7. Regional spending, tax autonomy and equalization
7.4. Belgium
The Belgian model of fiscal federalism is peculiar for two reasons.
First, Belgium is the only one of our case studies with two different forms of subunits: Communities andRegions. Of both subunits, only the Regions have some (limited) tax autonomy. Communities have notax autonomy at all. The lack of fiscal autonomy for the Communities partly explains why the overall level of regional fiscal autonomy (i.e. Communities and Regions combined) is so low. Communities have no tax autonomy because they are defined on a personal, not on a territorial, basis. The Flemish Community addresses the Dutch-speakers who live in Flanders andin the Brussels Capital Region. The French Community caters for the needs of French-speakers who live in Wallonia and in the Brussels Capital Region. Citizens who live in Brussels do not have to declare their subnationality, let alone to ‘fix’ it once and for all. For instance, Dutch-speakers are free to attend French-speaking schools and vice versa. The share of Community grants which is flowing to Brussels is usually divided on an 80 per cent French/20 per cent Flemish basis. Such a distribution is rather generous for the Dutch-speakers. The share of Dutch-speaking citizens who live in Brussels is estimated at no more than 15 per cent of the total regional population. However, Dutch-speaking schools attract a large number of pupils who speak French at home.
Second, the Communities and Regions are primarily funded on the basis of shared tax revenues. Unlike in Germany, the regional pie of these revenues is not spelled out in a fixed distributional formula, but is calculated by using the baseline grant for a given year. The baseline grant is adjusted annually, to reflect inflationary changes or adjustments to the Gross National Income (GNI) instead (Verdonck and Deschouwer 2003). The size of the regional grant is immune to changes in their tax structure (base, rates, administration), however, and in this respect the Belgian grant system is very different from comparable systems in other federations. In fact, regional tax receipts come under the form of massive, unconditional block grants which are meant to finance broad policy expenditures. The regional share of federal VAT revenue finances most of the educational competencies.
Communities and Regions are at best indirectlyinvolved in adjusting the base and rate of these taxes. The financing of the Regions and Communities is stipulated in a ‘special majority law’, which must be approved by both linguistic groups in the federal lower house and Senate.
Despite the wide spending autonomy of the Regions and Communities, regional governments cannot engage in extensive deficit-spending.
Borrowing policy is overseen by a Superior Council of Finances, which sets the objectives as well as the limits of regional deficit spending. Furthermore, regional governments need the consent of the federal government if they wish to exceed the upper limit of deficit-spending. In contrast, the burden of reducing Belgium’s overall public debt falls mainly on federal shoulders.
More recently the regions have agreed to contribute more to overall public- debt relief, reflecting their growing policy autonomy, and, in the case of the Regions at least, also their slowly increasing fiscal autonomy. As in Austria, the federal government has invoked the Maastricht criteria to increase the regional contribution to overall public-debt relief. To some extent, such a move coincided with a relaxation of the federal budgetary plan after the 2003 general (federal) elections.
The funding of the Communities
Because they lack tax-raising autonomy, the Communities are entirely funded on the basis of federal tax receipts. Two-thirds stem from VAT and almost a quarter from Personal Income Tax (PIT; Verdonck and Deschouwer 2003). VAT and PIT shares cover almost 95 per cent of Community expendi- tures. For both taxes, the 1989 transfer (when the important Community competence of education was first devolved) is used as the baseline. Until 2001, VAT revenues were adjusted to reflect changes in the consumer index.
VAT revenues finance the bulk of the Community expenditures in the field of education. However, a vast share of education expenditures is made up of the wages of teaching staff. The annual increase in VAT receipts was not high enough to cover the increases in wages. Consequently, it did not take long before the Communities faced budget shortfalls. For three reasons, the prob- lems have been particularly acute for the French Community.
First, as was explained in Chapter 3, in Flanders, the Flemish Community and Region have merged their institutions. Therefore, money can be easily moved around from Regional to Community budgetary posts. Regions not only have more tax autonomy, but their income is also pegged more explic- itly to adjustments in economic growth. In French-speaking Belgium the same budgetary ‘trick’ could not be used owing to the existence of separate Community and Regional budgets.
Second, the way in which Community grants are determined does not really entail an equalizing element. For instance, Community budgets for education are made up of VAT receipts. The share of VAT that flows to each of the Communities is calculated by considering the number of children
below the age of 18 attending school. Yet, average per capita schooling costs are higher in the French-speaking Community than in Flanders. At present, French-speaking Belgium faces higher unemployment rates, lower average income and more social deprivation than Flanders. Consequently, the share of students who take more time than needed for completing their primary and secondary education is higher than in Flanders. This pushes French Community expenditures above the national average.
Third, in Belgium, education is only partially provided in so-called Community schools. Notwithstanding the full subsidization of all school networks (thus, also the vast network of private, predominantly Catholic schools), public education is more cost effective in Flanders than in French- speaking Belgium. The dominance of the Catholic school network in that region leads to substantial economies of scale. By contrast, in French-speaking Belgium no single ‘network’ controls the public education system, which leads to reduced economies of scale (Henry, Pagano and Filleul 2000).
The fiscal worries of the French Community were an important element in the most recent round of constitutional reforms (2001). To relieve their worries, negotiators representing both language groups agreed to link Community revenues to changes in GNI growth and inflation, and not sim- ply to adjustments in the consumer index. Although Flemish negotiators were not particularly keen on increasing Community funding, they were offered something in return. Next to more fiscal autonomy for the Regions, Flemish negotiators obtained agreement that from 2011 onwards 20 per cent of VAT transfers will not be devolved on the basis of student figures any longer, but on the basis of the derivation principle instead.
The funding of the Regions
Unlike the Communities, the Regions have some degree of fiscal autonomy.
Although still limited, the 2001 reform package significantly increased the level of Regional fiscal autonomy. In 2003, they received 28 per cent of their revenue from fully ‘regionalized’ taxes. This percentage is still well below the 40 per cent that is derived from transferring part of PIT revenues. Following the 2001 fiscal reform, Regions have also been allowed to vary the PIT rate with 6.75 per cent in either direction. This turns PIT into a partially overlap- ping tax. Verdonck and Deschouwer calculated that if Flanders were to use the politically rewarding tax rebate, 8 per cent of its entire (Regional and Community) budget would be affected (Verdonck and Deschouwer 2003:
107). A small part of the Regional budget can be funded on the basis of a federal matching grant. Regions control labour market policy, although the federal government is in charge of social security and thus pays out unemployment fees. The federal government has agreed to pay out a subsidy for each unemployed person for which a Region finds a job. That subsidy would equal the amount of federal unemployment benefits which the fed- eral government no longer has to pay out. Although the extra money comes
as a matching grant, it does not tie Regions to specific expenditure programmes. The Regions may use the money that is received accordingly as they see fit.
As it stands, the funding of the Regions and Communities is not without some form of equalization. Only the federal government engages in fiscal equalization. For instance, VAT and PIT revenues are not allocated on the basis of the derivation principle. When determining the initial base-line fig- ures, the share of VAT and PIT revenues which accrued to Flanders was even lower than the Flemish share of the Belgian population. The fiscal reforms of 2001 project a gradual increase in the share of the Flemish pie of these tax receipts. Flanders’s share would be made compatible with its demographic strength (per capita), but not with its contribution to the corresponding tax resource (derivation). Furthermore, federal equalization payments of an unconditional nature are made available to regions with a personal per capita income below the national average. At present, Wallonia benefits most from this arrangement. In 2003, such equalization payments repre- sented 13.6 per cent of the Walloon Regional budget (Verdonck and Deschouwer 2003: 107).
In general, the fiscal equalization mechanisms that are explicitly tied to the funding of the Communities and Regions are relatively small. Therefore, the most profound mechanism of fiscal equalization comes in the form of social security and health payments. Social security and health policies (other than preventive health care) are entirely federally controlled. They are distinct from Regional and Community policies which rely on federal fund- ing. Some Flemish actors have repeatedly demanded that at least part of social security (in particularly health care and child allowances, including some aspects of their funding) would be devolved to the regions (i.e. Communities or Regions). Without building in explicit equalization mechanisms, this would strongly reduce existing levels of interterritorial solidarity. Such a change would require the consent of both language groups in the federal parliament and would almost certainly be vetoed by the group of French-speakers there.