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Public Debt in a Federal State: Warnings from Belgium

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  • Dieter Van Esbroeck
  • Erik Buyst

Abstract

This paper examines the dynamics of public debt in a fiscal federation, with a particular focus on Belgium from 1970 onwards. Lately, the institutions responsible for monitoring Belgium’s fiscal situation have been issuing increasingly alarming alerts regarding the sustainability of the current budget deficits. We show that Belgium has experienced a continuous cycle of high public debt and claim that the explanation for this phenomenon lies in the interplay between the different political or geographical entities in the feder ation. We examine whether the different entities exhibit free-riding behaviour in public debt creation and find significant fiscal imbalances both at the federal level and at the sub-national level. Multiple political and constitutional mechanisms are suggested as potential drivers. Furthermore, the paper presents and discusses several policy options for breaking the cycle of high public debt: devising a new state reform, implementing a no-bailout clause and establishing an insolvency framework.

Suggested Citation

  • Dieter Van Esbroeck & Erik Buyst, 2024. "Public Debt in a Federal State: Warnings from Belgium," Working Papers of Department of Economics, Leuven 743621, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
  • Handle: RePEc:ete:ceswps:743621
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    File URL: https://lirias.kuleuven.be/retrieve/764775
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