Belgium

In this chapter we will give a broad overview of Belgium’s practice of fiscal federalism. As we will show, the complexity of Belgium’s federal constellation is reflected in the financing of its subnational level of government. As we explain in section I, the unitary Belgian state only recently morphed into a federal State relatively. The origins of this federal transformation can be traced back to a coexistence of two major communities in a single country: a Dutch-speaking majority and a French-speaking minority. The State’s structures have hence been designed to achieve a political equilibrium between these two communities, consisting of two distinctively different federated entities (‘Regions’ and ‘Communities’) which – depending on the entity – acquired ever broader fiscal autonomy.
In section II we discuss in detail the various phases of this gradual institutional reform and specify how they affected the fiscal framework regulating the financing of the subnational governments (hereafter referred to as ‘federated entities’). In section III we focus on the final result of these reforms, so that readers interested mainly in the current situation can skip straight to this section. As in most federations, Belgian Fiscal federalism can be seen as resting on four pillars. First, tax autonomy gives federated entities authority over their own tax bases, tax rates, and tax policies, which we tackle in section III(A) The gap between subnational tax revenues and the overall funding needed to finance devolved competences is bridged by a system of federal grants, explained in section III(B), where we also address the difference between needs-based grants and incentivising (responsibility-based) grants.
As the COVID-19 crisis has shown, however, regional tax revenues and federal grants are often insufficient to balance the budget, and borrowing from financial markets becomes necessary. In section IV we discuss the rather weak borrowing constraints of the federated entities. When all other channels of regional finance are put under pressure, an additional source of financing can be found in interregional solidarity in the form of equalisation mechanisms, which we explain in section V. It should not come as a surprise that such a complex system comes with rather original solutions to manage and organise cultural or language diversity, that also produces severe challenges. These challenges are discussed in section VI. Building on them, section VII sketches out some lessons for the EU. Section VIII concludes.