See Dutch version below.
During Belgium’s transformation into a federal state, a complex set of rules has been designed in order to finance the regions and communities. The third state reform of 1988 has led to the approval of the Special Finance Act. The Act established that the financing of the regions and communities mainly stems from allocated parts (‘dotations’) of the federal personal income tax and the value-added tax.
Although these dotations are allocated parts of federal taxes, there is still accountability of the regions and communities. As the financial resources are limited, the efficiency level of their governance results in more or less financial resources which can be spend for implementing policies. The recent reform of the Special Finance Act partially focuses on accountability through fiscal autonomy for the regions. Henceforth, politicians on the regions have to choose and justify in which way they will generate tax revenue in order to accomplish their policy goals. At the time of elections this autonomy leads to democratic accountability. Although the notions ‘autonomy’ and ‘accountability’ are quite similar, they ought to be distinguished from each other.
Regional fiscal autonomy
The expansion of regional fiscal autonomy in the sixth state reform is accomplished through the power to impose unlimited “extensive surcharges” (a certain percentage on top of the standard tax) regarding the personal income tax. This autonomy replaces the previous dotation from the personal income taxes. Furthermore, the regions can impose tax increases or decreases, as well as reductions on the federal personal income tax concerning matters for which they are competent (e.g. the renowned “living bonus” to acquire or keep your own property). The sum of the surcharges, reductions, tax increases and decreases is called the “regional personal income tax”. Nevertheless, the powers transferred in the sixth state reform to the regions are financed with new dotations instead of increased fiscal autonomy.
Financing of communal powers
The powers transferred in the sixth state reform to the communities (e.g. family benefits, eldercare and healthcare) are also financed by new dotations. In contrast to the regions, the communities do not acquire fiscal autonomy, because this might cause problems with regard to the territorial division of powers and the principle of equality in Brussels. Consequently, the communities still receive most of their income from allocated parts (dotations) of the revenue of the federal personal income tax and the value-added tax. The Lambermont agreement of 2001 substantially increased the value-added tax dotation, but this so called “Lambermont-turbo” has retroactively been halted starting at 2010.
New solidarity mechanism
The former national solidarity compensation could result in ‘perverse effects’, such as the ‘development trap’. In the latter case a region would receive less dotations in spite of increased tax profit caused by economic growth in the region. The sixth state reform has maintained the national solidarity mechanism, but in a more limited way and without perverse effects.
Temporary transitional mechanism
At the request of Flemish politicians, negotiations were held about a reform of the Special Finance Act. As Wallonia would most likely receive less means in case of increased regional fiscal autonomy, a proposal has been launched in order to facilitate the negotiations, namely the introduction of a (temporary) transitional mechanism. As a result, it has been agreed that a region or community could neither structurally impoverish, nor financially gain or loss in the first year of the Special Finance Act reform. From budget year 2015 a transitional amount will be provided to the communities and regions in order to offset the impact of the reform. This amount remains the same in nominal value during the first 10 years. For the following 10 years it will linearly decrease (with a gradual decrease of 10% per year) until it has completely vanished. Hence, Wallonia has the time to economically strengthen itself.
“Proper funding” for Brussels
The sixth state reform also provides a more "proper funding” of the Belgian capital city. Several explanatory reasons can be mentioned. Firstly, fiscal autonomy concerning personal income tax as an accountability mechanism is not effective for Brussels. The wages of many employees can indeed not be taken into account in Brussels, as many of them commute to and live in other regions. Secondly, Brussels loses significant tax revenues due to the presence of many international and national public institutions which enjoy an exemption from property taxation. Finally, the status of Brussels as capital city and headquarters for numerous international institutions entails specific tasks and costs.
Therefore, the additional funding for Brussels will be 416 million EUR by 2015. One part of this funding is allocated to a specific purpose. The Brussels Region acquires funding for the additional burdens that they bear in comparison to other regions with regard to bilingualism, mobility, training and safety. The other part of the financing is called the "dead hand" compensation. It is a compensation for the loss of revenue due to the exemption from property tax of numerous buildings. In addition, a structural refinancing was provided for commuters (financed by the other two regions) and international officials (financed by the federal government). After 2015, the "proper funding" of the Brussels-Capital Region will be limited to maximum 0.1% of GDP.
Accountability for climate and pensions of statutory civil servants
The federal government pays the pensions, even for civil servants of the communities and regions. Traditionally, the regions and communities contributed to these pensions only to a very limited extent based on the Special Act of 5 May 2003. Following the sixth state reform, the financial contribution of the regions and communities will progressively increase from 2016.
The reform of the Special Finance Act also establishes a climate accountability mechanism for the regions and communities. The National Climate Committee defines goals to reduce greenhouse gas emissions. If a region or community does not reach or exceed the goals, there will be a financial bonus or a malus which will be paid or received by the federal government.
Contribution to public expenses and aging of the population
Starting 1 January 2014, the regions and communities ought also to significantly contribute to the public financing of the State (250 million EUR in 2014, 1.25 billion EUR in 2015 and 2.5 billion EUR from 2016) and the increasing cost of aging of the population (a contribution of 0.23% of GDP by 2030).
B. Bayenet & M. Bourgeois, “Le financement des entités fédérées en Belgique: quels changements après la sixième réforme de l’Etat ?”, in J. Sautois & M. Uyttendaele (eds.), La sixième réforme de l'Etat (2012-2013). Tournant historique ou soubresault ordinaire?, Limal, Anthemis, 2013, 263-310.
- J. Goossens & S. Vanbelle, “Institutioneel akkoord over de Bijzondere Financieringswet ontsluierd”, Rechtskundig Weekblad 3 March 2012, 1190-1208.
- J. Goossens & S. Vanbelle, “Zesde staatshervorming: welke fiscale bevoegdheden voor de Gewesten?”, Fiscoloog 12 February 2014, 1-6.
- G. Pagano, “ La sixième réforme de l’Etat: autonomie fiscale vs solidarité, le cas de la Région wallonne”, in J. Sautois & M. Uyttendaele (eds.), La sixième réforme de l'Etat (2012-2013). Tournant historique ou soubresault ordinaire?, Limal, Anthemis, 2013, 359-371.
- D. Yernault, “ Le refinancement de Bruxelles : « juste », « correct » ou… ?”, in J. Sautois & M. Uyttendaele (eds.), La sixième réforme de l'Etat (2012-2013). Tournant historique ou soubresault ordinaire?, Limal, Anthemis, 2013, 311-358.