Interregional Fiscal Transfers Resulting from Central Government Debt: New Insights and Consequences for Political Economy

We calculate that over the 1970-2002 period the combination of persistent primary surpluses of the Flemish region and persistent primary deficits of the Walloon region –and to a lesser extent of the Brussels region- increased the net fiscal transfer due to the federal debt provided by Flanders to Francophone Belgium to almost 100% of the total interest bill on the Belgian federal debt. This amount is considerably larger than the transfer amount resulting from previous “traditional” interregional transfer calculations that assume a balanced federal budget. The geographically very unevenly spread benefits from Belgian federal budget deficits –and hence the geographically strongly diverging incentives for federal budget deficits- may well explain to a considerable extent the large overall size of deficits and debt in Belgium since the 1970s. In other words, interregional fiscal transfers resulting from the federal debt may be important not just because of their distributional consequences, but even more because they may provide an explanation for the large overall size of deficits and debt that have particularly characterised Belgium since the 1970s.

Publication year:2021

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Authors from:Higher Education

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