The Politics of Territorial Finance in Belgium

Wilfried Swenden

University of Edinburgh

Belgium: ‘regime crisis’ since 2007? Formation process interim government following June 2007

elections:194 days Formation process ‘new coalition-government’ since (early) June

2010 federal elections: as of today 165 days Why so long:

Fragmented and split party systems along both sides of the linguistic divide, but especially in Flanders

Territorial reform high on the agenda most Flemish parties, especially CD&V (Leterme), NV-A, Vlaams Belang and Open-VLD (Liberals) but no appetite for territorial reform in Wallonia

Growing Left-Right divisions in a context of austerity 2010: polarization as a result of issue triggering early elections

(BHV) and especially disenchantment with absence agreement on constitutional reform after 2007. Charismatic leadership Bart De Wever helped NV-A make major inroads into support CDV, Open-VLD, Vlaams Belang and LDD.

Relative strength of parties 2010 elections (and comparison with 2007 –Senate) Dutch-speaking electoral

district

(C–Right – Ext Right) VB 12.3 (-6.6) LDD 3.37 (-2.2) NVA 31.4 (+31.4) Open-VLD 13.0 (-6.5) CD&V 16.9 (-14.5*)

(C-Left) SPA 15.6 (-1.7) Groen! 6.9 (+0.6)

French-speaking electoral district

(C-Right – Ext Right) FN 5.95 MR 24.3 (-7.9)

(C-Left-Left) Cdh 13.5 (-1.99) PS 35.7 (+8.89) Ecolo 14.3 (-0.92)

Current negotiations

Day 1 Bart de Wever (NVA informateur) Day 25 Elio Di Rupo (PS pre-formateur) Day 84 Danny Pieters (NV-A) and Andre

Flahaut (PS): mediators Day 99 Jan Jambon and Jean Claude

Marcourt (High Level working group) Day 118 Bart De Wever (NVA clarifier) Day 131 Johan Van de Lanotte (SP.A):

mediator

CdH/Ecolo/PS NVA/CDV/Green/SPa

PS manifesto 2010: ‘prosperity federalisme/ de prosperite’: need to retain strong federal role in providing interpersonal solidarity, social protection, labour market and social dialogue (wage-setting) + Brussels and surrounding municipalities (146-147)

NVA: manifesto 2010 ‘Daring to change now. A strong socio-economic perspective for Flanders and Wallonia’ Belgium = the sum of two democracies which have been increasingly growing apart What is needed is to turn Belgium into a ‘confederation’: Belgium will evaporate: what Belgium cannot

do by itself will be done by EU, what could be done by Belgium can be done much better by Wallonia or Flanders alone…the two language communities have different views about almost everything: home and justice policy, traffic regulation fines, asylum and migration, finance and the budget,… incapacity to find agreement on how to reform social security. All competences should go to the Regions, all financial transfers will be stopped, what we still want to do together we will do via direct transfers from one community to the other. Based on European socio-economic parameters (OMC), we will agree on ‘convergence criteria’ between Flanders and Wallonia’

The challenge of coalition building (in a context of austerity)

Left Right

Institutional Status Quo

Confederalism

CDV

Open-VLD

NVA LDDVB

SP.A

Groen!Ecolo

MR-FDF

PS CdH

Comparative thinking about territorial finance First generation fiscal federalists (Oates, Tiebout,

Musgrave and Musgrave… echoed by Peterson) Redistribution and Stabilization best federal, Allocation

decentralized However, balance can vary and depends on mobility labour

and capital (cf. US), as well as ‘heterogeneity’ of preferences Generates VFI, and therefore also expectation of bail outs

in case of underfunded regions, because regions cannot be held responsible for their own financing

Common for most WE countries, with partial exception of Switzerland and Basque Country

Second generation fiscal federalists (Weingast, but in recent years especially Rodden, Wibbels)

Emphasize role of political incentive structures in explaining outcomes of fiscal federalism Centre is too weak: i.e. strong shared rule provisions may

make it difficult for the centre to resist bailout requests or to regulate the fiscal behaviour of local governments Vertically integrated parties may cushion such ‘regionally

oriented’ actions Conversely, centre is too strong: predatory behaviour of the

centre can erode tax base regions, encroach regional autonomy through conditional grants or unfunded mandates

Enderlein (‘trilemma of fiscal federalism’)

Representational Equivalence

Fiscal equivalence

Equal Living conditions

Competitive Fiscal federalism

Solidaristic Fiscal Federalism (Belgium)

Unitary Fiscal ‘federalism’ (Scandinavia)

Explaining the Belgian gridlock Belgium: high shared rule (consociational), high VFI – expectation of regional bail out

high (notwithstanding restrictions borrowing autonomy sub-national governments) However, 1992-2001: regional bail outs (primarily Francophone demand)

accompanied by competence transfer Flanders Money for Francophone Belgium in exchange for competencies and over-

generous sub-state funding arrangements Furthermore, progressive worsening ‘own source revenues’ federal government in

the face of major challenges ahead (pensions, health, social security + public debt relief)

Mechanisms cannot work now: Macro-economic situation has reduced the availability of fiscal resources that can be

used to buy the support of Francophone parties without making the richest federal entity (Flanders) pay more directly

Furthermore, Francophones not in immediate need of funding after 2001 constitutional reform

Consensus in Flanders: to move Belgian fiscal federalism away from solidaristic model, and closer towards competitive model

Consensus in Wallonia: to retain strong solidaristic element in Belgian fiscal federal model

Solidaristic federalism: how did we get there? 70-80 Unitary state “federalism” but “unionist federalism” (Wilfried

Martens PM 1979-1992): Representational equivalence: Consociationalism (shared rule)

before self-rule… “Grendelgrondwet” (‘lock in constitution’)

Equal representation of ministers from each language group in the federal executive (which decides by consensus)

‘alarmbell procedure’ Special Laws (Special Majority Laws)

2/3 majorities overall in Chamber of Deputies and Senate must comprise majority in each language group in each parliamentary chamber

Destroys old dream some Flemish nationalists: i.e. to use their demographic, electoral and (now also economic weight) to shape Belgian state to suit their needs exit strategy through increased self-rule only option

Coming together logic is more amenable to competitive fiscal federalism than ‘holding together’ federalism

Equal living conditions: social security but also funding R/C 1970-1980: Central block grant corresponded with expenditure

assignments in regionalized competencies prior to their regionalization (1/15 national budget)

Finance Law 1980 (in effect January 82) Regions: Regional distribution key: 1/3 surface (benefits W), 1/3

population, 1/3 regional contribution to personal income tax receipts (benefits FL) ‘dotations’ (Berckx, 1990: 385) annual adjustments parallel adjustments in central budget (for first

year), thereafter to changes in consumption price index Communities:

Initially: Regional distribution key: 2/3 based on population, 1/3 surface and for Brussels distribution between FL-FR C based on share of votes most recent municipal elections for D or F-speaking parties, but with a minimum of 20 percent for D; annual adjustments parallel adjustments in central budget

As of 1982: 55-Fl/45 Fr + annual adjustment to reflect changes in consumption price index

1980: tax receipts for some smaller taxes (TV and radio license fee tax, vehicle tax, games and betting, property registration tax, alcohol tax, inheritance tax, ‘onroerende voorheffing’) ceded to Regions (‘ristournes’) Regional distribution key based on localization tax receipts Right to vary tax rates on the above, but without affecting overall

tax pressure and subject to agreement with national government (Berckx, 1990: 482)

Flemish compensation for support Walloon steel action plan Limited borrowing powers, under supervision of the national

government Parliamentary debates: some references to ‘consumption

federalism’ and comparison with Thatcher’s ‘I want my money back’ … however, ‘solidarity is essential for a federal structure’

But… the unfinished business of Belgian territorial reforms… 1988-9 Already in 1982: Flemish calls for more

competencies especially in education, (calls Van den Brande: 50% national budget should be transferred + full control over education)

Distribution key: Flanders wanted strengthening ‘juste retour’

No solution for Brussels yet… No direct elections yet for key regional

bodies Regional committees to decide on

‘national sectors’ (steel, ports, mining industry) prelude to their regionalization

1987: early elections and coalition negotiations for 147 days led by Dehaene (‘The Plumber’ or ‘Mr. Fix-it’) – more competencies, finance law, Brussels and direct election regional parliaments envisaged PS-SP-CVP-PSC (VU)

16 January 1989 Special Finance law (amended in 1992 and 2001) Transfer 40% national budget to Regions and Communities SFL: hints at need for supermajorities, justified by government

due to need for broad consensus between language communities (‘Bundestreue’)

‘as in other federal states, need to match ‘financial responsibility and reversible solidarity’ (parliamentary debates) Regional distribution keys main revenue sources amended (more

on the basis of ‘juste retour’) but transition period of 10 years National solidarity payment for Regions with below average per

capita personal income tax receipts, adjusted annually to reflect changes in consumption price index.

Bulk of funding still block grants, but transfer federal PTI and VAT receipts, adjusted annually to reflect changes in national economic growth

The unfinished business of the 1988 reform… 1992 Still no direct elections regional parliaments (except

for Brussels) Reason: reluctance 1989, monarch, those who opposed

reform two chamber system delays and early fall government

In the meantime, financial difficulties French Community… Compromise: transfers French Community in transition

period 89-99 accelerated, but overall amount not changed. – bill presented around 1999. In exchange, ‘third phase’ of 1988 compromise implemented

Points at wider problem since 1992 Francophone parties no longer demand more competencies (in 1992 and 2001)

but primarily more money; attitude PS very different in state reforms 1970s-1980s

‘Waffle iron politics’: Flemish Community receives more money than is necessary but French Community needs it to avoid default.

Federal government paymaster: CEO Agfa-Gevaert Andre Leysen: ‘one has not only undressed the federal government, now one has also turned off the

heat’ (in Falter, 1994:74) Budget surpluses Flemish government feed calls for increased self-rule (we do

not want more money, we want more competencies! – policy ownership) 2001 reform exacerbates this tendency:

federal government agrees to transfer extra € 200 million as of 2002 to fund Communities and progressively increases this amount to € 1 billion by 2012; Flemish obtain more control over some taxes transferred to the Regions, but not budget neutral operation; furthermore agriculture, foreign trade, (development aid) and control over sub-regional government (municipalities and communities) ceded to the Regions.

Yves Leterme: everything revolves around money: ‘maxi Flemish money for mini Flemish competencies’

Phillippe Moureaux (PS) ‘Nous n’avons plus de raisons d’etre demandeur’ echoed in 2007 Joelle Milquest (PSC) ‘Nous sommes demandeur de rien’ (nicknamed Madame Non in Flemish press)

New dynamics since 2009: federal budgetary situation worsened (and debt)

But also that of the regions, including Flemish Region… Flanders from surplus to deficit: approx. € 1 billion in 2009,

estimated € 500 billion in 2010 + no longer debt-free! Wallonia (2010 budget deficit): 6.340 million receipts versus

7.122 expenditures Brussels expected deficit ca € 350 million Changes dynamics of negotiations:

More competencies and finance now primarily seen as a means to safeguard own ‘Flemish’ iso ‘Belgian welfare’

Or (SPA/ to some extent CDV) reforming federalism in such a way as to make the federal governmental smaller but more efficient (strengthen its fiscal base) + increase incentives for Regions to be more efficient, for instance through more fiscal autonomy and especially (regionalization) labour market policy

Where are we now NVA agrees that regionalization social security is unacceptable for 5.5

of the parties (important, because BY FAR the most important redistributive tool – see text)

Therefore increased emphasis on Amending the SFL: increase input regions in personal income tax (‘split rate’)

but retain overall (federal) progressivity of income tax scales? Revise solidarity component of SFL

‘Development Trap’ (Cattoir and Verdonck/ Deschamps et.al): When a region improves its economic performance, the decrease in revenues generated by the equalization mechanism is more important than the increase in revenues related to a larger share of PIT grants

Horizontal externalities: economic performance of one region influences PIT grants of the other regions…

Diplomatic and technocratic approach Van De Lanotte (4 stage process) Each party makes proposal NBB/Planning Commission/six academic economists (3 FL-3FR):

anonymous peer review!!! + economic simulations Compromise proposal (since yesterday) Bilateral negotiations per language group as of today with VDL as mediator

Three issues

Cantillon et.al., 2010: 50; the cartogrophy of Belgian social security

1) Paul De Grauwe: In the end, the questionis… how much solidarity do we still want?

2) Brussels? (finance, borders, Communities)

3) SFL and competencies only first partPackage deal, also deal needed on BHV +Austerity package federal government