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Home News Annual puzzling over cuts in expenditure will not suffice

Annual puzzling over cuts in expenditure will not suffice

Published on 07/03/2013

The past few years have seen many economists and European policymakers insisting on the merits of savings efforts to secure credibility on the financial markets in tough economic times. But the tide now seems to be turning and a number of chief economists with Belgian banks feel that the pace of savings can no longer be maintained. “Missing short-term goals is not a disaster,” Hans Bevers Petercam summarizes the sentiment shared by Belfius, ING, KBS and Petercam’s chief economists. “A deficit that is slightly below the agreed 2.15% will not hurt the financial markets. From an economic point of view the budget target has little value.”   This change of thought has a lot to do with a recent study by IMF chief economist Olivier Blanchard which suggests that curbs on public spending are much more damaging to growth than expected. With every euro saved by the government causing economic activity the GDP to drop by more than one euro, the IMF is calling for a relaxation of stringent savings efforts. According to Economics professor Paul De Grauwe the current European recession, which he believes to be the result of savings, has made economists and policymakers see the light. European Commissioner Olli Rehn is also starting to change his tune and suggested that structural savings should be made rather than to focus on economic cyclical effects. This could well mean that Belgium will no longer need to save two billion euros extra lost as a result of the weak economic climate. The banks’ chief economists also agree that structural measures could provide a better solution. “The real challenge is a long-term one,” says Bevers in reference to the ageging population. “The annual puzzling over cuts in expenditure will not suffice.”  ING’s Peter Vanden Houte agrees, saying: “We must focus on structural measures to alleviate the debt burden each year, like a pension adjustment for example.”