THE IMPACT OF THE FISCAL CRISIS ON BELGIAN FEDERAL GOVERNMENT: CHANGES IN THE BUDGET DECISION MAKING PROCESS AND INTRA-GOVERNMENTAL RELATIONS Paper for the Conference on the Impact of the Fiscal Crisis on Public Administration, 3-4 May 2013, Tallinn, Estonia. Steve Troupin, Jesse Stroobants, Trui Steen KU Leuven, Public Management Institute
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THE IMPACT OF THE FISCAL CRISIS ON BELGIAN FEDERAL
GOVERNMENT: CHANGES IN THE BUDGET DECISION MAKING
PROCESS AND INTRA-GOVERNMENTAL RELATIONS
Paper for the Conference on the Impact of the Fiscal Crisis on Public
Administration, 3-4 May 2013, Tallinn, Estonia.
Steve Troupin, Jesse Stroobants, Trui Steen
KU Leuven, Public Management Institute
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Abstract
In this article, we analyse the impact of the fiscal crisis on budget decision-
making and governance in Belgium’s federal government by relying on
interviews with key stakeholders. After our introduction, the second section
situates the beginning of the fiscal crisis in Belgium by end 2008. The third
section analyses the budget decision-making process in Belgium, which is
found relatively unaffected by the fiscal crisis. The fourth section reports
differentiated impacts of the fiscal crisis on governance in the regular
administration and social security sector. The paper concludes that Belgium’s
federal government up to now has not seized the opportunity provided by the
fiscal crisis to engage in public management reform. We emphasize a number of
contextual factors able to trigger such a move.
Keywords: Belgian politics, fiscal crisis, budget decision-making processes, public management reforms, governance.
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1. THEORETICAL INTRODUCTION
In this paper, we study the impact of the fiscal crisis on federal government in
Belgium. The objective of this contribution is twofold. First, the paper provides fresh
empirical evidence as to the management of the fiscal crisis in federal Belgium.
Second, it aims at testing a hypothesis linking the magnitude of the fiscal crisis to that
of the state responses to it: big problems require big solutions, it sounds.
The relevance of such a research cannot be denied. Since the bankruptcy of
Lehman Brothers in fall 2008, the banking crisis and all its metastases remain on top
of the policy agenda in almost all OECD countries. Crises, however, also provide
windows of opportunities to engage in long-postponed reforms. By examining the
relation between crisis and reforms, this contribution helps understanding conditions
supporting reform implementation.
Public administration literature on the current crises remains scarce. Kickert
(2012) could nevertheless make two important points. First, he developed a sequential
model for unfolding of crises in the public sector. Banking crises required
governments to take recovery and other measures aimed at supporting the economy.
These weighted on public finances in such a way that deficits came to be seen as
excessive, leading to the current fiscal crisis. Second, he observed ambiguous impacts
of the fiscal crises on public administration. While some de-politicization of the
budget decision-making process could be observed in the Netherlands, with
“financial-economic institutions […] actually predetermin[ing] and maintain[ing] the
budgetary process” (Kickert, 2012: 309), modes of governance have shifted toward
more centralization and less administrative autonomy in Germany.
In this article, we examine whether these findings apply to federal Belgium as
well. We enquire whether crises have indeed unfolded according to Kickert’s
sequence, and whether the fiscal crisis has affected the budget decision-making
process and governance in federal Belgium.
We rely on COCOPS (2012: 5) for defining the fiscal crisis as the third phase of
the global crisis. In the initial phase, the banking crisis, “banks […] [face] difficulties
and governments undert[ake] different support and rescue measures to save the
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financial institutions”. The second phase of economic crisis emerges when “drastic
falls in GDP and employment [force] governments to undertake economic recovery
measures”. Finally, the fiscal crisis arises in the period when “the deficits c[o]me to
be seen as excessive”, in response to which “governments [start] consolidating the
budgets and undertaking cutback management”.
For observing changes in the budget decision-making process, we rely on
Johnson’s (1971) classification of governments’ budgets: the “A” budget contains all
expenditures required to merely continue existing policies at present levels, the “B”
budget contains expenditures foreseen to finance new policies or improve existing
ones; and the “X” budget contains the expenditures from previous “A” and “B”
budgets to be suppressed, so that “A + B – X = total government revenues”; the latter
falling outside the scope of this research. This classification allows distinguishing two
main types of budget decision-making process (Pollitt & Bouckaert, 2004; Pollitt,
2010): line-item and performance budgeting. The difference between both lies in the
way expenditures are transferred from the “A” and “B” budgets to the “X” budget:
while the former imposes an equal sacrifice to all policies through linear measures,
the latter relies on analysis to select those particular policies from “A” and “B”
budgets to be sacrificed. In this article, we define performance budgeting by two
attributes: it is a kind of budget decision-making process relying on targeted measures
versus linear ones, AND (Boolean “and”; Ragin, 1987) supporting these targeted
measures by analytical rather than partisan input; line-item budgeting corresponding
to all situations where one or both attributes are absent.
Finally, building further on some COCOPS’s (2012: 8, 13) indicators – such as
degree of (de)centralization and (de)politicization, modes of coordination, use of
(performance) management and budgeting instruments, autonomy versus control of
civil servants and public sector organizations, and relationships between public,
private and third sector to study the impact of crises on governance – , we
conceptualize the impact of the fiscal crisis on governance as shifts in the division of
labour (and level of responsabilisation) between political and administrative actors
related to public management.
In order to answer the research questions outlined earlier, next to document
analysis, six interviews were performed with key stakeholders: budget experts from
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two Vice-PM cabinets, a policy expert from a ministerial cabinet, administrative
budget experts in the subgroups “primary expenses” and “social security”, and one
administrative top manager.
Next, section two examines how crises unfolded in federal Belgium and situates
the beginning of the fiscal crisis. Section three presents the actual budget decision-
making process in federal Belgium and examines whether the fiscal crisis has affected
the process. Section four examines the impact of the fiscal crisis on governance, and
does so by contrasting the regular administration with the social security sector.
Finally, section five is devoted to discussion and section six to the conclusions.
2. CRISES IN BELGIUM
In federal Belgium, the unfolding of financial crises is tightly intertwined with
the unfolding of political crises, with no less than four different governments, three
PMs and two different coalitions following each other in a short time period.
A. The Belgian banking crisis
The banking crisis has hit Belgium very hard since its beginning in September
2008. Less than two weeks after the bankruptcy of Lehman Brothers, governments of
Belgium, the Netherlands and Luxemburg had to invest 11,2 billion euros in the
failing Fortis Bank. Two days later, Dexia Bank required a capital investment of 6,4
billion euros from the governments of Belgium, France and Luxemburg. On October
5th, Fortis Bank was nationalized by the Belgian government for 4,7 billion euros,
75% of the shares being sold to BNP Paribas. Two and three weeks later, the federal
government had to recapitalize other banking institutions, Ethias and KBC, for 4
billion euros.
In total, the federal government in 2008 invested about 20 billion euros or 5%
of GDP in rescuing the three failing banks Fortis, Dexia and KBC, while the federated
economic recovery measures, “X’ ” concern the additional transfers from “A” to “X”
budget required to finance the “B” budget.
Table II: Marginal budgetary measures in 2010 and 2011, in million euros (FPS,
2011)
2010 2011 X Cuts in administrative expenditures 200 200 • loans 100 100 • other expenditures (i.e.: underutilization) 100 100 Health care expenditure’s automatic growth rate reduction 644 812 Cuts in social security administrative expenditures 107 141 R Fiscal revenues 696 1075 • professional diesel 141 141
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• pawl system for diesel 140 285 • DBI deduction 140 140 • tobacco excise duties 59 118 • enterprises car fleet 95 105 • advantages in nature 117 109 R’ Non-fiscal revenues 547 1180 • fiscal fraud fighting 134 232 • social fraud fighting 48 133 • financial sector contribution 130 580 • energy sector contribution 235 235 X’ Additional cuts to finance economic recovery 338 528 B Economic recovery measures 719 594 • prolongation “anti-crisis package” 238 0 • new measures for the labour market 124 204 • lowering VAT in catering sector 255 255 • fiscal regime agriculture sector 20 20 • poverty plan and social integration 26 26 • independent workers 25 58 • administrative expenditures 31 31 Total X + R + R’ + X’ – B 1813 3342
4. IMPLICATIONS FOR GOVERNANCE
A. Introduction
In this part of the paper, we examine the impacts of the fiscal crisis on
governance in two ways. First, we comment on the results of the COCOPS WP3
survey in federal Belgium. Second, we examine the governance implications of the
budget decisions made. Belgium has undertaken modest NPM-like reforms, resulting
in a system of strategic planning. This system is affected by the fiscal crisis, through
the linear measure of underutilization. Yet its impact differs in two sectors (regular
administration and social security), resulting from the way it is implemented. Finally,
we discuss the governance implications of a targeted measure, the reform of pensions.
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B. COCOPS WP3 Survey Results
In the framework of COCOPS WP3, a survey on the impact of the fiscal crisis
on governance was sent to top civil servants. While the number of respondents
remained low (61 respondents working at central government level), the survey
nevertheless provided a first impression on the impact of the fiscal crisis on
governance.
The first question concerned the broader approach to fiscal crisis, and ultimately
relates to the previous section. Results show, first, that expenditures are cut
everywhere. Second, most respondents consider these cutback measures as targeted
ones. However, what is considered as a linear measure from government point of
view (i.e.: -10% on investments) generally amounts to targeted cuts in administrations
(i.e.: these investment projects are delayed to reach the norm). Moreover, almost as
many respondents consider the cutback measures as linear ones. Finally, some
respondents emphasize that efficiency gains are taken to realize savings in their policy
area.
Table III: In response to the fiscal crisis, how would you describe the broader approach to realizing savings in your policy area? (N=61)
N % Proportional cuts across-the-board over all areas 22 35,5 Productivity and efficiency savings 15 24,2 Targeted cuts according to priorities (reducing funding for certain areas, while maintaining it for the prioritized ones)
24 38,7
None / no approach required 1 1,6 Total 62 100,0
The second question related to the specific responses to the fiscal crisis in the
respondents’ organization. The survey results indicate that hiring freezes are the most
important response to the fiscal crisis. In contrast, little reliance on staff layoffs, pay
cuts, and pay freezes were observed. This can easily be explained by the public sector
employment rules at hand. The survey also confirms reliance on delaying and
cancelling “B” budget policies, as well as cuts in the “A” budget. Fees and users
charges seem to remain relatively unaffected.
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Table II: In response to the fiscal crisis, to what extent has your organization applied the following cutback measures? (N=61; 1= not at all; 7 = to a large extent)
Mean Stand.dev. Staff layoffs 1,80 1,39 Hiring freezes 5,13 2,01 Pay cuts 1,12 0,45 Pay freezes 1,78 1,67 Cuts to existing programmes 4,19 1,88 Postponing or cancelling new programmes 4,79 1,63 Downsizing back office functions 3,19 1,79 Reducing front line presence 2,44 1,65 Increased fees and user charges for users 1,71 1,41
The last survey question dealt more directly with this section’s concerns, by
discussing shifts in power relations and division of labour. Strong evidence of an
increased power of the FPS Budget could be found (in Belgium, the FPS Finance is
responsible for fiscal revenues, the FPS Budget for expenditures; “Ministry of
Finance” was hence translated to “FPS Budget”). Most results gravitated around the
middle position. Most important is increased power of FPS Budget. More surprising
is the reported greater reliance on performance information. While this may indicate
that administrations rely more on performance information, our analysis shows that
government-wide budget decision-making level still makes limited use of it.
Table VI: As a result of the fiscal crisis (N=61; 1= not at all; 7 = to a large extent)
Mean Stand.dev. The power of the Ministry of Finance has increased 4,75 1,71 Decision making in my organisation has become more centralized
3,90 1,85
The unit dealing with budget planning within my organisation has gained power
3,78 1,83
The conflict between departments has increased 2,95 1,74 The power of politicians (vs. nonelected public officials) in the decision making process has increased
3,83 1,88
The relevance of performance information has increased
4,41 1,77
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C. New Public Management in federal Belgium: Strategic planning
It is generally argued that the New Public Management (NPM) wave only
reached continental European countries like Belgium by late 1980s/early 1990s
(Pollitt & Bouckaert, 2004; Christensen & Lægreid, 2011). Beyond compliance with a
handful of common principles, each country’s government is responsible for the
organization of its administration. Brans et al. (2006) argue that NPM principles and
thoughts spread from the Flemish government (Bouckaert & Auwers, 1999) to the
federal one. This took the form of strategic planning, which can be defined by two
attributes: an increased autonomy for administrations in exchange for output steering.
Strategic planning was implemented in the traditional administration and in the social
security sector (agencies ruled by a board composed of workers’ and employers’
representatives). Both regimes however somewhat differ.
In 1999, PM Verhofstadt announced a major public administration reform
called Copernicus. It foresaw in a new structure, a modern personnel policy, a new
management culture and new operating procedures (Hondeghem and Depré, 2005).
This reform marked NPM’s advent in Belgian federal government (Brans et al.,
2006), with market-orientation, opening of senior positions to candidates external to
administration, and a new relation between the politicians and the administration
based on performance and responsibility (Broucker et al., 2009). With hindsight onto
the rather selective implementation of the Copernicus reform, the NPM-glass,
however, is but half-full (De Visscher et al., 2011; Montuelle et al., 2009): the basic
structure and principles of functioning of the Belgian regular administration remains
Weberian, with some elements of NPM, making federal Belgium a “Neo-Weberian
State” (Pollitt & Bouckaert, 2004). Notably, the administration remains highly
politicized (Drumaux & Goethals, 2007). However, senior civil servants are expected
to prepare and implement management plans, for which they receive annual budgets
and a certain degree of managerial autonomy (Drumaux & Goethals, 2007; De
Visscher et al., 2011).
The social security sector begun its modernization somewhat earlier, in the
framework of the fiscal crisis of the 90’s, when Belgium had to struggle to meet the
Maastricht criteria and join the Eurozone. Resources and information were centralized
inside the sector, and NPM reforms were progressively undertaken. By 1997, the
legislation foresaw in the contractualisation of the relation of social security agencies
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vis-à-vis the federal government. A number of capacity problems however delayed
implementation until 2002, when a first round of administration contracts between
each of the fifteen social security agencies and the federal government were signed.
These defined the service to be provided to the public, the administrative
modernization projects to be carried on, process and output indicators, and granted a
multi-annual management budget (Legrain et al., 2005).
Since this limited NPM wave, both the regular administration and the social
security sector thus enjoy a system of strategic planning, with increased managerial
autonomy in exchange for output steering. There are, however, differences between
both regimes: in the regular administration, this system binds individual senior civil
servants to the federal administration, and grants annual budgets for the realization of
output objectives; in the social security sector, the administration contracts concern
the whole agencies, who enjoy multi-annual budgets.
Let’s now look at how the fiscal crisis impacts these systems, through the most
significant linear measure taken in the framework of the budget decision-making
process: the underutilization of budgets. Overall, this measure leads to decoupling
budget allocation from the strategic planning systems. However, the way this measure
is implemented in both sectors has a different impact: de-responsabilisation in the
regular administration, responsabilisation in the social security sector.
D. Impact of the fiscal crisis in the regular administration
The rationale behind the underutilization of budget as cutback measures is an
expectation that cabinet staff members have of the behaviour of senior civil servants.
Because previous year’s budget is the basis for next year’s budget, cabinet staff
members expect senior civil servants to ask more finances than actually needed to
perform their tasks in order to safeguard their organization’s financial position in the
future. Hence the fiscal crisis budgets foresee in the automatic transfer of funds from
the “A” to the “X” budget. If a budget of, say 10 euros, is granted to a department, a
share of it, say 2 euros, is expected to be underutilized and is already booked in the
“X” budget.
This measure is implemented in two ways. On the one hand, in order to ensure
that underutilization “is a bit more than spontaneous”, a system of expenditure
monitoring has been put in place at the FPS Budget. In the longer term, this system
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should grow to a revamped, accrual-based accounting system for the federal
administration, eventually giving execution to the financial management part of the
Copernicus reform (Hondeghem & Depré, 2005: 232-233). On the other hand,
government expects underutilization to be inapplicable in certain circumstances, and
has foreseen in an exception to the measure. In the example taken above, a minimal
share of the automatically saved 2 euros are reserved in a fund. During the budget
year, administrations can draft demands for access to this fund, provided they can
justify the concerned expenditure is absolutely necessary for the continuity of the
public service.
It is principally this second implementation measure that creates frustration,
from the political as well as the administrative side. Cabinet staff members report the
poor cost-effectiveness of this measure. They spend much time discussing whether or
not invoices of marginal amounts should be paid immediately to preserve the
continuity of the public service. More generally, cabinet budget experts wonder
whether such discussions do belong to their core-business.
From the administrative side, this measure is perceived as a humiliation,
especially for those senior civil servants infused with NPM ideals. The Copernicus
reform foresaw in a de-politicization at least of purely operational management,
installed a system of strategic planning, and a remuneration scheme of senior civil
servants accordingly. In practice, however, the senior civil servants have to justify to
political actors why “new toilet paper is required for the continuity of the public
service”. The senior civil servants ask for clarification from the political side: either
they are seen as modern managers and at least these purely operational measures
should belong to their autonomy, or politicians row the public service and there is no
need for professional managers. Also, this measure is considered as unfair, since the
extent to which some expenditure is exempted from underutilization is perceived to
rely more on individual senior civil servants’ negotiation skills and personal network
than on some measurable yardstick if any. Finally, the measure is said to be
inefficient over the long run. What indeed counts are yearly expenditures. The