The sustainability of the Belgian government debt: regional, federal and European prospects (BELDEBT).

The objective of the BELDEBT project will be to address the main challenges for Belgian public finances considering their regional, national and European dimension. The project will develop along two lines of research. A first line will link the demographic transition pattern of Belgium with the sustainability of its public debt. Given the impact of ageing on household savings, one may expect ageing to affect the risk premium on government bonds via the current account. This issue will be tackled at a theoretical level using an overlapping generation model (OLG) calibrated for Belgium. The rationale for the link between the current account and debt sovereign risk pricing will be investigated at the theoretical and empirical level for all euro area countries. A second line of research will go into fiscal reforms increasing regional fiscal autonomy, and the effects of this process on the sustainability of the Belgian public debt. Reforms of this nature are bound to imply a substantial shift of federal tax revenue to the various lower level governments. For this reason the extent to which fiscal reforms are compatible with constraints drawn up by the EU (Stability and Growth Pact) and global financial markets needs to be looked into. In this light the need for an internal Stability Pact will be considered, as well as the necessity of having the regions take on part of the public debt. To this end the current Special Finance Act as well as alternative ways of regional finance will be modelled by means of a regionalized computable general equilibrium model, taking into account miscellaneous interregional externalities.

Keywords:Interregional externalities, Overlapping generation model (OLG), Fiscal federalism, Sovereign risk premium, Savings, Ageing, Debt sustainability, Public debt

Disciplines:Applied economics, Economic history, Macroeconomics and monetary economics, Microeconomics, Tourism