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The recent inflation shock increases government deficits and is also bad news for the debt ratio in the longer term. That's according to simulations made by the National Bank.

High inflation is sometimes seen as a positive thing for state finances because some product taxes rise along with it and the debt ratio falls in the short term. But the National Bank's study punctures that balloon: when you factor in all the effects, recent price increases are a bad thing for state coffers.

The news: The simulations show that high inflation makes Belgium's public deficit permanently worse than a scenario without the inflation shock. The negative effects outweigh the positive ones.

  • The positive effects for the exchequer flow through VAT, among other things: higher prices lead to higher tax revenues. Inflation also pushes down the debt ratio - public debt to gross domestic product (GDP) - as rising prices push up the denominator of the fraction.
  • But there are larger negative effects, the National Bank calculated.
    • "Public spending increases, especially if the indexation of spending is automatic, as is the case in Belgium for public employee wages and social benefits," the NBB wrote.
    • "In addition, inflation also raises nominal interest rates, all the more so as the central bank tightens its policy, increasing ." As a result, the debt ratio will also end up higher in the longer term.
    • The Vivaldi government's purchasing power measures cushioned the economic shock in the short term, but were largely unfunded. The Belgian state still has to foot that bill as well.

Conclusion: "Adding up the impact on all budget items together, the simulations show that the inflation shock will immediately and permanently weaken the Belgian budget balance by 2025," the Bank is clear. The NBB also sticks a figure on it: a negative impact of 1.4 percent of GDP in 2025. Or how the already lousy public finances were made even more lousy by high inflation.

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