Dec. 14 (Bloomberg) -- Belgium’s budget deficit will overshoot targets set by the European Union as the economy slows, putting pressure on the new government to maintain a tight grip on spending to insulate the country from the euro debt crisis.
Belgium’s deficit will reach 4.2 percent of gross domestic product in 2011, and may be driven as high as 4.6 percent by the costs of rescuing Dexia SA, once the country’s largest bank, the National Bank of Belgium said in Brussels today. The 2011 target was 3.6 percent.
While Belgium’s economy faces a “systematic deterioration of the outlook,” the bank’s governor, Luc Coene, told reporters today that the deficit might not go as high as forecast. “It’s very hard to say that things went off the rails here.”
The central bank also cut its forecasts for economic growth in Belgium, the sixth-largest economy in the euro region. With close links to Germany and other neighboring countries, export-oriented Belgium often serves as a bellwether for the 17-nation euro region.
Belgium’s economy will grow 0.5 percent in 2012, the bank forecast, cutting a previous estimate of 2.3 percent. It cut its 2011 growth forecast to 2 percent from 2.6 percent. Belgium is coming off a 0.1 percent drop in gross domestic product in the third quarter, the first contraction since the start of 2009.
Longer Life Expectancy
Coene declined to offer a forecast for the 2012 deficit, saying the bank completed its estimates before the new government -- in office since Dec. 6 -- hammers out a 2012 budget. Belgium has pledged to cut the 2012 deficit to 2.8 percent.
Coene, 64, warned of rising pension costs, saying “we will not be able to maintain our standard of living if we do not properly start working longer.” Belgians are living longer and “you cannot expect to just use that longer life expectancy for retirement.”
Coene’s term as central bank governor runs until 2016, when he’ll be 69.
The deteriorating outlook adds to strains on new Prime Minister Elio Di Rupo, already facing doubts over his ability to enact budget cuts that came close to upending efforts to form his six-party coalition government.
The six parties only agreed to a package of 11.3 billion euros of tax increases and spending cuts after Standard & Poor’s downgraded Belgium’s credit rating by one notch to AA on Nov. 25.
Another rating cut may be in the offing, this time as part of a broader S&P review of all euro-area governments after last week’s European summit on the debt crisis. S&P hasn’t said when it will issue its next judgment on Europe’s creditworthiness.
Belgian borrowing costs touched the highest level in 11 years in November, with the yield on the benchmark 10-year bond closing at 5.86 percent on Nov. 25. Ten-year bonds yielded 4.49 percent at 3 p.m. today.
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