Economic malaise forces Belgium to extend austerity

BRUSSELS Sun Mar 11, 2012 11:40am EDT

Belgium's Prime Minister Elio Di Rupo arrives at his residency for a budgetary control meeting in Brussels March 9, 2012. REUTERS/Yves Herman

Belgium's Prime Minister Elio Di Rupo arrives at his residency for a budgetary control meeting in Brussels March 9, 2012.

Credit: Reuters/Yves Herman

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BRUSSELS (Reuters) - Belgium will extend austerity measures by 1.82 billion euros ($2.39 billion) because of a possible contraction of its economy this year, to keep its 2012 budget deficit within EU limits.

After a full week of talks, ministers from the six-party coalition agreed a series of measures on Sunday as well as the freezing of a further 650 million euros of spending, in case further economic weakness meant more savings were required.

Belgium will raise tax on tobacco and investment products. It will save by postponing delivery of army helicopters, promoting generic medicines and giving less aid.

One-offs, notably the 289.6 million euros of state subsidies that postal services operator Bpost must return, will also help.

The new savings add to the 11.3-billion euro package of measures agreed when the government took power at the end of the year. Those measures included raising the effective retirement age from a current average of 59 and hiking tax on company cars.

Belgium has pledged to bring its public sector deficit down to 2.8 percent of gross domestic product (GDP) this year from 3.8 percent in 2011. It risks an EU fine if its deficit does not fall to at least 3 percent.

The country plans to bring its public sector budget into balance by 2015.

"To show how far we have gone, I offer the following comparison: the budget deficit of the Netherlands is 4.5 percent, of France 6 percent," Prime Minister Elio Di Rupo told a news conference.

"Of the countries that had a budget deficit of greater than 3 percent, our country is one of the best pupils in the class, if not the best."

The Federal Plan Bureau, whose estimates are typically used to draft budgets, has forecast Belgium's economy, the sixth largest in the euro zone, would grow by just 0.1 percent this year from 1.9 percent in 2011.

Belgium's central bank has forecast a contraction of 0.1 percent in 2012.

Di Rupo said the civil servant committee advising on the budget had said Belgium should save 1.47 billion euros and set aside a further 500 million euros. It had assumed growth of 0.1 percent.

The prime minister said the government had taken on the central bank's forecast and pushed through a greater amount of savings and a larger provision.

The government will again review its budget assumptions and austerity measures in July.

Belgium's public sector debt of nearly 100 percent of GDP, and its lack of government for 18 months, had seen it come under fire in financial markets, with a 10-year state bond yield pushing almost to 6 percent at the end of last November.

The formation of a government in December and its resolve to rein in Belgium's budget has helped bring the 10-year yield down to some 3.4 percent, although the euro zone crisis has also eased, with a deal on Greek debt restructuring and more than 1 trillion euros of cheap money pumped into banks by the European Central Bank.

($1 = 0.7622 euros)

(Reporting by Philip Blenkinsop; Editing by Alison Williams and David Hulmes)

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