Public Information Notice: IMF Executive Board Concludes 2004 Article IV Consultation with Belgium

March 3, 2005

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2004 Article IV consultation with Belgium is also available.

On February 18, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Belgium.1


During the recent upswing, growth has been comparatively robust, propelled by strong household spending and supported by the global recovery as well as macroeconomic policies. Tax cuts and wage increases have sustained disposable income growth, while household savings resumed a declining trend, amid improvements in the economic outlook and public finances. Private consumption was also supported by low interest rates and rising housing prices. The repatriation of assets due to the implementation of the EU savings taxation directive and a tax amnesty may also have played a role. Monetary conditions have remained accommodating despite the euro's appreciation. Countercyclical support from the fiscal policy stance was masked by large, one-off deficit-reducing measures.

In the staff's view, economic growth is expected to continue at a healthy pace in 2005, driven by private consumption as well as a likely strengthening of corporate investment and employment growth. Downside risks lie in high oil prices, weaker demand in key trading partners, and further appreciation of the euro. Weaker-than-expected employment growth or sagging confidence could also dampen growth prospects. With actual GDP expected to remain below potential, there are no underlying inflationary pressures, though indirect tax increases and higher energy prices will add to headline inflation into 2005. There could, however, be some wage drift in the wake of the 2005-06 interprofessional wage agreement, which also includes indexation. In the long run, demographic pressures are expected to reduce potential growth.

The authorities' strategy to cope with the adverse consequences of aging on growth and the budget consists of fiscal adjustment, pension reform, and measures to raise labor utilization. As a result of the buildup of large primary surpluses, the public-debt-to-GDP ratio has been declining steadily. Over the past five years, the budget has remained in balance, to a large extent due to the use of favorable one-time measures during the cyclical downswing. Achieving balance in 2005 continues to rely on some one-off measures. Meanwhile, the primary surplus declined in recent years as interest savings were used for tax cuts and increases in primary spending, including on health care and law and order. There is consensus on the need to build up fiscal surpluses over the medium term.

Reform of the main pension system is largely complete, with benefits of the pay-as-you-go pillar relatively low, though the decision about when to retire is not actuarially fair. Reform of the early retirement regime, key to prevent premature exit from the labor force by older workers, is scheduled for early 2005, but the option will remain in case of enterprise restructurings. To boost employment, the authorities have cut the tax wedge on labor, introduced an earned income tax credit, and strengthened job search requirements and verification.

Executive Board Assessment

Executive Directors commended the Belgian authorities for the economy's sustained strong performance, despite slow growth in several key trading partners. Directors attributed this impressive performance to the economy's sound fundamentals and prudent fiscal management as reflected in a steadily declining debt ratio. They singled out as exemplary the authorities' track record of maintaining the budget in balance or surplus, while implementing a program of cuts in taxes and social security contributions, geared at improving labor market performance.

Directors observed that reforms have begun to address the implications of impending population aging and increasing global competitive pressures, but encouraged the authorities to continue to strengthen policies on a broad front. Pointing to Belgium's still high debt ratio, they saw a need for further fiscal adjustment to help prefund aging costs while avoiding future tax increases or cuts in already modest pension benefits. Similarly, attaining higher employment rates will be essential to raise growth, sustain fiscal consolidation, and preserve favorable social outcomes.

Directors concurred that the growth outlook remains auspicious, though subject to some downside risks. Externally, high oil prices, softer demand in major trading partners, and further euro appreciation can stifle growth. Domestically, weaker-than-expected employment or sagging confidence can dampen growth prospects. Directors observed that inflation is expected to remain low. To preserve competitiveness and avoid cost-push pressures, they encouraged social partners to moderate wages and strive for higher productivity through more flexible work arrangements.

Directors supported the authorities' fiscal objectives, in particular of balancing the budgets in 2005-06 and gradually building surpluses thereafter, to about 1.5 percent of GDP by 2011. Such a strategy would allow a substantial part of the cost of aging to be covered through savings on the interest bill. In this regard, Directors saw a need to preserve the current level of the primary surplus.

Directors noted that fiscal efforts would need to be stepped up substantially to achieve these objectives. Against the background of robust economic growth, balancing the budget in 2005 appears feasible, though not without further efforts. In this context, Directors welcomed the authorities' early response to the 2004 spending overruns in health care spending and urged them to implement reforms, over a medium-term horizon, to lower spending growth in this area. They recommended to use information technology and the impending wave of retirements in the civil service for substantial budgetary savings. Directors also saw scope for durable adjustment through a narrowing of entitlements and streamlining of active labor market programs as part of a comprehensive labor market reform.

Directors encouraged the authorities to adopt a multi-year primary expenditure framework as a key tool of fiscal management. They acknowledged that the focus on the year-by-year achievement of nominal targets has been helpful, but it has led to heavy reliance on one-off measures. Adopting an expenditure-based medium-term framework will help establish sustainable ways of reducing public expenditure and enhance transparency. At the same time, Directors recognized that achieving the balanced budget targets in recent years has helped build policy credibility, with attendant improvements in confidence economy wide. In addition, Directors recommended the renewal and strengthening of the internal stability pact between the federal and regional governments to ensure that all regions balance their budgets in the long run and that their decisions do not adversely affect the federal budget.

Directors agreed that boosting labor utilization is a vital component of the strategy to deal with population aging and requires several actions. Overall, there is a need for moderation of wage increases and a modification of the collective bargaining system in the medium term, in particular by removing wage indexation and introducing more flexibility in the determination of wages and work arrangements at the enterprise level. Directors felt that the wage norm agreed in the 2005-06 collective agreement was on the high side. To prevent the premature exit of older workers from the labor force, Directors recommended making the retirement decision actuarially fair and phasing out the early retirement programs. For the young and less skilled, Directors welcomed targeted cuts in social security contributions and childcare costs, the earned income tax credit, the tightening of job search requirements, and the increase in job search assistance. To buttress this approach, they felt that the duration of unemployment benefits should be limited and that active labor market programs should be streamlined. A number of Directors pointed to the need to preserve social consensus in implementing these reforms. Noting that an efficient education system is vital to increase employment, Directors underscored that further attention to education and vocational training will help workers develop the skills needed to adjust to a changing job context.

Directors encouraged the authorities to extend the ongoing progress of improving the functioning of product markets to all regions and areas, ensuring that it benefits the consumer. In this context, they saw the establishment of a new competition authority as beneficial and recommended a gradual reduction of railway subsidies. The authorities were also encouraged to introduce more competition into the energy and telecommunications sectors. Directors welcomed the progress in reducing procedures involved in business start-ups. They encouraged the authorities to continue to lower the administrative burden on enterprises and taxpayers, making full use of available information technology.

Directors observed that financial sector performance has improved overall, though the life insurance sector remains vulnerable to interest rate developments. They commended the authorities on the merger of banking and insurance supervisory agencies, which they felt should lead to an improvement of supervision of the banking-insurance conglomerates. In this context, Directors welcomed the timely initiation of the Financial Sector Stability Assessment, to be completed with the next consultation. Directors supported the regular publication by the central bank of financial stability reviews, which has contributed to transparency and market discipline.

Directors welcomed Belgium's efforts to combat money laundering and terrorism financing, its adherence to antibribery initiatives, and its support for multilateral trade liberalization. They praised the sharp increase in official development assistance and the authorities' commitment to raise it to the UN target.

Belgium: Selected Economic Indicators







Real economy (change in percent)


Real GDP






Domestic demand












Unemployment rate (in percent)






Public finance (percent of GDP)


General government balance






Structural balance






Primary balance






General government debt






Interest rates (percent)


Money market rate (3 months)






Government bond yield






Balance of payments (percent of GDP)


Trade balance






Current account






Official reserves (US$ billion)






Exchange rate


Exchange rate regime

Member of EMU


Euro per U.S. dollar (January 25, 2005)




Nominal effective rate (2000=100, ULC based)






Real effective rate (2000=100, ULC based)






Sources: Data provided by the Belgian authorities, and IMF staff projections.
1/Staff estimates and projections.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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