## cr1769 ## Source details **Canonical URL:** [cr1769](https://www.imf.org/-/media/files/publications/cr/2017/cr1769.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1769.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1769.pdf.json) --- ### Context—A more difficult year - Real GDP growth is estimated to have declined to 1.2 percent in 2016. - Unemployment averaged 8 percent in 2016. - Private consumption contributed markedly less to growth than in peer countries, partly reflecting wage moderation combined with the “tax shift” that raised certain consumption taxes to offset labor tax wedge cuts. - Inflation came closer to the ECB’s target than in most other euro area countries. - Credit conditions: corporate lending growth picked up (manufacturing, real estate, health services); mortgage lending growth slowed through 2016Q3. - Current account moved back toward a moderate surplus and closer to its norm of 2.7 percent of GDP. - External balance assessment (preliminary): current account gap of -2¾ to -¾ percent and the real effective exchange rate overvalued by 2 to 7 percent. - Fiscal outturns (2016, selected figures): - Fiscal deficit widened to 2.7 percent of GDP in 2016, against an original budget target of 2.1 percent of GDP. - Revenues: 51.0 (percent of GDP) - Expenditures: 53.7 (percent of GDP) - Wages (o/w): 12.4 (percent of GDP) - Social benefits: 25.3 (percent of GDP) - Subsidies: 3.5 (percent of GDP) - Interest: 2.7 (percent of GDP) - Balance: -2.7 (percent of GDP) - Authorities' structural balance: -1.7 (percent of GDP) - Staff's structural balance: -2.4 (percent of GDP) - Note: revenue shortfalls were partly offset by one-off collections such as from the excess profit tax, which was found illegal under European Union state aid rules. ### Growth outlook and risks - Growth outlook: - Belgium’s economy is projected to grow at a moderate pace of around 1½ percent for the foreseeable future. - Potential output growth is estimated at around 1¼ percent, rising over the medium term as reforms help raise participation rates and reduce unemployment. - Key risks: - Stagnation scenario: nominal GDP growth lower by 0.6 percentage points per year would make the debt ratio explosive even if interest rates remain low. - Prolonged low growth and low interest rates would negatively affect bank profitability, reduce retained earnings, and constrain internal capital generation—raising vulnerability to shocks and potentially affecting credit supply. - Household indebtedness and full recourse mortgages imply households would likely cut consumption rather than default in a shock, potentially amplifying consumption declines and defaults elsewhere. ### Consolidation underpinned by growth-friendly fiscal reforms - Staff concerns and near-term targets: - Authorities targeted a structural adjustment of around 1 percent of GDP for 2017 via revenue and expenditure measures and continued savings from earlier reforms; staff view this target as hard to achieve without additional measures. - Staff emphasized the importance of a credible deficit target backed by realistic revenue and spending assumptions and high quality measures. - Recommended strategy and outcomes: - Efficiency-oriented spending reforms anchoring primary spending growth to stay broadly flat in real terms over the medium run, combined with revenue-neutral but growth-oriented tax rebalancing and a package of labor and product market reforms, could bring the structural fiscal position to near balance by 2021. - Staff recommended additional measures to achieve around ½ percentage point of GDP of structural primary fiscal adjustment per year, starting decisively from 2017 if necessary. - Scenario comparisons (selected staff estimates): - Stagnation: nominal GDP growth on average 0.6 percentage point lower than baseline. - Low quality: flat real spending growth, multiplier of 1.15, no other reforms. - High quality: flat real spending growth, multiplier of .85, product and labor market reforms. - Public Debt Ratio Under Various Scenarios (in percent of GDP, selected years): - Debt 2016: 105.6 - Debt 2021: - Baseline: 102.0 - Stagnation: 109.3 - Low quality: 101.7 - High quality with reform*: 97.5 - Debt 2026: - Baseline: 97.5 - Stagnation: 121.8 - Low quality: 89.6 - High quality with reform*: 78.7 - Nominal GDP index (2016 = 100) — selected: - Baseline 2021: 117.5; 2026: 139.6 - Stagnation 2021: 114.2; 2026: 130.5 - Low quality 2021: 112.8; 2026: 134.0 - High quality with reform 2021: 114.7; 2026: 138.1 - Deficit (in percent of GDP) — selected: - Baseline 2016: -2.7; 2021: -2.6; 2026: -2.4 - Stagnation 2021: -4.1; 2026: -6.4 - Low quality 2021: -1.1; 2026: -0.8 - High quality with reform* 2021: -0.2; 2026: 0.9 - Staff conclusion: the “High quality with reform” policy package would prevent output losses while bringing the debt-GDP ratio almost 20 percentage points below the baseline over ten years (and 10 percentage points below a low-quality adjustment scenario without reforms). ### Consolidation needs, coordination, and expenditure priorities - Consolidation needs and coordination: - With further tax cuts scheduled for 2018−20 under the tax shift, staff projects that additional measures of about 2−2½ percent of GDP would be needed to achieve the goal of a balanced budget over the medium term. - High-quality adjustment should rely primarily on measures to improve spending efficiency. - Agreement and implementation of measures would require cooperation and participation across all levels of government; strengthen coordination mechanisms via binding commitments and centralized intra-year monitoring. - Expenditure-side priorities and savings potential: - Public expenditure amounted to nearly 54 percent of GDP in 2015. - Options for fiscal reforms (effects in percent of GDP; effect estimated as convergence to EU average where noted): - Reduce wage bill: 1.8 - Reduce subsidies: 2.1 - Increase social benefits efficiency: 2.0 - Increase in public investment: -1.2 - Reform of business and investment income taxation (revenue neutral): 0.0 - Environmental tax: 0.3 - Total: 5.0 - 6.0 - Note: Assuming that the redistributive power of social benefits is increased to the EU average, Belgium could achieve the same reduction in income inequality at a fiscal cost lower by 3¼ points of GDP. This number is reduced by the planned reforms of social security of 1.2 percent of GDP over 2015-18. ### Revenue-side reforms and corporate income tax (Box 1 summary) - Revenue-side principles: - Targeted personal income tax and social security contribution cuts planned for 2018−20 will further reduce the tax burden on labor; staff suggested well-targeted offsetting measures to ensure revenue neutrality, including strengthening environmental taxation and eliminating deductions and exemptions, including on VAT and for company cars. - Corporate income tax considerations and Box 1 highlights: - Belgium’s statutory CIT rate is 34 percent. - The statutory rate makes the tax base vulnerable to outbound profit shifting and can deter foreign investors. - Belgium has used targeted tax incentives historically (intangible assets, financial services); some are being revised for compliance with EU rules and BEPS standards. - Belgium’s average effective rate is similar to peers, but the marginal effective tax rate is comparatively low. - Reform could reduce distortions and better balance growth and revenue objectives; potential efficiency gains include preferential rate for small businesses, the patent box, measures against international tax avoidance, and some specific deductions and exemptions. - The notional interest deduction (NID) reduces corporate debt bias and supports investment but has been used for tax planning; strengthened anti-avoidance rules could address abuses. - Reform could be broadened to include capital gains and dividend taxation to maintain neutrality and limit tax arbitrage. - Contributors to Box 1: R. De Mooij and S. Hebous. - Authorities: plan to lower the relatively high CIT rate but staff stress it should be part of a broader and revenue-neutral reform of business and investment income taxation. ### Public investment, productivity, and competition - Public investment and capital stock: - Public investment was 2.3 percent of GDP in 2015. - EU average public investment was 3.9 percent of GDP in 2015. - With new investment barely keeping up with depreciation since the late 1980s, the capital stock has been declining relative to GDP and is now one of the lowest in Europe. - Priority for transport infrastructure is maintenance and efficiency improvements rather than expanding network density. - A comprehensive and prioritized infrastructure strategy agreed between all levels of government should be reflected in medium-term budget plans. - Competition and services-sector reform: - Greater competition in services (telecommunications, retail, legal, architectural, accounting professions) would enhance productivity and reduce prices. - Some studies suggest that reducing regulatory burden in services to OECD best-practice levels could raise TFP by 1¼ percentage point more per year during five years, with most gains from reform of professional services and retail trade. ### Labor market reforms and employment fragmentation (Box 2 summary) - Wage-setting and labor cost measures: - Reform of the wage setting mechanism (the “1996 law”) aims to link wage growth to broader labor market and economic conditions; reforms include introducing a “security margin”, requiring social partners to correct past slippages, and increasing fines for non-compliance. - The cut in employers’ social contributions implemented under the tax shift would be used to reduce the “historical handicap” and not to allow faster wage increases. - Measures for young workers and work time: - Re-introducing a minimum wage for the young: reduction by 6 points per year below 21 (6 percent reduction for a 20-year-old, up to a 30 percent reduction for a 16-year-old); authorities estimate between 13,300 and 17,660 wage earners could be concerned; direct fiscal cost estimated at about €40.5 million (0.01 percent of GDP). - Increasing flexibility in work time: legal work time remains 38 hours per week on average, to be calculated on an annual basis rather than a quarterly basis; maximum working time rules and branch agreement flexibilities specified. - Training requirement change: shift from dedicating 1.9 percent of the wage bill to training to providing at least 5 days of training by equivalent full-time employee. - Employment fragmentation and vulnerable groups: - Only about half of non-EU immigrants aged 25–55 are employed, compared to over 80 percent for Belgian-born residents. - Reforms to minimum wage and training are first steps, to be complemented by improvements in education and on-the-job training and migrant integration measures. ### Financial sector resilience, housing market, and macroprudential policy - Household and corporate balance sheets (selected): - Household net financial wealth reached 238 percent of GDP in 2016H1. - Household debt reached 60 percent of GDP in 2016H1. - Aggregate household debt to disposable income has increased to over 100 percent. - Corporate debt on a consolidated basis reached 119 percent of GDP in 2016H1, up from 106 percent of GDP in 2014; excluding intragroup funding by special purpose vehicles reduces this ratio by around half. - Banking sector: - Tier 1 capital ratio reached 15½ percent. - Non-performing loans (NPLs) remain low at 3.5 percent (consolidated basis). - System customer deposits exceed loans. - Empirical findings (European bank panel, selected): - A one-percentage-point decline in nominal GDP growth is associated with a decline in bank NIMs of 2.4 bps (full sample). - In low-rate environment, a one-percentage-point decline in the ST rate is estimated to result in a 53 bps decline in NIMs in the low-rate environment compared with only 15 bps using the full sample. - Table 1 (Full sample, NIM): Nominal GDP growth coefficient: 0.024; Short-term interest rate coefficient: 0.150; Obs: 23,260; R-squared: 0.210; No. of banks: 3,408. - Table 2 (Full low-rate sample): Nominal GDP growth: 0.027 [0.005]***; Short-term interest rate: 0.528 [0.057]***; Obs: 14,836; R-squared: 0.187; No. of banks: 3,147. - Stagnation scenario simulation (2016–2022 assumptions: nominal GDP growth lower by 0.6 percentage points per year; ST rate and spread remain low): - Cumulative decline in banks’ NIMs by 2022: ¾ percentage point. - Corresponding decline in ROE by 2022: almost 5½ percentage points. - Greater impact on smaller-sized banks and on banks with higher reliance on retail funding or mortgage lending. - Insurance sector: - Average guaranteed interest rate fell to 2.82 percent at end-2015. - Past-concluded contracts offering guaranteed returns greater than 4.5 percent still accounted for 15 percent of inventory reserves. - EIOPA’s 2016 stress test found vulnerability to a prolonged low interest rate period; Belgian insurers would be less hurt than many others by a “low-for-long” scenario but among more affected by a “double-hit” scenario. - Housing market and macroprudential policy: - Various overvaluation estimates lie in the range of 0–20 percent. - Policy options discussed: - Existing 5-percentage-point add-on to certain domestic mortgage risk weights. - NBB plans to impose additional capital buffers targeted at mortgage loans with loan-to-value (LTV) ratio higher than 80 percent, effective May 2017 (pending European approval). - Possible further measures such as LTV or debt service to income (DSTI) limits discussed. - Counter-cyclical capital buffer currently set to zero; staff considers zero appropriate given credit gap estimates near zero but calls for close monitoring. ### Debt Sustainability Analysis (Appendix V) — projections and stress tests - Baseline projections and key numbers: - Public debt-to-GDP ratio peaked at 106.5 percent in 2014 and is projected to decline to 100.9 percent by 2021 under broadly unchanged policies. - Gross financing needs estimated at 18 percent of GDP in 2016 and expected to decline to 16–17 percent in the medium term. - Public debt was 105.8 percent of GDP in 2015 and 105.6 percent in 2016 (baseline snapshots). - Effective interest rate (selected): 2016: 2.9; 2017: 2.6; 2021: 2.1 (in percent). - Stress tests and scenarios: - Growth shock: real output growth lower by 1.6 percentage points (one standard deviation) starting in 2017–18; debt-to-GDP rises to 111 percent in 2018 and declines thereafter. - High interest rate scenario: increase in spreads by 470 basis points starting in 2018 leads to deterioration and reverses downward debt dynamics; impact on financing needs in 2021 is 2.9 percent of GDP. - Combined macro-fiscal scenario: debt reaches 112.6 percent of GDP in 2018 and remains elevated through 2021; financing needs close to 20 percent of GDP through 2021. - Persistent fiscal deficits shock: primary balance close to 1 percent of GDP through 2021 results in debt ratio hovering at current rates over the medium term. - Baseline nominal gross public debt (selected years): - 2014: 97.4 - 2015: 106.5 - 2016: 105.8 - 2017: 105.6 - 2018: 104.5 - 2019: 103.6 - 2020: 102.7 - 2021: 100.9 - Public gross financing needs (selected years): - 2014: 21.8 - 2015: 19.3 - 2016: 19.9 - 2017: 18.0 - 2018: 17.9 - 2019: 17.0 - 2020: 16.3 - 2021: 15.7 ### Selected macroeconomic and fiscal indicators (selected series and values as presented) - Real GDP (annual percent change): -0.1, 1.7, 1.5, 1.2, 1.5, 1.5, 1.5, 1.5, 1.5, 1.5 (2013–2022) - Domestic demand (annual percent change): -0.5, 2.3, 1.5, 0.4, 1.5, 1.5, 1.5, 1.6, 1.5, 1.5 (2013–2022) - Private consumption (annual percent change): 0.7, 0.6, 1.1, 0.8, 1.5, 1.4, 1.4, 1.4, 1.4, 1.3 (2013–2022) - Unemployment rate (percent): 8.5, 8.6, 8.5, 8.0, 7.8, 7.7, 7.6, 7.5, 7.4, 7.3 (2013–2022) - Consumer prices (percent): 1.2, 0.5, 0.6, 1.8, 1.9, 1.7, 1.8, 1.9, 2.0, 2.0 (2013–2022) - Revenue (percent of GDP): 52.7, 52.0, 51.3, 51.0, 51.0, 50.7, 50.4, 50.2, 50.2, 50.2 (2013–2022) - Expenditure (percent of GDP): 55.7, 55.1, 53.9, 53.7, 53.1, 53.0, 52.7, 52.7, 52.7, 52.7 (2013–2022) - General government balance (percent of GDP): -3.0, -3.1, -2.5, -2.7, -2.1, -2.3, -2.3, -2.5, -2.5, -2.5 (2013–2022) - Structural balance (percent of GDP): -2.9, -2.8, -2.2, -2.4, -1.9, -2.2, -2.3, -2.5, -2.6, -2.6 (2013–2022) - General government debt (percent of GDP): 105.4, 106.5, 105.8, 105.6, 104.5, 103.6, 102.7, 101.9, 100.9, 100.0 (2013–2022) - Current account balance (percent of GDP): -0.3, -0.7, 0.4, 1.1, 0.7, 0.8, 1.0, 1.1, 1.4, 1.7 (2013–2022) ### Staff appraisal and policy recommendations (summary) - Progress: - Government reforms (saut d’index, tax shift, pension reforms) support competitiveness, job creation, and reduce long-term aging costs. - Shortfalls and risks: - Fiscal slippage in 2016 halted nascent public debt reduction; deeper reforms are needed to avoid a low growth/high debt trap. - Recommended complementary efforts: - Increase efficiency of public expenditure. - Make the tax system more growth friendly (revenue-neutral business/investment taxation reforms). - Raise low employment rates among certain groups (young, low-skilled, non-EU immigrants). - Implement a coherent infrastructure investment strategy. - Strengthen competition in services. - Fiscal consolidation guidance: - Implement a credible 2017 budget backed by realistic revenue and spending assumptions and high-quality measures. - Beyond 2017, balance the budget across all levels of government; bulk of consolidation should come from the spending side (reduce subsidies and public employment; reform social benefits; streamline division of labor across levels of government; improve budget processes). *International Monetary Fund — cr1769 (excerpt).* ### 1. Growth-Friendly Corporate Income Tax Reform _______________________________________________ 13 ### 1. Growth-Friendly Corporate Income Tax Reform ### Context—A more difficult year - Real GDP growth is estimated to have declined to 1.2 percent in 2016. - Unemployment averaged 8 percent in 2016. - Private consumption contributed markedly less to growth than in peer countries, partly reflecting wage moderation combined with the “tax shift” that raised certain consumption taxes to offset labor tax wedge cuts. - Inflation came closer to the ECB’s target than in most other euro area countries. - Credit conditions: corporate lending growth picked up (manufacturing, real estate, health services); mortgage lending growth slowed through 2016Q3. - Current account: moved back toward a moderate surplus and closer to its norm of 2.7 percent of GDP. - External balance assessment (preliminary): current account gap of -2¾ to -¾ percent and the real effective exchange rate overvalued by 2 to 7 percent. - Fiscal outturns: - Fiscal deficit widened to 2.7 percent of GDP in 2016, against an original budget target of 2.1 percent of GDP. - Text Table. Budget and Projected Outturns (selected rows for 2016) - Revenues: 51.0 - Expenditures: 53.7 - Wages (o/w): 12.4 - Social benefits: 25.3 - Subsidies: 3.5 - Interest: 2.7 - Balance: -2.7 - Authorities' structural balance: -1.7 - Staff's structural balance: -2.4 - Note: revenue shortfalls were partly offset by one-off collections such as from the excess profit tax, which was found illegal under European Union state aid rules. ### A moderate rebound ahead but also risks - Growth outlook: - Belgium’s economy is projected to grow at a moderate pace of around 1½ percent for the foreseeable future. - Potential output growth is estimated at around 1¼ percent, rising over the medium term as reforms help raise participation rates and reduce unemployment. - Risks: - Stagnation scenario: nominal GDP growth lower by 0.6 percentage points per year would make the debt ratio explosive even if interest rates remain low. - Prolonged low growth and low interest rates would negatively affect bank profitability (see Appendix IV), reduce retained earnings, and constrain internal capital generation—raising vulnerability to shocks and potentially affecting credit supply. - Household indebtedness and full recourse mortgages imply households would likely cut consumption rather than default in a shock, potentially amplifying consumption declines and defaults elsewhere. ### Deepening and broadening reforms - Four broad structural challenges weighing on prospects: - Slow progress in reducing high public debt despite record low interest rates and ambitious consolidation goals; high and rising expenditure has undermined revenue-based consolidation. - Need to raise labor market participation and address structurally high unemployment among vulnerable groups and in Brussels and Wallonia. - Little movement in product market reforms; business environment affected by devolution of regulatory power under the sixth reform of the state. - Financial sector challenged by low growth/low interest rates and technological changes. - Governance constraints: - Fiscal authority and spending responsibilities are spread across federal, three regional authorities, and three language communities, complicating consensus and implementation. - Policy approach: - Balance the budget across all levels of government via an ambitious, credible medium-term strategy agreed across levels. - Emphasize high-quality fiscal measures to avoid output losses; combine consolidation with reforms to raise growth potential (employment, infrastructure investment, competition in services). - Flexibility in sequencing measures is important given governance context. ### A. Consolidation Underpinned by Growth-Friendly Fiscal Reforms - Staff concerns and near-term targets: - Authorities targeted a structural adjustment of around 1 percent of GDP for 2017 via revenue and expenditure measures and continued savings from earlier reforms; staff view this target as hard to achieve without additional measures. - Staff emphasized the importance of a credible deficit target backed by realistic revenue and spending assumptions and high quality measures. - Recommended strategy and outcomes: - Staff recommended efficiency-oriented spending reforms anchoring primary spending growth to stay broadly flat in real terms over the medium run, combined with revenue-neutral but growth-oriented tax rebalancing and a package of labor and product market reforms. This could bring the structural fiscal position to near balance by 2021. - Staff noted combining fiscal and structural reforms would be net positive for growth, employment, and fiscal sustainability; some labor market reforms could have a negative fiscal impact while still being positive for employment and growth. - For near-term budgeting, staff recommended additional measures to achieve around ½ percentage point of GDP of structural primary fiscal adjustment per year, starting decisively from 2017 if necessary. - Scenario comparisons (selected figures from staff estimates) - Stagnation: nominal GDP growth on average 0.6 percentage point lower than baseline. - Low quality: flat real spending growth, multiplier of 1.15, no other reforms. - High quality: flat real spending growth, multiplier of .85, product and labor market reforms. - Public Debt Ratio Under Various Scenarios (in percent of GDP, selected years) - Debt 2016: 105.6 - Debt 2021: - Baseline: 102.0 - Stagnation: 109.3 - Low quality: 101.7 - High quality with reform*: 97.5 - Debt 2026: - Baseline: 97.5 - Stagnation: 121.8 - Low quality: 89.6 - High quality with reform*: 78.7 - Belgium: Illustrating Debt and Deficits Under Different Scenarios (selected index and deficit points) - Nominal GDP index (2016 = 100): - Baseline 2021: 117.5; 2026: 139.6 - Stagnation 2021: 114.2; 2026: 130.5 - Low quality 2021: 112.8; 2026: 134.0 - High quality with reform 2021: 114.7; 2026: 138.1 - Deficit (in percent of GDP): - Baseline 2016: -2.7; 2021: -2.6; 2026: -2.4 - Stagnation 2021: -4.1; 2026: -6.4 - Low quality 2021: -1.1; 2026: -0.8 - High quality with reform* 2021: -0.2; 2026: 0.9 - Staff conclusion: a well-designed consistent policy package (staff recommended scenario = “High quality with reform”) would prevent output losses while bringing the debt-GDP ratio almost 20 percentage points below the baseline over ten years (and 10 percentage points below a low-quality adjustment scenario without reforms). - Sources cited for multipliers: Kilponen et al., National Bank of Belgium Working Paper No. 278, 2015 (as referenced by staff). *Source: IMF staff estimates.* ### 14. A sustainable strategy for growth-friendly medium-term consolidation would require ### 14. A sustainable strategy for growth-friendly medium-term consolidation would require ### Consolidation needs and coordination - With further tax cuts scheduled for 2018−20 under the tax shift, staff projects that additional measures of about 2−2½ percent of GDP would be needed to achieve the goal of a balanced budget over the medium term. - For high-quality adjustment, the strategy should rely primarily on measures to improve spending efficiency. - Agreement and implementation of measures would require cooperation and participation across all levels of government. - Current coordination mechanisms could be strengthened by binding commitments to meet agreed deficit targets, backed up by stronger budget processes, including centralized intra-year monitoring of outcomes across all levels of government. ### Expenditure-side priorities and savings potential - Expenditure is central to the consolidation challenge: - Public expenditure amounted to nearly 54 percent of GDP in 2015. - Years of rapid expenditure growth have not necessarily translated into better services or social outcomes. - Significant scope exists to improve spending efficiency, in particular by: - Reducing the high level of subsidies. - Making the division of labor between levels of government more efficient. - Accelerating ongoing reductions in public employment (through attrition). - Enhancing means-testing and stronger control of social benefits to better target the most vulnerable. - Options for fiscal reforms (effects in percent of GDP; effect estimated as convergence to EU average where noted): - Reduce wage bill: 1.8 - Reduce subsidies: 2.1 - Increase social benefits efficiency: 2.0 - Increase in public investment: -1.2 - Reform of business and investment income taxation (revenue neutral): 0.0 - Environmental tax: 0.3 - Other (Tax expenditures, labor taxation...): ... - Total: 5.0 - 6.0 - Note: Assuming that the redistributive power of social benefits is increased to the EU average, Belgium could achieve the same reduction in income inequality at a fiscal cost lower by 3¼ points of GDP. This number is reduced by the planned reforms of social security of 1.2 percent of GDP over 2015-18. ### Revenue-side reforms and tax policy - Further tax reform could support growth while safeguarding revenues: - Targeted personal income tax and social security contribution cuts planned for 2018−20 will further reduce the tax burden on labor. - Staff suggested well-targeted offsetting measures to ensure revenue neutrality, including strengthening environmental taxation and eliminating deductions and exemptions, including on VAT and for company cars. - Corporate income tax (CIT) considerations: - The authorities’ plan to lower the relatively high corporate income tax (CIT) rate has merits but should be part of a broader and revenue-neutral reform of business and investment income taxation. - Key principle: create a more level playing field across business and investment activities by reviewing profit tax deductions, rules against tax avoidance, capital gains taxation, taxes on interest and dividends, tax treatment of rental income and real estate, and tax preferences on savings accounts. - Box 1 — Growth-Friendly Corporate Income Tax Reform (summary of main points): - Belgium’s statutory CIT rate is 34 percent. - The statutory rate makes the tax base vulnerable to outbound profit shifting and can deter foreign investors. - Belgium has used targeted tax incentives historically (intangible assets, financial services); some are being revised for compliance with EU rules and BEPS standards. - Belgium’s average effective rate is similar to peers, but the marginal effective tax rate is comparatively low. - Reform could reduce distortions and better balance growth and revenue objectives; areas for potential efficiency gains include preferential rate for small businesses, the patent box, measures against international tax avoidance, and some specific deductions and exemptions. - The notional interest deduction (NID) reduces corporate debt bias and supports investment but has been used for tax planning; strengthened anti-avoidance rules could address abuses. - Reform could be broadened to include capital gains and dividend taxation to maintain neutrality and limit tax arbitrage. - Contributors to Box 1: R. De Mooij and S. Hebous. ### Public investment, productivity, and competition - Public investment and capital stock: - Public investment was 2.3 percent of GDP in 2015. - EU average public investment was 3.9 percent of GDP in 2015. - With new investment barely keeping up with depreciation since the late 1980s, the capital stock has been declining relative to GDP and is now one of the lowest in Europe. - Priority for transport infrastructure is maintenance and efficiency improvements rather than expanding network density. - A comprehensive and prioritized infrastructure strategy agreed between all levels of government should be reflected in medium-term budget plans. - Competition and services-sector reform: - Greater competition in services (telecommunications, retail, legal, architectural, accounting professions) would enhance productivity and reduce prices. - Protection of incumbents, self-regulatory bodies with regulatory power, and complex bankruptcy procedures contribute to low entry/exit rates in many services sectors. - Services-sector productivity growth is substantially weaker than in neighboring countries; services’ prices are comparatively high and dynamic, affecting tradable-sector competitiveness. - Some studies suggest that reducing regulatory burden in services to OECD best-practice levels could raise TFP by 1¼ percentage point more per year during five years, with most gains from reform of professional services and retail trade. ### Labor market reforms and employment fragmentation - Labor market reforms could boost growth potential: - Government reforms build on unemployment benefits and pension reforms since 2012. - The reform of the wage setting mechanism (the “1996 law”) aims to link wage growth to broader labor market and economic conditions, preserving gains from wage moderation. - In setting ceilings for wage growth, it is important to consider differences in labor productivity growth with neighboring countries. - Non-cost competitiveness measures (innovation, education and training, labor market performance) are necessary alongside wage moderation. - Box 2 — Labor Market Reforms (main elements): - Adjusting the wage setting mechanism (1996 law): - The reform would introduce a “security margin” in the wage norm calculation, require social partners to correct past slippages when establishing a new norm, and increase fines for non-compliance. - The cut in employers’ social contributions implemented under the tax shift would be used to reduce the “historical handicap” and not to allow faster wage increases. - The calculation of the wage norm could take into account deviations in labor productivity growth between Belgium and partner countries. - Re-introducing a minimum wage for the young: - A lower minimum wage for employees younger than 21 will be re-introduced (eliminated in 2015). - The minimum wage would be reduced by 6 points per year below 21 (6 percent reduction for a 20-year-old, up to a 30 percent reduction for a 16-year-old). - The young would receive compensation from the government so as not to receive lower pay. - Authorities estimate that between 13,300 and 17,660 wage earners could be concerned. - Direct fiscal cost estimated at about €40.5 million (0.01 percent of GDP). - Increasing flexibility in work time: - Legal work time remains 38 hours per week on average, but the average would be calculated on an annual basis rather than a quarterly basis. - Maximum working time of 9 hours per day and 45 hours per week would remain, with wage premium starting at 44 hours; branch agreements could increase limits to 11 hours per day and 50 hours per week. - For sectors facing international competition, the 38-hour week average could be calculated over up to 6 years. - Possibility for night work extended to E-commerce; administrative regulation of part-time jobs simplified. - Changing training requirements: - Shift from dedicating 1.9 percent of the wage bill to training to providing at least 5 days of training by equivalent full-time employee. - Employment fragmentation and targeted groups: - Employment growth has been solid, but the labor market is severely fragmented across regions and skill levels. - Many younger and older persons are not working; non-EU immigrants are less integrated into the labor market than in other European countries. - Only about half of non-EU immigrants aged 25–55 are employed, compared to over 80 percent for Belgian-born residents. - Reforms to minimum wage and training are first steps, to be complemented by improvements in education and on-the-job training, given needs for multiple-language competency and unmet demand for technical skills. ### Authorities’ views - Authorities emphasized the importance of sticking to the coalition agreement and reiterated determination and commitment to reach structural budget balance in the near term. - They agreed most consolidation effort should come from expenditures and acknowledged further measures could be required. - Authorities noted that budget credibility is critical and are assessing reasons for the deficit overshoot in 2016; some revenue measures under the tax shift took more time to implement and their effects will be fully felt from 2017. - Authorities appreciated the Fund staff’s broader perspective on corporate income tax reform while maintaining urgency for such reform. *IMF staff report excerpt.* ### 22. The authorities concur that there is a need to boost quality public investment, which ### cr1769 - 22. The authorities concur that there is a need to boost quality public investment, which ### Public investment and fiscal framework - Authorities agree on the need to boost quality public investment (examples cited: completion of the Antwerp ring; the 10-year plan for the public transport system in Brussels), which adds to the fiscal consolidation challenge. - Because major transport projects are typically large and occur at irregular intervals, authorities argue for more flexibility in European fiscal rules to avoid deterring such investment. - Eurostat has recently clarified the treatment of Public Private Partnerships. - The Prime Minister announced that an investment plan for Belgium will be elaborated in consultation with sub-federal levels of government, which undertake most public investment. - Government has initiated plans to speed up integration of immigrants from outside the EU. - The Minister of Economy commissioned a study to analyze reasons for stronger services inflation than in neighboring countries to guide where greater competition may be needed. - Authorities emphasized wage moderation gains while also agreeing on the need to foster non-cost competitiveness. ### Labor market fragmentation and vulnerable groups (Box 3) - Belgium suffers from low labor market participation and high (un)employment disparities across regions and population subgroups. - Probit regression analysis on EU LFS microdata identifies significant group “penalties” for conditional unemployment probabilities affecting: - the young, - the low-skilled, - non-EU immigrants. - Key findings: - Unemployment probability penalty for immigrants from outside the EU is considerably higher than in most other countries. - Vulnerability of non-EU immigrants decreases more slowly with years of residency than in other countries. - The crisis has not tangibly exacerbated these penalties in Belgium. - Strong regional disparities: Flanders’ residents of any socioeconomic group largely outperform comparable groups in Brussels and in Wallonia. - Immigrants seem equally placed to find a job across Belgium in the very first year upon arrival. - Suggested strategy: - Comprehensive approach involving labor market flexibility, activation policies, migrant integration, and steps to increase labor mobility to reduce fragmentation and unlock employment potential. - Selected quantitative points from Box 3: - Base headline unemployment rates cited: 8.3, 8.6, 7.2, 15.6, 6.1, 7.4 (as presented in the table). - Probability of being unemployed (selected base probabilities): - Age 25-54 years (base): 0.075, 0.080, 0.062, 0.150, 0.049, 0.064 (as presented). - 15-24 years: 0.127, 0.138, 0.082, 0.190, 0.070, 0.074 (as presented). - Non-EU born (country of birth): 0.113, 0.109, 0.034, 0.061, 0.066, 0.063 (as presented). - Non-EU born, years of residency 1 or less (base): 0.347, 0.285, 0.195, 0.335, 0.306, 0.308. - Non-EU born, years of residency 4 or more: -0.166, -0.109, -0.098, -0.130, -0.189, -0.180. - Lower secondary education (base): 0.131, 0.139, 0.084, 0.211, 0.087, 0.115. ### Household and corporate balance sheets - Household net financial wealth reached 238 percent of GDP in 2016H1. - Household debt reached 60 percent of GDP in 2016H1 and is now above the euro area average. - Debt service ratio remains contained at 7½ percent of gross disposable income. - Around 14 percent of indebted households had debt to income ratios above 3. - Aggregate household debt to disposable income has increased to over 100 percent. - Corporate debt on a consolidated basis reached 119 percent of GDP in 2016H1, up from 106 percent of GDP in 2014; excluding intragroup funding by special purpose vehicles reduces this ratio by around half. - Interest coverage in 2014: median firm earned (EBITDA) more than seven times interest paid; 25th percentile earned more than double interest paid. ### Banking sector profitability challenges - Post-crisis restructuring improved capital buffers: Tier 1 capital ratio reached 15½ percent. - Non-performing loans (NPLs) remain low at 3.5 percent (consolidated basis). - System customer deposits exceed loans. - Low-rate, low-growth environment effects: - Net interest margins broadly resilient, but margins on mortgage loans have been declining. - Prevalence of fixed rate loans and strong refinancing trends imply lower future returns through loan repricing. - Term premium on outstanding mortgage loans has come down close to zero. - Resulting squeeze on profitability and internal capital generation could constrain future credit supply. - Risk of search-for-yield behavior as investors shift from low-yielding bank accounts into real estate, asset management, or other vehicles. - Banks face digitalization, non-bank competition, and cyber-security expenses. - Sector consolidation: number of domestic banks has fallen; some banks reduced workforce and closed branches. - Empirical analysis (sample of more than 3,000 European banks) indicates: - Low nominal GDP growth and low interest rates tend to squeeze profitability measures. - A “stagnation” scenario (growth slowdown of 0.6 percent per year on average, as discussed above) accompanied by low rates and spreads through 2022 would result in a cumulative decline of ¾ percentage points in banks’ net interest margins and sharply lower returns on equity. - Given Belgian banks’ greater reliance on fixed-rate mortgage lending and retail deposit funding, effects could be more pronounced than for the typical European bank. ### Insurance sector vulnerabilities - Sector profitability deteriorating, squeezed by legacy guaranteed high-interest policies and declining yields. - Most Belgian insurers meet solvency capital requirement, but EIOPA’s 2016 stress test found vulnerability to a prolonged low interest rate period. - Belgian insurers would be less hurt by a “low-for-long” scenario than many other European insurers, but among more strongly affected by a “double-hit” scenario combining low yields with a sudden increase in risk premia. - Average guaranteed interest rate fell to 2.82 percent at end-2015. - Past-concluded contracts offering guaranteed returns greater than 4.5 percent still accounted for 15 percent of inventory reserves. - Authorities’ policy actions: - Action plans for capital strengthening of some smaller firms. - New mechanism for annual setting of maximum interest rates on individual long-term life insurance contracts to better reflect market conditions. - A royal decree expected to grant the NBB greater powers to supervise distribution of profit sharing or dividends by insurers. ### Housing market and macroprudential policy (Section 27) - Concerns: continued house price growth, rising household indebtedness, significant shares of risky mortgage lending practices, and strong expansion in mortgage credit. - Various overvaluation estimates lie in the range of 0–20 percent. - Policy options discussed: - Direct remedies: - Existing 5-percentage-point add-on to certain domestic mortgage risk weights. - NBB plans to impose additional capital buffers targeted at riskier loans (mortgage loans with loan-to-value (LTV) ratio higher than 80 percent), effective May 2017 (pending European approval). - Staff discussed possible further measures such as LTV or debt service to income (DSTI) limits to directly target vulnerable borrowers. - Other buffers: - Capital conservation buffer to be raised by 2019 by eight banks deemed domestically systemically important, including large mortgage lenders. - Counter-cyclical capital buffer currently set to zero; could be deployed if strong credit growth persists. Staff considers zero appropriate given various estimates of the credit gap of near zero, but calls for close monitoring. - Authorities’ stance: - Broad agreement with staff’s assessment. - Note scope for higher commercial margins on mortgage loans; banks diversified to fees and commissions; room to adapt cost structures. - Life insurance sector restructuring underway; some firms exiting or no longer offering guaranteed products. - NBB developing macroprudential tools including a national stress test framework for life insurers. - Authorities plan to wait and assess effectiveness of current and upcoming measures before considering further measures such as LTV and DSTI limits. ### Staff appraisal and policy recommendations (Sections 29–32) - Progress and shortfalls: - Government made progress on reforms (saut d’index, tax shift, pension reforms) that should help reduce the cost competitiveness gap, support job creation, and reduce long-term cost of aging. - Additional labor market reforms underway, including revision to the wage setting mechanism. - Fiscal strategy had less success; sizeable fiscal slippage in 2016 halted nascent public debt reduction. - Risks and recommended reforms: - Deeper reforms needed to avoid a low growth/high debt trap. - Complementary efforts to raise growth headroom should include: - Increase efficiency of public expenditure. - Make the tax system more growth friendly. - Raise low rates of employment among certain groups. - Implement a coherent infrastructure investment strategy. - Strengthen competition in services. - These measures would promote faster job creation, productivity growth, and faster debt reduction, especially amid global/regional uncertainties and weak growth in trading partners. - Fiscal consolidation guidance: - Essential that public sector be both a source of stability and contributor to growth given high public debt. - Implement a credible 2017 budget backed by realistic revenue and spending assumptions and high-quality measures. - Beyond 2017, main task is to balance the budget across all levels of government, requiring substantial additional measures and an ambitious credible medium-term strategy agreed and committed to by all levels of government. - The bulk of fiscal consolidation should come from the spending side, with scope to: - Reduce subsidies and public employment. - Reform social benefits to better target the most vulnerable. - Streamline division of labor between levels of government. - Improve the budget process across all levels of government. *International Monetary Fund — cr1769 (excerpt).* ### 33. Further tax reform should safeguard revenues while making the system more ### 33. Further tax reform should safeguard revenues while making the system more ### Tax policy and revenue neutrality - Targeted personal income tax and social security contribution cuts planned for 2018−20 will further reduce the high tax burden on labor; there is a need to ensure revenue neutrality through additional measures (see paragraph 16). - There would be merit in lowering the corporate income tax rate if it is part of a broader and revenue-neutral reform of business and investment income taxation designed to support jobs, growth, and innovation. ### Labor market and employment strategy - A comprehensive plan to raise the low employment rates among vulnerable groups would provide a major boost to Belgium’s growth potential. - Four broad priorities: - (i) Preserve gains from wage moderation by linking wage growth to broader labor market and economic conditions (supported by the reform of the 1996 law on employment and competitiveness). - (ii) Further reduce the labor tax wedge. - (iii) Improve education and on-the-job training, in particular given the need for competency in multiple languages and unmet demand for certain technical skills, while also promoting the integration of non-EU immigrants. - (iv) Address barriers to geographical mobility, including traffic congestion and gaps in the public transport network. ### Public investment, infrastructure, and product market competition - The backlog in public investment is weighing on economic prospects, with bottlenecks particularly severe in transport infrastructure. - Critical actions: - Develop a comprehensive and prioritized infrastructure strategy agreed between all levels of government and reflected in medium-term budget plans. - Foster greater competition in services—including in telecommunications, retail, and the legal, architectural, and accounting professions—to reduce prices paid by consumers and firms and boost productivity. ### Financial sector resilience and risks - The financial sector must continue adapting to the low interest rate environment; regulators should closely monitor pockets of vulnerability in the mortgage market. - Risks and required actions: - Prolonged very low growth and interest rates could put pressure on banks’ profit margins given high reliance on deposit taking and mortgage lending. - Banks need to pursue further cost reduction and diversification of revenue sources. - Continue monitoring and addressing potential risks in the mortgage, life insurance, and shadow bank markets, and be ready to deploy further macro-prudential measures when appropriate. - Measures already undertaken and ongoing restructuring in banking and insurance sectors to adapt to these challenges have been appropriate. ### Institutional and procedural note - It is proposed that the next Article IV consultation take place on the standard 12-month cycle. ### Key macroeconomic and fiscal indicators (selected, in percent or as noted) - Real GDP (annual percent change): -0.1, 1.7, 1.5, 1.2, 1.5, 1.5, 1.5, 1.5, 1.5, 1.5 (2013–2022) - Domestic demand (annual percent change): -0.5, 2.3, 1.5, 0.4, 1.5, 1.5, 1.5, 1.6, 1.5, 1.5 (2013–2022) - Private consumption (annual percent change): 0.7, 0.6, 1.1, 0.8, 1.5, 1.4, 1.4, 1.4, 1.4, 1.3 (2013–2022) - Unemployment rate (percent): 8.5, 8.6, 8.5, 8.0, 7.8, 7.7, 7.6, 7.5, 7.4, 7.3 (2013–2022) - Consumer prices (percent): 1.2, 0.5, 0.6, 1.8, 1.9, 1.7, 1.8, 1.9, 2.0, 2.0 (2013–2022) - Revenue (percent of GDP): 52.7, 52.0, 51.3, 51.0, 51.0, 50.7, 50.4, 50.2, 50.2, 50.2 (2013–2022) - Expenditure (percent of GDP): 55.7, 55.1, 53.9, 53.7, 53.1, 53.0, 52.7, 52.7, 52.7, 52.7 (2013–2022) - General government balance (percent of GDP): -3.0, -3.1, -2.5, -2.7, -2.1, -2.3, -2.3, -2.5, -2.5, -2.5 (2013–2022) - Primary balance (percent of GDP): 0.3, 0.2, 0.5, 0.0, 0.4, 0.0, 0.0, -0.1, 0.0, 0.0 (2013–2022) - Structural balance (percent of GDP): -2.9, -2.8, -2.2, -2.4, -1.9, -2.2, -2.3, -2.5, -2.6, -2.6 (2013–2022) - General government debt (percent of GDP): 105.4, 106.5, 105.8, 105.6, 104.5, 103.6, 102.7, 101.9, 100.9, 100.0 (2013–2022) - Current account balance (percent of GDP): -0.3, -0.7, 0.4, 1.1, 0.7, 0.8, 1.0, 1.1, 1.4, 1.7 (2013–2022) *Source: IMF Staff* ### Appendix II. E ### Appendix II. E ### Risk Assessment Matrix — key risks, likelihoods, impacts, and policy responses - High risk: Policy and geopolitical uncertainties, and retreat from cross-border integration. - Likelihood: High - Impact and transmission: - Uncertainty associated with negotiating post-Brexit arrangements, difficult to predict U.S. policy positions and upcoming major elections. - A fraying consensus about the benefits of globalization could lead to protectionism, with negative consequences for trade, capital and labor flows, sentiment, and growth. - Externally: protracted uncertainty on post-Brexit arrangements or on U.S. policy positions would likely transmit through postponed export-related investments and a loss of external demand. - Domestically: could manifest through weak implementation of fiscal and structural reforms; failure to keep up with competitiveness gains in the rest of the euro area would trigger adverse growth-fiscal dynamics. - Policy response: "A moderate pace of fiscal adjustment to bring down public debt gradually should be a driving policy objective. Pursue complementary reforms in product markets and reduce the regulatory burden." - High risk: Financial conditions (strengthening U.S. dollar and/or higher rates; bank distress in one or more major European banks). - Likelihood: High - Impact and transmission: - Investors reassessing policy fundamentals and term premia decompression. - Bank distress could lead to knock-on effects on the broader financial sector and sovereign yields. - Limited exposure of domestic banks to global risks; sovereign-bank nexus is gradually being unwound. Effects mainly indirect through spillovers from neighbors. - Lower U.S. corporate income tax rates and higher yields in the U.S. could lead to capital outflows and constrain investment. - Policy response: "Euro area monetary policy is first line of defense against liquidity stress, supported by activation of backstops and resolution mechanism." - High risk: Structurally weak growth in key advanced economies. - Likelihood: High - Impact and transmission: - Low productivity growth, failure to address crisis legacies and undertake structural reforms, and persistently low inflation undermine medium-term growth in advanced economies. - Strong impact through trade channel and by implication investment. Protracted growth shortfall could lower potential growth, raise structural unemployment and complicate further fiscal adjustment. - Policy response: "Coordinated policy response at European level to which Belgium could contribute by slowing the pace of consolidation." - Low risk: Rapid and disruptive housing price correction. - Likelihood: Low - Impact and transmission: - Overvaluation expected to be resolved gradually. Private adjustment in the context of an unemployment shock could accelerate in some vulnerable households, cutting consumption. - Banks are relatively well protected given capital buffers, prudent lending standards, and full recourse loans. - Policy response: "Additional macro-prudential measures may need to be adopted based on loan to value or debt service to income criteria, to protect vulnerable borrowers." Notes on RAM metrics: - The RAM uses staff subjective likelihood categories: "low" indicates probability below 10 percent, "medium" between 10 and 30 percent, and "high" between 30 and 50 percent. - "Short term" and "medium term" indicate risks could materialize within 1 year and 3 years, respectively. ### Appendix IV — Impact of Low Growth and Rates on Bank Profitability: context and stylized findings - Context and recent trends: - Belgium’s banking sector has undergone significant deleveraging since the Global Financial Crisis, with shifts in asset and liability structures and reorientation toward domestic and other core markets (National Bank of Belgium, 2016). - Outstanding mortgage credit in total loans to the private sector rose from under 30 percent in early 2012 to 43 percent in September 2016. - Belgian banks’ returns on assets and equity (ROA, ROE) fell during the crisis but recovered; net interest margins (NIMs) have been supported as interest savings from lower funding costs more than offset interest income compression. - Resilience partly due to one-off penalties associated with large volumes of refinanced loans (penalty equals three months’ interest payments on the outstanding amount). Majority of mortgages in Belgium have fixed-rate contracts. - Some banks increased non-interest revenues (fees and commissions) or benefited from lower loan loss provisions (examples: BNP Paribas Fortis, KBC Group). - Vulnerabilities identified: - Lending-deposit margins on household loans, particularly mortgages, have been shrinking due to falling market interest rates and a flat yield curve. - Tapering in refinancing volumes (and hence revenues from penalties) implies NIMs are expected to decline going forward, especially if growth stays subdued. - Future profitability will depend on banks’ ability/willingness to cut costs further and/or diversify income sources. ### Empirical strategy - Baseline panel specification (bank i, country j, year t): - y_ijt = β r_jt + γ s_jt + δ′ X_jt + θ′ Z_i,t−1 + α_i + μ_t + ε_ijt - y_ijt: measure of profitability (NIM, ROA, ROE) - r_jt: short-term (ST) interest rate (3-month interbank rate) - s_jt: slope of yield curve (spread between ST rate and 10-year government bond yield) - X_jt: macro variables (e.g., nominal GDP growth, real house price growth) - Z_i,t−1: lagged bank-level controls (asset size, capital, asset and funding structures) - Bank and year fixed effects included - Nonlinearities tested: - Classify countries each year as in a low-rate environment if average 3-month interbank rate is below 1.25 percent. - Split low-rate sample by bank characteristics: (i) asset size, (ii) share of deposits in total liabilities, (iii) share of mortgages in total loans. - Data: - Unconsolidated annual bank-level data from Fitch Connect. - Estimation sample: about 3,400 banks from 15 advanced European economies, spanning 2006−15. ### Key empirical results (summary) - Growth effects: - Full estimation sample: a one-percentage-point decline in nominal GDP growth is associated with a decline in bank NIMs of 2.4 bps. - In the low-rate period, the effect on NIMs increases slightly; estimates for ROA and ROE become much larger and highly significant. - Short-term interest rate effects: - A one-percentage-point decline in the ST rate is estimated to result in a 53 bps decline in NIMs in the low-rate environment compared with only 15 bps using the full sample; difference is statistically significant. - Corresponding estimates for ROE are 4.7 versus 1.6 percentage points. - Yield curve effects: - The slope of the yield curve affects NIMs only when rates are low; a one-percentage-point decline in spreads is estimated to reduce NIMs by 8 bps. - The spread does not appear to have a systematic impact on overall profits (ROA, ROE). - Mechanisms and offsets: - Low interest rates tend to compress interest income more than interest expenses (consistent with deposit rates being bounded below by zero). - Low growth/interest rates are associated with increased loan loss provisions but also higher non-interest income, which helps mitigate adverse impacts on overall profits. - Robustness: - Results broadly maintained across a range of robustness tests (alternate interest rate measures, inclusion of VIX, clustering, Generalized Least Squares, dynamic specifications). The coefficient on the short-term rate remains highly significant, with magnitude ranging from 0.03 to 0.29 (0.15 in the baseline). ### Selected regression statistics (from Table 1 and Table 2) - Table 1 (Full sample, NIM): - Nominal GDP growth coefficient: 0.024 - Short-term interest rate coefficient: 0.150 - Spread coefficient: -0.007 - Obs: 23,260 - R-squared: 0.210 - No. of banks: 3,408 - Table 1 (Low-rate environment, NIM): - Obs: 14,836 - R-squared: 0.187 - No. of banks: 3,147 - Table 2 (Impact on NIMs — full low-rate sample and subsamples): - Full low-rate sample: - Nominal GDP growth: 0.027 [0.005]*** - Short-term interest rate: 0.528 [0.057]*** - Spread: 0.075 [0.013]*** - Obs: 14,836; R-squared: 0.187; No. of banks: 3,147 - Small banks (Total assets less than $1bn): - Nominal GDP growth: 0.057 [0.008]*** - Short-term interest rate: 0.494 [0.062]*** - Spread: 0.129 [0.018]*** - Obs: 6,893; R-squared: 0.239; No. of banks: 1,635 - High deposit (Above-median share of deposits in total liabilities): - Nominal GDP growth: 0.059 [0.007]*** - Short-term interest rate: 0.587 [0.066]*** - Spread: 0.097 [0.022]*** - Obs: 9,720; R-squared: 0.188; No. of banks: 2,253 - High mortgage (Above-median share of mortgage lending in total loans): - Nominal GDP growth: 0.040 [0.013]*** - Short-term interest rate: 0.890 [0.094]*** - Spread: 0.084 [0.028]*** - Obs: 4,543; R-squared: 0.277; No. of banks: 1,088 ### Stagnation scenario and simulations — medium-term illustrative impacts - Scenario assumptions: - A stagnation scenario where nominal GDP growth is lower than the baseline projection by an average of 0.6 percentage points per year between 2016 and 2022. - The ST interest rate (and spread) remain low at roughly the current level until 2022. - Note: "With long-term yields having risen lately, these assumptions represent more a severe scenario." - Simulated impacts (assuming no change in bank business models and using coefficients from estimated models): - Cumulative decline in banks’ NIMs by 2022: ¾ percentage point (0.75 percentage point). - About two-thirds of the effect comes from the ST rate and one-fifth from growth. - Corresponding decline in ROE by 2022: almost 5½ percentage points (5.5 percentage points approximately described as "almost 5½"). - Decline in ROA is more muted. - Heterogeneity in impact: - Simulations using subsample coefficients (Table 2) suggest a more pronounced impact on smaller-sized banks, and banks with higher reliance on retail funding or mortgage lending. - The high-deposit, high-mortgage characteristics of Belgian banks imply greater profitability challenges in a protracted low-growth, low-rate period due to the zero lower bound on deposit rates and compressed mortgage margins. *Source: cr1769 - Appendix II. E* ### Appendix V. Debt Sustainability Analysis ### Appendix V. Debt Sustainability Analysis ### Public debt outlook and main findings - Public debt-to-GDP ratio is projected to have peaked at 106.5 percent in 2014 and to decline to 100.9 percent by 2021 under broadly unchanged policies. - Gross financing needs are estimated at 18 percent of GDP in 2016 and are expected to decline to 16–17 percent in the medium term. - Public debt is estimated to have reached 105.8 percent of GDP in 2015. - The projected decline in public debt is relatively sensitive to macroeconomic shocks, particularly combined shocks. - Belgium’s high level of government debt and gross financing requirement calls for using the higher scrutiny framework. ### Baseline assumptions and realism of projections - Macroeconomic assumptions: - Growth is estimated at 1.2 percent in 2016 and rising to 1½ percent in 2017. - The output gap is projected to close by 2020. - Inflation is projected to reach 2 percent by the end of the projection period. - Fiscal outlook: - General government deficit: 2.7 percent of GDP in 2016 declining to 2.3 percent in 2019, then rising again in the medium term mainly due to unfinanced revenue losses from tax shift. - The primary balance is projected to remain in small deficit throughout the projection period. - Structural deficit projected at 2½ percent of GDP in 2021. - Debt levels and gross financing needs: - Gross financing needs estimated at 17.9 percent of GDP in 2017 and expected to remain around 16–17 percent of GDP in the medium term. - Public debt projected to stay above 100 percent through the medium term. - Realism of baseline assumptions (forecast track record, 2007–15): - Median forecast error for real GDP growth: 0.11 percent. - Median forecast error for inflation (GDP deflator): -0.3 percent. - Median forecast error for primary balance indicates forecast bias of -1.1 percent of GDP (staff projections have been optimistic). - Cross-country evidence: - The projected fiscal adjustment (small change in CAPB) is considered feasible, but stronger and more sustained adjustment would require significant quality structural measures. - Heat map and vulnerabilities: - Debt level risks deemed high given threshold of 85 percent is breached under baseline and all stress test scenarios. - External financing requirement at 99 percent of GDP is significantly above upper early warning benchmarks. - Public debt held by foreigners: 54 percent of total (relatively high). ### Stress tests and shock scenarios (results and assumptions) - General: DSA framework shows sensitivity to GDP growth, real interest rate shocks, and a combined macroeconomic-fiscal shock; in some scenarios debt ends the projection period on a rising trajectory. - Growth shock: - Assumption: real output growth rates lower by one standard deviation starting in 2017–18, i.e. 1.6 percentage points relative to the baseline. - Assumed decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth). - Result: debt-to-GDP ratio increases to 111 percent of GDP in 2018 and declines thereafter. - High interest rate scenario: - Assumption: increase in spreads by 470 basis points starting in 2018 (historical high observed in 1995). - Result: deterioration of public debt and gross financing needs are back-loaded; in 2021 impact on financing needs is 2.9 percent of GDP. Debt dynamics are reversed and the debt ratio no longer follows a downward trajectory. - Real exchange rate shock: - Assumption: 10 percent depreciation in the real exchange rate in 2017. - Result: small effects relative to the baseline. - Primary balance shock: - Assumption: revenue shock and rise in interest rates leading to cumulative 2 percentage points of GDP deterioration in the primary balance in 2017–18. - Result: deterioration in the debt ratio of 0.8 percentage points relative to the baseline in 2021 and slightly higher gross financing needs. - Combined macro-fiscal scenario: - Aggregates shocks to real growth, interest rate, exchange rate, and primary balance without double-counting. - Result: debt reaches 112.6 percent of GDP in 2018 and remains elevated through 2021. Financing needs remain high through 2018 and remain close to 20 percent of GDP through 2021. - Persistent fiscal deficits shock: - Assumption: primary balance close to 1 percent of GDP through 2021. - Result: debt ratio hovers at current rates over the medium term. ### Baseline scenario snapshots and key projection numbers (selected) - Nominal gross public debt: - 2014: 97.4 - 2015: 106.5 - 2016: 105.8 - 2017: 105.6 - 2018: 104.5 - 2019: 103.6 - 2020: 102.7 - 2021: 100.9 - Public gross financing needs: - 2014: 21.8 - 2015: 19.3 - 2016: 19.9 - 2017: 18.0 - 2018: 17.9 - 2019: 17.0 - 2020: 16.3 - 2021: 15.7 (2016 baseline noted 17.0 elsewhere for medium term) - Real GDP growth: - 2016: 1.2 - 2017–2021: 1.5 (baseline) - Inflation (GDP deflator): - 2016: 0.7 (table also shows 1.5 in alternative sections); projection to 2.0 by 2021 - Effective interest rate (in percent): - 2014: 4.1 - 2015: 3.2 - 2016: 2.9 - 2017: 2.6 - 2018–2021: around 2.4–2.1 range, 2.1 in 2021 (baseline table) - Cumulative change in gross public sector debt (projection to 2021): -4.8 (cumulative) - Contribution to identified debt-creating flows (cumulative to 2021): primary deficit contributes 2.0 (cumulative), automatic debt dynamics -5.8 (cumulative), other identified debt-creating flows -0.1 (cumulative), residual -0.9 (cumulative). ### Composition of public debt and alternative scenarios (high-level) - Debt by maturity: charts show medium and long-term versus short-term shares over 2005–2021 (no enumerated percentages beyond charts in source). - Debt by currency: charts show local currency-denominated and foreign currency-denominated shares over 2005–2021 (no enumerated percentages beyond charts in source). - Alternative scenarios presented include Historical Scenario and Constant Primary Balance Scenario with differing assumptions for real GDP growth, inflation, primary balance, and effective interest rate. ### Authorities’ views and methodological notes - Authorities agreed that foreign holdership of public debt can be both a source of risk and a sign of investor confidence in Belgium’s public finances. - Authorities noted the DSA methodology did not take into account projections for the cost of aging given the relatively short time frame of the DSA. - Higher scrutiny framework applies to advanced economies meeting any of: debt-to-GDP ratio above 60 percent; gross financing needs-to-GDP ratio above 20 percent; or having/seeking exceptional access to Fund resources. For such cases, teams produce a heat map and write-up to discuss risks and country-specific considerations. *Source: IMF staff (Appendix V. Debt Sustainability Analysis).* ### Appendix VI. Labor Market and Pension Reform Measures ### Appendix VI. Labor Market and Pension Reform Measures ### UNEMPLOYMENT BENEFITS AND LABOR MARKET POLICIES - Search distance requirements: - 2011: Suitable job is 25 km away or less - 2012/2016 and 2017–2020: Suitable job is 60 km away or less - Status: Implemented - Restriction on searching for same kind of job: - 2011: Restrict rights to search for the same kind of job to six months - 2012/2016 and 2017–2020: Restrict right to search for the same kind of job to three months (young unemployed) and five months (other unemployed) - Status: Implemented - Monitoring search efforts after unemployment: - 2011: Monitor search efforts for 18–21 months after unemployment, with an annual follow-up - 2012/2016 and 2017–2020: Monitor search efforts nine months (<26 years old) or 12 months (26 or older) after start of unemployment, with follow-ups every nine months - Status: Implemented - Search requirement by age: - 2011: Search requirement until 60 - 2012/2016 and 2017–2020: Search requirements applicable until 60 and according to concept of “adequate availability” between 60 and 65. Exemptions are still possible according to the length of the career. - Status: Implemented - Exemption of search requirements for familial and social reasons: - 2011: Exemption of search requirements for familial and social reasons - 2012/2016 and 2017–2020: Use of the exemption is restricted (exemption for caregivers with more restrictive access conditions). - Status: Implemented - Registration timing to obtain unemployment benefits: - 2011: To obtain unemployment benefits, unemployed have to be registered as job seekers within 2 weeks from the day they are laid off - 2012/2016 and 2017–2020: Registration as job seeker has to be done within 4 weeks following the notice of lay-off - Status: Postponed at request of the social partners - Control of search efforts and sanctions: - 2011: Control of search efforts at the Federal level (for the attribution of the unemployment benefit) and at the Regional level (for counseling and training) - 2012/2016 and 2017–2020: The control and the application of sanctions is transferred to the Regions - Status: Implemented in Flanders and Wallonia; Will be implemented in Brussels in 2017. - Unemployment benefit levels: - 2011: Initial unemployment benefits are 60 percent of last wage, falling after one year to 55 percent for people living alone and 40 percent for people living in a family with another income - 2012/2016 and 2017–2020: Initial unemployment benefits are 65 percent of last wage for three months, then 60 percent for the following nine months. After 13 months there is a reduction to 55 percent for people living alone and 40 percent for people living in a family with another income. Between 15 and 24 months of unemployment, depending on career length before unemployment, a stepwise reduction to arrive after maximum 48 months at a level just above social assistance - Status: Implemented - Degressivity and career length for exceptions: - 2011: No degressivity of unemployment benefits for unemployed proving long periods of work - 2012/2016 and 2017–2020: Required career length did raise from 20 years in 2012, to 23 years in 2015, and will become 25 years from November 2016 on. - Status: Implemented - Seniority complement: - 2011: Higher unemployment benefits for unemployed above 50 (Seniority complement) - 2012/2016 and 2017–2020: Eliminated for new entrants, except in specific cases related to collective dismissals or heavy jobs - Status: Implemented - Base wage reference for unemployment benefit: - 2011: Unemployment benefit based on the wage of the last work period of at least 4 weeks - 2012/2016 and 2017–2020: Unemployment benefit based on the average wage of the last 12 months - Administrative note: Administratively complicated – An alternative is implemented: verification of wage evolution in the 12 months before unemployment - Involuntary part-time allowance (AGR): - 2011: Involuntary part time workers can obtain an allowance for income support so that their net income is higher than the unemployment benefit in case of full unemployment - 2012/2016 and 2017–2020: Allowance for income support in case of part time job (AGR) is divided by 2 after two years of work - Planned reform: Calculation of the allowance for income support (AGR) will be reviewed based on the calculation that was made before 2008 - Status: Planned by the government for 2018; Adapted calculation: implemented. - Access to unemployment benefits based on employment periods completed abroad: - 2011: Access to unemployment benefits based on employment periods completed abroad - 2012/2016 and 2017–2020: Access is restricted (limited list of foreign countries and obligation to have worked 3 months in Belgium instead of 1 day previously) - Status: Implemented ### UNEMPLOYMENT BENEFITS FOR YOUNG ENTERING THE LABOR FORCE - Eligibility timing: - 2011: Available after nine months of unemployment - 2012/2016 and 2017–2020: Available after 12 months of unemployment - Status: Implemented - Evaluation of search efforts before opening right on unemployment benefits for young school leavers: - 2011: Evaluation of search efforts before opening the right on unemployment benefits for young people leaving school - 2012/2016 and 2017–2020: Two evaluations of search efforts 7 and 11 months after registering as jobseeker. Opening of right on unemployment benefits only after two positive evaluations - Status: Implemented for all youngsters that have left school after June 1, 2013 - Ongoing evaluation of search efforts while on benefits: - 2011: Search effort requirement every 12 or 16 months when on unemployment benefits based on studies (insertion benefits, the earlier waiting allowances) - 2012/2016 and 2017–2020: Evaluation of search requirements every six months. In case of negative evaluation: no UB until the next evaluation, and no earlier than after 6 months - Status: Implemented - Duration and age limits for young unemployed living with family: - 2011: Unlimited - 2012/2016 and 2017–2020: Limited to three years (five years for worker on the margin of the labor market) for unemployed living with family with other income, or until the age of 33 in other family situations. Period of three years could be extended by six months if at least worked six months in the last 24 months. - Status: Implemented - first application started in January 2015 - School leavers eligibility: - 2011: Young school leavers can apply for unemployment benefit if they have participated in the secondary education final exam - 2012/2016 and 2017–2020: Until 21, young school leavers can apply for unemployment benefit if they have obtained a secondary education degree or another degree opening good prospects on the labor market - Status: Implemented - Maximum age to introduce demand for unemployment benefits for school leavers: - 2011: For school leavers, the maximum age to introduce a demand for unemployment benefits is 30 - 2012/2016 and 2017–2020: Maximum age reduced to 25 - Status: Implemented ### EASING THE TRANSITION TO THE LABOR MARKET FOR LOW-SKILLED YOUTH - Sectoral collective agreements: - 2011: At sectoral level social partners have to conclude collective agreements addressing the employment needs of groups at risk for the equivalent of at least 0,10 % of gross wage cost of the whole sector. - 2013: At least one quarter (0.025%) of the money spent has to go to unemployed youngsters < 26 years - Status: Implemented - 2015: Sectors are invited to raise the effort for youngsters: at least 0.05 % has to go into actions for youngsters - Sectorial plans for ingrown jobs: - 2011: Supplementary efforts at sectorial level for so called “ingrown” jobs for youngsters < 26 years without work-experience - 2012/2016 and 2017–2020: Sectorial plans to offer supplementary job experience for youngsters in ingrown-jobs (total budget of €12 million), only accessible for sectors that have foreseen an effort of at least 0.05 % - Status: 13 plans approved – implementation in 2016–2017 - Reduced social contributions for job students: - 2011: Reduced social contribution for job students benefit from reduced social limited to 50 days worked (equivalent to 400 hours) - 2012/2016 and 2017–2020: Ceiling will be calculated in hours raised to 475 hours - Status: Planned (approved by the Council of Ministers) - Minimum wage for the young: - 2015: Eliminated - 2017: Re-introduced. The minimum wage would be reduced by 6 points by year below 21 (6 percent reduction for a 20-year-old up to a 30 percent reduction for a 16-year-old). - Status: Planned for 2017 (approved by the Council of Ministers) ### GOVERNMENT SUBSIDY FOR TEMPORARY UNEMPLOYMENT, TIME-CREDIT, AND CAREER BREAK SYSTEM - Government subsidy for temporary unemployment: - 2011: Without employer penalty - 2012/2016 and 2017–2020: Employers will pay a penalty if there is excess use of the system - Status: Implemented and strengthened from 2016 on - Allowance level for temporary unemployment: - 2011: Allowance for temporary unemployment is 70 percent of last salary - 2012/2016 and 2017–2020: Reduced to 65 percent of salary - Status: Implemented - Access limits for employers' use of temporary unemployment: - 2011: No limits on the use by employers of temporary unemployment - 2012/2016 and 2017–2020: The right to temporary unemployment benefits is opened only after a working period of at least one year. - Status: Implemented - Government subsidy for time-credit and career break system: - 2011: Five-year duration before the age of 50 - 2013: One-year duration (two to five years if part-time), with supplementary credit of maximum 36 months for specific motivated breaks, such as childcare or studies (maximum 48 months for specific cases such as taking care of a handicapped child less than 21-year-old) - Status: Implemented - 2015: Elimination of the rights to benefits for one-year non-motivated break. For childcare, one supplementary year of break with benefits - Status: Implemented - Unlimited duration above certain ages (time reduction): - 2011: Unlimited duration above the age of 50 (time reduction) - 2013: Unlimited duration above the age of 55 (time reduction) - 2015: Unlimited duration (time reduction) above the age of 60 and 25 years of seniority (with transitional measures and possible derogations till 2019) - Status: Implemented with some exceptions (age limit 55) for long periods of night- and shiftwork - Public sector duration differences: - 72-month duration in public sector (2011) - 60-month duration in public sector (2012/2016 and 2017–2020) - Status: Implemented - Harmonization of career breaks in public sector: - 2011: More favorable rights on career breaks in the public sector - 2012/2016 and 2017–2020: Progressive harmonization of career break in the public sector with time credit in the private sector (full harmonization by 2020) - Status: In progress ### WORK TIME - Legal work time: - 2011: Legal work time is set at 38 hours per week calculated on a quarterly basis - 2012/2016 and 2017–2020: Legal work time remains set at 38 hours per week on average but is calculated on an annual basis - Status: Planned for 2017 (approved by the Council of Ministers) ### PENSION BENEFITS - Pre-pension benefits (renamed to “Unemployment benefits with employer top-up”): - 2011: Minimum age and career length: 60/30 (men) 60/26 (women) - 2012/2013: Minimum age and career length 60/40 for new collective agreements (60 years in 2015 for existing agreements with 40 years’ career in 2015 for men and in 2024 for women) - Status: Implemented - Alternative long careers/arduous jobs: - Or: 58/37 (men) and 58/33 (women) for long careers - 2012/13: 60/40 for men, 35 for women (40 in 2015) for new collective agreements. For existing agreements: 60 in 2015 for men and 38 for women (40 in 2017) - Or: 58/35 for arduous jobs / 58/35 for heavy jobs - Status: Implemented – transitional period 2015–2017 with possibility to maintain 60 instead of 62. - 2015: Minimum age 62 for new entrants; No more “long career” scheme; Minimum age 58 for new entrants in case of hardship jobs (60 on a date to be fixed by the National Labour Council) - 2015: Special schemes 56/33 become 58/33 (60 on a date to be fixed by the National Labour Council) - Pre-pension years counting toward pension: - 2011: Pre-pension years count fully towards pension rights at the last wage level - 2012/2016 and 2017–2020: Pre-pension years below the age of 60 do not count towards pension rights at last wage level but on a lower fictive level - Planned for 2017: All pre-pension years will count toward pension rights at a lower fictive level instead of at last wage level except for pre-pensions in case of restructuration, firms in difficulties, or aduous jobs - Status: Implemented; Planned for 2017 (as noted) - Employer social security contributions on employer top-up payment: - 2011: Reduced social security contributions on employer’s top-up payment - 2012/2016 and 2017–2020: Employer social security contributions will be higher and linked to age of worker entering pre-pension - Status: Implemented - Age limit in restructuring and loss-making companies: - 2011: The age limit in restructuring companies and loss-making companies is between 50 and 55 - 2015: The age limit is 55 in 2015 and rises every year with one year to arrive at the minimum age of 60 in 2020 for companies in difficulty. For companies undergoing restructuring, the age limit will be 60 in 2020. - Status: Implemented - Taxation of employer top-up: - 2011: Top-up from the employer is submitted to taxation - 2012/2016 and 2017–2020: No taxation during periods of work by another employer - Status: Implemented - Part-time pre-pension system: - 2011: Part-time pre-pension system - 2012/2016 and 2017–2020: No new entries from 2012 - Status: Implemented - Government subsidy for working time reduction to part time (time-credit with unlimited duration): - 2011: Minimum age 50 - 2013: Minimum age 55 (with exceptions for physically demanding jobs) - Status: Implemented - 2015: Minimum age 60 (with exceptions for physically demanding jobs) - Status: Planned by the new government - Statutory early retirement benefit (evolution): - 2012 and before: Minimum age 60, full career length 35 years (5 years for civil servants) - 2013: Minimum age increased by six months every year to 62 by 2016, career length increased by one year every year to 40 years by 2016. Exceptions for long career: 61/41 or 60/41 in 2016 - Status: Implemented - 2015: Minimum age will increase by six months in 2017 and 2018 to 63 on condition of a full career length that will increase by one year to 41 in 2017 and to 42 in 2019. Exceptions for long career will be stricter: required career length to retire at 60 will increase from 42 years in 2016 to 43 years in 2017 and 44 in 2019 (and for an early retirement at the age of 61 career length rises from 41 in 2016 to 42 in 2017 and 43 in 2019) - Status: Implemented - Pension bonus and complements: - 2011: Pension bonus for workers and self-employed persons: €2.2974 for every day worked extra if 62 or a career of 44 years - 2011: Pension complement for statutory government employees: percentage increase for every month worked after 60 years of age. - 2012/2016 and 2017–2020: Unified pension bonus for workers, self-employed persons and statutory government employees: progressively increasing lump sum amount (from €1.5 to €2.0) for every day worked extra. Bonus starts not earlier than 12 months after earliest possible date for early retirement. Bonus continued after 65 years of age. Only real working days create bonus rights. - Status: Implemented - Pension bonus is phased out. Only people who met conditions for early retirement by December 1, 2014 or were 65 years old and had a career of 40 before December 1, 2014 were still eligible to a pension bonus. - Status: Implemented - Diploma bonus: - 2011: Diploma bonus: Years spent to get a bachelor or a master degree required to become civil servants are accounted for in the calculation of the career condition for early retirement - 2012/2016 and 2017–2020: Diploma bonus will be phased out (6 months each year) starting 2016 - Status: Implemented - Employer obligations towards older workers: - 2011: None - 2012/2016 and 2017–2020: Draw up a plan to retain older workers - Status: Implemented by collective agreement n° 104 ### SOCIAL SECURITY CONTRIBUTIONS AND WAGE SUBSIDIES - Reduced contributions for hiring older long-term unemployed: - 2011: Reduced for hiring of older long-term unemployed - Status: Implemented/transferred to Regions in 2015 - Reduced for older workers from 50 years on: - 2013: stronger reduction, but starting at 54 years instead of 50 years and only for those with gross wage under 4.453/month - Status: Implemented - 2015: reductions to social security contributions for “target” groups become a competence of the Regions (sixth state reform) - Status: Implemented - 2015: Higher reductions for the first 3 employees in small SME’s - Status: Subject to advice of National Labour Council - Reduction for small SMEs: - 2014: First hiring in SMEs extended to 4 and 5 - Status: Implemented - 2016: First hirings exempted of SSC, reduction for 2–6th hirings - Status: Implemented - 2014: SSC cuts for the catering sector combined with anti-fraud measures - Status: In preparation - 2016–2020 tax shift package (profit sector SSC overhaul): - Two-stage overhaul of the SSC reductions in the profit sector: lower headline SSC rates (down to 30% in 2016 and 25% in 2018), strengthening the low-wage measure (2016–2020), removing high-wage measure (2018) and removing across-the-board cut per employee (2018) - Status: Implemented - 2020 tax shift package: SSC cuts mainly for construction - Status: Law and Royal Decree in preparation - 2016 tax shift package: Night and shift work wage subsidies (from 15.6% in 2015 to 22.8% in 2016) - Status: Implemented - 2014: Strengthening shift work wage subsidies for around-the-clock activities - Status: Law and Royal Decree in preparation - 2016: tax shift package: Strengthening around-the-clock shift work wage subsidies in high-tech sectors - Status: Implemented - 2014: Increase general wage subsidy rate for SMEs (from 1% to 1.12%) - Status: Implemented - 2015 tax shift package: Strengthening general wage subsidy in micro start-ups from 1.12% to 10% or 20% (2015) - Status: Implemented - 2016 tax shift package: Strengthening overtime wage subsidies in construction and catering (2016) - Status: Implemented - 2016–2020 tax shift package: Labor cost reducing package for non-profit sector (50% non-profit wage subsidy, 45% SSC cuts for low wages, 5% hospitals) - Status: Implemented - Tax shift package: Removing 1% general wage subsidy (2016) - Status: Implemented - Employees’ SSC cuts for low-wage earners: compensation for non-indexation wages (2015) - Status: In preparation - Tax shift package: employees’ SSC cuts for low-wage earners (2016-2020) - Status: Implemented ### ENCOURAGE LONGER EMPLOYMENT VIA PENSION SYSTEM REFORMS - Income limits for pensioners aged 65 or more: - 2011: Encourage longer employment via pension system reforms - 2012/2016 and 2017–2020: For pensioners aged 65 or more, abolish ceiling on permitted earned incomes for those with careers spanning more than 42 years - Status: Implemented - No limits to income for pensioners who are 65-year-old or have a career of 45 years - Status: Implemented - Valorization of assimilated periods in pension calculation: - 2011: Full valorization of assimilated periods in pension calculation at last wage earned: unemployment, unemployment with company top-up and time credit - 2012/2016 and 2017–2020: Limited valorization of assimilated periods in pension calculation: - 3rd period unemployment, unemployment with company top-up before 60 and end of career time credit before 60 at pension minimum wage - unmotivated time credit limited to 1-year assimilation - Status: Implemented - Unmotivated time credit: - 2011: Unmotivated time credit is still possible - 2012/2016 and 2017–2020: Unmotivated time credit is still possible but gives no right to any benefit since 2015 - Status: Implemented - Survivors’ pension for widow(er)s: - 2011: Survivors’ pension for widow(er)s: always for survivors of 45 years and older, under certain conditions in case of survivors younger than 45 - 2012/2016 and 2017–2020: For widow(er)s younger than 45 survivors’ pension replaced by transition allowance (12 months if no children, 24 months if children) that can be combined without limitation with work income, followed by automatic access to unemployment benefit if no gainful occupation and entitled to appropriate and early guidance. - Status: Implemented - Eligibility age changes for survivors’ pension: - 2011: Eligibility age of 45 - 2012/2016 and 2017–2020: Eligibility age of 45 increased gradually to 50 by 2025 - Planned: As for 2025, the eligibility age of 50 will increase gradually by one year each year to reach 55 in 2030 - Status: Planned by the new government - Months of professional activity in year of retirement included in pension calculation: - 2011: In workers’ and self-employed persons’ pension schemes the months of professional activity in the year of retirement are not taken into account for pension calculation. - 2012/2016 and 2017–2020: In workers’ and self-employed persons’ pension schemes the months of professional activity in the year of retirement are taken into calculation. - Status: Implemented - Career unity limitation and notion: - 2011: Principle of the limitation to the career unity in pension calculation in pension schemes of workers, self-employed persons and statutory government employees: career fraction or sum of career fractions cannot exceed 1 (45/45) - 2012/2016 and 2017–2020: Notion career no longer expressed in years (45), but in full time equivalent days (14,040) - Status: Implemented - Increased taxation of the second pillar system in case of early retirement: - From July 1, 2013, 20 percent instead of 16.5 percent if leaving at 60 and if leaving at 61 without legal pension 18 percent instead of 16.5 percent - Status: Implemented - Legal age for full pension: - 2011: Legal age for full pension is 65 - 2012/2016 and 2017–2020: Increased to 66 in 2025 and 67 in 2030 - Status: Implemented - Second pillar system alignment: - 2012/2016 and 2017–2020: The legal framework for the second pillar system adapted such that the access is more in line with the statutory (early) retirement age - Status: Implemented ### DECREASE PENSION EXPENDITURE - Pension complement for frontier or seasonal workers: - 2011: Pension complement for frontier or seasonal workers in workers’ pension scheme: frontier or seasonal workers residing in Belgium granted pension complement to increase foreign pension to level of pension they would have received if they had worked in Belgium - 2012/2016 and 2017–2020: As of 2015, pension complement for frontier or seasonal workers takes into account the 2nd pillar pension and is only payable when the foreign pension is paid. Pension complement for frontier or seasonal workers is accessible only to those who worked as frontier or seasonal workers before 2015 - Status: The new system is not applicable to those who are before December 1, 2015: - 65 years old, or - Fulfill the conditions for early retirement - Status: Implemented - Minimum pension career condition: - 2011: Minimum pension: Career condition to benefit from 1/45th of the minimum pension is 30 years of 208 days - 2012/2016 and 2017–2020: From 2015, at least 52 days in a year are required to obtain 1/45th of the minimum pension. - Status: Implemented - Structural reform of the pension scheme: - 2012/2016 and 2017–2020: Planned by the new government *Sources: Belgian Federal Public Service Employment, Labor and Social Dialogue, National Bank of Belgium, National Employment Office, Federal Planning Bureau, Ministry of Pensions, and Belgian Stability Program 2012–15.* ### introduction of macrofinancial risk dashboard to monitor systemic and emerging risk. Funding and ### introduction of macrofinancial risk dashboard to monitor systemic and emerging risk. Funding and ### Macrofinancial risk monitoring and supervisory framework - Introduction of a macrofinancial risk dashboard to monitor systemic and emerging risk. - Funding and risk management standards are being improved. - Supervisory tools for monitoring group-wide risks need to be upgraded. - The crisis management framework, while updated for handling systemic firms, is in need of a further upgrade owing in part to EU-wide developments. - Insurance supervision has been significantly strengthened although further work is needed, particularly, in strengthening the solvency framework. - Both bank and insurance supervisory frameworks integrate vertical analyses of individual insurers with horizontal review of the sector. - The adoption of the new institutional architecture has allowed the FSMA to focus solely on market and business conduct and the adoption of EU directives in the interim has addressed many of the recommendations for the securities sector. - The FSMA’s plan to adopt a risk-based approach to conduct supervision must be adequately resourced. - Pension regulation and supervision has been strengthened. While pension funds remain the remit of the FSMA, there is currently a debate as to whether this should be the responsibility of the NBB. ### Fiscal transparency and public finance findings - In many areas Belgium meets, and in some cases exceeds, the requirements of the fiscal transparency code. - The basic government finance processes are supported by a sound institutional and legal framework. - Roles and responsibilities in the budget process are clear, with a well-defined separation of powers between the executive and legislature. - Fiscal information is provided through regular publications and extensive use of the internet. - Budget formulation is appropriately supported by medium-term macroeconomic forecasts and clearly formulated medium-term fiscal policy goals, and fiscal policy is presented clearly, and in a medium-term context. - Audit processes are extensive and help improve budget management decisions, practices and standards, with government financial decisions evaluated ex ante and ex post by various institutions. - Areas for improvement: - Limited insight about the objectives and targets of government expenditure. - The medium-term budget estimates need to make budgetary decision-making more oriented to the medium-term. - The presentation of new policy measures and their medium-term costs could be clarified. - Budget implementation by departments and agencies could be streamlined. - Increase public information on fiscal risk and tax expenditures in budget documents; in-year budgetary data on local government and agencies; the content of the final government accounts; and the governance of state-owned equity holdings. - Institutional arrangements for fiscal policy coordination could be strengthened by: - Reinforcing and expanding the role of the High Council of Finance, including by providing additional institutional safeguards as to its continuity and independence, and having the Council cover all important issues bearing on fiscal policy. - Converting the budget agreements between the federal government, regions, and communities into published agreements which specify the targeted balance for each partner and identify the measures needed to achieve this target. - Internal audit processes could be better coordinated and simplified by reducing the number of internal control and audit layers; the Court of Audit’s Single Audit initiative to minimize overlap, coordinate work programs, and to share common data and analysis is timely. ### AML/CFT assessment - Belgium’s AML/CFT framework was last assessed in July 2014. - The assessment was conducted by the Financial Action Task Force (FATF) against the 2012 FATF standard using the 2013 assessment methodology. - The evaluation report was adopted during the FATF February 2015 plenary meeting and found that the core elements of a sound AML/CFT regime were present, although some elements remained to be brought in line with the 2012 FATF standard. ### Statistics and data dissemination - Belgium’s economic and financial statistics are adequate for surveillance purposes. - The National Bank of Belgium (NBB) regularly publishes a full range of economic and financial data and provides calendar dates of main statistical releases. - On-line access to comprehensive databases is facilitated by the NBB’s data search engine, Belgostat. - Belgium is a SDDS subscriber. - Statistics for International Financial Statistics on banking institutions and monetary aggregates are prepared on a monthly basis and are timely. - Belgium adopted the European System of Integrated Economic Accounts 2010 (ESA 2010) in 2014; revisions of national accounts were released in September, 2014. - The central bank is responsible for compiling national accounts statistics. - Quarterly accounts are published within a lag of three months. - Shortcomings mainly related to export and import deflators, which are based on unit values, rather than prices collected directly from exporters and importers. - Belgium compiles and publishes a complete set of general government accounts on an accrual basis (ESA 2010). - The NBB publishes annual and quarterly data on general government revenue, expenditure, and net lending/borrowing; transactions in financial assets and liabilities and a financial balance sheet data; and details on the consolidated gross debt. - The authorities provide quarterly updates of financial sector indicators (FSIs) in a timely manner. ### Key statistics and projections (selected items as presented) - Real economy - Real GDP-0.11.71.51.21.61.51.51.51.51.5 - Domestic demand-0.52.31.50.51.51.61.51.61.51.5 - Private consumption0.70.61.10.71.41.51.41.41.41.4 - Public consumption0.11.40.50.20.40.40.70.70.80.8 - Gross fixed investment-1.55.12.42.12.62.92.42.82.42.6 - Stockbuilding1-0.60.40.3-0.40.00.00.00.00.00.0 - Foreign balance1 0.4-0.50.00.80.20.00.00.00.00.0 - Exports, goods and services0.85.14.36.14.83.94.14.04.04.0 - Imports, goods and services0.35.94.35.34.74.04.14.04.04.1 - Household saving ratio12.312.111.712.612.913.013.213.313.313.4 - Potential output growth1.01.11.11.21.31.41.41.51.51.5 - Potential output growth per working age person0.81.00.90.91.01.21.51.51.61.5 - Output gap (in percent)-1.6-1.0-0.6-0.6-0.2-0.10.00.10.10.1 - Employment - Unemployment rate8.58.68.58.07.87.67.47.47.37.3 - Employment-0.30.40.91.30.90.80.60.40.50.5 - Prices - Consumer prices1.20.50.61.82.01.71.71.82.02.0 - GDP deflator1.20.70.91.61.61.71.71.82.02.0 - Public finance (Percent of GDP) - Revenue52.752.051.351.051.050.750.450.250.250.2 - Expenditure55.755.153.953.753.153.052.652.652.652.7 - General government balance-3.0-3.1-2.5-2.7-2.1-2.2-2.3-2.4-2.4-2.5 - Structural balance-2.8-2.8-2.2-2.4-1.9-2.2-2.3-2.4-2.5-2.5 - Structural primary balance0.40.40.80.30.50.10.0-0.10.0-0.1 - Primary balance0.30.20.50.00.40.10.0-0.10.00.0 - General government debt105.4 106.5 105.8 105.5 104.3 103.3 102.3 101.4 100.399.4 - Balance of payments - Goods and services balance0.10.42.33.62.92.52.62.42.42.5 - Current account-0.3-0.70.41.00.91.01.41.51.81.9 - Exchange rates - Euro per U.S. dollar, period average0.80.80.90.9 - NEER, ULC-styled (2005=100) 102.2102.197.998.9 - REER, ULC-based (2005=100) 104.2104.098.3101.4 - Memorandum items - Nominal GDP (in billions of euros)391.7 400.8 410.4 422.0 435.6 449.6 464.2 479.8 496.9 514.6 - Population (in millions)11.211.211.211.311.411.411.511.511.611.7 *Prepared By European Department; March 9, 2017. International Monetary Fund.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1769.pdf_