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).


21 Responses

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  1. JakeS said, on August 17, 2011 at 12:06 pm

    Actually, governments really shouldn’t run long-run balanced budgets. They should be somewhat in the red on a cycle-averaged basis, because in a (nominally) growing economy the private sector will desire to hold a non-zero net long position in the sovereign.

    • PhilJo Mar said, on August 17, 2011 at 12:15 pm

      I’m not an economist but I’m going to take a punt on this one. Governments should run deficits because it allows private investors a safe outlet for parking some of their surplus, for maintaininjg its value over a long period (thus helping overall long-run profitability), which guarantees a little more private sector stability as governments don’t (ahem!) go bust. Now Mr JakeS if I’ve paraphrased you correctly why can’t economists talk proper English and gain a little more intellectual respect?
      Alternatively if I’ve got it wrong then I will disappear back into my little Humanities hole in the skirting board!

      • JakeS said, on August 17, 2011 at 2:39 pm

        “I’m not an economist but I’m going to take a punt on this one. Governments should run deficits because it allows private investors a safe outlet for parking some of their surplus, for maintaining its value over a long period”

        No, the government has no particular obligation to maintain the value of government securities.

        The reason the private sector typically wants to hold a net long position in the government is that the private sector needs to pay taxes and amortise loans, both of which can only be performed by legal tender. So you normally want to have some cash on hand that does not come with strings attached. You can only have cash on hand with no strings if the government has deficit spent at some time in the past.

        “Now Mr JakeS if I’ve paraphrased you correctly why can’t economists talk proper English and gain a little more intellectual respect?”

        Because “people want to hold cash in order to get a safe return” is speculating on the motives of people. The statement “people want to hold cash” is a statement about an easily observable fact. But “people want to hold cash” is imprecise. “People want to hold cash without that cash being balanced by debt” is better, but still imprecise, because “cash” is actually only a small component of total sovereign liabilities, which is what matters. “The private sector wants to hold a net long position in the sovereign” covers not just “people” but also corporations, foreign central banks and so on. And “net long position” includes all cash, bonds, outstanding taxes, etc.

        And since I’m advancing a view that is not commonly accepted among Marginalist economists, I need to be precise, because otherwise I can spend the rest of my life clarifying nitpicks.

        Also, command of the jargon demonstrates that you are A Serious Person and people need to take you Very Seriously. Sorta like how priests in medieval times would hold Mass in Latin to show that they were Very Serious People. (I work with the colleagues I have, not the ones I’d like – so shoot me.)

        – Jake

  2. Strategist said, on August 17, 2011 at 6:47 pm

    This is a most extraordinary and useful post. Thanks for pointing it out.
    The bankruptcy of mainstream conventional economics & government policy on this is just staggering.
    Belgium’s 2.2% could have been us if the LibDem members had not been blackmailed into approving a cuts first & foremost Tory-led coalition by the Quislings Clegg & David Laws. They in turn were probably blackmailed by Gus O’Donnell. A sorry sorry tale. Osborne and the LibDems must be made to pay for this catastrophe – and so should the top of officialdom.

  3. jomiku said, on August 17, 2011 at 11:34 pm

    A long term program to balance the budget is not austerity. Take the US: we were on track to pay back the debt when Clinton left office. The small tax increases and typical levels of GDP growth – nothing extraordinary – generated surplus. That surplus was GWBush’s excuse for a tax cut; he was “returning” the money to the American people. If not for that tax cut plus the war spending, the US would be in good financial shape. My point is not to discuss GWBush, but to note that a relatively small change might well have a similar effect.

    My belief – just my opinion – is that deeper levels of austerity do the opposite of what is claimed, that they lead not to expansion but a permanent loss of GDP. This is partly due to structural harm to institutions. Another effect is more complicated to explain: austerity movements are based on a “faith” that removing constraint means greater prosperity while the historical evidence is that constraint is needed to generate innovation, that constraint generates a better allocation of capital, etc. A modern example is Germany, of course, which constrains business not only for “social” reasons but because their long history of craft manufacturing has taught them that constraint sharpens the pencil and forces useful innovation. Historical examples abound. What’s missing is the opposite.

    Nice post.

    • JakeS said, on August 18, 2011 at 7:14 am

      “A long term program to balance the budget is not austerity. Take the US: we were on track to pay back the debt when Clinton left office.”

      No you weren’t. It’s not Clinton’s fault, but you weren’t.

      In the first place, unless you want your central bank to engage in some serious Enron accounting, you can’t “pay back the debt.” That “debt” is a significant part of your monetary base, and your economy would stop working if it were to go away. Because that would mean that people could no longer hold a net long position in the government, which people like to do for a variety of reasons.

      Second, Clinton did nothing meaningful about the current account deficit, which means that the surpluses were guaranteed to eventually stop. You can only run a sustainable sovereign surplus if you can run a sustainable current accounts surplus in excess of the desire of the private sector to accumulate net financial assets. Which is very nearly impossible in the real world. Clinton’s surpluses were largely correct policy – it was only partly his fault that the private sector was engaged in a debt bubble. But being the smart response to a private debt bubble does not make them sustainable.

      “The small tax increases and typical levels of GDP growth – nothing extraordinary – generated surplus.”

      This is a just-so-story that does not discuss the underlying causal relationships. The GDP growth was driven by increasing private debt, the same debt which allowed the sovereign to run a surplus… for a while. Because here’s the thing about private debt driven growth: It eventually stops. Messily.

      “That surplus was GWBush’s excuse for a tax cut; he was “returning” the money to the American people. If not for that tax cut plus the war spending, the US would be in good financial shape.”

      Define “good financial shape.” The sovereign – being sovereign – is solvent by fiat rather than by balance sheet, so associating a reduction in the volume of outstanding sovereign securities with being in good financial shape is a nonsense.

      The private sector, had Clinton’s policies continued, would have been almost as insolvent as it became under Bush. The testament to Bush’s mendacity and/or incompetence is not so much that he created mammoth deficits – deficits would have been necessary in any event, simply from the need of the private sector to deal with the massive private debt overhang from the dotcom bust. The real measure of Bush’s Fail is that he managed to make the private sector more insolvent while running deficits that, had they been deployed correctly, would have reduced the private sector solvency problem.

      “My belief – just my opinion – is that deeper levels of austerity do the opposite of what is claimed, that they lead not to expansion but a permanent loss of GDP.”

      You don’t need to postulate that on faith. Anybody who has been paying attention to the IMF’s propensity to turn problems into disasters and disasters into catastrophes could tell you that.

      “A modern example is Germany,”

      Be very careful when extolling Germany. Germany does many things right, but Germany is also looting the rest of Europe’s industrial plant. The current Eurozone crisis is the culmination of forty years of German foreign policy focus on a single goal: To get someone who is not the BuBa to pay the price of defending the BuBa’s policy decisions.

      – Jake

  4. Gareth said, on August 18, 2011 at 10:41 am

    Government expenditure as a % of GDP has also been shrinking, according to the IMF Article IV doc. So, expansionary fiscal contraction, resulting in a smaller deficit. Right?

    Unemployment is 8%+. With a saving ratio of 17%, running a budget deficit of 5% of GDP is no problem at all, I would guess most of the government debt is held domestically.

    • duncanseconomicblog said, on August 18, 2011 at 11:24 am

      Not sure we can measure the stance of fiscal policy by looking at govt spending to GDP.
      Better to take a narrative approach and look at discretionary changes.

    • JakeS said, on August 19, 2011 at 12:34 am

      In a word, no. Expansionary fiscal expansion, resulting in a smaller relative (but larger absolute) deficit, since the spending multiplier is above one.

      In general, you do not get to use ex post data (like observed deficit to GDP ratio) to argue for ex ante behavioural relations (like whether fiscal policy is expansionary or contractionary). At least, not if you’re doing science, as opposed to (Chi)cargo cult economics.

      – Jake

  5. Peter Kunzmann said, on August 18, 2011 at 7:41 pm

    Excellent stuff!

  6. Paul Odtaa said, on August 19, 2011 at 12:22 pm

    One of the main reasons that a Belgium central government is unimportant is the strength of its regions and towns. Decisions are made on a local basis.

    Another is that Belgium like Germany, Holland, Scandinavia and some other European countries do not see a big distinction between public and private spending. So a business setting up a factory will have infrastructure built to help them and the local colleges will work with the business to provide the necessary training.

    • Cahal Moran (@tmmbloguk) said, on August 20, 2011 at 9:17 pm

      That is precisely the way it should be – it is a mutually beneficial relationship rather than a parasitic one, which is what some believe.

      The parasitic relationship is between the financial sector and real economy.

  7. Redshift said, on August 19, 2011 at 1:21 pm

    Am I right in thinking that Belgium like some of the Scandinavian countries uses a ‘Ghent system’ for distributing unemployment benefits?

    The ‘Ghent system’ is where trade unions or trade union federations are responsible for the distribution of unemployment benefits and has resulted in the maintainence of high proportions of trade union membership density (in contrast to the UK where it has declined significantly).

    If stronger wages has maintained consumer spending and therefore growth in some countries. Can it be said that the higher trade union density in Belgium has resulted in the maintenence of growth?

    • duncanseconomicblog said, on August 19, 2011 at 1:24 pm

      It’s certainly true that in countries with higher density GDPO growth is more likely to feed through into wage growth.

      And given we suffer from falling real wages in the Uk at the moment – higher density would be a good thing for the economy.

  8. Ken said, on August 20, 2011 at 8:49 pm

    Actually there’s little enough evidence of Belgian fiscal expansion (as in discretionary stimulus spending). The bulk of the rise in the government spending appears to be the standard automatic stabilisers – benefits (3% of GDP) and government employee salaries(1% of GDP). The rise in fixed capital formation is minimal, although there is a substantial rise in subsidies (slightly smaller than the rise in wages).

    The big difference with the UK of course is that it was running a relatively sensible government fiscal plan pre- the crisis:

    General government deficit relative to GDP
    2001: +0.4%
    2002: -0.1%
    2003: -0.1%
    2004: -0.4%
    2005: -2.7%
    2006: +0.1%
    2007: -0.3%
    2008: -1.3%
    2009: -5.9%
    2010: -4.1%

    Compare this to the drunken sailor G. Brown. Total spending 2001-2007: -17.2% (Belgium was -3%).

    True lesson of Belgium: Do not overspend in the good times.

    • JakeS said, on August 22, 2011 at 10:06 am

      It is nonsense to claim that Brown “overspent,” since (a) the British economy has not been operating at capacity for the last thirty years, and there is plenty of useful work left undone while there remains involuntary idleness. And (b) the period 2001-07 was Tory Bliar’s watch, not, for the most part, Brown’s.

      Since Britain is a sovereign country with a floating currency, the only measure of whether it is spending too much or too little is whether its economy is operating at or below capacity, not some arbitrary ex post accounting construct like the sovereign deficit.

      What is true is that Tory Bliar misspent a lot of money on subsidising the City (and, more importantly, failed to tax it properly – most such taxes would not have raised great revenues because they would have taxed the activity they were levied on to extinction, but they would have created a healthier business climate for productive enterprise) and salving his imperial phantom limb pain with a couple of losing colonial wars.

      But all of that has been true ever since the traitor Thatcher destroyed British manufacturing. Singling out Brown, or even Tory Bliar, for criticism on this matter clouds rather than clarifies the discussion.

      – Jake

  9. Andrew Zalotocky said, on August 21, 2011 at 6:42 pm

    One of the things that deters businesses from expanding is regulatory uncertainty. For example, if a government is talking about creating lots of new entitlements for workers then many businesses will postpone hiring new staff until they know what it’s actually going to cost them. This will particularly apply to small businesses, which have very little margin for error. Belgium still has a government in the sense that all the agencies of the state are still functioning. It lacks a government in the sense that there is nobody holding the great offices of state, so there are no politicians to initiate new policies. So regulatory uncertainty is temporarily eliminated, which is very likely to have a positive effect on the private sector. I suspect that the Belgian experience will come to be seen as an important case study in this area.

    • JakeS said, on August 22, 2011 at 10:26 am

      In one sense a caretaker government reduces regulatory uncertainty. In another sense it increases it, because regulations that require regular extension and renegotiation (such as some contract regimes between state utilities and volatile electricity producers) is suspended pending political decision, while regulation of emerging or obviously dysfunctional sectors will remain up in the air longer.

      This creates considerable uncertainty for those firms which rely on this regulation, and those tend to be the large manufacturing businesses that are the growth drivers of modern industrial economies. Small business is not a growth driver in most mature industrial societies – it is mostly reactive rather than proactive (and therefore cannot drive short-term growth) and it contributes little to technological improvement or the capital accumulation of society (which are the two key drivers of long term growth).

      – Jake

  10. Prince Kropotkin said, on August 23, 2011 at 6:24 pm

    JakeS – Do you have a day job?

    • JakeS said, on August 24, 2011 at 10:20 am

      I’m in accounting. Why? You offering?

      – Jake

  11. […] this is as bad as it looks, and simply taking your hands off the stick and leaving it to George was relatively the best policy, just because it wasn’t actively […]

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