deficit to rise further to 6.6% of GDP in 2010, before narrowing to 5.5% of GDP in 2011.
• After contracting sharply in 2009, we forecast that domestic and foreign demand will both resume moderate growth in 2010-11, underpinning GDP growth of 0.8% in 2010 and 1.3% in 2011.

Monthly review

• The prime minister, Herman Van Rompuy, presented the government's fiscal programme in parliament in mid-October, calling for a series of austerity measures to rein in the burgeoning overall government budget deficit.
• The government programme did not address the issue of constitutional reform, but the prime minister claimed that he expected the BHV issue to be settled by March 2010. This is likely to be overly optimistic.
• The austerity measures in the federal government programme are designed to generate €3.4bn in cost savings and new revenue in 2010-11, reducing the deficit by 0.5% of GDP in 2010 and by 1% of GDP in 2011.
• On September 29th the Flemish regional government announced measures to generate cost savings and new revenue of €200m in 2009 and €1.6m in 2010.
• On October 13th the Walloon regional government and the government for the francophone linguistic community announced their budget for 2010, designed to generate savings of €586m.
• Despite rapidly rising rates of insolvency, business confidence has improved significantly over the past few months, particularly in the services sector.