EXPLANATORY MEMORANDUM2017 BUDGET REVIEW

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Table of Content1 INTRODUCTION AND NET POLICY SPACE...........................................................................6

1.1. Introduction – 2017 Budget Review...........................................................61.2. Purpose net policy space table..................................................................6

1.2.1 Evolutions given constant policy........................................................................................................81.2.2 Measures and New initiatives...........................................................................................................101.2.3 Detailed net policy space table............................................................................................10

2 ECONOMIC AND FINANCIAL ENVIRONMENT...................................................................142.1 General....................................................................................................142.2 Belgium....................................................................................................152.3 Flanders...................................................................................................15

2.3.1 General cyclical policy............................................................................................................152.3.2 Production and demand..........................................................................................................162.3.3 Investments.................................................................................................................................182.3.4 Business development.............................................................................................................192.3.5 Consumers....................................................................................................................................202.3.6 Unemployment...........................................................................................................................21

3 EUROPEAN FRAMEWORK AND STANDARDISATION.....................................................243.1. Background..............................................................................................243.2. Opinion of the High Council of Finance....................................................25

3.2.1 Medium-term objective............................................................................................................253.2.2 Path of the general government.............................................................................................253.2.3. Path apportionment....................................................................................................................263.2.4 HCF balance versus ESA balance............................................................................................273.2.5 Recommendation for Flanders..............................................................................................27

3.3. Flemish vision for the 2017-2020 path....................................................293.4. Concertation Committee..........................................................................30

4. REVENUE BUDGET....................................................................................................................314.1. Total revenues.........................................................................................314.2. Surcharges and allocated portion of the VAT and the PIT (personal income tax) 34

4.2.1 Parameters...................................................................................................................................344.2.2. Results.............................................................................................................................................36

4.3. Specific grants from the Federal Administration......................................434.4. Regional taxes.........................................................................................454.5. Allocated revenue....................................................................................474.6. Other revenues........................................................................................474.7. Lottery funds...........................................................................................484.8. Institutions to be consolidated.................................................................48

5. EXPENDITURE BUDGET...........................................................................................................525.1 Introduction.............................................................................................525.2 Policy and payment appropriations.........................................................52

5.2.1 Policy appropriations................................................................................................................525.2.2 Payment appropriations..........................................................................................................545.2.3 Overall evolution of policy and payment appropriations...........................................56

5.3 Policy and payment appropriations spread over the 13 policy areas.......575.4 Discussion per policy area.......................................................................59

5.4.1 Finance and Budget (F&B).....................................................................................................595.4.2 Flemish Department of Foreign Affairs (IV).....................................................................605.4.3 Economy, Science and Innovation (EWI)..........................................................................615.4.4 Education and Training (OV).................................................................................................615.4.5 Welfare, Public Health and Family (WVG)........................................................................625.4.6 Culture, Youth, Sport and Media (CJSM)............................................................................635.4.7 Employment and Social Economy (WSE)..........................................................................645.4.8 Agriculture and Fisheries (LV)...............................................................................................655.4.9 Environment, Nature and Energy (LNE)............................................................................65

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5.4.10 Mobility and Public Works (MOW)........................................................................................665.4.11 Spatial Planning, Housing Policy and Immovable Heritage (RWO).........................675.4.12 Chancellery and Administration (K&B)..............................................................................675.4.13 Higher entities (HE)...................................................................................................................68

6 ESA CORRECTIONS...................................................................................................................686.1 ESA corrections with regard to the public sector perimeter....................................696.2 ESA corrections in the context of the Stricter European budgetary surveillance

697 GOVERNMENT BALANCE........................................................................................................71

7.1 Government balance...............................................................................717.2 ESA revenues...........................................................................................727.3 Primary ESA expenditure.........................................................................737.4 Underutilisation.......................................................................................747.5 ESA corrections........................................................................................757.6 Sensitivity analysis..................................................................................757.7 Government balance...............................................................................76

8 FINANCIAL MANAGEMENT......................................................................................................788.1 Consolidated debt: introduction...............................................................788.2 Evolution of the consolidated debt in 2017.............................................788.3 Refinancing requirements and new financing requirements in 2017.......798.4 Evolution of the consolidated debt in 2016 and 2017 per entity.............80

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List of Tables

Table 1-1: Summary net policy space table (in thousands of euros)...................................7Table 1-2: Summary table constant policy (in thousands of euros)....................................8Table 1-3: Summary table measures and new initiatives (in thousands of euros)............10Table 1-4: Detailed table of net budget space (in thousands of euros).............................11Table 2-1: Estimates of the actual GDP growth, International and Belgium and regions, in %...................................................................................................................................... 14Table 3-1: Attribution of the Flemish regional personal income tax (in thousands of euros)......................................................................................................................................... 27Table 3-2: From HCF government balance to structural HCF balance (%GDP)..................28Table 3-3: Recommended path HCF (incl. estimate ESA-government balance ) (%GDP and million euros)....................................................................................................................29Table 4-1: Major items of the ESA-corrected resources (in thousands of euros) 2016 BP. 31Table4-2: Cumulative impact Tax Shift on Flemish surcharges (in million euros).............34Table 4-3: Full run-down of parameter..............................................................................35Table 4-4: Gross supplementary income tax charge and allocated portion of PIT and VAT (in thousands of euros).....................................................................................................37Table 4-5: Gross surcharges according to the transactionalised cash basis (in thousands of euros)...........................................................................................................................39Table 4-6: Sensitivity (in thousands of euros)...................................................................43Table 4-7: Specific allocations from the Federal Administration (in thousands of euros). .44Table 4-8: Regional taxes (in thousands of euros)............................................................47Table 4-9: Institutions to be consolidated (in thousands of euros)....................................48Table 5-1: Consolidated policy and payment appropriations (in thousands of euros).......52Table 5-2: Balance calculation – Policy appropriations for ministries (in thousands of euros)...............................................................................................................................53Table 5-3: Balance calculation – Policy appropriations for consolidated (in thousands of euros)...............................................................................................................................54Table 5-4: Balance calculation – Total policy appropriations (in thousands of euros).......54Table 5-5: Balance calculation – Payment appropriations for ministries (in thousands of euros)...........................................................................................................................55Table 5-6: Balance calculation – Payment appropriations for consolidated institutions (in thousands of euros)..........................................................................................................55Table 5-7: Balance calculation – Total payment appropriations (in thousands of euros)...55Table 5-8: Policy appropriations per policy area (in thousands of euros)..........................57Table 5-9: Payment appropriations per policy area (in thousands of euros).....................57Table 7-1: Summary government balance table (thousand euros)...................................71Table 7-2: From revenue appropriations to ESA revenues (thousand euros)....................72Table 7-3: From expenditure appropriations to consolidated primary expenditure (thousand euros)..............................................................................................................73Table 7-4: change of interest rate by 1% (thousand euros)..............................................75Table 7-5: government balance........................................................................................76Table 8-1: Financing requirement ministry IB 2017 and BR 2017 (in thousands of euros)80Table 8-2: Evolution of the consolidated gross debt of the Government of Flanders per entity (in thousands of euros)...........................................................................................80

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List of Figures

Figure 2-1: Flemish overall economic trend, January 2008 – March 2017.........................15Figure 2-2: Rate of production in industry and trade, January 2008 – March 2017...........16Figure2-3: Economic trend in carcass construction, business-related services, January 2008 – March 2017...........................................................................................................16Figure 2-4: Rate of production according to business leaders and industrial production, January 2008 – March 2017..............................................................................................17Figure 2-5: Foreign orders industry, January 2008 – March 2017......................................18Figure 2-6: Factors determining investment, January 2011 – March 2017........................19Figure 2-7: Start-up ratio of businesses in the Flemish Region, January 2015 – January 2017, per 1,000 existing businesses.................................................................................20Figure 2-8: Consumer confidence, January 2008 – March 2017........................................21Figure 2-9: Year-on-year change in the number of non-working job seekers, Jan 2008 – Mar 2017 (in absolute numbers).......................................................................................22Figure 4-1: Major items of ESA-corrected resources, 2017 BR..........................................33Figure 4-2: Evolution of tax autonomy as a proportion of total resources from 2014 ACT until 2017 BR....................................................................................................................33Figure 5-1: Policy and payment appropriations (in thousands of euros)...........................56Figure 5-2: Policy and payment appropriations per policy area – 2017 BR (in thousands of euros)...........................................................................................................................59

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1 INTRODUCTION AND NET POLICY SPACE

1.1. Introduction – 2017 Budget Review

In September of last year, the2017 initial budget achieved the balanced budget objective that had been pursued. This objective has been rigorously sustained in the present 2017 budget review. In doing so, we are continuing to exclude two expenditure items from the objective:

- the construction cost of the Oosterweel link;- the very specific issue of the federal regulations governing the investment grants

for hospital infrastructure which This was already discussed at length as part of the initial budget.

The effect of the upward trend shown by the economic climate is that a limited policy margin has been established in compiling the2017 budget review. This margin is used guardedly. For the first time in years, the Government of Flanders is again creating a buffer of 100 million euros to allow for possible setbacks. In addition, the remaining 45 million euro margin is mainly spent on non-recurrent measures.

This budget review consolidates the initiatives implemented in recent years with a view to maintaining the balanced budget in 2019.

1.2. Purpose net policy space table

An in-depth analysis of the budget documents will show readers which (budgetary) challenges the Flemish Government is faced with as part of a budgetary cycle and how it acts in response thereto. However, because of the sheer volume of information involved, this can be a daunting enterprise. Which is why the Government of Flanders has made it a tradition in recent years to summarise the essence of the information in the net policy space table in the Explanatory Memorandum.

The purpose of this table is first and foremost to distinguish between the evolutions given a constant policy framework and the measures or new policy initiatives implemented by the Government of Flanders as part of a budgetary cycle. One particular merit of this table is that it shows the government balance assuming a constant policy framework. If this balance is more positive than envisaged under the budgetary target, the Government of Flanders has at its disposal a net policy space, to be used for new policy initiatives or enabling the Government of Flanders to put in place decisions which result in less revenue. In the reverse case, whereby the government balance results in a balance that is less than the target envisaged, the Government of Flanders is required to put measures in place (scrapping certain appropriations or providing for extra revenue) in order to reach the intended budgetary target. This information is also included in the net policy space table.

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Table 1-1: Summary net policy space table (in thousands of euros)Balanced budget 2017 IB (1) 4,408Expenditures excluded from budgetary target (2) 120,220Government balance 2017 IB (3=1-2) -115,812Evolution given constant policy (4) 189,559Government balance 2017 BR given constant policy (5=3+4) 73,747Buffer (6) 100,000New initiatives (7) 45,000Government balance 2017 BR (8=5-6-7) -71,253Expenditures excluded from budgetary target (6) 73,717Balanced budget 2017 BR (7=5+6) 2,464

Table 1-1 shows the evolution of the balanced budget from initial budget to budget review. To deduce the government balance from the balanced budget in the initial budget both the construction cost for the Oosterweel link and the investments for hospital infrastructure prior to the transfer of powers that affects the 2017 budget, must be added. In the initial budget, these expenditures were estimated at 120.2 million euros. As such, the estimated net borrowing in the initial budget stood at -115.8 million euros.

In the budget review the Government of Flanders estimates that the general balance improves by 189.6 million euros given constant policy (line 4). If no measures or new initiatives were to be implemented, this would still produce a positive government balance to the amount of 73.7 million euros in 2017.

In its 2017 initial budget, the Government of Flanders not only aimed at a balanced budget in 2017, it also laid the groundwork to maintain a balanced budget in the years ahead. To this end, the available policy space was first and foremost used to create a 100 million euro buffer. In addition, 45 million new initiatives are being planned which, to a large degree, are non-recurrent.

In total, the policy space has accordingly been filled with 145 million euros in additional appropriations. This produces 71.3 million euros in net borrowing. Smoothed out for the expenditures which are excluded for the purpose of the verification of the balanced budget, there is a 2.5 million euro surplus. The expenditures that are excluded from consideration are 46.5 million euros less in the budget review than they were in the initial budget. This is due to the fact that the construction cost for the Oosterweel link is currently estimated at 33.7 million euros instead of 80.2 million euros as stated in the initial budget.

In the upcoming sections of the present chapter, we first discuss the various factors of constant policy. We then look at the measures and new initiatives. Finally, the entire net policy space table is presented, whereby the main evolutions given constant policy are included as well as a detailed table of the new appropriations.

In reading this chapter, readers should remember that the sole purpose of the information that is included here is to outline the key developments. In that sense, the net policy space table is to be seen as a management summary of the budget which should always be read in combination with the other chapters of the Explanatory Memorandum as well as with the explanatory notes for each programme. In the detailed table we have included references to the programmes or the institutions concerned, to simplify the link with other information.

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1.2.1 Evolutions given constant policy

The net policy space table first and foremost shows how the appropriations are evolving given constant policy. Both on the revenue and the expenditure side, the appropriations are seen to change with every budgetary cycle as a result of the altered situation or as a result of adjusted estimates of the underlying cost drivers.

In addition, an update is performed of the ESA corrections (see chapter 6 for further details) and of the estimate of the underutilisation (see chapter 7).

Table 1-2: Summary table constant policy (in thousands of euros)Revenues (1) 484,574General Revenues 169,677Adjustment of consolidation perimeter 256,940Other revenues institutions 57,957

Expenditures (2) 310,709Index 90,284Updated policy and payment appropriations -116,019Increase in expenditures in function of evolution of revenues 79,531Adjustment of consolidation perimeter 256,913ESA corrections (3) -12,908Underutilisation (4) 28,601Evolution given constant policy (5=1-2+3+4) 189,559

Further to the budget review the policy space given constant policy is seen to rise by 189.6 million euros.

This increase is largely to do with changes in revenues. Under constant policy conditions, the revenues rise by 484.6 million euros. On the one hand the net policy table shows the evolution in the general revenues, on the other hand the change in the institutions’ revenues.

The term ‘institutions’ is used in the Explanatory Memorandum in reference to the institutions whose revenues and expenditures are factored in to determine the consolidated Flemish revenues and expenditures. Every six months, the INR publishes an updated list of the institutions which are considered to be part of the Flemish Administration. Insofar as possible the revenues and expenditures of these institutions are included in the consolidated Flemish appropriations. The addition of a new institution as part of the consolidation perimeter means the Flemish revenues and expenditures increase, without this having a (significant) impact on the general balance. At the time of the budget review a number of new institutions have been added to the consolidation perimeter, most notably from a budgetary perspective are the Flemish Social Protection Agency (formerly known as the Care Fund) and the Flemish Association for Development Cooperation and Technical Assistance. In addition, the budgets of the Flemish Inter-University Council (VLIR) and the Flemish Council for University Colleges (VLHORA) are included in the consolidations from the 2017 budget review onwards. The bulk of the rise in revenues at the institutions is the result of the inclusion of these institutions in the Flemish consolidation perimeter (see Table 1-4).

In the net policy space table, the expenditure dynamics given constant policy is further broken down into 4 categories:

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- Index- Updated policy and payment appropriations- Increase in expenditures in consideration of revenue dynamics- Adjustment of consolidation perimeter

The first major factor of constant policy is the implementation of the agreements in respect of the index parameters, both for the payroll and operating appropriations.

The “Updated policy and payment appropriations” category contains the alterations that are the result of a re-estimated appropriations, insofar as they are not the result of the modified index parameters or of reallocations. Since these reallocations are budgetary neutral they are not included in the table.

Elements included in this category are the adjustment of the salary appropriations in the policy domain of education as a result of the latest estimates of pupil numbers for instance (teachers’ wage simulation), or an update of the appropriations required for the service vouchers. In most cases, this update has an impact on policy and payment appropriations alike. Some of them are just about an adjustment of the payment appropriations. These changes too are included in this category.

A third category is the adjustment of the expenditure appropriations which are the direct result of a changed revenue estimate. The main reason to segregate this category is that this expenditure modification is directly financed with extra revenues from the institution in question, to the effect that it is budget-neutral. In many cases, these extra appropriations are only available to be used provided the pertaining revenues materialise. The net policy space table is made to include the institutions for which a substantial rise in expenditures due to an adjusted revenue estimate.

A fourth and final category in the expenditure dynamics relates to an adjustment of the appropriations by reason of the expansion of the consolidation perimeter. This results in allocating existing expenditures to the Flemish Administration which were not yet assigned to Flanders.

All in all, this produces a 310.7 million euro increase of the expenditure appropriations given constant policy, which has a negative impact on the net policy space. All the more so as an increase of the expenditure appropriations results in a deterioration of the government balance.

Alongside an adjustment of the revenue and expenditure estimate given constant policy, the ESA corrections too are updated in every budgetary cycle. This has a negative impact on the government balance to the amount of 12.9 million euros.The ESA corrections are discussed in greater detail in chapter 6.

Finally, the underutilisation assumption too is to be re-estimated as part of every budgetary cycle. As explained in chapter 7, the underutilisation estimate goes up by 28.6 million euros. A greater level of underutilisation has a positive impact on the government balance. We refer to chapter 7 for further information on this topic.

1.2.2 Measures and New initiatives

Given constant policy, the budget would show a surplus of 73.7 million euros. As the historical expenditures for the hospital bill and the construction expenditures for the Oosterweel link are not factored in for the balanced budget objective, the Government of Flanders had a net policy space of 147.4 million euros.

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The Government of Flanders has not planned any new measures (cost-cutting measures or new revenues) to create additional policy space. Out of prudential considerations and with a view to maintaining a balanced budget in the years ahead, the available policy space has been assigned to building a 100 million euro buffer and 45 million euros in new initiatives.

Table 1-3: Summary table measures and new initiatives (in thousands of euros)Measures (1=2+3) 0Revenues (2) 0Expenditures (3) 0

Buffer (4) 100,000

New initiatives (5=6+7) 45,000Revenues (5) 0Expenditures (6) 45,000

Adjustment net policy space (8=1-4-5) -145,000

The detailed net policy space table contains the list of the main elements of these new initiatives. The explanatory notes for each programme have more details of these new initiatives.

1.2.3 Detailed net policy space table

The detailed net policy margin table contains the list of the main factors which determine the evolution of the Flemish revenues and expenditures, broken down according to constant policy and measures/new initiatives as explained above.

For the constant policy, the elements have been included which, in absolute figures, are in excess of 5 million euros.

The first column contains - insofar as relevant – a reference to the programme of the institution where the change is seen to occur. The second column describes the nature of the change. For a more detailed explanation, readers are referred to the explanatory notes for each programme.

For a clear understanding of the table, it is important to reiterate that the reallocations, both within a given policy area and across the policy areas, have not been included in the table. The net policy space table is not intended to reflect the evolution for each programme or institution in full, but only the evolutions that have an impact on the Flemish Administration’s net policy space. For instance, on the occasion of the budget review, the resources of the Flemish Climate Fund were reassigned to various policy areas by way of grants. These shifts are not incorporated in the net policy margin table, with only the net impact on the consolidated policy and payment appropriations included.

The amounts detailed in table 1-4 reflect the difference with the available appropriations upon initial budget (evolution), not the absolute amounts that are available.

Table 1-4: Detailed table of net budget space (in thousands of euros)

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PR/Institution

Policy appropriations

Payment appropriations

Balanced budget 2017 IB (1) 4,408Expenditures to be excluded from consideration for verification of budgetary target (2) 120,220Government balance 2017 IB (3=1-2) -115,812

Revenues constant policy (4) 484,574

General Revenues 169,677Federal transfers 157,352Gross supplementary income tax charge 45,956Regional taxes 11,568Flemish Climate Fund -38,085Resource fund education -12,598Other MFC revenues 5,484

Revenues institutions 314,897Adjustment perimeter 256,940Other revenues institutions 57,957

Expenditures constant policy (5) 558,610 310,709

Index 91,289 90,284CB Exceedance threshold index May 2017 77,672 77,672X Other index 13,617 12,612

Updated policy and payment appropriations 121,852 -116,019CB Provision unallocated policy space -5,000 -5,000CB FFEU 12,877 -2,061CD Tax expenditures: housing tax regime -16,507 -16,507CD Tax expenditures: Service vouchers 20,363 20,363CE Interest -11,192 -11,192CE Issuance differences -10,138 -10,138VFLD Disaster Fund 31,649 31,649FWO 5-yearly call Big Science -17,862 0Hermes Indirect Carbon Leakage (ICL) -2,909 7,527Hermes New estimate payment schedule (other) 0 -35,734F Teachers’ wage simulation 6,262 6,262F Fund resources -12,598 -6,161

FGAdjustment payment schedule capacity resources education 0 -11,521

GF Family benefits -17,527 -17,527GH Home and elderly care policy -22,281 -21,674GH Expedients policy 8,826 8,826VIPA Strategic flat rate hospital funding 6,700 6,700VSB (ex Care Fund) Defrayments Care Insurance Schemes 7,692 7,692FoCI Appropriation FFEU resources 8,900 0Sports Flanders Agency Equestrianism infrastructure 20,426 0

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JD Care appropriation 12,235 12,235JD Service vouchers -23,451 -23,451X Appropriation resources Flemish Climate Fund 41,098 -4,081MINA Mina Fund 0 -17,554MF Road Safety Fund 6,457 3,536MI Adjustment energy cost 5,285 0VIF Road infrastructure 0 -33,211VIF Hydraulic/marine engineering 0 -17,000De Lijn Update parameters 14,880 14,880De Lijn Tram investments 56,322 0W&Z Hydraulic engineering works 7,000 0W&Z Seine Scheldt 0 10,000DVW Investments The Flemish Waterway 10,000 0BAM Oosterweel link (excluded from budgetary objective) -46,503 -46,503PM Municipal Fund 6,686 6,686X Other 24,162 26,940

Increase expenditures in consideration of evolution of revenues 88,642 79,531VEB 5,709 5,709GO! 9,111 0University & University Colleges 34,979 34,979VRT -6,810 -6,810De Lijn 5,800 5,800VMSW 39,853 39,853

Adjustment Consolidation perimeter 256,827 256,913Flemish Association for Development Aid 9,441 9,527Flemish Social Protection (VSB) 247,386 247,386Other 218 218

ESA corrections (6) -12,908Correction Flemish Social Protection 578Planned building expenditures DBFM Scholen van Morgen -43,748PMV rolling fund 346Hospital infrastructure A1/A3 -396VAC Brussels 4,000Provision for ESA corrections 26,312

Underutilisation (7) 28,601

Government balance 2017 BR given constant policy (8=3-4+5+6+7) 73,747

CB Buffer (9) 100,000 100,000

New initiatives 2017 BR (10) 45,000 45,000

DAReinforcement of staff numbers Foreign Affairs – Brexit 180 180

DE Consortium 12-12: 1,000 1,000FD GON resources 5,063 5,063FG Sign language interpreters 237 237

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GA IT resources in consideration of Sixth State Reform 500 500HC Court case Aalst 1,100 1,100FoCI Investment impulse FoCI 2,000 2,000HD Socio-Cultural Work (incl. Public lending rights) 526 466HE Arts policy 874 934JE Investment call Social economy 5,920 5,920LC Circular economy projects 1,700 1,700OVAM Asbestos removal policy 7,500 7,500LE Removal of obstacles to renewable energy 3,000 3,000MI Super storm Dieter 7,000 7,000VMSW Reinforcement SHMs 5,000 5,000NA Immovable heritage IT 1,000 1,000NF Kogge, Flanders Participation Fund, Digital Portfolio 500 500PN Urban regeneration projects 1,500 1,500PO Language tests civic integration 400 400

Government balance 2017 BR further to new policy (11=8-9-10) -71,253

To be excluded from consideration upon verification of budgetary target (appropriations 2017 BR)(12) 73,717

Construction cost Oosterweel link 33,717Investments hospital infrastructure prior to transfer of competences 40,000

Balance after corrections verification budgetary target 2017 BR (13=11+12) 2,464

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2 ECONOMIC AND FINANCIAL ENVIRONMENT

2.1 General

The growth of the world economy is forecast to gain traction in 2017. In the Eurozone, most indicators indicate that the economy is doing better. Consumer confidence is recovering, in spite of some uncertainty over the outcome of elections in a number of Eurozone countries. In the UK, domestic demand has kept up remarkably, despite the negative forecasts on the effects of Brexit.In the US, there is optimism over the new president’s policy to boost the economy. American consumer confidence too is on the rise, in part thanks to the creation of jobs and declining unemployment rates.Economic activity did relatively well in China, in spite of the increasing importance of the service economy (which is resulting in lower growth). The Chinese government is putting in place a range of policy incentives, but needs to remain vigilant and guard against the unduly fast expansion of loans and credits and for the financial situation in state-owned companies. India and Brazil on the other hand are doing slightly worse than initially forecast. Russia is benefiting from the recent rise in prices of natural resources.

Table 2-5: Estimates of the actual GDP growth, International and Belgium and regions, in %

2017 2018Eurozone 1.6 1.6UK 1.5 1.4US 2.3 2.5Japan 0.8 0.5China 6.5 6.0India 7.2 7.7Brazil 0.2 1.5Russia 1.1 1.2Belgium 1.41 -Flemish Region 1.4 1.7Walloon Region 1.1 1.3Brussels-Capital Region 0.8 1.4Source: IMF (2017) and Federal Planning Bureau (Regions: 2016, Belgium: 2017)

1 The Belgian figure for 2017 is more recent then the figures of the regions. The most recent estimate of the regional figures (Federal Planning Bureau 2016) coincide with a Belgian GDP growth of 1,2%.

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2.2 Belgium

In February, the Federal Planning Bureau (FPB) raised its growth forecast for Belgium from +1.2% to +1.4% for 2017. This is due to strong domestic demand. The actual disposable income of households went up by 1% in in 2016. Which means consumer confidence is on the rise, as this is also underpinned by rising employment prospects. All of which benefits consumer spending. Investments too are increasing. Net exports on the other hand are not said to contribute to economic growth in 2017.

2.3 Flanders

2.3.1 General cyclical policy

The results of the monthly economic -cycle survey among Flemish businesses and consumers up to and including March 2017 have been published. The Flemish economic climate is doing well, as shown by the latest indicators. According to the HERMREG forecasts of June 2016, the actual growth of the Flemish GDP was forecast to total up to 1.4% for 2016, and 1.7% in 2017. This recent upward review of the growth rate of the Belgian economy is likely to result in a more favourable figure for Flanders for 2017 in the HERMREG update next July.

The overall economic cycle in business confidence in Flanders has known a clear upswing since late 2016 (Figure 2-1). The recent stagnating gross figures warrant attention, although it is too early to determine their impact on the trend. At any rate, the economic cycle is at a high level.

Figure 2-1: Flemish overall economic trend, January 2008 – March 2017

Source: NBB:

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The picture seen per main sector is as follows (Figure 2-2 and Figure2-3): in industry the economic cycle has been steadily climbing since the second half of 2016, showing no signs of coming to an end soon. In the world of trade, the business trend is currently neutral, after it had been climbing during the first six months of 2016. The business cycle in the construction industry has been consistently rising since the middle of 2014. The growth level in construction is levelling -down, but the trend definitely remains at a relatively high level. In business-related services finally, the trend has been on the rise again since late 2016, however more recent gross figures no longer warrant presumptions of further improvement.

Figure 2-2: Rate of production in industry and trade, January 2008 – March 2017

Industry Trade

Figure2-3: Economic trend in carcass construction, business-related services, January 2008 – March 2017Carcass construction Business-related services

Source: NBB:

2.3.2 Production and demand

The Directorate-General Statistics (DGS) calculated that industrial production in 2016 was up by 5.6% compared to 2015. Especially at the end of that year, the production trend was seen to rise. In January 2017 too, this trends remains relatively high. Mainly the category of non-durable consumer goods experienced an increase in 2016 (+8.8%). According to the NBB’s economic cycle survey, industrial business leaders believe their production output is slightly picking up (Figure 2-4).

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Figure 2-4: Rate of production according to business leaders and industrial production, January 2008 – March 2017

Source: NBB, DGS, 2016.

Order books with foreign orders were completed slightly easier since the second half of 2016 according to Flemish industrial business owners (Figure 2-5). It is likely to boost our export. Over 2016, Flemish export (community concept) rose by 1.5% in actual prices.

Orders in the trade sector are doing slightly better, however recent gross figures look less rosy. Shell construction shows increasing order levels

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Figure 2-5: Foreign orders industry, January 2008 – March 2017

Source: NBB:

2.3.3 InvestmentsThe investment climate is improving (Figure 2-6). The rate of capacity utilisation in industry (excluding food) reached 84.3% at the start of the first quarter of 2017 and is clearly overshooting the long-term average figure of 80.8% (from the 2nd quarter 1988 until the 1st quarter 2017). These kinds of lofty figures were last seen during the boom period in 2007. The demand outlook too is picking up and the inventory level is slightly diminishing. In addition, enhanced profitability and more flexible terms for loans are also seen to play a role, according to the FPB. All of these factors could enhance investments in the near future. The FPB estimates the increase of Belgian business investments in volume at +3.2% in 2017. For public investments this would go up to as much as +3.7%, due to the upcoming local and provincial council elections in 2018.

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Figure 2-6: Factors determining investment, January 2011 – March 2017

Source: NBB:

2.3.4 Business development

For 2016, the start-up ratio (the number of new legal and natural persons per 1,000 existing businesses/self-employed workers) stood at 107 (95 in 2015). The start-up ratio was nearly every month of 2016 higher than it had been in 2015. In January 2017, the ratio is higher than the same months in 2015 or 2016 (Figure 2-7). Business shut-downs among natural and legal persons fell from 69 per thousand businesses in 2015 to 64 per thousand businesses in 2016. The activity shut-down ratio was consistently lower during the first ten months of 2016 than it had been in 2015. However, this is not the case in November and December 2016. In January 2017, the business shut-down ratio also ran higher than the figure seen in January 2016.The bankruptcy ratio dropped to 9.0 in in 2016 (9.3 in 2015). In January 2017, the indicator is higher than it was in January 2015 or in January 2016. However, so far this is the observation of only a single month in 2017. 

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Figure 2-7: Start-up ratio of businesses in the Flemish Region, January 2015 – January 2017, per 1,000 existing businesses

jan feb maa apr mei jun jul aug sep okt nov dec0

2

4

6

8

10

12

14

16

2015 2016

Source: ADS, KBO.

2.3.5 Consumers

Flemish consumer confidence embarked on a downward trend from July 2015 forward. This may be explained by the perils in Greece, the uncertainty on situation of the Chinese economy and some turbulence on the financial markets. From October to December 2015, consumer confidence enjoyed renewed and vigorous recovery. In 2016, the indicator constantly varied: down until April, then up until August, before going down again as far as October. However, in November, continuing into December 2016 and into the first months of 2017, Flemish consumer confidence was picking up again (Figure 2-8). The favourable development of consumer confidence is largely due to the fact that Flemings are seeing a fall in unemployment rates and are getting increasingly more upbeat about their individual financial situation.

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Figure 2-8: Consumer confidence, January 2008 – March 2017

Source: NBB:

2.3.6 Unemployment

Unemployment in the Flemish Region has been steadily declining for up to two years (figure 8).

In late February 2017, the Flemish Region recorded 219,595 non-working job seekers (NWWZ), i.e. 10,534 or 4.6% less than a year ago. Both the number of short duration (< 1 year) job seekers (-5.9%) as well as of medium-skilled job seekers (-7%) and the 50-plus looking for a job (-5.4%) are falling more than average. The recent migration wave manifests itself in increased migrant unemployment (+1.3%). The number of occupationally disabled job seekers too is rising year-on-year (+1.4%), in part due to the extended availability.

 

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Figure 2-9: Year-on-year change in the number of non-working job seekers, Jan 2008 – Mar 2017 (in absolute numbers)

Source: VDAB

Furthermore, the VDAB received 20,790 direct vacancies from the Regular Economic Circuit without temping assignments (excluding vacancies in the job placement and recruitment & selection agencies sector) in February 2017. This is 14.4% or 2,613 more vacancies than in February 2016. Over the past 12 months combined, 232 958 vacancies were directly reported to the VDAB, i.e. a 24.9% rise compared to the previous 12-month period. The highest rise is seen in the number of vacancies for the highly skilled (+34.2%).

In Q4 2016, the temporary employment sector recorded a positive growth on a quarterly basis (+1.8%). This is growth exceeds the level seen in the previous quarter when the temporary employment sector activity rose by 0.7% (quarterly basis). The number of temporary employment hours is also rising year-on-year by 4.6%.

Finally, the employment outlook is on the rise in industry, trade and business-related services. In carcass construction the outlook is seen to stabilise at a high level.

SOURCESFederal Planning Bureau (2016). Regional economic forecasts 2016-2021. July 2016. Federal Planning Bureau BrusselsFederal Planning Bureau (2017). Economic forecasts 2017. February 2017. Federal Planning Bureau BrusselsIMF (2017). World Economic Outlook. Update January 2017. Washington.

Abbreviations

DGS: Directorate-General StatisticsGDP: Gross domestic productECB: European Central BankESI: Economic Sentiment IndicatorFPB: Federal Planning Bureau

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HERMREG: Harmonised Econometric Research for Modeling RegionsIMF: International Monetary FundINR/ICN: National Accounts InstituteKBO/BCE: Crossroads Bank for EnterprisesNBB: National Bank of BelgiumOECD: Organisation for Economic Cooperation and DevelopmentDKB-SVR: Department of Public Governance and the Chancellery, Research Centre of the Flemish GovernmentVDAB: Flemish Public Employment and Vocational Training Service

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3 EUROPEAN FRAMEWORK AND STANDARDISATION

3.1. Background

Belgium is currently subject to the preventive arm of the Stability and Growth Pact and must achieve an annual fiscal adjustment of at least 0.6% of GDP towards the medium-term objective (MTO). In addition, annual expenditure growth should not exceed a  reference medium-term rate of potential GDP growth, unless the excess is matched by discretionary revenue measures. Furthermore, Belgium must comply with the obligations of the corrective arm of the Stability and Growth Pact: the general government deficit must not exceed the threshold of 3% of GDP and Belgium must ensure that the debt level evolves sufficiently quickly towards 60% of GDP.

In its opinion on the Belgian Draft Budget Plan 20172 and in its winter 2017 economic forecast3, the European Commission pointed out that Belgium is at risk of non-compliance with the provisions of the Stability and Growth Pact. The Commission projected a significant deviation from the required adjustment path towards the MTO. Moreover, Belgium is prima facie at risk of non-compliance with the debt reduction benchmark. The Commission invited Belgium to implement all planned measures within the national budgetary process and to ensure that the 2017 budget complies with the Stability and Growth Pact. In addition, the European Commission invited Belgium to accelerate progress with regards to an agreement on an enforceable distribution of fiscal targets among al government levels. The Eurogroup of December 2016 expressed its agreement with the Commission’s assessment 4.

If Eurostat confirms the figures from the winter economic forecasts in April, the European Commission will issue a report under Article 126(3) of the Treaty on the Functioning of the European Union (TFEU). In this report, which represents the first step in the excessive deficit procedure (EDP), the European Commission analyses a Member State’s compliance with the deficit and debt criterion of the Treaty, with due regard to the economic conditions and other relevant factors, such as the compliance with the required adjustment towards the MTO and the implementation of growth-enhancing structural reforms.

The Cooperation Agreement of 13 December 2013 between the Federal Government, the Communities, the Regions and the Community Commissions on the implementation of Article 3, §1 of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union specifies that, as part of the yearly update of the Stability Programme, the annual budgetary targets of the general government are distributed across the different levels of government, on the basis of an opinion of the Public Sector Borrowing Requirements Section of the High Council of Finance (HCF) The overall budgetary targets of the general government are discussed at the Concertation Committee5. The setting of

2 https://ec.europa.eu/info/files/commission-opinion-16112016-draft-budgetary-plan-belgium_en

3 https://ec.europa.eu/info/files/winter-2017-economic-forecast-belgium_en

4 http://www.consilium.europa.eu/en/press/press-releases/2016/12/05-eurogroup-statement-dbp/

5 The Concertation Committee consists of the Prime Minister and five members of the federal government, the Minister-President and a member of the Flemish Government, the Minister-President of the French Community and the Walloon Region, the Minister-President of the government of the Brussels-Capital Region and a member of his government belonging to the other language group. The Concertation Committee decides by consensus.

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the individual budgetary targets for the parties to the agreement and for the local authorities has to be approved by a decision of the Concertation Committee.

3.2. Opinion of the High Council of Finance

On 1 April 2017 the Public Sector Borrowing Requirements Section of the High Council of Finance (HCF) issued an opinion on the budgetary path in preparation for the 2017-2020 Stability Programme.

3.2.1 Medium-term objective

In its previous Stability Programme (2016-2019), Belgium laid down a new MTO for the 2017-2019 period. Belgium opted for a structural balance, which should be reached by 2018.

Determining a new MTO followed from the normal triennial review cycle of the MTO set out in the Stability and Growth Pact and linked to the triennial publication of the European Commission's Ageing Report. As part of this review, the European Commission determined a lower limit for the MTO of the Member States. This lower limit follows from the mechanical application of the formula for determining the MTO and does not guarantee compliance with all the rules of the Stability and Growth Pact. The European Commission set a lower limit for Belgium equal to a structural deficit of 0.5% GDP (compared to the previous lower limit of a structural surplus of 0.75%). This significant downward review of the lower limit was primarily the result of the decrease in the implicit cost of ageing as a result of the pension reform. Had Belgium opted for this lower limit as its MTO, it would comply with the debt reduction rule only from 2019 onward. By choosing a more ambitious objective than the minimum MTO, Belgium is hoping to comply with all European budgetary rules, including the debt criterion, on an accelerated basis.

In keeping with the target set out in the 2016-2019 Stability Programme on the one hand, and the premium which the HCF places on compliance with the debt criterion at the earliest opportunity on the other, the HCF recommends a budgetary path for the 2017-2020 time period in which the MTO, i.e. a structural balance, should be reached in 2018. If this path is chosen, Belgium is set to meet the debt criterion from 2018 onward, with a limited margin of 0.1% of the GDP. In an alternative budgetary path the MTO would be reached in 2019. In adopting the latter path, Belgium would also comply with the debt criterion from 2018 onward, albeit without any margin.

3.2.2 Path of the general government

The HCF puts forward an opinion on the effort to be made in 2017. In addition, the HCF suggests two paths for the 2018-2020 period.

For 2017, the HCF sets out on the premise that the required structural effort over the 2016-2017 period should amount to 1.2% of GDP. This matches the sum of the minimum requirements of the preventive arm of the Stability and Growth Pact for the two years taken together. The analysis conducted by the Federal Planning Bureau (FPB) shows that a 0.2% GDP structural improvement was made in 2016, which means a further structural improvement of 1.0% GDP (approximately 4.2 billion euros) is required in 2017 in order to achieve an average structural improvement of 0.6% GDP on an annual basis.

For the following years, the HCF puts forward a recommended path and an alternative path. An important principle in both paths is that Belgium needs to comply with the debt criterion by 2018 at the latest, by reducing the difference between the debt ratio (106.6% GDP in 2016 according to FPB estimates) and the 60% reference value at an average rate of 1/20th per year over a 3-year period.

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Up to and including 2016, Belgium was subject to a transition period. In its opinion, the HCF states that a number of mitigating circumstances exist for Belgium not to comply with the debt criterion as of 2017, but considers it crucial that Belgium meets the criterion from 2018 onward.

The recommended path proposes to reach the MTO in 2018. As the MTO for Belgium tallies with a structural balance, under the recommended scenario, Belgium would have a structurally balanced budget in place from 2018 onward . This matches with the objective set out in the 2016 Stability Programme and ensures compliance with the debt criterion from 2018 onward, with a small margin of 0.1% GDP. To the extent that a structural improvement of 1.0% GDP were to be effected in 2017 (as recommended by the HCF), a further structural improvement of 1.0% GDP would need to be accomplished in 2018.

The minimum required path entails that the minimum Belgian effort is such that the debt criterion is met from 2018 onward. Under the recommended path, there was still a small margin, under the minimal path there would be no margin. As a consequence the MTO would not be reached until 2019. More specifically, this trajectory would require an additional improvement of 0.8% GDP in 2018 and 0.2% GDP in 2019 to achieve a structurally balanced budget in 2019.

3.2.3. Path apportionment

The Cooperation Agreement of 13 December 2013 stipulates that a path is to be established for Belgium as a whole as well as for the various levels of government and for every individual region and community.

In order to be able to apportion the overall structural effort across the various entities, the HCF devised a method to determine the structural budget balance for the various communities and regions. In essence, this boils down to correcting the government balance for cyclical conditions and one-offs, with a specific correction for the federal transfers. This is explained in detail in the HCF opinion of March 2015, supplemented with a description of how the correction for the autonomy factor is to be implemented, set out in the opinion of April 2016).

The starting point for the apportionment of the effort is that each sub-entity reaches the structural balance in the same year in which Belgium is required to achieve a structurally balanced budget6).

The starting point for each entity is the government balance in the way it is known in late March 2017 based on an informal enquiry by the HRF with the National Accounts Institute. This government balance is converted into a structural balance using the HCF’s methodology.

In the recommended path the difference with a balanced budgetary position in structural terms is to be eliminated through efforts that are evenly spread across 2017 and 2018. In the minimum required path, approximately half of the structural deficit is to be eliminated in 2017, which is similar to the effort proposed in the recommended path, which leaves 2/3rds of the remaining difference to be eliminated in 2018, in order to reach a balanced budget in 2019.

3.2.4 HCF balance versus ESA balance

Before converting the HCF’s paths to Flanders, it is important that we explicitly reiterate the HCF definition of the government balance.

6 For the local authorities the HCF advises to attain a structurally balanced budget from 2018 onward in either scenario. Since the FPB’s estimate show that the local authorities would achieve a structurally balanced budget or a surplus in a no policy change scenario, no additional effort is required.

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To establish the different paths, the HCF sets out from the HCF government balance. To determine this HCF government balance, the revenues of the regional personal income tax (surcharges) are determined differently from the way they are determined in the National Accounts in compliance with the ESA2010 methodology, which is also adopted by the Flemish Administration from this budgetary cycle onward (see 4.2.2.2).

The HCF uses a specific method as the implementation of the ESA method for 2015 - the first year in which the regions were allowed to collect surcharges – only partially attributes the surcharges regarding 2015 to 2015, whilst in 2014 the regional surcharges were yet to come into existence. In light of the negative impact this would have on the regions, the HCF has chosen to use its own definition to draft the paths, which acts to neutralise this partial attribution. The difference between both methods is especially striking in 2015.

Table 3-6: Attribution of the Flemish regional personal income tax (in thousands of euros)2015 2016 2017 2018

According to HCF definition 1 5,601,138 5,900,517 5,933,367 5,902,715

According to ESA definition (transactionalised cash) 2 2,772,617 5,779,174 5,832,755 5,816,660

HCF - ESA 3 (1) 2,828,521 121,343 100,612 86,055

For 2016, this implies that the deficit which the HCF sets out from in order to determine the budgetary paths, is 121.3 million euros more favourable than the government balance according to the ESA method. For 2017, the Flemish budget shows a government balance in HCF terms that is 100.6 million euros more favourable than the government balance included in the present Explanatory Memorandum. This difference between these two approaches will continue to diminish in the following years.

3.2.5 Recommendation for Flanders

The starting point is the HCF government balance of Flanders in 2016 as known in late March. This balance is converted into a structural balance in accordance with the HCF method.

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Table 3-7: From HCF government balance to structural HCF balance (%GDP)2016

Government HCF balance (1) -0.010%Correction autonomy factor (AF) (2) 0.074%Cyclical effect (3) -0.092%One-offs (excl. AF) (4) 0.014%Correction transfers (5) 0.012%Structural HCF balance (6=1-2-3-4-5) -0.017%

Source: HRF report April 2016

Based on the latest information in the HCF’s possession, it estimated Flanders’ government deficit at 0.010% of GDP (41 million euros).

To make the transition from the structural HCF balance, the HCF first applies a correction for the autonomy factor. The current transfer payments of the surcharges are based on an autonomy factor which was provisionally determined for the 2015-2017 period. As this factor was overrated, the regions are receiving more transfer payments than needed in the 2015-2017 period to fund the competences transferred as part of the Sixth State Reform. To redress this, a negative settlement is to follow in 2018, the year in which the provisional autonomy factor will be revised. The annual deviation in the period 2015-2017 needs to be corrected for. In 2016, the correction amounts to 0.074% of the GDP.

Secondly, the government balance needs to be corrected for the cyclical position of the economy. As the economy was performing below its potential in 2016 , the revenues of the Flemish government were negatively influenced by the cycle. The HCF estimates the impact thereof at -0.092% of the GDP.

The federal transfer payments are made based on estimated parameters. This is to be corrected in the budget review of the following year (settlements). These corrections are incorporated under the header “one-offs (excl. autonomy factor)”. In 2016 the correction amounts to 0.014% GDP.

Finally, there is a further correction regarding the federal transfers which are not based on definitive parameters, as this would require adjustments to be made for a considerable number of years to come. In February of budget year t+1, the parameters for the federal transfers are laid down to final effect. If the federal transfer payments would have been made in accordance with the actual parameters, the Flemish revenues would have evolved differently, resulting in a different government balance . In order to be able to measure the correct impact on the Flemish revenues, the HCF applies a technical correction which amounts to 0.012% in 2016.

Taking into account the above mentioned corrections, the HCF estimated the structural HCF deficit of Flanders to amount to -0.017% GDP, which concords with a structural deficit of 72 million euro.

In the recommended path, this structural deficit is to be halved in 2017 in order to achieve a balanced budget in structural terms in 2018. The objective is formulated in structural terms, but may subsequently be converted by implementing various corrections.

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Table 3-8: Recommended path HCF (incl. estimate ESA-government balance ) (%GDP and million euros)

2016 2017 2018Structural HCF balance (1) -0.017% -0.008% 0.000%Correction autonomy factor (AF) (2) 0.074% 0.074% -0.226%Cyclical effect (3) -0.092% -0.086% -0.062%One-offs (excl. AF) (4) 0.014% 0.000% 0.035%Correction transfers (5) 0.012% 0.017% 0.013%Government HCF balance (6=1+2+3+4+5) -0.010% -0.003% -0.240%

GDP (billion euros) (7) 422 435 449Government HCF balance (8=(6*7)*1000) -41 -15 -1076Correction ESA balance (9) -121 -101 -86Standardised ESA balance (recommended path) -162 -116 -1162

Source: HCF report April 2017 and own calculations

The starting point are the structural budget balances in 2016, 2017 and 2018. Based on the information from the HCF report with regard to the correction for the autonomy factor, cyclical impact, one-offs and the correction for transfers, this produces the HCF government balances expressed in % GDP.

The recommended HCF path allows Flanders to have a government HCF deficit of 15 million euros in 2017. Taking into account the settlement for the autonomy factor in 2018, this deficit is allowed to increase to 1.076 million euros next year.

The final step shown in the table is the conversion of the HCF government balance into the ESA government balance (see also Table 3-6). According to the recommended HCF path, Flanders is allowed to have an ESA government deficit of 116 million euros in 2017.

3.3. Flemish vision for the 2017-2020 path

From 2017 onward, Flanders is set to be in line with the balanced budget objective and plans to maintain this balance throughout the entire programme period.

In 2017, Flanders will not be applying for flexibility for expenditures associated with the asylum crisis.

In 2018, a one-off correction of 1.015 million euros will be applied in respect of the balanced budget objective in order to take into account the effect of the revision of the autonomy factor in that year, which is in compliance with the opinion of the High Council of Finance.

The impact of the construction cost of the Oosterweel Link, which the Flemish Government regards as a non-recurring investment of major economic importance at the local, regional, national and euregional level, is excluded from the balanced budget objective. In addition, the potential impact of the investment expenditures in respect of the A1/A3 hospital infrastructure, which should have been taken into account before the transfer of competence, is also excluded from of the budgetary target.

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3.4. Concertation Committee

Having regard to Article 2 §4 of the Cooperation Agreement of 13 December 2013 between the Federal Administration, the Communities, the Regions and the Community Commissions on the implementation of Article 3, §1 of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, the determination of the individual budgetary targets of the different levels of general government must be approved by a decision of the Concertation Committee .

Belgium had to submit its coordinated 2017-2020 Stability Programme to the European Commission by 30 April at the latest. The assessment of this Stability Programme will follow in May.

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4. REVENUE BUDGET

4.1. Total revenues

Table 4-1 shows a rundown of the major items of the ESA-corrected revenues for the 2017 budget review.

The gross supplementary income tax charge (surcharges) is estimated on a transactionalised cash basis and sets out from the estimate of the state taxation for the 2016 and 2017 tax years, made available to the Regions and Communities by the FPS Finance in mid-March 2017.

As a result of the federal 2017 spending review, the FPS Finance possesses definitive actual figures for assessing the 2015 tax year (gross surcharges and tax expenditures). This gives the FPS Finance a definitive base to arrive at an estimate of the state taxation for the 2016 and 2017 tax years, and the regional breakdown thereof.

Table 4-9: Major items of the ESA-corrected resources (in thousands of euros) 2016 BP

2017 IB 2017 BR BR - IB BR - IB(%)

Gross supplementary income tax charge 7,609,995 7,655,952 45,956 0.60%Regional resources SFA 2,178,764 2,242,214 63,450 2.91%Community resources SFA 21,622,820 21,716,378 93,558 0.43%Specific grants SFA 86,748 87,091 344 0.40%Regional taxes 6,219,199 6,230,767 11,568 0.19%Own non-tax allocated revenues 745,237 708,175 -37,062 -4.97%Own non-tax non-allocated revenues 279,494 271,357 -8,137 -2.91%Lottery funds 29,999 29,999 0 0.00%Institutions scope of consolidation 3,044,631 3,359,528 314,897 10.34%TOTAL 41,816,887 42,301,461 484,574 1.16%

incl. commuter allocation contribution -27,604 -27,604 0incl. contribution for consolidation of

overall public finances -1,586,178 -1,594,023 -7,845incl. contribution for cost of

demographic ageing -24,840 -29,260 -4,420incl. contribution to civil servants’

pension plans -103,099 -103,099 0

Total contributions -1,741,721 -1,753,986 -12,265

For the 2017 budget review, the ESA revenues are budgeted at 42.3 billion euros. This is 0.5 billion euros or 1.16% more than in the 2017 initial budget.

Figure 4-1 shows the relative share of the revenue categories in proportion to total revenues. This figure shows that Flemish surcharges represent 18% of ESA-corrected Flemish revenue. Regional taxes represent 15%.

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Figure 4-10: Major items of ESA-corrected resources, 2017 BR

18%

56%

15%2%

8%

Bruto aanvullende belasting op de PB Gewest- en Gemeenschapsmiddelen BFWSpecifieke dotaties BFW Gewestelijke belastingenNiet-fiscale, toegewezen ontvangsten Niet-fiscale, niet-toegewezen ontvangstenLotto gelden Instellingen consolidatiekring

The Sixth State Reform has given Flanders increased tax autonomy, partially made up of the proceeds of the regional taxes and of the regional surcharges for another Figure 4-2 below shows that this autonomy stood at 19.4% in 2014 and has risen to 32.8% in the 2017 budget review.

Figure 4-11: Evolution of tax autonomy as a proportion of total resources from 2014 ACT until 2017 BR

19,4%14,0% 15,1% 14,9% 14,7%

19,7% 19,0% 18,2% 18,1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

REA 2014 REA 2015 BA 2016 BO 2017 BA 2017

Aand

eel i

n to

tale

ont

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sten

Gewestbelastingen Bruto aanvullende belasting op de PB Andere

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4.2. Surcharges and allocated portion of the VAT and the PIT (personal income tax)

4.2.1 Parameters

For the 2017 budget review, the resources deriving from the Special Funding Act (gross regional supplementary personal income tax charge (regional surcharges), regional and community grants, and other federal allocations) are estimated based on the rates of inflation and economic growth (GDP) as specified in the Economic Budget of February 2017.

The other parameters on which the present revenue estimate is based are parameters that were communicated to the regions and communities on 7 March 2017 by the FPS Finance. A more recent update of the population projections by the Federal Planning Bureau - in particular the situation as per 1 January 2017 - have not been incorporated in the revenue estimate.

Alongside the traditional economic growth and inflation rate parameters, the fiscal capacity of the regions and communities and the number of students and under-18s in the communities play an important role in determining the resources that are allocated under the Special Funding Act. Taking effect from the 2015 budget year onwards, the enactment of the amended Special Funding Act has added two new parameters to this list: the number of 0 to 18-year-olds and the number of people aged 80 or over.

In addition, from the 2015 tax year onwards , the fiscal capacity will also be interpreted as the regional apportionment of the revenue from the federal personal income tax component. For the 2017 budget, the fiscal capacity for the 2016 tax year is applied.

The “state taxation” parameter is of importance with a view to the estimation of the surcharges for the 2016 and 2017 tax years. With regard to the state taxation for the 2016 and 2017 tax years, as stated above, the estimate is based on actual figures of the assessments in respect of the 2015 tax year, the first full tax year after the Sixth State Reform took effect. Moreover, the estimate of the state taxation also factors in the effects of the recent Tax Shift. Table 4-2 shows the cumulative impact of the federal Tax Shift on the Flemish surcharges.

Table 4-10: Cumulative impact Tax Shift on Flemish surcharges (in million euros)2016 tax

year2017 tax

yearImpact TS I -62.1 -128.0Impact TS II 0.0 -168.1Total delta surcharges -62.1 -296.1Source: FPS Finance

It should be emphasised that the estimate of the Flemish gross surcharges continues to be based on a Flemish surcharge rate which remains unchanged. In doing so, the Flemish budget absorbs the expected revenue shortfall as a result of the federal measures in personal income tax and consequently opts not to reverse the negative impact of the federal measures on the Flemish budget, but to implement the federal Tax Shift in the broadest possible sense.

The population-related parameters are actual figures as per 1 January 2016, supplemented with estimates as communicated by the FPS Finance on 7 March 2017. A more recent update of the population projections by the Federal Planning Bureau - in particular in respect of the situation as per 1 January 2017 – has not been incorporated into the revenue estimate.

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Table 4-3 shows a summary of all the parameters used. The columns headed '2016 definitive' and '2017 adjusted' show the basic assumptions for the resource calculation for the 2017 budget review.

Table 4-11: Full run-down of parameter Budget year 2017 IB 2017 BR

2016 presumed

2017 adjusted

2016definitive

2017adjusted

ParametersInflation (CPI) 2.00% 1.60% 1.97% 2.10%Economic growth (GDP) 1.40% 1.20% 1.20% 1.40%Personal income tax (federal portion)Tax year 2015 2016 2015 2016Flemish Region 20,764,272 20,962,428 20,780,226 21,160,242Walloon Region (excl. German speakers) German speakers 9,065,333 9,097,713 9,070,141 9,182,684Brussels-Capital Region 3,619,000 2,644,586 2,688,663 2,655,628 2,721,628German speakers 141,080 142,273 140,435 142,849Fiscal capacity (FC)Tax year 2015 2016 2015 2016Flemish Region 63.66% 63.73% 63.65% 63.72%Walloon Region (excl. German speakers) 27.79% 27.66% 27.78% 27.65%Brussels-Capital Region 3,619,000 8.11% 8.17% 8.13% 8.20%German speakers 0.43% 0.43% 0.43% 0.43%Scale of apportionment education (pupils)Situation actual estimate actual estimateFlemish Community 56.62% 56.65% 56.68% 56.71%French Community 43.38% 43.35% 43.32% 43.29%InhabitantsReference date 01/01/2016 01/01/2017 01/01/2016 01/01/2017Counting date 01/01/2016 estimate 01/01/2016 estimateFlanders 6,477,804 6,524,663 6,477,804 6,524,663Wallonia (excl. German speakers) 3,525,571 3,551,176 3,525,571 3,551,176Brussels 1,187,890 1,206,032 1,187,890 1,206,032German speakers 76,645 77,395 76,645 77,395Under-18s (excl. German speakers) (DENAT)Reference date 30/06/2015 30/06/2016 30/06/2015 30/06/2016Counting date 01/08/2016 01/08/2016 01/02/2017 01/02/2017Dutch speakers 1,253,159 1,259,177 1,253,245 1,260,078French speakers 741,524 740,970 741,602 741,566Brussels 269,844 273,027 269,853 273,297Denatality coefficient 105.9671% 106.1460% 105.9747% 106.2189%Scale of apportionment Botanical GardenSituation 01/01/2014 01/01/2014 01/01/2014 01/01/2014Flemish Community 79.87013% 79.87013% 79.87013% 79.87013%French Community 20.12987% 20.12987% 20.12987% 20.12987%Commuters to Brussels-Capital RegionFlemish Region 62.769% 62.735% 62.769% 62.735%Walloon Region 37.231% 37.265% 37.231% 37.265%State taxationTax year 2016 2017 2016 2017FPS Finance communication 16/09/2016 16/09/2016 03/03/2017 03/03/2017Flemish Region 29,637,857 29,492,450 29,613,565 29,536,400Walloon Region 12,949,191 12,938,442 12,937,838 12,895,968Brussels-Capital Region 3,712,749 3,758,135 3,707,985 3,728,608State taxationTax yearEstimate FB departmentFlemish RegionWalloon RegionBrussels-Capital Region

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Budget year 2017 IB 2017 BR2016

presumed2017

adjusted2016

definitive2017

adjusted0 up to and including 18-year oldsReference date 01/01/2016 01/01/2017 01/01/2016 01/01/2017Counting date 01/01/2016 estimate 01/01/2016 estimateFlemish Community 1,328,368 1,337,769 1,328,368 1,337,769French Community 784,489 789,338 784,489 789,338Common Community Commission 284,573 289,498 284,573 289,498German-speaking Community 15,665 15,721 15,665 15,721Over-80sReference date 01/01/2016 01/01/2017 01/01/2016 01/01/2017Counting date 01/01/2016 estimate 01/01/2016 estimateFlemish Community 336,284 343,155 336,284 343,155French Community 164,667 164,525 164,667 164,525Common Community Commission 45,090 44,802 45,090 44,802German-speaking Community 3,484 3,645 3,484 3,645Tax expenditures 2015 tax yearFPS Finance communication 16/09/2016 03/03/2017Flemish Region 1,764,370 1,790,368Walloon Region 774,167 788,086Brussels-Capital Region 3,619,000 143,863 148,932

4.2.2. Results

4.2.2.1 General

Table 4-4 shows the revenues to be expected in 2017 on the basis of these parameters. This takes into account the impact of the Sixth State Reform. The figures in this table are not rounded. Rounding differences may therefore occur for the figures in table 4-1.

Overall, the revenues deriving from the gross supplementary income tax charge and the allocated portion of PIT and VAT go up by 51.6 million euros in the 2017 budget review.

As shown in table 4-3 (overview of parameters), in the initial budget and the budget review the resources under the Special Funding Act for the previous budget year are re-estimated on each occasion. In concrete terms, in the 2017 budget review the allocated portion of PIT and VAT and the grants for the new competences are re-estimated with regard to the 2016 budget year. This re-estimate is compared with the estimate raised as part of the 2016 budget review. The comparison in question results in a settlement that is integrated into the estimates for the 2017 budget year. For each component of the resource calculation, table 4-4 situates the 2016 settlement balance in the 2017 resource estimate (column (d)).

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Table 4-12: Gross supplementary income tax charge and allocated portion of PIT and VAT (in thousands of euros)

SFA article 2017 IB 2016 in 2016 BR

2016 definitive

in 2017 BR

2016Settlementupon 2017

BR

2017 BRexcl. 2016 settlement

2016 BRincl. 2015 settlement

2017 BRexcl. 2016 settlement

2016 BRincl. 2015 settlement

2017 BR –2017 IB

(a) (b) (c) (d) = (c) - (b) (e) (f) (g) = (e) -

(a)

title III/1, art. 5/1 and 5/2 Gross supplementary income tax charge 7,609,995 7,520,131 7,520,131 0 7,655,952 7,655,952 45,956title IV, chapter II, section

4 Advance budget appropriations on federal PIT 2,739,256 2,798,154 2,684,008 -114,146 2,765,304 2,651,158 26,04835 octies resources various competences 469,903 454,552 457,139 2,586 471,677 474,263 1,77435 nonies resources labour market policy 1,185,958 1,149,118 1,155,162 6,044 1,189,792 1,195,837 3,83535 decies resources tax expenditure 1,083,395 1,194,483 1,071,707 -122,777 1,103,835 981,058 20,440

title VII, art. 54, §1 resources tax expenditure – recalculation 2018

title V, art. 48 National solidarity mechanism 0 0 0 0 0 0 0title V/1, art. 48/1, §2 Transition mechanism -334,961 -363,517 -320,879 42,638 -320,879 -278,241 14,082title VIII, art. 64quater Correct funding Brussels institutions -27,604 -30,757 -30,757 0 -27,604 -27,604 0

65 quinquies contribution to civil servants’ pension plans (Regions & Communities) -103,099 -93,781 -93,781 0 -103,099 -103,099 0Subtotal resources Flemish Region 9,883,587 9,830,229 9,758,721 -71,508 9,969,674 9,898,166 86,087Settlement over year t-1 -94,828 -71,508 23,320Total resources Flemish Region 9,788,759 9,830,229 9,758,721 -71,508 9,898,166 9,898,166 109,407

title IV chapter III section 2 art. 40 quinquies Advance budget appropriations on VAT 9,045,002 8,711,800 8,778,588 66,788 9,103,381 9,170,169 58,379

title X art. 81 quinquies, §2 Deduction Tongeren youth detention centre -1,249 -1,222 -1,229 -7 -1,255 -1,261 -6

title IV chapter III section 3, art. 47/2 Advance budget appropriations on federal PIT 5,210,856 5,060,527 5,078,685 18,159 5,231,777 5,249,936 20,921

title IV/1 Allocations for competences transferred in the areas of 7,053,329 6,801,535 6,844,341 42,806 7,084,710 7,127,516 31,380

47/5 child benefits 3,767,920 3,651,787 3,676,062 24,275 3,785,345 3,809,620 17,425

68 quinquies, §§ 1 and 2 cost for administrative management of family benefits (-) - - - - - - -

47/7 care for the elderly 2,385,438 2,277,252 2,290,690 13,437 2,395,645 2,409,082 10,206

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SFA article 2017 IB 2016 in 2016 BR

2016 definitive

in 2017 BR

2016Settlementupon 2017

BR

2017 BRexcl. 2016 settlement

2016 BRincl. 2015 settlement

2017 BRexcl. 2016 settlement

2016 BRincl. 2015 settlement

2017 BR –2017 IB

(a) (b) (c) (d) = (c) - (b) (e) (f) (g) = (e) -

(a)

47/7, §3, second paragraph

change isolated geriatric services (in basis as from 2015 budget year) (-)

68 quinquies, §3 payment for maximum billing contribution fed. administration (-) - - - - - - -

47/8 various healthcare services and personal assistance 486,996 472,353 475,113 2,761 489,081 491,841 2,085

47/8, member 2 change for rehabilitation and treatment (in basis as from 2015 budget year) (-)

47/9 hospitals (from 2016 budget year) 357,955 347,051 349,086 2,035 359,365 361,400 1,409

47/9, §4 deduction for investments in hospital infrastructure (from 2016 budget year) - - - - - -

47/10 houses of justice 55,020 53,092 53,390 298 55,275 55,573 255

47/11 Interuniversity attraction poles (from 2018 budget year)

title V/1, art. 48/1, §1 and §4 Transition mechanism 148,515 136,952 153,485 16,533 153,485 170,018 4,970

65 quinquies contribution to civil servants’ pension plans (see Region)Subtotal resources for the Flemish Community 21,456,454 20,709,592 20,853,871 144,279 21,572,098 21,716,378 115,644

Settlement over year t-1 166,365 144,279 -22,086Total resources for the Flemish Community 21,622,820 20,709,592 20,853,871 144,279 21,716,378 21,716,378 93,558

Flemish Region + Flemish Community 31,411,579 30,539,821 30,612,592 72,772 31,614,543 31,614,543 202,964

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4.2.2.2 Region: Gross supplementary income tax charge and allocated portion of PIT

For 2017, the regional resources are estimated at 9,749,680 thousand euros, including a negative settlement of -71.508 thousand euros. Compared to the 2017 initial budget, the 2017 budget review estimates an increase in revenue of 109.407 thousand euros.

As specified in paragraph 4.1, the estimate of the gross supplementary income tax charge (regional surcharges) is based on the estimate of state taxation for the 2016 and 2017 tax years. The state taxation is subsequently reduced by the autonomy factor (25.990%). The amount for the surcharges is arrived at by applying the surcharge rate on the reduced state taxation. A surcharge rate of 35.117% is assumed for the 2017 tax year. In doing so, the Flemish budget is seen absorbing the expected revenue shortfall as a result of the federal measures in the personal income tax, whereby Flanders is consequently choosing not to reverse the negative impact of the federal measures on the Flemish budget.

Moreover, the gross surcharges for the 2017 budget year are estimated on a transactionalised cash basis. Said method was coordinated and discussed with the NAI in late 2016, and is adopted by the National Accounts Institute to assess the accounts of the regions from the 2015 tax year forward. As set out above, the estimate of the gross surcharges sets out from the regional estimates of the state taxation made available by the FPS Finance, as well as a very high 99.48% collection rate. The table below shows the switch from gross surcharges per tax year to gross surcharges to be accounted to the 2017 budget year in accordance with the transactionalised cash method. The percentage rates used in this table are based on implementation figures for the 2015 tax year as per the end of January 2017.

Table 4-13: Gross surcharges according to the transactionalised cash basis (in thousands of euros)

2016 tax year

2017 tax year

Expected gross surcharges 2016 tax year et seq. at 100% = (2) = CASH 7,699,765 7,691,801

1 Prefinanced amount (= withholding tax in assessment books up to and including month T)

Prefinanced amount / assessment books (full tax year) (3) 92.45% 92.45%Spread prefinanced amount end of December (4) 50.31% 50.31%

2 Amount received (= received up to and including month T+2)Amount received / assessment books (full tax year) (5) 7.03% 7.03%

Spread amount received end of February (6) 12.56% 12.56%ESA posting expected gross surcharges tax year as per the end of February tax year+1 = (7) = (2)*((3)*(4)+(5)*(6)) 3,649,262 3,645,487

3 Expected collection rate as per the end of collection term = (8) 99.48% 99.48%ESA posting remainder gross surcharges tax year-1 as per the end of February tax year+1 = (9) = (2)*(8)-(7) 4,010,464Total gross surcharges according to transactionalised cash = (10) = (7)+(9) 7,655,952

In order to estimate the ESA amount to be attributed, the gross surcharges for the 2016 and 2017 tax years need to be broken down into a prefinancing section and a revenue section. The prefinancing section relates to the withholding tax and the advance tax payments that are included in the amounts entered into the accounts. The prefinancing is

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attributed to the month when the assessment was established (= month of assessment). Whether or not the tax payer pays the tax debt has no impact on the attribution of the prefinancing. The revenue section relates to the actual payment of the tax debt by the tax payer. In case of a negative tax debt, this refers to a refund by the tax authorities. For the attribution of the revenues a two-month shift is applied. The cash receipts (or cash expenditures in the event of refunds) in the period from March of the budget year up to and including February of the next budget year are consequently attributed to the current budget year in compliance with ESA regulations. The 2-month shift has to do with a 2-month payment term upon receipt of the assessment books.

In doing so, the amount for the 2016 and 2017 tax years that is to be attributed under ESR regulations to the tax year itself, is estimated at 3,649,262 and 3,645,487 thousand euros. The remainder of the 2016 tax year – taking into account an expected 99.48% collection rate - is to be attributed under ESA regulations to 2017. This second component is estimated at 4,010,464 thousand euros. The sum of both components results in an ESA attributable amount of 7,655,952 thousand euros, an increase of 45,956 thousand euros in relation to the 2017 initial budget.

As such, in terms of the estimation method and the collection rate adopted, the present estimate of the gross surcharges derogates from the (cash) estimate communicated by the FPS Finance, but is more in keeping with the ESA logic. For the 2017 initial Flemish budget, a purely cash reasoning was adopted, based on preparations by the FPS Finance.

The tax expenditures which have been transferred to the regions under the Sixth State Reform are not budgeted as a revenue shortfall in the Flemish budget, but as an item of expenditure.

The allocations which relate to the additional regional competences pursuant to the Lambermont Agreement (2001) have, since 2015, been incorporated in a new allocation (resources various competences) that will henceforth be apportioned in accordance with a fixed scale of apportionment (50.33% for the Flemish Region). In 2015, the new allocation was supplemented with specific additional resources: 5.0 million (transfer of buildings) and 626,0 million euros (for new competences: Participation Fund, urban policy, agricultural disasters, transfer of staff (purchase committees), FRGE, BIRB). Finally, the allocation per Region until 2019 has been reduced by a nominal amount specified in the amended Special Funding Act to cover amounts outstanding for the ‘urban policy’ power that the Federal Administration will settle further. The total allocation for the Flemish Region is estimated at 474,263 thousand euros in 2017, including 2,586 thousand euros in settlement funds.

As a result of the Sixth State Reform, the regions are now also in charge of certain aspects of the employment policy and specific tax expenditures (tax relief measure for owner-occupied dwellings, the 'construction savings' home saving scheme, energy-saving measures, security, renovation, urban policy, service vouchers). To this end, the regions have been assigned two new grants (one for employment policy and one for tax expenditures). Not 100%, but 60% of the transferred competences in the area of tax expenditures is funded by a grant from the Federal Administration. The remaining 40% is funded by the regions via surcharges. In 2015, a recurrent deduction of 831.3 million euros was applied to the grant for the employment policy (for all three regions combined) to help with the consolidation (debt clearance) of public finances. For 2016, an additional recurrent deduction of 831.3 million euros was applied. The new grants for employment and tax expenditure in the 2017 Flemish budget are estimated at 1,195,837 euros (including 6,044 thousand euros in settlement funds) and 981,058 euros (including -122,777 thousand euros in settlement funds) respectively.

The present estimate of the region grants is also entirely in keeping with the estimate communicated by the FPS Finance. It should be pointed out that the estimate of the grant for tax expenditures since the 2017 initial budget is based on an updated base amount for the tax expenditures of the 2015 tax year. This sees the FPS Finance somewhat preempting the general recalculation announced for 2018.

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The amount of the regional portion of the transition mechanism (part of the Special Funding Act) is negative and is estimated at -278,241 thousand euros (including settlement funds of 42,638 thousand euros). The adjustment of the base amount of the transition mechanism is explained by the use of the actual tax expenditures for the 2015 tax year and the scale of apportionment thereof among the regions, whereas the 2017 initial budget still set out from the nominal scale of apportionment provided for in the Funding Act. The aim of the transition mechanism is to provide for a budget-neutral enactment of the amended Special Funding Act in the starting year. The budgetary differences in the starting year are consequently balanced by way of an equalisation sum per region.

From 2014, the Sixth State Reform also puts in place a new transfer to the Brussels-Capital Region for commuter movements. In 2017, the commuter allocation will amount to 44 million euros. The commuter allocation is defrayed by the Flemish and the Walloon Region in proportion to their share in the net commuter flow to the Brussels-Capital Region. The share of the Flemish Region in the net commuter flow to the Brussels-Capital Region is estimated at 62.74% in 2017. This works out at -27,604 thousand euros. As the share over the year 2016 remains unchanged, the commuter allocation does not include settlement funds.

Lastly, the allocated portion of the PIT is reduced by the contribution to civil servants’ pension plans (for the region and the community combined), which are nominally specified under Article 65 quinquies of the Special Funding Act.

4.2.2.3 Community: Allocated portion of the VAT and the PIT and grants for new competences

In 2017, Community resources are estimated at 21,716,378 thousand euros, including 144,279 thousand euros in settlement funds. Compared to the 2017 initial budget, the 2017 budget review estimate involves a 93,558 thousand euro increase.

Since 2015, the allocated portion of the VAT has consisted of four components. The effect of coupling the basic VAT allocation to economic growth over the 2010-2015 timeframe has been isolated from the additional VAT Lambermont resources since 2015. In 2015, this isolated portion was added to the overall VAT allocation and consequently undergoes the changes in and the apportionment of the overall VAT allocation. The remainder of the additional VAT Lambermont resources is added to the overall PIT allocation. In addition, starting in 2015, the allocation offsetting the radio and television licence fees was incorporated into the overall VAT allocation and consequently also submits to the changes in and the apportionment of the overall VAT allocation. Lastly, in 2015 the overall VAT allocation was raised by 158.5 million euros on a recurrent basis to fund a number of transferred competences. As such, the allocated portion of the VAT is estimated at 9,170,169 thousand euros in 2017, including 66,788 thousand euros in settlement funds.

In 2015, the allocated portion of the PIT is made up of three components: the basic PIT allocation as it existed before the Sixth State Reform, the remainder of the additional VAT Lambermont resources and a recurring deduction of 356.3 million euros (for both Communities together) for consolidation of public finances. For 2016, an additional recurring deduction of 356.3 million euros is taken into account. From 2016, the total allocated portion of the PIT follows the development and apportionment of the basic PIT allocation. The allocated portion of the PIT is estimated at 5,249,936 thousand euros, including 18,159 thousand euros in settlement funds.

The nominal reduction in resources specified under Article 81 quinquies of the Special Funding Act (for the 2015 budget year) is in respect of staff who remain employed as federal workers at the youth detention centre in Tongeren. From 2016 onwards, the reduction is adjusted for inflation each year. The reduction will be permanently

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discontinued as soon as the staff members are no longer fully or partially employed as federal staff at said detention centre. This discontinuation will take place on 31 December 2018 at the latest. In the 2017 budget review, the reduction is estimated at 1,261 thousand euros, including -7 thousand euros in settlement funds.

From 2015 onwards, the communities also receive additional grants for the additional competences transferred to them under the Sixth State Reform (family benefits, care for the elderly, health care, hospital infrastructure (from 2016), houses of justice and Interuniversity attraction poles (from 2018 onwards)). For 2017, the additional resources for the Flemish Community are estimated at 7,127,516 thousand euros, including 42,806 thousand euros in settlement funds.

The costs for the administrative management and the disbursement of family benefits, as intended under Article 68 quinquies of the Special Funding Act, are not deducted from the revenues. They are posted in the Flemish budget as an expenditure. The same applies to the deductions made by the FPS Finance in respect to maximum billing for health care services (deduction from grants for care for the elderly) and of hospital infrastructure (deduction from hospital infrastructure grants). Both deductions are posted in the Flemish budget as an expenditure, not as a revenue shortfall.

For the communities too, the amended Special Funding Act introduces a transition mechanism. The transition mechanism amount is positive and is estimated at 170,018 thousand euros in 2017, including 16,533 thousand euros in settlement funds. The positive adjustment of the base amount of the transition mechanism – which amounted to 148,515 thousand euros in the 2017 initial budget– is explained by the reduction of the 2016 deductions for the maximum billing for healthcare services and hospital infrastructure, which relatively speaking was higher in the French-speaking Community, which in turn had a positive impact on the transition mechanism of the Flemish Community. The reduction of the deductions was initiated by the Federal Administration at the end of 2016 in the 2016 adjustments sheet. The aim of the transition mechanism is to provide for a budget-neutral enactment of the amended Special Funding Act in the starting year. The budgetary differences in the starting year are consequently balanced by way of an equalisation sum per community.

4.2.2.4 Sensitivity

Given the volatile nature of the parameters specified in table 4-3, with specific reference to economic growth and inflation rate, table 4-6 provides a concise overview of the sensitivity of both parameters on the estimated resources under the amended Special Funding Act for the 2017 budget year. This paragraph looks at the extent to which the surcharges, the allocated portion of the VAT and the PIT, and the specific allocations (see paragraph 4.3.) react to a change in the economic growth and inflation rates in the 2016 and 2017 budget years.

Table 4-6 provides a schematic overview of the analysis conducted. Each change investigated was 0.1 percentage point (10 base points). Changes in the other parameters specified in table 4-3 also have an impact on the resources, although here the impact is less pronounced. For these reasons, they are not included in table 4-6.

Table 4-14: Sensitivity (in thousands of euros)2017 resources

Parameter 2016 settlement 2017 basis Total2016 GDP 17,931 28,711 46,6432017 GDP - 15,631 15,6312016 CPI 23,768 32,074 55,842

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2017 resourcesParameter 2016 settlement 2017 basis Total

2017 CPI - 23,775 23,775

4.3. Specific grants from the Federal Administration

Table 4-7 shows the estimated resources with regard to (other) specific allocations from the Federal Administration.

The additional grants which the communities have been receiving since 2015 for the additional competences transferred to them under the Sixth State Reform (family benefits, care for the elderly, health care, hospital infrastructure (from 2016), houses of justice and Interuniversity attraction poles (from 2018 onwards)) are discussed in paragraph 4.2.

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Table 4-15: Specific allocations from the Federal Administration (in thousands of euros)

SFA article 2017 IB2016

definitivein 2016 BR

2016 definitive

in 2017 BR

2016Settlementin 2017 BR

2017 BRexcl. 2016

settlement in aggregate

2017 BRincl. 2016 settlementintegrated

2017 BR –2017 IB

(a) (b) (c) (d) = (c) - (b) (e) (f) (g) = (e) -

(a)title IV chapter III section 3, Art. 35 Employment schemes - - - - - - -title VIII, Art. 62 Foreign students 38,243 37,420 37,630 210 38,420 38,631 177

title IV chapter III section 4, Art. 47bis

Allocation offsetting radio and television licence fees - - - - - - -

title VIII, Art. 68ter Transfer of road tax 15,352 15,021 15,105 84 15,423 15,507 71title VIII, Art. 62ter Allocation National Botanical Garden 7,054 6,806 6,845 38 7,086 7,124 33title VIII, Art. 68ter Transfer of registration duties and

inheritance tax 24,953 24,416 24,553 137 25,069 25,206 115title VIII, Art. 63 Compensation mortmain 637 637 637 0 623 623 -14

Subtotal allocations from the Federal Administration 86,239 84,300 84,770 470 86,621 87,091 382

Settlement over year t-1 509 470 -38Total allocations from the Federal Administration 86,748 84,300 84,770 470 87,091 87,091 344

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From the 2015 budget year onwards, the allocation for the re-employment of the unemployed, set out under Article 35 of the (previous) Special Funding Act, is included at a rate of 90% in the global employment allocation. The remaining 10% is added to the transition mechanism. For this reason, the allocation is no longer included in Table 4-7 from the 2015 budget year onwards.

Under Article 62 of the Special Funding Act, the communities are given an allocation to fund university education provided to foreign students. The base amounts set out in said article are adjusted annually for inflation.

Under the Lambermont Agreement, the radio and television license fees were converted from a community tax to a regional tax. However, the Communities were given an allocation offsetting the loss of these licence fees. From the enactment of the amended Special Funding Act (Sixth State Reform), the allocation for both communities is integrated into the basic VAT allocation and consequently follows the changes in and the apportionment of the basic VAT allocation.

Following the transfer of the department for road-related regional taxes (road tax, car registration tax and Eurovignette) in 2011, each year the Flemish Region has been receiving an additional allocation from the Federal Administration to offset the cost of transferred federal staff. The calculation of the allocation is based on the average cost of the department for the relevant regional taxes for the years 1999, 2000 and 2001, expressed in 2002 prices. From 2003 forward, this amount (per regional tax) has been adjusted in line with the consumer price index. The basic amounts are stipulated in the Act of 8 March 2009 establishing the total cost of the regional tax department in implementation of Article 68ter of the Special Funding Act (Belgian Official Journal of 20 March 2009). Since 2015, the Flemish Region has been given a similar allocation for the transfer of the department for registration duties and inheritance tax.

Article 62ter of the Special Funding Act grants the communities an allocation starting from the budget year in which the National Botanical Garden is transferred. The basic amount specified in Article 62ter is adjusted annually to reflect inflation and economic growth. The apportionment of the adjusted sum to the two Communities follows a formula based on the language register of the actual National Botanical Garden workforce at the time of the transfer. This transfer took place on 1 January 2014. The formula applied in the 2017 revenue budget therefore reflects the language register at 1 January 2014.

Finally, pursuant to article 63 of the Special Funding Act of 1 January 2014 the regions are also compensated for the loss of the regional tax as a result of the non-collection of the (surcharges over) real property tax on state-owned real property that is exempt from property tax.

4.4. Regional taxes

The regional tax estimates for the 2017 budget review are on the one hand based on the estimates of the FPS Finance, and on the other hand on the parameters of the Economic Budget of 09 February 2017. For the regional surcharges that the Flemish Administration collects under its own management, the Flemish Administration compiles its own estimates.

As a result of the 2017 budget review, the regional surcharges are estimated to be €230.1 million lower than in the 2017 initial budget. Table 4-8 summarises the budget items and the various estimates. Table 4-8 also shows the actuals over the 2016 budget year. For the registration duties, the recognition method of the revenues in 2016 differs from the method adopted in 2015. This prevented the full year’s revenues from being posted in 2016. So as to enable an accurate comparison with the 2017 revenues, an extra

44

column has been added showing the 2016 revenues in accordance with the method adopted by the NAI in 2015 on a one-off basis.

For the regional taxes which are administered by the FPS Finance, the estimates used are the ones compiled by the FPS Finance in March 2017.

In all, registration duties (duties on property sales, mortgages and gifts) are seen to increase by 107.4 million euros, compared to the 2017 initial budget. The estimate of the revenues is compiled based on an analysis of the deeds submitted for processing in 2016 and the average duties paid per deed. For all registration duties, account is taken of a price effect that is equal to the changes in the consumer price index (+2.1%). 2016 proved a record year as far as the number of transactions was concerned. For sales and mortgage duties, the 2017 budget review goes by the assumption that the number of transactions will continue to slightly rise over the 1st six months of 2017 compared to 2016, before showing a slight decline in the 2nd half of the year (-0.5% for sales duties and -2.5% for the mortgage duties). For the gift duties, the number of gifts in 2017 is expected to stabilise at the level of 2016. This will result in a fall in revenues from gift duties by 12.4 million euros against the initial budget. At the time of the initial budget, it was still assumed that the number of gifts would go up.

The inheritance taxes (excluding fiscal amnesties) fall by 55.9 million euros compared to the 2017 initial budget. The estimate is based on the expected number of deaths and the average sum in inheritance tax to be paid over these deaths. The average duty per death is going up, but less quickly so than assumed in the 2017 initial budget, hence the downward adjustment in relation to the initial budget.

The proceeds of the fiscal amnesties is adjusted in a negative sense by 75 million euros and amount to 25 million euros in the 2017 budget review. In light of the deceleration that occurred upon the introduction of the regulations governing the non-strippable amounts (through the Cooperation Agreement), no full years’ worth of amnesties will be able to be collected in 2017. In its own 2017 spending review, the Federal Administration estimates a federal income of 50 million euros from the non-strippable amounts. The amounts specified are apportioned between the Flemish region and the Federal Administration on a 50/50 basis. Consequently it is justifiable for the Flemish Region to post income to the amount of 25 million euros for 2017, i.e. half of what is stated in the federal budget.

The estimate of the road traffic-related regional taxes is based on the actuals over the 2016 budget year. In addition to inflation, the estimates also factor in the limited negative effects for the budget as a result of a more eco-conscious buying behaviour among road users and technological advances appearing in the vehicle fleet.

Specifically for the vehicle registration tax, the impact of the greening of the road traffic tax regime is taken to regular revenue levels. Other than this, the estimate of the road tax also factors in the negative effect of road pricing on the road tax.

To estimate the road pricing proceeds, we set out from the average per diem proceeds over the mid-April to 31 December 2016 timeframe. These proceeds are continued into 2017, factoring in weekend days, public holidays and holiday periods. Also, we are reckoning with a 1.4% increase in volume, plus the fact that the rates are to be index-corrected from 1 July 2017 onwards.

Table 4-16: Regional taxes (in thousands of euros)

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Sensitivity (in thousands of euros) 2016 IBREA 2016 method

INR 20152017 IB 2017 BR

2017 BR –

2017 IB

Gaming and betting 38,383 38,383 43,488 42,331 -1,157Automatic amusement machines 23,180 23,180 28,404 28,404 -0Tax on the opening of establishments 75 75 0 0 0Sales duties and division duty 2,129,664 2,257,552 2,222,493 2,331,135 108,642Mortgage registration duty 167,831 175,097 165,904 177,141 11,237Gift duties 378,744 405,312 426,315 413,855 -12,460Inheritance tax excl. fiscal amnesties 1,334,503 1,334,503 1,413,157 1,357,286 -55,871Inheritance tax fiscal amnesties 0 100,000 25,000 -75,000Real property tax (Flemish Tax Service) 96,920 96,920 109,014 108,953 -61Road tax (Flemish Tax Service) 1,049,419 1,049,419 1,053,903 1,086,370 32,467Vehicle registration tax (Flemish Tax Service) 224,650 224,650 232,693 231,306 -1,387

Eurovignette (Fed) 13,823 13,823 2,332 2,332 -0Eurovignette (Flemish Tax Service) -5,052 -5,052 0 0Road pricing 312,762 312,762 421,496 426,654 5,158Total 5,764,902 5,926,623 6,219,199 6,230,767 11,568

4.5. Allocated revenue

Revenue allocated or assigned to a budget fund – which cannot be designated as revenue from lending or holdings – is revenue that is reserved to cover clearly defined expenditures. Allocated revenue for the 2017 budget review year is estimated at €576.7 million. This represents a -€9.1 million decrease compared to the 2017 initial budget.

The drop in the allocated revenues in the 2017 budget review is chiefly explained by the re-estimation of the revenues of the Flemish Climate Fund(-38.1 million euros).

The most important allocated revenue in the resource budget is made up of the following:- reimbursed salary and salary bonuses in the field of education;- the income as part of the medical-social policy;- the income of the Fund for the support of the road traffic and road safety policy.

4.6. Other revenues

Other revenues are non-tax non-allocated revenues that cannot be designated as either (1) revenue from lending or holdings or (2) allocations from institutions within the consolidation perimeter.

Other revenue for the 2017 budget review is estimated at €252.3 million. This represents an -€11.3 million decrease compared to the 2017 initial budget. The variation in the ‘other revenues’ category is chiefly explained by the fall in revenues from active debt management (-5.5 million euros) and from the refund claims in connection with service vouchers (-3.4 million euros).

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4.7. Lottery funds

In application of article 62bis of the Special Funding Act, each Community is allocated a certain percentage of the National Lottery’s distributable profit. To this end, it is for the Federal Council of Ministers to establish the profit available for distribution. The lottery funds in this resource budget are estimated at 30.0 million euros. This estimate is based on the preliminary profit appropriation plan for the 2016 service year.

4.8. Institutions to be consolidated

Table 4-9 summarises the ESA revenue of the Flemish institutions within the consolidation perimeter. Institutions with significant amounts of self-generated (ESA-corrected) revenue are mentioned separately.

The ESA revenues of the institutions to be consolidated go up by 314.6 million euros in comparison to the 2017 initial budget. 247.4 million euros of this increase are the upshot of the inclusion of the Flemish Social Protection Agency (Care Fund) into the budgetary consolidation process. Up to and including the 2017 initial budget, the impact of the Care Fund on the general balance was visualised by way of a correction line in the general balance.

Table 4-17: Institutions to be consolidated (in thousands of euros) 2017 IB 2017 BR BR – IB

MINA 135,360 136,367 1,007VIF 58,118 65,122 7,004Pilotage 78,262 82,617 4,355Other institutions in the form of an SMS 27,643 27,982 339VDAB 112,831 112,954 123VRT 206,879 200,069 -6,810Child and Family Agency 185,696 185,623 -73VSB 247,386 247,386VVM – De Lijn 215,249 221,049 5,800VEB 122,199 127,908 5,709VITO 64,133 67,588 3,455Liefkenshoek Tunnel 59,171 63,851 4,680VWF 66,955 63,721 -3,234VMSW 184,092 223,945 39,853University colleges and Universities 908,310 943,289 34,979Other institutions not taking on the form of an SMS 619,733 590,057 -29,676Total 3,044,631 3,359,528 314,897

The ESA-corrected revenue of the Mina Fund mainly derive from the environmental duties. These levies are collected by the Flemish public environmental institutions. Specifically, OVAM (Flanders Public Waste Agency) collects the duty on waste, VMM (Flemish Environment Agency) collects the water levies and VLM (Flemish Land Agency) collects the administrative fines imposed under of the manure action plan.

Compared with the 2017 initial budget, the ESA-corrected revenues of the Mina Fund go up by 1 million to reach 136.4 million euros in the 2017 budget review. This is the result of the adjustments below.

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The total estimated amount of the water pollution duty and the levy on the extraction of groundwater is seen to go up by 4.8 million euros. The 2016 actuals were 11 million higher than estimated as a result of the recovering economy, the amalgamation of the contribution and the billing fee and the successful switch to digital declarations. For 2017, further favourable effects are expected. However, due to fluctuations in the levies at the region’s biggest levy payer, the increase posted is confined to 4.8 million euros.

Revenues from materials and waste charges (62.1 million euros) have remained constant in relation to the 2017 initial budget. In the 2017 budget review, the surcharges are estimated to be 11.8 million euros less than in the 2017 initial budget. This reduction is the result of the effect of the regulating levy, which has resulted in a fall in the amounts of waste tipped. The income from the waste packaging policy goes up by 0.2 million euros as a result of a change in rates. The income from the indirect tax and levies increases by 0.6 million euros.

Lastly, the estimated revenues from the manure duty are adjusted upward by 0.3 million euros compared to the 2017 initial budget. In the 2017 budget review, these revenues amount to 2 million euros and are based on receivables to be issued.

Through the establishment of a Hunting Fund, into which the income from the purchase of hunting permits and licences is collected, approximately 2 million euros is siphoned over from the Mina Fund to the new Hunting Fund.

The total ESA-corrected revenues of the VIF (Flemish Infrastructure Fund) are estimated at 65.1 million euros for 2017, i.e. 7 million euros up from the 2017 initial budget. These are extra revenues as a result of the sale of land, the repayment of unused advances by the Antwerp Port Authority under the Port Decree and a number of revenues that are European subsidies.

The ESA revenues taken by the Pilotage Separate Management Service (SMS) are seen to go up by 4.4 million euros compared to the 2017 initial budget. This comes as a result of the decision by the Government of Flanders on the pricing starting from 1 August 2016, the expected rise in traffic and the increasing size of the ships. As a result, total ESA revenues from the Pilotage Separate Management Service are estimated at 82.6 million euros.

At the VDAB, total ESA revenues go up slightly (+0.1 million) in relation to the initial budget. These revenues now stand at 113 million euros. Over half of this amount (61.4 million) relates to revenues from training courses (individual occupational training courses and career entry training programmes). The VDAB also collects 26 million euros under various European schemes, a 3.3 million drop compared to the initial budget. The income in respect to the (reformed) PWA (Local Employment Agency) system is also expected to go down by 3.8 million. Other than this, extra income is expected to the amount of 7.5 million euros as a result of building sales.

The ESA revenues of the VRT (public broadcasting network) are estimated at 200.1 million euros in the 2017 budget review. Compared to the initial budget, this figure represents a 6.8 million euro fall. The fall is the result of an 8.4 million euros drop in revenues from the sale of non-durable goods and services, higher dividends, 1.1 million euros in income from interests and a 0.5 million euro rise in revenues from the sale of equipment.

The ESA-corrected revenues of the Child and Family Agency are seen to go down by 0.1 million to 185.6 million euros. This is the result of a minimal fall in the revenues from parent contributions as part of the family-based child care system.

The ESA revenues of the Flemish Social Protection Agency (formerly known as the Care Fund) are estimated at 247.4 million euros. Member contributions are estimated at 209.8 million euros. This represents a 1.8 million increase. The income derived from securities is estimated at 30.7 million euros, a 1.9 million euro decline compared to the initial budget.

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Finally, the income from administrative fines is seen to go up by 1.9 million euros to reach 6.3 million euros.

The ESA-corrected revenue of the VVM-De Lijn are estimated at 221 million euros in the 2017 budget review. The revenues are seen to go up by 5.8 million euros compared to the 2017 initial budget. Of this sum, 4 million euros is due to a price effect as a result of the indexation of the rates from 1 February 2017, and 1.8 million euros is to be attributed to the quantity effect.

The revenues of the VEB (Flemish Energy Company) are estimated at 128 million euros, which represents a 5.7 million euros increase compared to the initial budget. This rise mainly follows from the accelerated growth of the Supplies activity (4.2 million euros) and the launch of the Energy Efficiency activity (1.5 million euros).

The self-generated income of the VITO (Flemish Institute for Technological Research) primarily consists of current contracts in the public sector (14 million) and outside of the public sector (40.9 million). Whereas the former income is seen to go up by 4 million, the income from contracts outside of the public sector have fallen by 3 million. The expected revenues from disinvestments too are going up by 1.5 million euros. Finally, the revenues coming in from the Federal Administration are going up by 0.8 million euros as a result of the assessment of the tax appropriation for costs for research and development.

The ESA revenues from the Liefkenshoek Tunnel are 63.9 million euros at the time of the 2017 budget review. This is a 4.7 million euro increase up from the 2017 initial budget, due to higher traffic and the associated higher turnover of the tunnel.

Compared with the 2017 initial budget, the VWF (Flemish Housing Fund)’s self-generated revenues fell by 3.2 million to 63.7 million euros. This is the result of lower interest income (-3.8 million euros), the sale of social housing units purchased by their occupants (+0.3 million euros) and the takeover the activities of the EKM Roeselare-Tielt (accredited loan company) (+0.3 million euros).

ESA revenues from the Flemish Social Housing Company (VMSW) (Flemish Social Housing Company) increase by 39.9 million to 224 million euros. This is the result of falling interest revenues (-14.6 million euros), the refund of an unduly received management fee to the social housing companies (-1.2 million euros) and a correction to the posting of FS3 social loan grants in line with ESA regulations. Up to and including the 2017 initial budget, these were deducted from the interest income and are now more accurately rendered as part of the ESA expenditures in the 2017 budget review. This drives up ESA revenues and ESA expenditures by 55.7 million euros (see also chapter 5).

From 2017 onwards, the Universities and University Colleges are part of the Flemish Administration’s scope of consolidation and are treated in aggregate. In total, the ESA revenues of these institutions amount to 943.3 million euros (a 35 million euro increase compared to the 2017 initial budget). 316.1 million euros is derived from private businesses (support for research, costs for training and in-service training), 324.2 million euros is derived from households (primarily enrolment/tuition fees). To this should be added 101.6 million euros from other Belgian authorities, 74.3 million euros in revenues from EU institutions and 53 million euros in revenues from foreign authorities. The remaining 74.1 million euros in revenues are scattered across smaller posts: interest income, cost for training for (foreign) authorities and the sale of real property.

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5. EXPENDITURES

5.1 Introduction

The 2017 budget review has increased the consolidated policy appropriations by 708.6 million euro and the consolidated payment appropriations with 455.7 million euro. The difference between policy and payment appropriations amounts to 567.3 million euro.

Table 5-18: Consolidated policy and payment appropriations (in thousands of euros)

2017 IB (1) 2017 BR (2) Evolution BR (3=2-1)Consolidated policy appropriations 43,219,357 43,927,967 708,610Consolidated payment appropriations 42,904,970 43,360,679 455,709Policy minus payment 314,387 567,288 252,901

In this chapter about the expenditure budget, an explanation is first given about how the transition is made from the expenditure appropriations as stated in the administrative table and the budgets of the consolidated institutions policy and payment appropriations as shown in Table 5-18.

In a following section, an overview is given of the consolidated policy and payment appropriations and also the evolution per policy area.

The fourth and final part of this chapter describes the most important evolutions for each policy area.

5.2 Policy and payment appropriations

5.2.1 Policy appropriations

The starting point for ministries’ policy appropriations is the sum of the commitment appropriations. These appropriations are supplemented by the expected income from budget funds.

A number of corrections are applied to this sum, which must also be largely applied to the calculation of payment appropriations:

- First, the sum of the appropriations is corrected for the appropriations provided for lending and holdings (ESA-8), and for repayments (ESA-9). That is to say, these appropriations must not be included when calculating the Flemish Community’s general balance.

- Second, a correction is applied to the appropriations intended for the consolidated institutions of the Flemish Community. The policy that can be conducted with these appropriations is further included in the consolidated institutions (see below).

A final remark concerns the interest appropriations recorded for outstanding direct and indirect debt. Since these interest charges must actually be paid and they have not previously been provided for in policy appropriations, and given that the starting point is

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that the definition of policy appropriations must correspond as closely as possible with the definition of payment appropriations, interest appropriations are retained in policy appropriations. Nevertheless, the appropriations provided to pay interest cannot be used to fund policy.

This is why the principle of primary expenditure (in this case, expenditure less interest) is also applied to the general balance (see Section 7).

Table 5-19: Balance calculation – Policy appropriations for ministries (in thousands of euros)Policy 2017 BRCommitment appropriations (CA) + 40,807,584Anticipated income from budget funds (TI) + 740,279 Corrections for:Holdings and lending (ESA code 8) - 1,966,209Government debt repayments (ESA code 9) - 47,646Allocations to institutions & corrections - 11,292,684TOTAL = 28,241,324

To calculate the policy appropriations for the consolidated institutions, a distinction is made between the ones which divide their budget into commitment appropriations and settlement appropriations, and the other institutions with a budget only for settlement appropriations.

For institutions that divide the budget into commitment and validation appropriations, the commitment appropriation is taken (corrected for lending and holdings, debt repayment, allocations to other institutions to be consolidated, reserve accumulation and balance to be carried forward). In any event, the commitment appropriations recorded also contain the authorisations and the commitment appropriation of the allocations to the institutions that are registered in the ministries’ budgets.

For the remaining consolidated institutions, the commitment appropriations are assumed to be equal to the settlement appropriations recorded (corrected for lending and holdings, debt repayment, allocations to other institutions to be consolidated, reserve accumulation and balance to be carried forward). However, these commitment appropriations are corrected even further if an authorisation is recorded in the ministries’ budgets. In such a case, the difference between the authorisation included in the ministries’ budgets and the settlement of commitment authorisations included in the ministries’ budgets is corrected for the total appropriations recorded for the institution (the settlement of commitment authorisations may be further supplemented by the appropriation of historical budget balances).

The same remark can be made about interest appropriations as was made in the case of the ministries.

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Table 5-20: Balance calculation – Policy appropriations for consolidated (in thousands of euros)

2017 BRInstitutions with policy and payment expenditure sideCommitment appropriations + 6,237,078 Corrections for:Holdings and lending (ESA code 8) - 87,163Government debt repayments (ESA code 9) - 40,385Allocations to Flemish ministries and other institutions to be consolidated - 159,836Internal transactions - 35,215SUBTOTAL 5,914,479

Institutions with payment expenditure side onlySettlement appropriations + 15,797,582 Corrections for:Holdings and lending (ESA code 8) - 2,782,346Government debt repayments (ESA code 9) - 1,557,827Allocations to Flemish ministries and other institutions to be consolidated - 197,113Internal transactions - 1,550,931Commitment authorisations + Commitment appropriations – Settlement of commitment authorisations – Settlement appropriations + 62,799SUBTOTAL = 9,772,164

TOTAL = 15,686,643

Table 5-21 summarises the total policy appropriations for ministries and consolidated institutions as recorded in the 2017 budget review.

Total policy appropriations have risen by €708.6 million or 1.6% to the initial budget.

Table 5-21: Balance calculation – Total policy appropriations (in thousands of euros)

2017 IB (a) 2017 BR (b)(c) = (b) –

(a) %Policy appropriations for ministries 28,705,853 28,241,324 -464,529 -1.6%Policy appropriations for institutions 14,513,504 15,686,643 1,173,139 8.1%TOTAL 43,219,357 43,927,967 708,610 1.6%

5.2.2 Payment appropriations

To calculate the payment appropriations, a distinction is also made between payment appropriations for the ministries (excluding SMS) and those for institutions that are to be consolidated.

The starting point for payment appropriations is the aggregate of the settlement appropriations and the variable appropriations.

A few corrections are made to this sum, such as in the calculation of the ESA general balance of the Government of Flanders. Thus a correction is made for the expenditure on lending and holdings (ESA-8), debt repayments (ESA-9) and appropriations destined for institutions to be consolidated.

No correction is implemented for the interest appropriations recorded.

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Table 5-22: Balance calculation – Payment appropriations for ministries (in thousands of euros)Payment 2017 BRSettlement appropriations (VA) + 41,024,457Variable appropriations (VRA) + 774,322 Corrections for:Holdings and lending (ESA code 8) - 2,001,057Government debt repayments (ESA code 9) - 46,896Allocations to institutions & corrections - 11,626,699TOTAL = 28,124,127

To determine the payment appropriations for the consolidated institutions , the starting point is the expected payment appropriations in the institutions’ respective budgets. Corrections are applied to this for lending and holdings, debt repayment, allocations to other institutions to be consolidated, reserve accumulation and balance to be carried forward.

Table 5-23: Balance calculation – Payment appropriations for consolidated institutions (in thousands of euros)

2017 BRSettlement appropriations + 23,090,078 Corrections for:Holdings and lending (ESA code 8) - 2,869,609Government debt repayments (ESA code 9) - 1,598,549Allocations to Flemish ministries and other institutions to be consolidated - 397,164Internal transactions - 2,988,204TOTAL = 15,236,552

Table 5-24 summarises the total payment appropriations for ministries and consolidated institutions as recorded in the 2017 budget review.

Overall, the total payment appropriations have risen by 455.7 million, or 1.1 % compared to the initial budget.

Table 5-24: Balance calculation – Total payment appropriations (in thousands of euros)2017 IB (a) 2017 BR (b) (c) = (b) – (a) %

Payment appropriations for ministries 28,614,407 28,124,127 -490,280 -1.7%Payment appropriations for institutions 14,290,563 15,236,552 945,989 6.6%TOTAL 42,904,970 43,360,679 455,709 1.1%

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5.2.3 Overall evolution of policy and payment appropriations

Figure 5-1 shows that policy appropriations are 567.3 million euros higher than payment appropriations in the 2017 budget review. This difference amounted to 314.4 million euros in the initial budget. The difference between policy and payment appropriations reflects the investment ambitions of the Government of Flanders. With classically funded investment projects, there is, logically, the influence of a delayed payment schedule.

Figure 5-12: Policy and payment appropriations (in thousands of euros)

IB 2017 (1) BR 2017 (2)0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

Policy appropriations Payment appropriations

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5.3 Policy and payment appropriations spread over the 13 policy areas

Table 5-25, resp. Table 5-26 below show the changes in the amounts of the policy and payment appropriations, respectively, of the 2017 initial budget and the 2017 budget review for each policy area.

Table 5-25: Policy appropriations per policy area (in thousands of euros)Policy area 2017 IB (a) 2017 BR (b) (c)=(b) - (a) %Higher entities (HE) 129,615 129,615 0 0.0%Finance and Budget (F&B) 2,458,660 2,618,762 160,102 6.5%Flemish Department of Foreign Affairs (IV) 182,683 197,269 14,586 8.0%Economy, Science and Innovation (EWI) 1,579,212 1,544,329 -34,883 -2.2%Education and Training (OV) 12,824,990 12,905,390 80,400 0.6%Welfare, Public Health and Family (WVG) 11,480,852 11,723,097 242,245 2.1%Culture, Youth, Sport and Media (CJSM) 1,222,414 1,264,887 42,473 3.5%Employment and Social Economy (WSE) 3,576,945 3,582,625 5,680 0.2%Agriculture and Fisheries (LV) 188,420 195,603 7,183 3.8%Environment, Nature and Energy (LNE) 1,416,707 1,395,054 -21,653 -1.5%Mobility and Public Works (MOW) 3,559,870 3,662,327 102,457 2.9%Spatial Planning, Housing Policy and Non-Movable Heritage (RWO) 818,770 889,417 70,647 8.6%Chancellery and Administration (K&B) 3,780,219 3,819,592 39,373 1.0%TOTAL 43,219,357 43,927,967 708,610 1.6%

Table 5-26: Payment appropriations per policy area (in thousands of euros)Policy area 2017 IB (a) 2017 BR (b) (c)=(b) - (a) %Higher entities (HE) 129,615 129,615 0 0.0%Finance and Budget (F&B) 2,363,134 2,505,025 141,891 6.0%Flemish Department of Foreign Affairs (IV) 172,574 184,391 11,817 6.8%Economy, Science and Innovation (EWI) 1,486,224 1,438,673 -47,551 -3.2%Education and Training (OV) 12,834,920 12,886,634 51,714 0.4%Welfare, Public Health and Family (WVG) 11,433,466 11,671,037 237,571 2.1%Culture, Youth, Sport and Media (CJSM) 1,202,527 1,212,607 10,080 0.8%Employment and Social Economy (WSE) 3,595,127 3,609,106 13,979 0.4%Agriculture and Fisheries (LV) 189,764 200,587 10,823 5.7%Environment, Nature and Energy (LNE) 1,374,220 1,321,319 -52,901 -3.8%Mobility and Public Works (MOW) 3,519,749 3,481,820 -37,929 -1.1%Spatial Planning, Housing Policy and Non-Movable Heritage (RWO) 828,427 904,854 76,427 9.2%

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Chancellery and Administration (K&B) 3,775,223 3,815,011 39,788 1.1%TOTAL 42,904,970 43,360,679 455,709 1.1%

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Figure 5-2 shows the policy and payment appropriations for each policy area.

Figure 5-13: Policy and payment appropriations per policy area – 2017 BR (in thousands of euros)

Higher EntitiesFlemish Foreign Affairs

Agriculture and FisheriesSpatial Planning, Housing Policy and Immovable Heritage

Culture, Youth, Sport and MediaEnvironment, Nature and Energy

Economy, Science and InnovationFinance and Budget

Mobility and Public worksEmployment and Social EconomyChancellerry and Administration

Welfare, Public Health and FamilyEducation & Training

0 3,000,0006,000,000

9,000,00012,000,000

15,000,000

Payment appropriations BR 2017 Policy appropriations BR 2017

5.4 Discussion per policy area

In the discussion of the expenditure evolution per policy area, the emphasis is placed on the evolution of policy appropriations since this best illustrates which policy intentions have been taken. Unless stated otherwise, the term “appropriations” refers to policy appropriations. To the extent that there is a major deviation between the evolution of the policy and payment appropriations, this is also indicated. Generally the difference is due to an adjustment of the payment schedule or a commitment that does not occur annually. The impact of the inflation parameter is not systematically included in the discussion of the policy areas. This information, however, is included per budget article in the explanatory notes per programme of the policy areas.

5.4.1 Finance and Budget (F&B)

In accordance with the most recent monthly forecasts for the smoothed health index, the next time the threshold index would be exceeded is May 2017. In 2017, 194.7 million euros must be provided on the index provision, which is an increase of 77.7 million euros compared to the 2017 initial budget (whereby the assumption is that an overrun of the threshold index would take place in August 2017).

For 2017, the pension service of the public sector (PDOS) expects that the contributions level to the parastatal pool shall grow with 2 percentage points compared with the level of 2016 (36%) to 38%. The provision earmarked for this in the initial budget (6.1 million euros) shall, for 5.6 million euros, be redistributed to the legal entities involved and the balance shall be returned to the general fund.

As in previous years, the provision of 6.3 million euros to cover the cost of endogenous growth at ministries and agencies with legal personality was redistributed in its entirety to the entities involved.

To cushion unexpected events, the 2017 budget review earmarks an additional CA/SA buffer of 100 million euros.

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The non-recurrent appropriations for addressing the asylum issue which were added in the 2017 IB to the provision within the policy area Finance and Budget, are allocated to the relevant budget articles of the policy areas concerned. This implies a downwards adjustment of the provision within the department of Finance & Budgeting of 34.8 million euros.

The provision for unallocated budget space of 5 million euros is being deleted.

From the Flemish Climate Fund, 2 million euros are being added to the provision for investments in the context of the energy efficiency action plan.

An addition 12.9 million euros in payment appropriations is being added to the FFEU provision as correction on the allocated 2015 FFEU appropriations and the payment appropriations decrease by 2 million euros.

In the context of the 6th state reform, Flanders is authorised for the fiscal expenditure of tax relief measure for owner-occupied dwellings and the savings for building purposes, the energy-saving investments, investments in security, restoration activities to monuments, social housing and service vouchers. Based on the most recent estimates of the FPS FIN and calculated according to the transactionalised cash method, the housing-related fiscal expenditure drops by 16.5 million euros and the fiscal expenditure rises with regard to the service vouchers by 20.4 million euros compared to the 2017 IB.

In the 2017 budget review, the interest appropriations decreased by 11.2 million euros to 78.9 million euros.

The costs on the interest article also decreased by 8.1 million euros to 8.3 million euros. This is largely the consequences of a different way of charging the issuance differences.

For the foreclosure of an old surety that was granted in the context of economic expansion for the Van Weynsberghe file, 3 million euros was entered, where this was not foreseen in the initial budget. For Vlabel, an additional 1 million was provided for non-recurrent interest on overpaid tax.

The appropriations for the Flemish Fund for the Redemption of Charges (VFLD) has been increased by 31.6 million euros so that the total amount for the Disaster fund for 2017 is set at 57.8 million euros.

5.4.2 Flemish Department of Foreign Affairs (IV)

The appropriations of the Department of Foreign Affairs are increased with a non-recurrent amount of 1 million euros as contribution from the Government of Flanders to the Consortium 12-12 for the benefit of the victims of famine in South Sudan and the threatened famine in Somalia, Yemen and Nigeria. While awaiting approval and implementation of the budget review, this contribution has, in the meantime, been pre-financed from the normal appropriation for development cooperation. In addition, a non-recurrent budget of 0.18 million euros is provided to support the activities in connection with the Brexit. VISITFLANDERS provides for a policy appropriation of 2.6 million euros for the ‘Reception Structure Brussels Airport’ project, for which an expenditure of 1.3 million euros is expected in 2017. This project is financed from its own cash resources.

Finally, the appropriations within the policy area increase by 9.5 million euro by the inclusion of the Flemish Association for Development Co-operation and Technical Assistance in the Flemish budget perimeter.

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5.4.3 Economy, Science and Innovation (EWI)

The ESA policy appropriations by the Fund for Ancillary Economic and Innovation Policy (Hermes Fund) dropped by 9 million euros, primarily as a consequence of the re-estimation of the costs required for Indirect Carbon Leakage (ICL) and a shift of policy expenditure to other institutions to be consolidated. The payment expenditure of the Hermes fund declines by 39.3 million euro. The two most important elements in this are a new estimation of the payment schedule (-35.7 million euros) and a positive adjustment of the costs to be settled for ICL (7.5 million euros).

At the FWO, the commitment authorisation has fluctuated over time due to long-term triggers. In the budget review there is a drop in the policy appropriations as a result of the shift of the five-year trigger for Big Science from 2017 to 2018 (-18 million) and an acceleration of the commitment for scientific research groups in 2016 (-1 million in 2017). In addition, the expenditure on consolidated institutions (mainly universities) rose by 11.4 million euro, so that the policy effect of this expenditure shifts for the same amount from the FWO to these institutions. The consolidation has a similar effect on the payment appropriations of the FWO, which decrease by 8.3 million.

At the VITO, the current expenditures (wages and operating costs) rise by 3.5 million euro.

The policy appropriations of Meise Botanical Gardens rise by 2 million euros, on the one hand as a result of higher commitments with FFEU resources in the context of the master plan (+0.8 million) and on the other with regard to the leverage project of VISITFLANDERS (+1.1 million).

By applying the charging rules provided in the ESA2010 for standardised guarantees, the expected appropriation for the Guarantee Scheme shall decrease by 4.1 million euros.

The expenditure of the VEB rises by 6.1 million euros and consists mainly of costs linked to the supply activity and more specifically the purchasing costs of electricity, the transport and distribution costs, costs of green energy certificates and taxes & charges. These costs are charged at the expense of the customers.

5.4.4 Education and Training (OV)

In order to fund the wages and structural operation of primary, secondary, DKO, pupil guidance centres, LBV inspection, pedagogic supervision and adult education, the appropriations are adjusted by 6.3 million euros (salaries), -6.2 million euros (own funds resources) and 4.5 million euros (operating costs):

Salaries: With a stable policy, the salary costs in education would show a downward trend of 15.2 million euros (quite apart from the downward trend in the resources fund), but as a result of the necessary expenditure in the context of the asylum crisis (+14.5 million euros for NT2 teachers), implementing the original growth path NT2 language demands by 12.0 million euros (+1.9 million euros in salaries) and an adjustment for new staff within the GON guidance (+5.1 million euros), this drop was nullified. The additional GON resources systematically increase in the coming years to a recurrent adjustment of 15.2 million euros.

Own fund resources: The necessary expenditures funded through own resources of the OV policy area decrease, based on the latest estimates, by 6.7 million euros. The expected revenues of the fund decrease, however, by 13.0 million euros.

Operating costs: in addition to the guarantee scheme of the wages for the transfer of pupils from special-needs education to the normal education system, a guarantee scheme has also been developed for the operating costs (+1.1 million euros for special-needs primary and secondary education), moreover, the operating costs for compulsory education increase as a result of of the new data by 0.7 million euros. In addition, an adjustment of 2.6 million euros is also required for the Dutch as a second language (NT2) training in adult education.

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Within the OV policy area (excl. legal entities), revenues of 6 million euros are expected from the Flemish Climate Fund. Of this, 3 million is already settled in 2017, including 2.5 million euros that are forwarded to the Flemish Universities and Colleges. In addition, in the context of energy-saving investments in Higher Education, which were approved and fixed in 2016, there is an adjustment of 1.5 million euros in payment appropriations.

The appropriations of the SMS Fund Registration Fees CVO increase by 1.2 million euros as a consequence of a growing number of students who can enjoy an exemption on the registration fees.

The appropriations of the Agency for Infrastructure in Education (AGIOn) rise by 7.5 million euros, this as a result of the use of the climate resources (these give AGIOn the possibility of entering into 14 million euros in commitments, of which 3 million shall be paid out in 2017), expenditure in the context of the PPS Schools of Tomorrow (1.3 million euros) and a new evaluation of the payment schedule (3.2 million euros). The ESA chargeable revenues do not change. The non-ESA expenditures rise by 5 million euros in order to grant loans in the context of the Flemish Solar Plan for placing solar panels on the school infrastructure. This expenditure shall be funded by the transferred balance and are thus ESA neutral. Finally it should be stated that the investment authorisation for AGIOn in 2017 is increased by 4.1 million euros as a consequence of the adjustment of the positive effect of lowering VAT.

The policy appropriations of the Community Education (GO!) rise by 16.9 million euros, this as a consequence of the climate resources that GO! receive in 2017 (4 million euros) and the estimated necessary investment commitments. This includes an increase of the investment authorisation by 1.9 million as a consequence of an adjustment of the positive effect of the VAT reduction. The payment appropriations rise by 3.3 million euros as a consequence of a partial settlement of commitments on the climate resources (1 million euros) and a new evaluation of the payment schedule of ongoing investments (2.1 million euros). The own revenues of the GO! do increase by 3 million euros, so that the additional impact on the general balance remains restricted to 0.1 million euros.

There is an increase in appropriations at the universities and colleges of around 39.5 million euros.

5.4.5 Welfare, Public Health and Family (WVG)

The administrative appropriations of the WVG department are increased by 0.5 million euros to cover IT investments (new policy).

With the Youth Welfare Fund, there is an extra provision of 6.7 million euros for the residential buffer capacity, the strengthening of supervised independent living and the residential capacity in co-funding with Fedasil. This amount is transferred from the asylum provision that was provided earlier.

The appropriations for home and elderly care decrease, assuming no policy changes, by 22 million euro as a consequence of various evolutions. The appropriation for funding the residential care centres drops by 16.1 million euros, that is primarily due to a delayed start-up of the number of residential units in accordance with the recognition calendar and the lower occupancy rate. Furthermore, the zero-based estimate of the expenditure for the social agreement of the care staff in the elderly care has been adjusted downwards by 6.2 million euros.

We see the expenditure for mobility aids increase by 8.8 million euros in the context of the procedural guidelines entered into with NISDI, by which the mobility aids shall, until the end of 2018, be paid by the NISDI via the mutual insurance funds to the providers. In compliance with the concept paper, a reform of the aids and appliances policy shall be developed that, among other things, shall enable budgetary efficiency gains. The reform

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shall be implemented in 2019 because the procedural guidelines with the NISDI only expire in 2018.

The most important reason for the increase of the appropriations in this policy area is the inclusion of the Flemish Social Protection (ex Care Fund) in the Flemish budget perimeter. As a result, the appropriations increase by 247.4 million euros. In addition, the expenditure of the Flemish Social Protection also increases by 7.7 million euros through the rise in expenditure in the Flemish care insurance scheme component, which is largely due to a higher percentage rise (4.16% instead of 3%) than projected in informal and home care. Finally, there is, within this institution, a transfer of 10.3 million euros to the Flemish Agency for Persons with Disabilities (VAPH).

Within the Flemish Infrastructure Fund for Matters relating to the Individual (VIPA) an additional 6.7 million euros is provided, in the context of the hospital funding, for the implementation of the strategic fixed sum. Further, 7 million euros in policy appropriations shall be entered in implementation of the Flemish Climate Plan. Finally, the investment authorisation of the alternative funding shall be lowered once by 2 million euros to compensate the investments by the Youth Welfare Fund.

The estimated family benefits to be paid have decreased by 18.1 million euros. In view of implementation in 2016, the projected package for payment and administrative fees has also decreased by 3.3 million euros. This is being transferred to the Child and Family Agency (2.4 million euros) and the Flemish Social Protection (0.9 million euros) in order to fund the ICT expenditure in preparation for the competences transferred under the Sixth State Reform. In addition to this, the development of this ICT platform has suffered a non-recurrent delay, which means that the Child and Family Agency has been forced to carry over 1.5 million euros in expenditure to 2017.

Based on the agreed target groups for the basis support budget (BOB), the budget for the BOB that was provided in the initial budget was assessed too high by 10.3 million euros. These resources shall be added to the expansion policy of the Flemish Agency for Persons with Disabilities (VAPH) in the context of the start-up of person-linked financing.

5.4.6 Culture, Youth, Sport and Media (CJSM)

As far as the new policy, a recurrent adjustment of 0.7 million euros is allocated for the implementation of the international component of the Arts Decree, the acquisition of contemporary works of art and the settlement of the higher costs for the public lending right. There is also a non-recurrent adjustment of 1.8 million euros allocated for a number of urgent projects or inevitable costs, including the removal of the art collection of the Government of Flanders to a new depository and the ICT costs with regard to the introduction of the regulated book price.

In addition to the adjustments for new policy, a total of 0.3 million euros in payment appropriations was added to settle undertaken commitments.

The policy appropriations of the Fund for Cultural Infrastructure (F0CI) increase by 13.2 million euros, this on the basis of climate resources that FoCI receives in 2017 (3 million euros), an additional inclusion of policy appropriations that, in the context of the former FFEU, were transferred and a non-recurrent adjustment of 2 million euros to adopt new policy. The payment appropriations if the FoCI rise by 1.4 million euros as a consequence of a new estimate of the payment schedule, a partial settlement of commitments of the climate resources (0.2 million euros) and the adjustment of 2 million euros for new policy.

The appropriations of the Museum for Contemporary Art (MuHKA) increase by 1.1 million. These appropriates are being internally compensated at the Culture policy area and VISITFLANDERS and serve for renovation investments.

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At the Sport Flanders Agency, the policy appropriations rise by 21 million euros, mainly as a consequence of deploying equestrian resources for the general sport infrastructure plan and for Sport Flanders centres. The decrease in payment appropriations remains limited to less than 2.9 million euros. In the 2017 budget review, the policy appropriations of the VRT (public broadcasting network of the Flemish Community) have decreased by 2.6 million euros. The investment expenditure is adjusted downwards by 4.8 million (including 2.4 million for the planned new-build housing), while the current expenditure is raised by 2.2 million.

As with the 2017 initial budget, in the budget review, the appropriations of the Media Fund - a separate fund operation within the VAF - is again raised by 1 million euros. The increase is the consequence of the transfer of the surplus of income from commercial communications of the VRT.

5.4.7 Employment and Social Economy (WSE)

In September 2016, the new Flemish Care Credit was started. Since then, entry into the existing system of career break is no longer possible. As a result of this change, there was a stronger influx in 2016 into the existing system than expected at the initial budget. This influx led to a rise in the policy and payment expenditure by 12.2 million euros in 2017.

Based on the 2016 implementation figures, there appears to be an increase in the number of issued service vouchers of 4.4% compared to the year before. For the calculation of the appropriations for the 2017 budget review, the implementation figures for 2016 were used and a growth of 4.4% was applied to this. This resulted in a decline in the projected appropriation for service vouchers of 23.5 million euros.

The expenditures for the work resumption benefits rise by 4.6 million euros and so are equated to the implemented expenditure for this measure in 2016. For the Flemish Support Benefits, a rise in the policy and payment appropriations of 3.1 million euros is projected, while the expenditure for end-of-career jobs drops by 0.82 million compared to the initial budget.

For the youth bonus, a rise in the appropriations is projected, based on updated estimates, of 1.7 million euros.

For Flemish co-funding to ESF projects, an additional 3.85 million euros in payment appropriations have been made available.

The policy appropriations for investments of the VDAB, which fluctuate over time, drop by 4.5 million euros compared to the initial budget. This has no effect on the payment appropriations. The VDAB is also provided with an increase of 2 million euros from the asylum provision and an increase of 2.7 million for training measures that will be financed in the context of the kilometre charge.

An amount of 5.9 million euros has been freed up (non-recurrent new policy) for the organisation of a new investment appeal for social enterprises.

Within the social involvement economy (SINE), the appropriations are reduced by 2 million euros in response to the lower implementation figures for 2015 and 2016.

5.4.8 Agriculture and Fisheries (LV)

The policy appropriations of the Flemish Agricultural Investment Fund (VLIF) increase by 3.6 million euros in the context of the greenhouse gas emissions reduction (climate resources).

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The payment appropriations of the VLIF increase by 8 million as a consequence of an updating of the payment schedule for the aid to farmers and horticultural gardeners and also because of payments in response to the measures for greenhouse gas emissions.

Since the EV ILVO has won a number of new EU projects, the revenues increase by 4.2 million euros which occasion an increase in the policy appropriations of 3.5 million euros.

5.4.9 Environment, Nature and Energy (LNE)

As a result of the intra-Belgian Climate Agreement, proceeds from the Belgian auction of emission rights will be transferred to the Flemish Climate Fund. In the 2017 budget review, the surcharges are estimated to be 38.1 million euros lower than in the 2017 initial budget. This drop is due to a decrease in the CO2 price on the ETS market.

The expenditure for the internal Climate Policy, international climate funding and the funding of the Indirect Carbon Leakage is paid from the Flemish Climate Fund. In the context of the commitment to invest 300 million euros during this term of office in internal climate policy and 24 million euros in international climate funding, a policy appropriation is provided this year of 92.2 million euros. An amount of 39.4 million euros is provided for Indirect Carbon Leakage. The total payment appropriations are, respectively, 42.5 million euros and 39.4 million euros. The payment of these resources are distributed over the various policy areas involved. In the context of setting up the Hunt Fund, to which the income from the sale of hunting permissions and permits is allocated, a sum of 2 million has already been transferred to the Agency for Nature and Forests and will then be placed in the new fund that is being set up. Thanks to the establishment of a Hunt Fund, the resources can be used to the benefit of the policy on hunting in the widest sense, with participation in decision making by the hunting sector.

A new policy measure in 2017 for stimulating projects in the “circular economy” in cities and the municipalities is provided with 1.7 million euros. With these extra resources, municipalities are supported with the necessary expertise for developing innovative projects and specific pilot projects and testing grounds.

This year, 7.5 million euros will also be freed up in the context of the asbestos removal policy. In 2014, the Government of Flanders approved an accelerated removal of asbestos by 2040. With the 7.5 million euros provided, the emphasis shall in the initial phase be placed on the removal of asbestos from schools.

Subsidies for drinking water companies from the MINA Fund are 2.3 million euros higher than the 2017 initial budget due to the Aquafin invoice.

The updating of the payment schedule on the MINA fund also leads in a decline of the payment appropriations by 17.6 million euros. These are mainly payment appropriations for the integral water policy (-9.1 million euros).

To ensure the removal of obstacles concerning renewable energy, an additional 3 million euros has been earmarked (non-recurrent new policy).

5.4.10 Mobility and Public Works (MOW)

In implementation of the wish of the Court of Audit, the expenditure fee linked to the kilometre charge is entered at MOW. The fees amount to 59 million euros in the2017 budget review, representing a rise of 4.8 million euros compared to the 2017 initial budget.

The policy appropriations of the Road Safety Fund are being increased by 6.5 million euros in the 2017 budget review. This expenditure is necessary in the context of the digitisation of the speed cameras and the expansion of section controls.

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In 2017, the main work for the Oosterweel link will start on the Left Bank. In total, 33.7 million euros is included for the main work compared to 80.2 million euros provided in the initial budget. Since the work shall begin in the 4th quarter of 2017, the budgetary impact for 2017 will be more limited than initially estimated. This expenditure with regards to the main work is kept outside the budget standardisation. Projects already started such as Ijzerlaan, Groot Schijn and moving utility mains shall be continued.

Payment appropriations in respect of the FFEU provision have increased by 20 million euros. Half of this is about the FFEU appropriation for the renovation of the Theunis Bridge over the Albert Canal in Antwerp. In addition, it is largely a (budgetary) reallocation of 5.4 million euros from Waterways and Sea Canal for the transfer of staff appropriates in the context of the merger. The payment appropriations of the Flemish Water evolve less quickly by 6.5 million euros, partly because the increase of the FFEU appropriations do not fully persist in the payment appropriations.

The policy appropriations of Waterways and Sea Canal increase by 6 million euros. This is an increase by using 7 million euros of FFEU appropriations for the Driefonteinen Bridge project in Sint-Pieters-Leeuw and connecting roads (Canal to Charleroi). In addition there is an increase of 2.6 million euros through recovery of own revenues in 2016 that were transformed in 2017 into policy appropriations. As stated earlier, an appropriation of 5.4 million euros was compensated by The Flemish Waterway for staff appropriations in the context of the merger and there are still several adjustments to the amount of 1.4 million euros, such as energy costs, parastatal pool, endogenous growth and indexation. The payment appropriations increase by 6.5 million euros, mainly through an increase of them in the context of the Seine-Schelde project. The policy appropriations of De Lijn increase by 95 million euros. Updating the parameters in the indexation mechanisms for fuel, electrical energy, operators and pupil transport results in an increase in the expenditure by De Lijn of 15.0 million euros. In addition, a non-recurrent appropriation has been added to the budget of De Lijn, derived from the appropriations transferred in the past, namely 56.3 million euros for the trams. This is because the proposed order of the trams was moved from 2016 to 2017. Finally, in the budget of De Lijn there is also a policy appropriation of 12.5 million euros from the Flemish Climate Fund. The payment appropriations of De Lijn increase by 17.1 million euros, mainly because of the updating of the parameters in the indexation mechanisms. Finally, a non-recurrent 7 million euros in additional resources is provided for implementing repair activities on the sea defences after super storm Dieter.

5.4.11 Spatial Planning, Housing Policy and Immovable Heritage (RWO)

The greater influx of recognised refugees, puts pressure within the VMSW on the existing rental subsidy budget. In the context of the 2017 budget review, the budgetary needs are updated, which results in an additional 2.1 million euros in policy and payment appropriations.

For the normal appropriations regarding the rental subsidies and benefits, 5.7 million euros is deployed for the new policy budget space in the initial and 2017 budget review. The new policy budget space will be further used for additional aid to inter-municipal partnership projects for local housing policy (1.1 million euros) and the social rental stock (7 million euros, of which 5 million in new policy in response to the budget review) whereby the last stated expenditure transits via the VMSW.

Still with the VMSW, the expenditure for recruitment subsidies (SV) and the benefits for rational energy use (REG) drop by 0.8 and 2.5 million euros respectively. In the implementation of the Flemish Climate Plan, the VMSW can enter into commitments for an additional 20 million euros, of which an additional 18 million euros in expenditure is

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added to the budget. In addition, corrections are applied to the ESA processing of interest swaps on the one hand and FS3 contributions of the other.

The FS3 contributions up to and including the 2017 initial budget are deducted from the interest revenues. These are shown more correctly in the 2017 budget review in the ESA payments. Because of this, ESA revenues and ESA expenditure increase by 55 million euros.

Finally, the lending mandate of the VMSW for allocating bullet loans with complete interest contributions is lowered by 5 million euros. As a consequence of the scrapping of support for social owner-occupied houses, this interest-free pre-funding can only be allocated for land on which social rental dwellings are to be built. This has no ESA impact.

A non-recurrent budget of 1 million euros is added to the appropriations for Immovable Heritage so that the current IT project of the agency (including the new inventory tool) can be entirely completed. In addition, 0.5 million euros in non-recurrent appropriations are added to fund a number of non-recurrent expenditure, including the non-recurrent start-up costs of the Flanders Participation Fund for the roll-out of the heritage loans (including an IT tool), the non-recurrent removal costs of the Kogge in Antwerp (that has to move to another location because of works) and a digital portfolio of good restoration practices. The availability of these additional non-recurrent resources allow 0.5 million euros of normal resources to be freed up for the allocation of benefits.

5.4.12 Chancellery and Administration (K&B)

The expenditure of the Flemish Brussels Fund rises by 0.9 million euros in payment appropriations in order to be able to settle commitments made.

The redistribution of the non-recurrent provision for the asylum crisis results in an increase of 14.9 million euros. This covers 11.5 million euros for civic integration and supervision to Dutch which is paid to the Agency for Integration and Civic Integration (II) and 3.4 million euros to the urban Agencies II (Antwerp/Ghent) and to the House of the Dutch non-profit organisation (Brussels).

In addition, a non-recurrent 0.4 million euros new policy is provided for language tests for civic integration.

For three years, the programme Flanders Radical Digital - digitisation of the Government of Flanders will be supported with an annual leverage budget of 10 million euros. For the payment of the triggers for projects launched in 2015, 2016 and 2017, an additional 4 million euros in payment appropriations is provided, primarily for the implementation of the projects that were established in 2016: the citizen counter, the e-counter for enterprises and the smart subsidies for organisations project.

As a consequence of the sharply increased number of residents in the city of Leuven, the category of special funding by the Municipalities Fund was created to provide additional funding for the city. For this, an additional 6.7 million euros in policy and payment appropriations is provided within the budget of the Domestic Affairs Agency.

The action plans ‘building portfolio Agency for Facility Operations’ and ‘Mobility Government of Flanders’ must contribute to achieving the objectives from the Flemish Climate and Energy Pact, and 12.2 million euros policy appropriations have been added to the appropriations of the Agency for Facility Operations from the Flemish Climate Fund. This leads to an increase of the payment appropriations by 8.7 million euros, namely 1.4 million euros for the mobility action plan and 7.3 million euros for the building portfolio action plan.

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2.7 million euros can be added to the budgetary fund Immobile Property of the Agency for Facility Operations pursuant to a re-estimation of the planned valuations. In addition, 2.2 million euros will be spent less by this fund.

In the context of the Master Plan Hydraulic Engineering lab, a sum of 2.6 million euros in policy and payment appropriations was added during the 2017 initial budget to the appropriations of the Agency for Facility Operations. Since additional study work is necessary as a consequence of an amendment in the RD Work Places, the postponed expenditure in 2017 to an amount of 2.6 million euros shall be provided later. As a consequence of, among other things, the re-tendering for the talent component of the Staff Point project, there is a downward adjustment of 2.1 million euro in policy appropriations and 3.2 million euros in payment appropriations in the expenditure of the Separate Management Service Government Staff.

The sum of 1.5 million in payment appropriations is added to the new investment funds for local authorities, which has bundled the 3 subsidy flows (i.e. the urban regeneration projects, major city policy and Rural Funds), to settle made commitments. In addition, there is an additional 1.5 million euros in policy and payment appropriations for city projects.

5.4.13 Higher entities (HE)

The appropriations in this policy area do not change.

6 ESA CORRECTIONS

To arrive at a government balance that is in accordance with the ESA 2010 regulation, a number of corrections have to be applied to the government balance of the Flemish Community.

A first category of corrections involves corrections regarding institutions within the public sector perimeter.

A second category involves a number of PPPs alternative financing projects that the INR/ICN has reclassified in light of stricter European budgetary surveillance and the implementation of ESA 2010 from September 2014 onwards.

The changes compared to the 2016 budget for two categories of corrections are described below.

6.1 ESA corrections with regard to the public sector perimeter

In response to the EDP notification (Excessive Deficit Procedure) of April 2017, the sector classification of the Flemish Agency for Social Protection (ex-Care Fund) changes from social security (S1314) to federated state authority (S1312). Considering this amended sector categorisation, the VSB is now completely consolidated with the Government of Flanders and no ESA correction needs be implemented further.

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6.2 ESA corrections in the context of the Stricter European budgetary surveillance

In response to the EDP notification of April 2017, the project association NV Schools of Tomorrow (SvM) were categorised within the Flemish public sector perimeter.

For the consolidation of the DBFM SvM, the schools built were considered as government investments and the expenditures relating to the construction of these schools were added to the government balance.In addition, an ESA correction was made on the availability fee for the share capital component. The investments (capital expenditure for building schools) were, after all, charged to the ESA government balance at the moment of building the schools. In consultation with the Institute of National Accounts, the capital component was calculated by dividing the investment costs by 30 (= economic life span).After application of this ESA correction, we received a proxy for the annual ESA-related chargeable components (funding costs, maintenance) of the availability fees.

As a consequence of the full consolidation of the DBFM SvM (but reimbursement of capital via the loan runs progressively instead of linear) the actual incomes and expenditures must be charged. Due to the linear approach to the cost of capital for the consolidation of the DBFM SvM, the ESA impact was moderated (but made less digressive). The actual ESA cost of the DBFM SvM is higher than the approach via the linear depreciation. On the other hand, the intercalary interest because of the consolidation of SvM is charged at the reception date and not upon completion as it was in the situation before consolidation. This amended charging moment has a positive effect on the ESA impact.

On balance, the ESA impact (upon the via Agion funded availability fees) of the Schools of Tomorrow project amounts, after the consolidation of the project firm, to 132.5 million euros, which is 43.7 million euros higher compared to the initial budget. Of this extra ESA impact, 7.2 million euros is due to the consolidation of the DBFM-company SvM.

In response to the evaluation of the operation of the fiduciary administration by the Flanders Participation Company (PMV), the rolling fund has been abolished. The associated current account of the Government of Flanders with PMV shall be settled from the normal appropriations on the EWI budget. The ESA correction can therefore be deleted.

For the funding of the infrastructure and the medical-technical services of the hospitals, the so-called A1 and A3 components of the Financial Resources Budget (BFM), an update has been made of the ESA chargeable expenditure based on the advice of the Institute of National Accounts concerning the 2016 implementation figures. The extra ESA impact of 0.4 million euros is largely found in an amended processing of the medical appliance funding.

In response to the sale at the end of 2016 by PMV of its participation in Meander NV (VAC Brussels), an amount of 4 million euros will be received in 2017 (a so-called earn out payment).

With regards to the PPP project Brabo II, the National Accounts Institute has recently assessed that the project may not be charged in the government account (as investment as fixed asset), and this means that the ESA correction provision of 26.3 million euros provided in the 2017 initial budget lapses.

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7 GOVERNMENT BALANCE

7.1 Government balance

Table 7-27 shows the calculation of Flanders’ government balance. Contrary to previous years, the table no longer consists of an individual calculation of the balance of the Flemish ministries (excl. SMS) on the one hand and the institutions to be consolidated on the other hand, but instead the ESA revenues and ESA expenditure of the ministries and the institutions to be consolidated, are grouped in order to calculate one government balance.

Table 7-27: Summary government balance table (thousand euros) 2017 IB 2017 BR Delta

Consolidated ESA revenues (1) 41,816,887 42,301,461 484,574 Consolidated primary ESA expenditure (2) 42,503,175 42,966,367 463,192 Consolidated primary balance (3=1-2) -686,288 -664,906 21,382 Underutilisation (4) 662,042 690,643 28,601 Consolidated primary ESA balance after underutilisation (5 = 3+4) -24,246 25,737 49,983 Interest payments (6) 401,795 394,312 -7,483 ESA corrections (7) 310,229 297,321 -12,908 Corrected government balance (8=5-6+7) -115,812 -71,253 44,559 Excluded from budgetary target: Building costs Oosterweel link + A1/A3 unsolicited provisional amounts

120,220 73,717 -46,503

Balance after corrections verification budgetary target (10=8+9) 4,408 2,464 -1,944

Budgetary target 0 0 0 Variation with budgetary target 4,408 2,464 -1,944

Correcting for the settlement of the expected underutilisation and taking into account the ESA corrections Flanders’ government balance amounts to -71.25 million euros.

In the verification of the government balance against the budgetary target, 2 elements were not taken into consideration in the present budget.

First the construction costs of the Oosterweel link: in 2017, 33.7 million euros are projected for this as expenditure in the budget. Considering the underlying payback model, the strategic importance of this investment and the fact that it is an exceptionally large and non-recurrent expenditure for the Government of Flanders, which cannot be integrated without other essential investment in the coming years coming under threat, the Government of Flanders has decided, when verifying the budgetary target, to exclude these building costs.

In addition to the Oosterweel link, the Government of Flanders is confronted with the specific issue of the federal legislation concerning investment grants for hospital infrastructure. Specifically, the Government of Flanders expects to have to include 40 million euros in the budget for hospital investments. This concerns hospitals that were already being built before the transfer of competences. Consultation with the federal government has already been commenced about this issue.

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The government balance in the context of the balanced objective (corrected general balance excl. buildings costs for Oosterweel link and A1/A3 unsolicited provisional amounts) hardly changes in response to the budget review: from a positive balance of 4,408k euro to 2,464k euro. The Government of Flanders concludes with a balanced budget.

7.2 ESA revenues

Table 7-28: From revenue appropriations to ESA revenues (thousand euros) 2017 IB 2017 BR Delta

Receipts general budget (1) 38,938,841 39,135,858 197,017 Loans (2) 750 750 0 Holdings and lending (3) 129,487 125,738 -3,749 Grants to institutions (4) 36,348 67,437 31,089

ESA revenues general budget (5=1-2-3-4) 38,772,256 38,941,933 169,677

Revenues institutions (6) 21,555,255 23,090,078 1,534,823 Loans (7) 2,763,442 2,736,366 -27,076 Holdings and lending (8) 1,172,036 1,145,658 -26,378 Grants to Flemish ministries and other institutions (9) 11,189,561 11,859,190 669,629 Internal transactions (10) 3,385,585 3,989,336 603,751 ESA revenues institutions (11=6-7-8-9-10) 3,044,631 3,359,528 314,897

Consolidated ESA revenues (12=5+11) 41,816,887 42,301,461 484,574

Table 7-28 shows the ESA revenues from the Government of Flanders as the sum of the ESA revenues from the Flemish ministries (excl. SMS) (5) and those of the institutions to be consolidated (11). These amount to 38.9 + 3.4 = 42.3 billion euros.

The revenues of the ministries (excl. SMS) are the total revenues (1) from the general resources fund. In order to arrive at the ESA revenues of the Flemish ministries (excl. SMS) (5), a number of corrections are applied. First, income and expenditure estimated for lending and holdings (ESA code 8) (3) are neutralised. The financial debt is considered the same way (ESA code 9) (2). Calculating the consolidated general balance implies that the financial flows to and from the Flemish institutions to be consolidated must be neutralised. For this reason, the income is decreased with the grants derived from the institutions to be consolidated (4).

Besides the ESA corrections set out above for holdings and lending (code 8) and government debt (code 9) and the neutralisation of the financial flows to and from the ministries and the Flemish institutions to be consolidated, the balance carried forward from a previous financial year and the withdrawal from the reserve fund are not included (internal transactions) as part of the income side.

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7.3 Primary ESA expenditure

Table 7-29: From expenditure appropriations to consolidated primary expenditure (thousand euros)

2017 IB 2017 BR Delta Expenditure general budget (1) 41,866,200 41,798,779 -67,421 Holdings and lending 2,256,740 2,001,057 -255,683 Grants to institutions (3) 10,849,803 11,526,699 676,896 Debt repayments (4) 45,250 46,896 1,646 SA buffer (5) 100,000 100,000 0 Interest payments (6) 93,471 82,271 -11,200 primary ESA expenditure general budget (7=1-2-3-4-5-6) 28,520,936 28,041,856 -479,080

Expenditure institutions (8) 21,555,255 23,090,078 1,534,823 Repayments (9) 1,194,859 1,598,549 403,690 Holdings and lending 2,930,850 2,869,609 -61,241 Grants to Flemish ministries and institutions (11) 372,061 397,164 25,103

Internal transactions (12) 2,766,922 2,988,204 221,282 Interest payments (13) 308,324 312,041 3,717 Primary ESA expenditure institutions (14=8-9-10-11-12-13) 13,982,239 14,924,511 942,272

Consolidated primary ESA expenditure (15=7+14) 42,503,175 42,966,367 463,192

Table 7-29 shows the primary ESA expenditure by the Government of Flanders (15) as the sum of the ESA revenues from the Flemish ministries (excl. SMS) (7) and those of the institutions to be consolidated (14) and amounts to 28 + 14.9 or 43 billion euros.

For the expenditure of the ministries (excl. SMS) the total payment appropriations are taken from the administrative expenditure table. These are calculated as the sum of the settlement appropriations and variable appropriations and together they amount to 41.8 billion euros (see table pag. 540).

To make the transition to ESA expenditure, the same corrections are applied as on the income side: holdings and lending (code 8) (2), debt repayment (code 9) (4) and the financial flows to the Flemish institutions to be consolidated (3) are neutralised.

In addition, the settlement appropriation buffer (5) to an amount of 100 million euros is not taken into account for the calculation of the government balance. The Flemish Budgeting & Accounting Bill does not, at the moment, allow transfers to be made from one policy area to another. The settlement appropriation buffer offers a technical solution for redistributing any surpluses in payment appropriations in one policy area to other policy areas with a deficit in payment appropriations. All things considered, the settlement appropriation buffer thus has no impact on the ESA government balance and this can be neutralised.

Finally, a correction is made for interest payments (6) so as to arrive at the ESA-corrected primary balance for the ministries.

In order to calculate the ESA expenditure of the institutions (15), similar corrections - with the clearing of the correction of the settlement appropriation buffer - are applied as those applied for the ministries and in addition the balance to be transferred to a following

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budget year and the allocations to the reserve fund are not taken into account (internal transactions) (12).

7.4 Underutilisation

For underutilisation, we start - as usual - with the average of the observed underutilisation percentages for the two previous years (in this instance the 2015 and 2016 financial years), and apply some corrections for non-recurrent factors that have influenced underutilisation for these years.The 2015 underutilisation - as reported in the preliminary implementation figures on 15 February 2016 - stood at 353 million euros, or 0.92% of recorded payment appropriations in 2015. These figures include the underutilisation of the competences transferred as part of the Sixth State Reform – which are still being implemented by the social security institutions – in the amount of €57.4 million. Due to the high degree of uncertainty and volatility that are connected with these implementation figures, we firstly filter out the underutilisation of the appropriations for the Sixth State Reform competences from this calculation.

This underutilisation, excluding the competences transferred as part of the Sixth State Reform, was influenced by a number of non-recurring factors.On the one hand, underutilisation in 2015 was slightly increased by the non-utilisation of provisions amounting to 9.7 million euros, but on the other it was reduced by non-recurrent transactions for non-recurrent over-utilisation in a number of institutions that are active in the area of public investment (FFEU, VIF, Hermes, W&Z) for an amount of 70.5 million euros.If we remove these factors from the identified underutilisation in 2015, we arrive at a corrected underutilisation in 2015 of 356.3 million euros (i.e.353 - 57.4 - 9.7 + 70.5), or 1.26% of ESA payment appropriations (excl. Sixth State Reform) in 2015.The 2016 underutilisation - as reported in the preliminary implementation figures on 15 February 2017 - stood at 744.8 million euros, or 1.85% of recorded payment appropriations of which 53.1 million euros in underutilisation on the competences that were assumed in the context of the Sixth State Reform. For 2016, too, this underutilisation is first filtered out.As each year, the implementation figures (excluding the competences transferred as part of the Sixth State Reform) are influenced by a number of non-recurring factors.On the one hand, underutilisation in 2016 was increased, in a non-recurrent way, by the non-utilisation of appropriations with several institutions in the area that are active in the area of public investment (VIF and BAM) for an amount of 70 million euros, 128.4 million euros at the Energy Fund due to a temporary mismatch between ESA income and revenues and by not using 12.6 million euros on the non-recurrent provision with asylum appropriations.On the other hand, the underutilisation in 2016 was affected in a non-recurrent way for 79 million euros by a non-recurrent overspend at the Hermes Fund (39 million euros for ICL), VAPH (20 million euros settlement previous years of service) and an extra subsidy to LSM (20 million euros).If we remove these factors from the identified underutilisation in 2016, we arrive at a corrected underutilisation in 2016 of 559.7 million euros (i.e.744.8 -53.1 -70 - 128.4 + 79), or 1.84 % of ESA payment appropriations (excluding Sixth State Reform) in 2016.The average of these corrected underutilisation percentages – i.e. 1.55% (= 1.26 + 1.84)/2 – is applied to the payment appropriations available in 2017, excluding the appropriations for competences that have been transferred under the Sixth State Reform or 31.5 billion euros with a view to arriving at the expected underutilisation in the 2017 budget review. 31.5 billion euros x 1.55% = 488.8 million euros.Given the underutilisation identified at colleges and universities in both 2015 and 2016, the underutilisation of the appropriations to finance the competences that were transferred as part of the Sixth State Reform in 2015, as well as the strengthening of the

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monitoring process, underutilisation is being increased as in 2016 by 90 million euros to 578.8 million euros.

7.5 ESA corrections

For the ESA corrections, we refer to section 6 of the General explanatory remarks.

7.6 Sensitivity analysis

In the resources chapter, reference has already been made to the sensitivity of the income (Table 4-14)

Below, the sensitivity of the income and expenditure for a change in the interest rate is illustrated.

Hereby the effect is shown of a linear increase of the interest rate with 100 basis points (1%). For 2017, this rise would imply additional budgetary costs of 16.43 million euros. Through the rise of the interest rate during the period 2017-2019, the impact would be 59.55 million euros in 2019.

Table 7-30: change of interest rate by 1% (thousand euros)2017 2018 2019

16,430.3 36,455.3 59,546.4

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7.7 Government balance

Flanders’ government balance, after settlement of the expected underutilisation of 578.8 million euros and addition of the ESA corrections of 307.5 million euros, amounts to -71.3 million euros.The government balance in the context of the budgetary target (corrected government balance excl. buildings costs for Oosterweel link and A1/A3 unsolicited provisional amounts) amounts to 2.3 million euros so that the Government of Flanders ends up with a balanced budget.

Table 7-5: government balance 2017 IB 2017 BR BR-IB

Income general budget 38,938,841 39,135,858 197,017 Loans 750 750 0 Holdings and lending 129,487 125,738 -3,749 Grants of institutions 36,348 67,437 31,089 ESA revenue general budget (1) 38,772,256 38,941,933 169,677 Revenues institutions 21,555,255 23,090,078 1,534,823 Loans 2,763,442 2,736,366 -27,076 Holdings and lending 1,172,036 1,145,658 -26,378 Grants to Flemish ministries and institutions 11,189,561 11,859,190 669,629 Internal transactions 3,385,585 3,989,336 603,751 ESA revenues institutions (2) 3,044,631 3,359,528 314,897

Consolidated ESA revenues (3=1+2) 41,816,887 42,301,461 484,574

Expenditure general budget 41,866,200 41,798,779 -67,421 Holdings and lending 2,256,740 2,001,057 -255,683 Grants to institutions 10,849,803 11,526,699 676,896 Debt repayments 45,250 46,896 1,646 Settlement appropriation buffer 100,000 100,000 0 Interest payments 93,471 82,271 -11,200 Primary ESA expenditure general budget (4) 28,520,936 28,041,856 344,238

Expenditure institutions 21,555,255 23,090,078 1,534,823 Repayments 1,194,859 1,598,549 403,690 Holdings and lending 2,930,850 2,869,609 -61,241 Grants to Flemish ministries and institutions 372,061 397,164 25,103 Internal transactions 2,766,922 2,988,204 221,282 Interest payments 308,324 312,041 3,717 Primary ESA expenditure institutions (5) 13,982,239 14,924,511 942,272 Consolidated primary ESA expenditure (6=5+4) 42,503,175 42,966,367 1,286,510

Consolidated primary ESA balance (7=3-6) -686,288 -664,906 -801,936 Underutilisation Colleges and Universities 122,559 111,893 -10,666 Underutilisation others 539,483 578,750 39,267 Underutilisation (8) 662,042 690,643 28,601 Consolidated primary ESA balance after underutilisation (9=7+8) -24,246 25,737 49,983 Interest payments 401,795 394,312 -7,483 Consolidated primary ESA balance after underutilisation (11=9+10) -426,041 -368,575 57,466 Correction Care Fund (with respect to grant) -578 0 578 FWO correction -10,214 -10,214 0

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ESR corrections perimeter and time of charging (12) -10,792 -10,214 578 Expected building expenditure in DBFM Scholen van Morgen -88,709 -132,457 -43,748 Reclassification VIPA alternative funding 89,514 89,514 0 Viapass 1,467 1,467 0 PMV rolling fund -346 0 346 Positive correction Amoras 4,700 4,700 0 De Lijn Depot Tongeren 168 168 0 De Lijn Depots Cluster II -3,264 -3,264 0 Brabo 1 1,276 1,276 0 Livan 2,742 2,742 0 VIA-Invest (Zaventem, N-Z Kempen, R4) 4,392 4,392 0 Ghent University Hospital 50,512 50,512 0 Hospital infrastructure A1/A3 276,671 276,275 -396 Effect of the unsolicited provisional amounts A1/A3 with regard to investments before 2016 -40,000 -40,000 0 Terneuzen lock 48,210 48,210 0 VAC Brussels 0 4,000 4,000 Provision for ESA corrections -26,312 0 26,312 ESA corrections stricter European budgetary surveillance (13) 321,021 307,535 -13,486

Government balance (14=11+12+13) -115,812 -71,253 44,559

Construction expenses Oosterweel link (incl. interest) 80,220 33,717 -46,503

A1/A3 (unsolicited provisional amounts with regards to investments before 2016) 40,000 40,000 0 Corrections before verification budgetary target (15) 120,220 73,717 -46,503 Balance after corrections verification budgetary target (16=14+15)

4,408 2,464 -1,944

Budgetary target0 0 0

Variation with budgetary target4,408 2,464 -1,944

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8 FINANCIAL MANAGEMENT

8.1 Consolidated debt: introduction

The consolidated gross debt of the Government of Flanders is drawn up in accordance with the National Accounts Institute (INR). The INR published its most recent list of institutions to be consolidated as a result of the September 2016 EDP notification. For the EDP notification of April 2017, only a provisional list is available for the moment. The most important consolidation on this list - namely the DBFM Schools of Tomorrow - has already been taken into account for the calculation of the consolidated debt. The financial debts of the institutions on this list are indicated below (see Table 8-2). Together with the direct and indirect debt of the Flemish ministries (including current account) the financial debts of all these legal entities and alternatively financed investment schedules form the consolidated gross debt. Investments are not deducted from the outstanding gross debt. At consolidated level, the loans between entities within the scope of consolidation are not included in the calculation. Such loans are therefore immediately deducted from the debt of the relevant institutions.The estimated consolidated debt at year-end 2016 amounts to 23.8 billion euros.

8.2 Evolution of the consolidated debt in 2017

The evolution of the gross consolidated debt depends first and foremost on the budget balance. The effect on the debt can be estimated by the expected balance in ESA terms on the consolidated budget.

In 2017 - taking into account the building costs for the Oosterweel link and taking into account the subsidies still to be charged in an ESA way for hospital infrastructure that was built before the transfer of competences - a limited ESA deficit of 71 million euros is estimated. Due to the fact that NV BAM shall pay the deficit of 33.7 million euros as a consequence of the building costs of the Oosterweel link from its cash reserves, this deficit has not been taken into account in the calculation of the consolidated debt. The subsidies for hospital infrastructure built before the transfer of competences that are still to be charged in an ESA way, are added to the debt that has been taken over.

The balance of lending and holdings also determines the evolution of the consolidated debt. Cash income and expenditures of the Government of Flanders equity participations are estimated on the basis of the planned budgets.

The most important ESA 8 income of the ministry was, in the past, the repayment by KBC of the aid given in 2009. At the end of 2015, KBC has fully repaid the aid so that in 2017 the projected ESA-8 income for the ministries shall be limited to 126 million euros.

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To sum up, a further increase in the consolidated debt is expected for 2017 as a result of the balance of ESA-8 transactions and the possible additional debt of the hospital infrastructure. The inter-federal working group is investigating whether this debt could not be mapped through the accounting of the hospitals. To summarise, towards the end of 2017, a further increase of the consolidated debt is expected by an amount of 939 million euros.

8.3 Refinancing requirements and new financing requirements in 2017

In 2017, there are several smaller due dates for the acquired loans of the Municipal Holding Company (2.4 million euros) and Vismijn Oostende (213 thousand euros).

As of mid-2015, the Government of Flanders takes care of the direct funding of the social housing companies VMSW and VWF. For 2017, net 938 million euros is provided for VMSW and 190 million euros for VWF. This includes the repayments of this new debt. The best possible match with the lending requirements of these institutions, from a long-term perspective, will be sought for the withdrawals.

Total direct funding of 442 million euros is provided in 2017 through bonds issued through the x/n settlement system (192 million euros) and through the BCP programme (an additional 250 million euros in short term compared to 2016, or a total of 500 million euros) for the takeover of the long-term funding of the DBFM Schools of Tomorrow by NV School Invest. When the repayments of this new debt is taken into account, the Government of Flanders will directly fund 436 million euros in 2017.

The withdrawals mentioned above cause an increase of the direct debt while the debt of the concerning institutions decrease with the repayment of their existing portfolio of (guaranteed) debt (see further table 8-2).The table below summarises the gross financing requirements of the ministries for 2017, taking into account this direct funding.

To summarise, this is a total financing requirement in 2017 of 1.9 billion euros.

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Table 8-1: Financing requirement ministry IB 2017 and BR 2017 (in thousands of euros)

2017 IB 2017 BRRepayment of ministry debt 2,796 2,796Repayment BCP 0 0Balance ESA-9 CFU members 7,048 -5,372

Budget deficit/surplus adjusted for stricter European budgetary surveillance

345,821 334,858

Balance ESA-8 ministries 37,856 -16,305Balance ESA-9 ministries -46,146Balance ESA-8 CFU members 87,747 85,969

Cash surpluses + investments 0 0

Refinancing of VIPA 0 0Refinancing of VMSW 1,236,545 937,987Refinancing of VWF 340,010 190,010Financing of Schoolinvest 412,232 436,350Total 2,470,055 1,920,147Repayments 2,796 2,796

Net DIRECT debt increase 2,467,259 1,917,351

8.4 Evolution of the consolidated debt in 2016 and 2017 per entity

Table 8-2 draws a comparison between the actual situation of the consolidated debt at the end of 2016 and the expected consolidated debt in the BP and BA 2017 at the end of 2017. Since the INR shall shortly submit its EDP notification of April 2017 the debt figures for 2016 are still provisional which can slightly change.

Table 8-2: Evolution of the consolidated gross debt of the Government of Flanders per entity (in thousands of euros)

2016 REA 2017 IB 2017 BR

Direct debt MFC incl. negative current account 4,624,366 7,826,759 6,541,717Indirect debt of MFC 1,592 1,391 1,391Negative position CFU of Flemish public institutions to be consolidated 0 0 0ex-FRGE 50,320 10,985 50,320Flemish public institutions (CFU)Total 184,697 467,268 184,697

Institutions reclassified before 2014 and not belonging to the CFUBAM 136,830 120,175 120,732Balance subsidised free education  381,160 365,592   381,160Universities and colleges 460,550 305,089 460,550Others 60,330 228,309 55,630New in 2014 (INR/ICN March reclassification)PMV and daughters 95,939 114,215 95,939VPM 30,000 30,000 30,000

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Others 100 71 100New in 2014 (INR/ICN September reclassification)VMSW 6,282,503 5,958,223 6,104,447VWF 2,842,660 2,699,274 2,699,445VIPA 1,760,224 1,670,713 1,670,710RCC 590,590 614,896 587,771Others 70,232 39,077 24,835New in 2015Agency for Integration and Civic Integration 2,259 0 2,259New in 2017Vitare 42,679 0 42,679DBFM “Schools for Tomorrow” 393,877 0 171,380Consolidated PPP debtPPP Debt 779,060 539,057 773,746NewGhent University Hospital 50,100 0 0Hospital infrastructure 4,963,206* 4,726,534 4,726,931Total consolidated debt 23,803,273 25,717,627 24,726,438

* The figures of THE hospital infrastructure of 2016 is an estimated figure since there is no final figure available concerning the commitment of the hospital sector.

The estimated consolidated debt at the end of 2017 amounts to 24.7 billion euros or an increase of 923 million euros compared to the situation at the end of 2016.

Next to the consolidated debt, there are also marketable assets. An update of these assets will be available in the initial 2018 budget7.

Table 8-2 only shows the consolidated debt. Since the majority of the PPP debt is consolidated, this is also included in the table above. For an overview of the PPP debt that is not reclassified, please look at the annual report of the PPP Knowledge Centre. An overview of the total guaranteed debt (of which the biggest part is also included in the consolidated debt) is shown on an annual basis in the Cash, Debt and Guarantee Management Report of the Finance and Budget department that is submitted to the Flemish Parliament in May. Since the largest institutions that enjoyed a guarantee in the past are now being funded directly, the guaranteed debt will decrease in the coming years.

7 At the end of 2015 the consolidated debt was equal to 18.9 billion euro whereas the financial assets amounted to 21.7 billion euro. The upswing in consolidated debt in 2016 is mainly due to the takeover of the federal debt that is the result of investments in hospital infrastructure in the period before 2016. From 2016 onwards, due to the 6th state reform, the communities have the authority to decide on hospital infrastructure.

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