Belgian budget talks collapse, straining center-right coalition

October 11, 2016 3:21 AM EDT

Prime Minister Charles Michel of Belgium addresses the 71st United Nations General Assembly in Manhattan, New York, U.S. September 23, 2016. REUTERS/Carlo Allegri

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BRUSSELS (Reuters) - Talks over Belgium's budget collapsed early on Tuesday, forcing Belgian Prime Minister Charles Michel to postpone his planned annual address before parliament and straining his center-right coalition.

The talks failed when one of four parties in Michel's government, the Flemish Christian Democrats, demanded the introduction of a capital gains tax which the three other parties in the government opposed.

The federal government had penciled in budget savings in excess of 3 billion euros ($3.36 billion) mainly by cutting back on pension and healthcare spending.

The Christian Democrats are under pressure from their own trade union to steer a more left wing course and introduce taxes seen as targeting the rich. Other parties fear a capital gains tax may harm investment.

Belgium's federal government, which has for years been trying to produce a balanced budget, is expected to run a deficit of about 2.8 percent this year, just below the European Commission's upper limit of 3 percent.

The Belgian difficulties highlight the problems in other euro zone countries where governments have to balance between the European Commission's budget rigor and the feedback from voters increasingly exasperated by years of austerity measures.

In late September, tens of thousands of Belgian workers marched through Brussels to protest against Michel's government.

In August, the Commission warned both Spain and Portugal to take "effective action" to lower their deficits, though it stopped short of handing out a budget fine.

Spain's case is more complicated than Portugal's, as it is struggling to form a government after two inconclusive national elections in December and June.

While worries about Belgium's high sovereign debt, above its annual economic output, has in the past sent its bond yields soaring, the low interest rate environment has allowed the country to receive, rather than pay, interest on bonds of up to eight years.

(Reporting by Robert-Jan Bartunek; Editing by Philip Blenkinsop and Alison Williams)

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