Duncan’s Economic Blog

When having no government is helpful – the strange case of Belgian growth

Posted in Uncategorized by duncanseconomicblog on August 17, 2011

In the past nine months theUKeconomy has grown by 0.2%,Belgiummeanwhile has grown by 2.2% – a very healthy performance. In the second quarter of this year it racked up quarterly growth of 0.7% – putting it near the top of the Eurozone growth league.

What’s the secret of the small state’s recent faster growth?

Oddly enough, the answer appears to be its lack of functioning government.

But before the small state libertarians open the champagne – the connection isn’t the one they might expect and hope for.

It’s not that the lack of an intrusive, interfering government has set the forces of enterprise free – instead the political paralysis afflicting Belgium has meant that, unlike most Euro-area governments, it has not embarked on an austerity drive.

As the FT reports the of absence of austerity (and the fact that Belgian salaries and pensions are indexed to inflation) is providing a boost to growth.

Belgium can’t avoid austerity forever, public debt to GDP stands at over 100% (much higher than the UK) but in the short to medium term it is certainly outperforming its neighbours. The FT quotes a perplexed economist from ING:

“In the case of public spending, the short-term gain is paradoxical. It makes it more and more clear that we will have to undertake deeper austerity measures in the future.”

I don’t think this is paradoxical at all – nor do I agree that an effective short term stimulus now necessarily means deeper austerity later. As Christine Lagarde argued yesterday, the right policy mix for most states is a short term stimulus to get growth moving coupled with a medium to long term programme to balance the budget.

Belgium, in the absence of a functioning government, lacks the ability to commit to a credible medium term plan – hence the recent market pressure on its bond yields, but in the short term its current policy mix is certainly generating growth – as of result of which the government’s deficit narrowed from 4.6% of GDP in 2010 to an estimated 4.0% this year (according to the IMF’s Fiscal Monitor).