UPDATE 3-Belgium sets new savings for 2013 budget deficit cut

Tue Nov 20, 2012 10:01am EST

Related Topics

* Deficit to be cut to 2.15 pct of GDP in 2013 from 2.8 pct in 2012

* Measures to limit wage increases

* Tax break for companies to stimulate job creation

* Aim to reduce wage cost disadvantage relative to neighbours (Adds Di Rupo at news conference, economist comment)

By Philip Blenkinsop and Ben Deighton

BRUSSELS, Nov 20 (Reuters) - Belgium's government agreed extra savings on Tuesday to rein in its budget deficit in 2013 and take measures including a cap on wage hikes to reverse its loss of competitiveness.

After five weeks of talks, including a final 16 hour push, Prime Minister Elio Di Rupo's six-party coalition announced 3.4 billion euros ($4.4 billion) of tax hikes and savings to cut the deficit to 2.15 percent of GDP from 2.8 percent this year.

Belgium aims for a balanced budget in 2015. Tuesday's package comes on top of some 14.5 billion euros of measures this year, including a limit on early retirement, higher tax on corporate cars and a freeze of some government spending.

Economists said the measures were broadly growth-friendly. However, they said the 0.7 percent economic growth assumption for next year was over-optimistic, with stagnation more likely.

Belgium was the euro zone's fifth most indebted state last year, and its debt pile this year is seen rising to 99 percent of gross domestic product (GDP).

However, its deficit/GDP ratio is lower than the euro zone and EU average - below for example levels in Britain, France and the Netherlands, a point Di Rupo noted at a news conference.

"We don't wish to be euphoric. It was a difficult task, but we have spared the public as much as we could. There will for example be no sales tax hike or extra burdens on those who work," he said.

Unlike European neighbours, including Germany, Belgium had not resorted to cuts in family allowances, pensions or healthcare provision or a rise in value-added tax, he said.

Belgium plans to increase taxes on life insurance and savings products as well as on tobacco and alcohol and raise 513 million euros from Belgians legalising black economy money and repatriating funds secretly stashed abroad.

Steven Vanneste of BNP Paribas Fortis said that if growth this year was zero, as he expected, the government would need to find a further 1 billion euros for 2013. He said the new budget included hefty one-offs items, meaning that major additional savings would be required in 2014 - an election year.

"They have backloaded the effort, with not so much needed in 2013. It is also based on very positive growth assumptions," he said.

NARROWING COMPETITIVENESS GAP

The deal came hours after Moody's stripped neighbouring France of its prized triple-A credit rating as the ratings agency fretted about its uncertain fiscal outlook and loss of competitiveness.

A year ago, without a government, double-A rated Belgium's 10-year debt yields hit a euro-era high of almost 6 percent. After an S&P downgrade, Di Rupo finally formed a government, which pledged to curb the deficit, bringing investors back and reducing those yields to a current level of about 2.3 percent.

But Belgium's export-oriented economy is under increasing strain. Preliminary data from the central bank in October showed stagnation in the third quarter and contraction in the second. Business and consumer sentiment are also at their lowest points since 2009.

The tortuous budget talks have not helped, pushing up the cost of insuring Belgian debt over five years by about 12 percent since the start of the negotiations.

Belgium will retain its system of increasing wages for both the private and public sectors in line with inflation.

However, wages will not be allowed to rise beyond that level in the coming two years. The aim is to eliminate Belgium's wage cost disadvantage relative to neighbours France, Germany and the Netherlands by 2018, with the gap to Germany halved by 2015.

The inflation measure used to determine wage increases will also change. It already discounts tobacco products, alcoholic drinks and motor fuel. In future, it will also take into account prices during sales.

Belgium is also driving increased competition in its energy sector so that prices are more in line with those of neighbours.

Companies will face a 400 million euro reduction in their tax bill to encourage them to hire.

Economy Minister Johan Vande Lanotte said it was important to put Belgian expenditure savings in perspective, adding 300 million euros would be freed up for those on low incomes.

"In other countries people strike to prevent wages falling. In Belgium, wages are adapted to the cost of living." ($1 = 0.7803 euros) (Reporting by Ben Deighton and Philip Blenkinsop; Editing by Lisa Shumaker, Andrew Osborn and Stephen Nisbet)

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