## 1belea2019001 - 1.3 percent in 2019 and 1½ percent over the medium run. Risks have risen and are

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### Context: a moderating recovery
- Ten years after the global financial crisis: real GDP per capita has surpassed pre-crisis levels; employment rates at historic highs.
- Labor market and inflation:
  - Unemployment rate fell to 5.9 percent in 2018.
  - Real GDP growth: 1.7 percent (2017), 1.4 percent (2018).
  - Headline inflation: 2.3 percent (2018); core inflation: 1.3 percent.
- Public finances and external position:
  - Fiscal deficit narrowed to 0.8 percent of GDP at end-2018.
  - Public debt: around 101 percent (end-2018).
  - Current account: averaged a deficit of 0.3 percent of GDP since the crisis; 2018 current account estimated surplus of 0.4 percent (2017: 0.7 percent).
- Competitiveness:
  - ULC-based REER appreciated by 5.3 percent since 2015; nominal effective exchange rate appreciated by 3.5 percent.
  - Preliminary estimated current account gap of 1–3   percent of GDP below the norm (EBA model cyclically adjusted current account norm of 2.4 percent in 2018).
- Political context: caretaker government preparing for federal and regional elections planned for May 2019 after Michel government collapse in December (prior year).

### Key reforms over the last four years
- Pension Reform:
  - Measures: statutory retirement age increased; stricter eligibility for early retirement and pre-pension benefits; pension bonus system abolished; elimination of years of study from civil servants’ pension calculation.
  - Staff assessment: measures expected to cut the annual growth in pension costs by about a third and increase participation rate of older workers; effective retirement age remains below the OECD average; further reforms needed.
- Wage Moderation:
  - Indexation suspended April 2015–April 2016 (“index jump”), resulting in real wage losses of 2 percent for all employees.
  - 2017 wage-setting reform (wage norm) requires social partners to correct for past slipages and includes a safety margin.
  - Staff assessment: enhanced cost competitiveness and employment growth; wage norm does not account for deviations in labor productivity growth vis-à-vis trading partners.
- Labor Market Reforms:
  - Measures: tightened eligibility for unemployment benefits; shorter notice periods in initial employment months; extended “flexi-jobs” to retail; more working-hour flexibility in e-commerce; tax advantages for employers hiring first worker.
  - Staff assessment: contributed to rapid employment growth and lower unemployment, but labor market remains fragmented; integration limited for immigrants born outside the EU, the young, and the low-skilled.
- Tax Shift:
  - Adopted 2015, phased in over 2016–2020; lowers social security contributions and personal income taxes; offset by higher excise duties, higher VAT on electricity, and tax increases on non-labor income.
  - Staff assessment: supported growth and job creation; taxes on labor remain relatively high; reform not revenue-neutral and only partially exploited opportunities for environmentally friendly taxation.
- Corporate Income Tax Reform:
  - Headline CIT rate cut from 33 percent to 29 percent in 2018 and to 25 percent in 2020; SMEs rate of 20 percent on first €100,000.
  - Broadened tax base via changes to the notional interest deduction (NID) scheme.
  - Staff assessment: should improve competitiveness and attract foreign investment; changes to NID help render reform broadly revenue neutral but reintroduce some debt bias.

### Outlook: steady growth, but increased downside risks
- Staff projections:
  - Real GDP growth: 1.3 percent in 2019.
  - Growth over the medium term: about 1½ percent.
  - Inflation: projected to moderate to 1.9 percent (2019) as energy price inflation recedes.
  - Output gap: expected to remain closed in the medium term.
- Drivers and assumptions:
  - Private consumption supported by further cuts in payroll taxes coming into effect in 2019 and continued wage growth.
  - Business investment and export growth expected to soften amid moderating foreign demand (projections assume an orderly Brexit scenario).
  - Potential output growth supported by recent tax, pension, and labor market reforms; planned scaled-up investment over next decade (Strategic Investment Pact aims to mobilize €150 billion in investment between now and 2030).
- Selected indicators (Real GDP change in percent): 2017: 1.7; 2018: 1.4; 2019: 1.3; 2020: 1.4; 2021: 1.5; 2022: 1.5; 2023: 1.5; 2024: 1.5.
- Selected indicators (CPI year average): 2019: 1.9; 2020: 1.5; 2021: 1.8; 2022: 1.9; 2023: 2.0; 2024: 2.0.

### Downside risks (external and domestic)
- External risks:
  - Brexit:
    - Belgium highly integrated with the UK (second after Ireland among EU countries).
    - IMF study estimates Belgium’s output would fall by about 0.5 percent in the long run under a standard free trade agreement and by about 1 percent under a “no-deal” Brexit (WTO rules).
    - Two-thirds of Belgian companies depend directly or indirectly on demand from the UK; a quarter import either directly or indirectly from the UK.
  - Escalating trade tensions:
    - Exports of goods and services equal 85 percent of GDP.
    - Two-thirds of Belgian firms contribute to export value-added.
  - Tighter financial conditions:
    - Belgian banks’ exposure to vulnerable countries is limited; contagion effects cannot be excluded.
- Domestic risks:
  - Tightening labor market could lead to production constraints and add to inflationary pressures together with energy supply limitations.
  - Political uncertainty: caretaker government status and potential delays in forming a new government reduce prospects for significant near-term reforms.

### Policy priorities and recommendations
- Rebuild fiscal buffers:
  - Gradually move toward a balanced budget in the medium term, supported by efficiency-oriented spending reforms.
  - Staff recommended a steady structural effort of about 0.5 percent of GDP per year during 2019−21 to attain structural balance and put public debt on a firmer downward path.
- Fiscal measures (staff illustrative recommended policies, percent of GDP, 2018–2024):
  - Revenue: 51.3, 50.7, 50.4, 50.4, 50.4, 50.4, 50.4
  - Expenditure (recommended scenario): 52.1, 51.6, 51.1, 50.6, 50.6, 50.5, 50.4
  - Fiscal balance (recommended scenario): -0.8, -0.9, -0.7, -0.2, -0.2, -0.1, 0.0
  - Structural balance (recommended scenario): -1.6, -1.0, -0.5, 0.0, 0.0, 0.0, 0.0
  - Gross government debt (recommended scenario): 101.0, 99.1, 97.2, 94.7, 91.9, 89.0, 85.5
- Spending-side reforms:
  - Rationalize spending and improve efficiency by reducing duplication in public administration, streamlining the civil service (Entity II level), curtailing high subsidies, and better targeting social benefits.
  - Strengthen coordination at all levels of government.
  - Follow up on the 2015 pension reform with further measures to contain long-term costs of aging.
- Revenue-side actions:
  - Safeguard revenues by reducing deductions and exemptions and reviewing taxation of dividends and capital gains, preferential tax treatment of rental income and real estate, and tax preferences on savings accounts.
  - Consider further revenue-neutral reductions in the labor tax wedge.
- Labor market and productivity:
  - Improve education and training; reduce barriers to mobility; make wage-setting more flexible to link wages with productivity.
  - Support entrepreneurship, increase investment in infrastructure, strengthen competition in services, and foster innovation.
- Financial sector vigilance:
  - Closely monitor cyclical risks in the financial sector; stand ready to tighten macroprudential policy further (including countercyclical capital buffer).

### Fiscal assessment, debt sustainability, and stress tests
- Public debt and financing:
  - Public debt = €452 billion, or 103.0 percent of GDP at end-2017.
  - Under baseline: public debt projected to fall to 92.7 percent by 2023.
  - Gross financing needs estimated at 15 percent of GDP in 2019 and expected to average around 14 percent over the medium term.
- Baseline fiscal assumptions:
  - Fiscal deficit projected to widen to around 1¼ percent of GDP in 2019 and to 1½ percent over the medium term under unchanged policies.
  - Structural deficit stays at around 1½ percent; primary surplus narrows to ½ percent by 2023.
- Stress test outcomes (selected):
  - Growth shock (real GDP growth reduced by 1.4 percentage points): debt-to-GDP increases to 104 percent in 2020 and declines thereafter.
  - Interest rate shock (increase by 511 basis points): debt-to-GDP continues to decline but at a slower rate; gross financing needs 2½ percentage points of GDP higher in 2023 relative to baseline.
  - Combined macro-fiscal scenario: debt at 104 percent of GDP and gross financing needs equal 17 percent of GDP at the end of the projection period.
  - Contingent liability shock (non-interest expenditures increase by equivalent of 10 percent of banking sector assets): debt increases to 122 percent of GDP before declining slowly.
- Vulnerabilities:
  - External financing requirement was 87 percent of GDP in 2017.
  - Share of debt held by foreigners = 52 percent of total.
  - IMF flags debt burden benchmark = 85 percent (Belgium exceeds).

### Labor market, regional competitiveness, and wage-setting
- Labor market snapshot:
  - Employment at historic highs; unemployment at lowest level in four decades.
  - Labor force participation among the lowest in euro area despite increases (70 percent of 20-64 age group at work).
  - Employment growth concentrated among high-skilled workers; employment rate of low-skilled workers declined.
- Regional differentials and firm-level evidence:
  - Firm-level results (2002–2015): Brussels productivity premium ~10 percent vs Flanders; Wallonia productivity discount ~19 percent vs Flanders.
  - Wallonia competitiveness gap of about 10 percent relative to Flanders (declines to about 6 percent for firms with at least 10 employees).
- Bargaining structure and wage responsiveness:
  - Empirical cross-country results (196 regions, 12 countries, 2003–2015): lagged productivity differential coefficients ~0.285*** to 0.255***, indicating wages respond positively to productivity differentials.
  - Interaction terms: Index of coordination * Productivity differential = -0.049* and -0.047* (significant at 10 percent), suggesting more coordinated/centralized bargaining reduces regional wage responsiveness to productivity.
- Policy recommendations:
  - Revisit wage-setting framework to better link wages to domestic productivity trends; reconsider indexation to health index to limit terms-of-trade effects on competitiveness.
  - Strengthen labor mobility, cross-regional training, coordination of public employment services, and education reforms to address skill mismatches.

### Productivity, entrepreneurship, and the Belgian Growth Fund
- VC and scale-up financing gaps:
  - Belgium VC market size: 0.03 percent of GDP (about half is “scale-up” financing).
  - Share of institutional investors in Belgian VC market: less than 1 percent.
  - Average late-stage investment in US ~ $30 million; average European VC fund size in 2015: €65 million (vs about $140 million in the US).
- Belgian Growth Fund (fund-of-funds) design:
  - Modeled on Danish fund; public support through SFPI.
  - Institutional investors can invest 40 percent in equity and 60 percent as a loan to the SFPI.
  - Total loan amount to SFPI from all institutional investors would not exceed €150 million, or about 0.035 percent of GDP.
- Potential impact and risks:
  - Danish fund cited as supporting creation of 5,000 jobs; proportional Belgian impact could be up to 10,000 jobs (~0.2 percent of current workforce), to be interpreted with caution.
  - Risks include modest contingent risk to state via issuance of public debt — need for strong governance, diversification, and limited public support.
- Complementary measures: improve legal environment, tax incentives for R&D and equity investment, strengthen labor market flexibility, and increase public spending efficiency in R&D.

### Financial sector resilience, housing, and macrofinancial risks
- Banking sector:
  - Banks reduced balance sheets; greater emphasis on domestic lending and deposit funding.
  - Stress tests indicate banks and insurers can withstand a severe deterioration in macrofinancial conditions.
  - Profitability pressures from persistent low interest rates and digitalization.
- Housing and household debt:
  - Mortgage lending growth: 9 percent in 2018.
  - Mortgage loans represent 20 percent of bank’s total assets (2007: 8 percent).
  - NBB model estimates prices are overvalued by 6.5 percent (down from 9 percent at end-2015).
  - Credit growth: overall 5.9 percent in 2018; bank credit to corporate sector: 6 percent growth in 2018.
- Macroprudential measures:
  - May 2018: NBB reinstated a 5 percentage-point risk weight add-on for IRB banks’ mortgage exposures and added a targeted component; implied risk weight of Belgian mortgage loans increased from 10 percent to 18 percent on average.
  - Staff recommendation: NBB continue close monitoring and stand ready to tighten macroprudential policy further, including countercyclical capital buffer; consider revising decision-making framework to deploy broader tools timely.

### Corporate debt and external position
- Corporate debt dynamics:
  - Unconsolidated corporate debt: about 110 percent of GDP (2000–06) to 160 percent of GDP at end-2017.
  - Consolidated debt (excluding resident intercompany loans) above euro area average of 80 percent of GDP.
  - Accounting for all intragroup loans, corporate debt was 63 percent of GDP in 2017.
  - Cross-border intercompany loans, resident intercompany loans, and loans from captive financial institutions accounted for over 60 percent of the corporate debt stock at end-2017.
  - About half of the increase between 2006 and 2017 due to debt of AB Inbev.
- External sector:
  - NIIP strong at 51 percent of GDP as of 2018:Q3.
  - Gross foreign assets: 461 percent of GDP.
  - External public debt: 63 percent of GDP as of 2018:Q3.
  - Target 2 balances: -€12.2 billion (-2.7 percent of GDP) as of 2018:Q3.
  - Assessment: large gross positions inflated by corporate treasury units; strong NIIP mitigates vulnerabilities from high external public debt.

### Implementation status, authorities’ views, and staff appraisal
- Authorities broadly shared staff’s outlook and risk assessment; emphasized balancing consolidation with growth and the importance of job-creation supporting reforms.
- Authorities agreed on the need for better coordination across government levels and on boosting labor force participation and public investment (Strategic Investment Pact).
- Staff appraisal: economy has achieved significant progress but faces rising external risks and unfinished reform agenda; priority to rebuild fiscal buffers, reduce labor market fragmentation, raise productivity, and guard financial stability.

*International Monetary Fund — Belgium: Article IV Consultation staff report (February 19, 2019).*

### 1.3 percent in 2019 and 1½ percent over the medium run. Risks have risen and are

### 1belea2019001 - 1.3 percent in 2019 and 1½ percent over the medium run. Risks have risen and are

### CONTEXT: A MODERATING RECOVERY
- Ten years after the global financial crisis, Belgium’s economy is performing well by many measures; real GDP per capita has surpassed pre-crisis levels and employment rates have reached historic highs.
- Unemployment returned to pre-crisis levels; the unemployment rate fell to 5.9 percent in 2018.
- Real GDP growth slowed to 1.4 percent in 2018 from 1.7 percent in 2017.
- Headline inflation edged higher to 2.3 percent in 2018; core inflation was 1.3 percent.
- The fiscal deficit narrowed to 0.8 percent of GDP at end-2018.
- Public debt declined to around 101 percent (end-2018).
- External position: current account averaged a deficit of 0.3 percent of GDP since the crisis; 2018 current account estimated surplus of 0.4 percent (2017: 0.7 percent).
- ULC-based REER appreciated by 5.3 percent since 2015; nominal effective exchange rate appreciated by 3.5 percent.
- Preliminary estimated current account gap of 1–3   percent of GDP below the norm (EBA model cyclically adjusted current account norm of 2.4 percent in 2018).
- Political development: Michel government collapsed in December (prior year), caretaker government in place preparing for federal and regional elections planned for May 2019.

### KEY REFORMS OVER THE LAST FOUR YEARS
- Pension Reform:
  - Statutory retirement age increased; stricter eligibility for early retirement and pre-pension benefits; pension bonus system abolished; elimination of years of study from civil servants’ pension calculation.
  - Staff assessment: measures expected to cut the annual growth in pension costs by about a third and increase participation rate of older workers; effective retirement age remains below the OECD average; further reforms needed.
- Wage Moderation:
  - Wage indexation suspended April 2015–April 2016 (“index jump”), resulting in real wage losses of 2 percent for all employees.
  - 2017 reform of wage-setting framework (wage norm) requires social partners to correct for past slipages and includes a safety margin.
  - Staff assessment: enhanced cost competitiveness and employment growth; wage norm does not account for deviations in labor productivity growth vis-à-vis trading partners.
- Labor Market Reforms:
  - Measures: tightened eligibility for unemployment benefits; shorter notice periods in initial employment months; extended “flexi-jobs” to retail; more working-hour flexibility in e-commerce; tax advantages for employers hiring first worker.
  - Staff assessment: contributed to rapid employment growth and lower unemployment, but labor market remains fragmented; integration limited for immigrants born outside the EU, the young, and the low-skilled.
- Tax Shift:
  - Adopted 2015, phased in over 2016–2020; lowers social security contributions and personal income taxes; offset by higher excise duties, higher VAT on electricity, and tax increases on non-labor income.
  - Staff assessment: supported growth and job creation; taxes on labor remain relatively high; reform not revenue-neutral and only partially exploited opportunities for environmentally friendly taxation.
- Corporate Income Tax Reform:
  - Headline CIT rate cut from 33 percent to 29 percent in 2018 and to 25 percent in 2020; SMEs rate of 20 percent on first €100,000.
  - Broadened tax base via changes to the notional interest deduction (NID) scheme.
  - Staff assessment: should improve competitiveness and attract foreign investment; changes to NID help render reform broadly revenue neutral but reintroduce some debt bias.

### OUTLOOK: STEADY GROWTH, BUT INCREASED DOWNSIDE RISKS
- Staff projections:
  - Real GDP growth: 1.3 percent in 2019.
  - Growth over the medium term: about 1½ percent.
  - Inflation: projected to moderate to 1.9 percent (2019) as energy price inflation recedes.
  - Output gap: expected to remain closed in the medium term.
- Drivers and assumptions:
  - Private consumption supported by further cuts in payroll taxes coming into effect in 2019 and continued wage growth.
  - Business investment and export growth expected to soften amid moderating foreign demand (projections assume an orderly Brexit scenario).
  - Potential output growth supported by recent tax, pension, and labor market reforms; planned scaled-up investment over next decade (Strategic Investment Pact aims to mobilize €150 billion in investment between now and 2030).
- Selected economic indicators, 2017–24 (excerpt):
  - Real GDP (change in percent): 2017: 1.7; 2018: 1.4; 2019: 1.3; 2020: 1.4; 2021: 1.5; 2022: 1.5; 2023: 1.5; 2024: 1.5
  - Private consumption: 2017: 1.1; 2018: 0.8; 2019: 1.4; 2020: 1.5; 2021: 1.7; 2022: 1.6; 2023: 1.6; 2024: 1.6
  - Gross fixed investment: 2017: 1.8; 2018: 1.8; 2019: 1.5; 2020: 2.0; 2021: 2.4; 2022: 2.7; 2023: 2.7; 2024: 2.7
  - Exports of goods and services: 2017: 5.0; 2018: 3.3; 2019: 2.8; 2020: 2.9; 2021: 2.8; 2022: 2.6; 2023: 2.4; 2024: 2.5
  - CPI (year average): 2017: 2.2; 2018: 2.3; 2019: 1.9; 2020: 1.5; 2021: 1.8; 2022: 1.9; 2023: 2.0; 2024: 2.0
  - General government balance (percent of GDP): 2017: -0.9; 2018: -0.8; 2019: -1.2; 2020: -1.4; 2021: -1.4; 2022: -1.4; 2023: -1.5; 2024: -1.6
  - General government gross debt (percent of GDP): 2017: 103.0; 2018: 101.0; 2019: 99.2; 2020: 97.7; 2021: 96.0; 2022: 94.4; 2023: 92.7; 2024: 90.7
  - Output gap (percent of potential GDP): 2017: 0.1; 2018: 0.2; 2019: 0.2; 2020: 0.1; 2021: 0.1; 2022: 0.1; 2023: 0.1; 2024: 0.1

### DOWNSIDE RISKS (EXTERNAL AND DOMESTIC)
- External risks (Annex III and Box 2):
  - Brexit:
    - Belgium highly integrated with the UK (second after Ireland among EU countries).
    - IMF study estimates Belgium’s output would fall by about 0.5 percent in the long run under a standard free trade agreement and by about 1 percent under a “no-deal” Brexit (WTO rules).
    - Two-thirds of Belgian companies depend directly or indirectly on demand from the UK; a quarter import either directly or indirectly from the UK.
    - Government measures: high-level working group recommendations, an online “Brexit Impact Scan,” emergency law prepared for a “no-deal” Brexit.
  - Escalating Trade Tensions:
    - Exports of goods and services equal 85 percent of GDP.
    - Two-thirds of Belgian firms contribute to export value-added.
    - Further tariffs and counter-tariffs pose downside risk; potential for trade diversion toward Belgium exists.
  - Tighter Financial Conditions:
    - Financial conditions tightened in parts of Europe due to political and policy uncertainty; potential spillovers to Belgium.
    - Belgian banks’ exposure to vulnerable countries is limited; sovereign bonds have benefited from flight-to-safety flows; contagion effects cannot be excluded.
- Domestic risks:
  - Tightening labor market could lead to production constraints and add to inflationary pressures together with energy supply limitations.
  - Political uncertainty: caretaker government status and potential delays in forming a new government reduce prospects for significant near-term reforms and could amplify external risk consequences.

### POLICY PRIORITIES AND RECOMMENDATIONS
- Rebuild fiscal buffers:
  - Gradually move toward a balanced budget in the medium term, supported by efficiency-oriented spending reforms.
- Address labor market fragmentation:
  - Improve education and training.
  - Reduce barriers to mobility.
- Boost productivity growth:
  - Support entrepreneurship.
  - Increase investment in infrastructure.
  - Strengthen competition in services.
  - Foster innovation.
- Financial sector vigilance:
  - Closely monitor build-up of cyclical risks in the financial sector.
  - Stand ready to tighten macroprudential policy further.

### ADDITIONAL OBSERVATIONS FROM STAFF
- Recent reforms have contributed to job creation, improved competitiveness, and lowered the deficit, but the reform agenda is unfinished.
- The new government should take advantage of still favorable economic conditions to press ahead with further reforms to strengthen resilience and growth potential.

*International Monetary Fund — Belgium: Article IV Consultation staff report (February 19, 2019).*

### 8.      The authorities broadly shared staff’s views on the outlook and risks. They saw near term

### 8. The authorities broadly shared staff’s views on the outlook and risks. They saw near term

### Outlook and risks
- Authorities and staff saw near-term growth at around 1½ percent.
- Authorities considered the medium-term outlook relatively more constrained by the weak external environment and slowing productivity growth.
- Risks are tilted to the downside, especially related to Brexit and protectionism, to which Belgium is significantly exposed.
- Domestic risk: potential political gridlock could threaten continuation of reforms in the near term.

### Policy guidance: overall priorities
- Continue reforms while growth is solid and unemployment historically low to support growth and strengthen resilience.
- Address remaining domestic and external imbalances through:
  - Rebuilding fiscal buffers.
  - Pursuing structural reforms to raise potential growth and make it more inclusive.
  - Guarding against cyclical vulnerabilities in the financial sector (notably risks in the real estate market).

### A. Rebuilding fiscal buffers — findings and recommendations
Findings
- Public debt has been falling gradually since 2015 but remains the fifth highest in Europe and far above the Maastricht limit of 60 percent of GDP.
- Belgium’s spending ratio is one of the highest in Europe: 52.2 percent of GDP.
- Most net structural adjustment during 2010−17 occurred on the revenue side; this is now being partially unwound with the tax shift reform.
- A credible plan for achieving stated fiscal goals is lacking; the 2018 Stability Program targeted a structural deficit of 0.6 percent of GDP in 2019 and structural balance in 2020, but the 2019 draft budget relaxed the 2019 structural deficit target to 0.8 percent of GDP and lacked concrete structural measures.
- Belgium is operating under a rule that prevents new spending initiatives after the 2019 budget was not approved.

Staff baseline projections and recommended effort (numeric values preserved exactly)
- Under staff’s current policy baseline scenario:
  - Deficit projected to widen to around 1¼ percent of GDP in 2019.
  - Deficit projected to further deteriorate to 1½ percent over the medium term.
  - Public debt projected to remain elevated at over 90 percent of GDP over the medium term.
- Staff recommended a steady structural effort of about 0.5 percent of GDP per year during 2019−21 to attain structural balance and put public debt on a firmer downward path.
- Staff illustrative recommended policies (fiscal projections, percent of GDP):
  - Baseline forecast (2018–2024):
    - Revenue: 51.3, 50.7, 50.4, 50.4, 50.4, 50.4, 50.4
    - Expenditure: 52.1, 51.9, 51.8, 51.8, 51.8, 51.8, 51.9
    - Fiscal balance: -0.8, -1.2, -1.4, -1.4, -1.4, -1.5, -1.6
    - Structural balance: -1.6, -1.4, -1.5, -1.5, -1.5, -1.5, -1.6
    - Gross government debt: 101.0, 99.2, 97.7, 96.0, 94.4, 92.7, 90.7
  - Recommended policies (illustrative scenario, 2018–2024):
    - Revenue: 51.3, 50.7, 50.4, 50.4, 50.4, 50.4, 50.4
    - Expenditure: 52.1, 51.6, 51.1, 50.6, 50.6, 50.5, 50.4
    - Fiscal balance: -0.8, -0.9, -0.7, -0.2, -0.2, -0.1, 0.0
    - Structural balance: -1.6, -1.0, -0.5, 0.0, 0.0, 0.0, 0.0
    - Gross government debt: 101.0, 99.1, 97.2, 94.7, 91.9, 89.0, 85.5

Policy recommendations (spending and revenue)
- Spending reform is key: rationalize spending and improve efficiency by:
  - Reducing duplication in public administration.
  - Streamlining the civil service, particularly at the Entity II level (regions, communities, and local authorities).
  - Curtailing high level of subsidies.
  - Better targeting social benefits to the most vulnerable.
- Strengthen coordination at all levels of government.
- Follow up on the 2015 pension reform with further measures to contain long-term costs of aging.
- Achieve lasting reductions in current spending to create space for additional public investment.
- Safeguard revenues by reducing deductions and exemptions and reviewing:
  - Taxation of dividends and capital gains.
  - Preferential tax treatment of rental income and real estate.
  - Tax preferences on savings accounts.
- Consider further revenue-neutral reductions in the labor tax wedge.

Authorities’ views
- Authorities agreed reducing deficit and debt is important for fiscal sustainability but stressed the need to balance consolidation and growth.
- Ministry of Finance emphasized reforms supporting job creation as key to faster growth and lower fiscal deficits to help meet Belgium’s MTO.
- Authorities highlighted potential of planned labor market reforms to boost labor force participation and medium-run revenues.
- Authorities agreed better coordination between regional and federal governments could improve decision making.

### Box 3 — Intertemporal Net Worth and aging pressures (key figures and implications)
- Belgium’s old age dependency ratio projected to increase from about 30 percent in 2017 to 45 percent by 2070.
- EC’s 2018 Aging Report projects age-related spending to add around 5 percentage points of GDP to the fiscal deficit between 2017 and 2070.
- Measures of intertemporal net worth (INW) using the EC’s aging costs estimate Belgium’s INW at about -170 percent of GDP for 2018–70.
- Belgium’s current net financial worth (financial assets minus liabilities) is estimated at around -90 percent of GDP at end-2017.
- Staff note achieving the MTO by undertaking a structural adjustment of some 1.5 percent of GDP would improve INW by about 70 percent of GDP.
- Further pension reforms suggested to contain aging costs: linking retirement age to longevity and other parametric reforms, alongside productivity-enhancing reforms and measures to integrate vulnerable groups.

### B. Raising potential output — findings and recommended labor market reforms
Findings
- Labor market remains fragmented despite recent reforms.
- Unemployment declined but inactivity rate is among the highest in Europe.
- Difficulties integrating vulnerable groups: immigrants born outside the EU, the young, and the low-skilled.
- Since end-2014, nearly all employment increase attributed to high-skilled workers; employment rate of low-skilled workers declined; employment of non-EU migrants remains far below natives.
- Youth employment much lower than other age groups; large regional unemployment disparities persist.
- Firm-level analysis suggests regional wage-productivity gaps; wage-setting may lack flexibility to account for productivity differentials.
- Business dynamism weak: rates of firm entry and exit among the lowest in Europe; share of high-growth young/small firms has declined and is the third lowest among EU-15.

Jobs deal announced (implementation uncertain after government collapse)
Key elements announced included:
- Reform of the unemployment insurance scheme: increase in unemployment benefits during the first six months and a more rapid reduction thereafter to the unchanged minimum level; exemptions for people undergoing relevant job training contemplated.
- Incentives for job training: tax advantages for unemployed pursuing training for professions with labor shortages.
- Tighter eligibility for pre-pension benefits: raise eligibility age for pre-pension in the event of corporate restructuring from 56 to 59 in 2019 and 60 in 2020.
- Potential changes to salary scales: examine linking salary scales to productivity and skills rather than seniority.

Recommendations for future governments
- Implement the planned jobs deal measures to:
  - Bring Belgium’s net replacement rate more in line with peers in initial unemployment years.
  - Incentivize return to work via re-phased unemployment benefits.
  - Encourage longer working lives and fiscal savings via tighter pre-pension eligibility.
  - Increase flexibility by linking salary scales to productivity where appropriate.
- Follow up with additional measures to preserve competitiveness and reduce labor market fragmentation:
  - Make wage-setting framework sufficiently flexible to link wages with productivity.
  - Address educational gaps, improve training and lifelong learning, and reduce barriers to mobility to reduce skills mismatches and better integrate vulnerable groups.

Entrepreneurship and business dynamism policies
- Recent initiatives: Belgian Growth Fund (modeled on Danish fund-of-funds) to channel savings from institutional investors into venture capital funds for Belgian growth companies; complementary measures include knowledge exchanges, manager training for young firms, conferences.
- Tax policy: income tax credit introduced for individuals investing in shares issued by young SMEs to improve availability of equity financing.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1belea2019001.pdf*

### 20.      These initiatives are welcome and should be complemented with additional measures

### 1belea2019001 - 20.      These initiatives are welcome and should be complemented with additional measures

### Productivity growth, entrepreneurship, and policy priorities
- Recommendations to boost productivity growth:
  - Increase availability of domestic venture capital, including through creation of a fund of funds with public support.
  - Manage risks to the public-sector balance sheet by: limiting the extent of public support, ensuring an adequate diversification strategy, and maintaining strong governance arrangements.
  - Strengthen the domestic ecosystem for growth companies by fostering exchange of information and best practices.
  - Address impediments to entrepreneurship and growth by: increasing investment in infrastructure (including energy), boosting competition in services (e.g., telecommunications, retail, distribution, transportation) and regulated professions (e.g., accounting, legal services), streamlining regulations, and fostering innovation (e.g., through tax incentives, investments in human capital, and improving the efficiency of R&D spending).
- Authorities’ views:
  - Increasing the labor force participation rate is a key policy priority.
  - Authorities highlighted efforts to improve competitiveness and new measures in the jobs deal to encourage labor market participation and facilitate flexibility.
  - Agreed on need for further efforts to support education and training, particularly for vulnerable groups.
  - Agreed on need to increase public investment, in particular in energy and infrastructure, as planned in their Strategic Investment Pact.
  - Acknowledged more efforts are needed to further liberalize services and regulated professions and boost productivity.

### Financing innovation and the Belgian Growth Fund (Box 4)
- Background on venture capital (VC) and scale-up financing:
  - US VC market larger by a factor of 10, measured by VC investments relative to GDP.
  - In Belgium, VC market size: 0.03 percent of GDP, of which about half is “scale-up” VC financing.
  - The average late-stage investment is about $30 million in the US.
  - The average European VC fund had a size of €65 million in 2015, compared to about $140 million in the US.
  - European institutional investors accounted for 8 percent of total VC investments during 2013–17; US institutional investors accounted for 35 percent. The share of institutional investors in Belgium is less than 1 percent.
- Structure and features of the Belgian growth fund:
  - The fund-of-funds is modeled after the Danish fund established in 1992 and benefits from public support through SFPI (state-owned holding and investment company).
  - Institutional investors can invest 40 percent in equity and 60 percent as a loan to the SFPI.
  - The total loan amount to the SFPI from all institutional investors would not exceed €150 million, or about 0.035 percent of GDP.
  - A Europe-wide fund-of-funds program aims to raise up to €2.1 billion in public and private investment to support start-ups and scale-ups in Europe.
- Potential impacts and risks:
  - The Danish fund-of-funds investment was found to support the creation of 5,000 jobs.
  - If the Belgian growth fund had proportionally the same impact, it could increase employment by up to 10,000, corresponding to 0.2 percent of the current workforce (figures should be interpreted with caution).
  - The fund-of-funds keeps the government “further away” from the ultimate investment compared with direct financing, but a modest risk to the state remains due to issuance of public debt — highlighting need for strong governance and prudent risk-diversification.
- Complementary measures for growth-company development:
  - Legal environment, financial market development, tax system, labor market regulation, cultural and managerial practices, and public spending on research and development are important.
  - Authorities’ initiatives include sharing of information and best management practices, tax incentives (e.g., income tax credit for people investing in shares or securities issued by young companies), legal status of student-entrepreneurs, and educational measures to promote entrepreneurship among youth.
  - Importance of additional reforms: support a flexible labor market, improve education and training to reduce skills mismatches, and strengthen the business environment by facilitating competition and reducing regulations.

### Safeguarding financial sector stability
- Financial sector resilience and challenges:
  - Banks have reduced balance sheets and emphasize domestic lending and deposit funding.
  - Stricter regulations and upgraded financial sector supervision, including macroprudential supervision.
  - Stress tests indicate banks and insurance companies can withstand a severe deterioration in macro financial conditions.
  - Persistent low interest rate environment and increased competition from digitalization weigh on financial institutions’ profitability.
  - A sudden rise in interest rates could pressure interest margins if funding costs increase rapidly but interest income adjusts only gradually.

### Housing market, household debt, and macrofinancial risks
- Housing and household debt:
  - Strong growth in mortgage lending: 9 percent in 2018.
  - Mortgage loans represent 20 percent of bank’s total assets, compared to 8 percent in 2007.
  - NBB’s model estimates prices are overvalued by 6.5 percent, down from a recent high of 9 percent at end-2015.
  - A sharp housing (and asset) price correction could result in rising defaults for some groups and affect banks’ solvency, investment, consumption, and growth.
- Credit growth and corporate lending:
  - Robust overall level of credit growth: 5.9 percent in 2018.
  - Bank credit growth to the corporate sector: 6 percent growth in 2018.
- Macroprudential measures and recommendations:
  - NBB introduced in May 2018 an add-on to risk weights on bank mortgage exposures.
    - Reinstated a 5 percentage-point risk weight add-on for internal ratings-based (IRB) banks’ exposure to all mortgage loans.
    - Added a second, more targeted component that further increases risk weights in line with the risk profile of banks’ residential mortgage portfolios.
    - The measure increased the implied risk weight of Belgian mortgage loans from 10 percent to 18 percent on average—slightly above the European average.
  - Staff recommended NBB continue to closely monitor cyclical risks and stand ready to tighten macroprudential policy further, including use of a countercyclical capital buffer.
  - Consider revising macroprudential decision-making framework to deploy a broader range of policies timely, as recommended by the 2017 FSAP.

### Financial-sector supervision, preparedness, and Brexit risks
- Ongoing supervisory enhancements and priorities:
  - Progress in implementing 2018 FSAP recommendations and initiating exercises to test and enhance banks’ preparedness for cyberthreats.
  - Staff encouraged supervisory and resolution authorities to:
    - (i) Enhance the risk analytical framework for both banks and non-banks.
    - (ii) Strengthen supervision and oversight, including ensuring consistency of bank internal models and prudent provisioning practices, enhancing broader financial center supervision and SWIFT oversight.
    - (iii) Ensure feasibility and effectiveness of bank resolution strategies, including maintaining sufficient and consistent allocation of MREL as needed.
  - Authorities should encourage banks to adapt business models to address challenges from growing digitalization of finance.
  - Staff called for vigilance and preparedness of the financial and non-financial sector to deal with a “no-deal” Brexit scenario.

### Corporate debt dynamics (Box 5)
- Levels and composition:
  - Unconsolidated corporate debt increased from about 110 percent of GDP in 2000–06 to 160 percent of GDP at end-2017.
  - Consolidated debt (excluding resident intercompany loans) was lower, but still above the euro area average of 80 percent of GDP.
  - When accounting for all types of intragroup loans (including cross border and captive financial institutions), debt was 63 percent of GDP in 2017.
  - Cross-border intercompany loans, resident intercompany loans, and loans from captive financial institutions accounted for over 60 percent of the corporate debt stock at end-2017.
  - About half of the increase between 2006 and 2017 was due to debt of AB Inbev.
- Comparative analysis and risks:
  - Firm-level cross-country regressions suggest Belgian firms do not stand out compared to peers after controlling for firm characteristics.
  - Nevertheless, recent corporate credit growth warrants close monitoring given strong bank credit growth to the corporate sector (6 percent in 2018), partly reflecting one-off transactions linked to cross-border mergers and acquisitions and long-term investment in a low interest rate environment.

*INTERNATIONAL MONETARY FUND*

### Box 5. Is Belgium’s Corporate Debt a Source of Concern? (concluded)

### Box 5. Is Belgium’s Corporate Debt a Source of Concern? (concluded)

### Findings on corporate and housing credit dynamics
- Corporate debt growth has been broad-based across firm sizes and industries.
- Over half of outstanding credit to NFCs carried a maturity of more than five years—a share that has been fairly stable in recent years.
- While Belgium’s corporate debt level appears in line with peers when taking into account intra-group loans, its strong dynamics warrant continued monitoring.
- Recent strong credit growth has pushed up corporate and household debt and housing prices, posing new challenges.

### Authorities’ views
- The authorities broadly agreed with staff’s assessment and policy recommendations.
- They concurred that developments in the housing market warranted close monitoring, although they noted that housing prices were not strongly misaligned relative to fundamentals and considered that the banking sector currently had adequate buffers to absorb a potential shock to housing prices.
- They considered that close monitoring of current credit conditions and pricing of new mortgage credit remains needed.
- They shared staff’s view that credit developments in the corporate sector warrant close monitoring and agreed on the need to stay vigilant and be prepared to tighten macroprudential policy as necessary.
- The NBB highlighted their commitment to follow up on the implementation of the FSAP recommendations.
- The authorities agreed with the need for preparedness in case of a “no-deal Brexit,” noting efforts made at the European level in this regard, including to facilitate derivative contracts.
- Footnote: A significant portion of over-the-counter derivative contracts are cleared via central counterparties in the UK. The European Commission has announced that it will take measures to maintain banks' access to UK-based clearing houses in case of a no-deal Brexit.

### Staff appraisal and policy recommendations
- Macro outlook and risks:
  - A decade after the onset of the global financial crisis, Belgium has achieved significant economic progress, supported by ambitious reforms.
  - The economy is entering its tenth year of expansion, real GDP per capita has surpassed pre-crisis levels, and employment is at historic highs.
  - Growth has slowed recently, in line with broader developments in Europe, and is expected to remain modest over the medium term.
  - The economy is exposed to rising external risks related to escalating protectionism, Brexit, increased financial turbulence in Europe, and domestic political uncertainty given the collapse of the coalition government and the approaching elections.
  - The challenge for the upcoming government is to continue to build the foundation for higher growth while enhancing buffers against shocks.
- Fiscal policy:
  - Fiscal consolidation remains a priority. Although the fiscal deficit has narrowed significantly in recent years, it remains below pre-crisis levels and is expected to widen over the medium term in the absence of new reforms.
  - Public debt is the fifth highest in the euro area, leaving Belgium with little room to maneuver in the event of future shocks.
  - To safeguard fiscal sustainability, staff recommends reducing the structural deficit by about ½ percent of GDP per year until structural balance is reached, starting in 2019.
  - Achieving a more sustainable fiscal position hinges on making spending more efficient: reduce duplication in the public administration, streamline the civil service, curtail the high level of subsidies, and better target social benefits to the most vulnerable.
  - To address population aging, build on previous reforms to further bolster the sustainability of the pension system.
  - Spending reforms should be complemented by measures to safeguard revenues, including further reducing deductions and exemptions.
- Labor market and structural reforms:
  - Reforms to reduce the fragmentation of the labor market are key to supporting higher, more inclusive growth.
  - Vulnerable groups—especially non-EU immigrants, the young, and the low-skilled—remain largely excluded from the labor market.
  - Regional disparities in competitiveness and unemployment persist, and labor supply-demand mismatches are widespread.
  - Recommended actions: address educational gaps, improve the quality of training and lifelong learning, reduce barriers to mobility, and better link wages with productivity to improve resource allocation and competitiveness.
- Business environment:
  - Unlocking growth potential requires removing bottlenecks to business growth: increase business dynamism, develop entrepreneurial culture, promote equity financing, streamline and harmonize regulations, increase investment in infrastructure including in energy, improve the efficiency of R&D spending, and strengthen competition in services and regulated professions.
- Financial sector resilience and macroprudential policy:
  - The financial sector has become more resilient since the crisis, with banks bolstering capital and liquidity buffers.
  - Staff welcomes new macroprudential measures aimed at the housing market and encourages the authorities to stand ready to activate the countercyclical capital buffer to build up further resilience, should cyclical risks persist or intensify.
  - Supervisory and resolution authorities need to continue to enhance risk monitoring and ensure the feasibility and effectiveness of bank resolution strategies.

*Source: 1belea2019001 - Box 5. Is Belgium’s Corporate Debt a Source of Concern? (concluded).*

### 34.      It is proposed that the next Article IV consultation take place on the standard

### 34.      It is proposed that the next Article IV consultation take place on the standard

### Real economy
- Real GDP: 1.7 (2017), 1.4 (2018), 1.3 (2019), 1.4 (2020), 1.5 (2021), 1.5 (2022), 1.5 (2023), 1.5 (2024)
- Domestic demand: 1.1, 0.7, 1.3, 1.5, 1.7, 1.7, 1.7, 1.7 (2017–24)
- Private consumption: 1.1, 0.8, 1.4, 1.5, 1.7, 1.6, 1.6, 1.6 (2017–24)
- Public consumption: 0.6, 0.7, 0.9, 1.0, 1.0, 1.0, 1.0, 1.0 (2017–24)
- Gross fixed investment: 1.8, 1.8, 1.5, 2.0, 2.4, 2.7, 2.7, 2.7 (2017–24)
- Stockbuilding (contribution to GDP growth): 0.0, -0.3, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 (2017–24)
- Foreign balance (contribution to GDP growth): 0.6, 0.8, 0.0, -0.1, -0.2, -0.2, -0.2, -0.2 (2017–24)
- Exports, goods and services: 5.0, 3.3, 2.8, 2.9, 2.8, 2.6, 2.4, 2.5 (2017–24)
- Imports, goods and services: 4.3, 2.5, 2.9, 3.1, 3.1, 2.9, 2.7, 2.8 (2017–24)
- Household saving ratio: 11.5 (2017), 11.4 (2018), 12.0, 12.0, 12.0, 12.2, 12.3, 12.3 (2019–24)
- Potential output growth: 1.2, 1.3, 1.4, 1.4, 1.5, 1.5, 1.5, 1.5 (2017–24)
- Potential output growth per working age person: 1.6, 1.1, 1.3, 1.3, 1.4, 1.5, 1.5, 1.5 (2017–24)
- Output gap (in percent): 0.1, 0.2, 0.2, 0.1, 0.1, 0.1, 0.1, 0.1 (2017–24)

### Employment and prices
- Unemployment rate (in percent): 7.1 (2017), 5.9 (2018), 5.9, 5.9, 5.9, 5.9, 5.9, 5.9 (2019–24)
- Employment growth: 1.4, 1.6, 1.0, 0.7, 0.5, 0.5, 0.5, 0.5 (2017–24)
- Consumer prices (HICP): 2.2, 2.3, 1.9, 1.5, 1.8, 1.9, 2.0, 2.0 (2017–24)
- GDP deflator: 1.7, 1.3, 1.8, 1.6, 1.7, 1.8, 1.9, 1.8 (2017–24)

### Public finance (percent of GDP)
- Revenue: 51.3 (2017), 51.3 (2018), 50.7 (2019), 50.4 (2020), 50.4 (2021), 50.4 (2022), 50.4 (2023), 50.4 (2024)
- Expenditure: 52.2, 52.1, 51.9, 51.8, 51.8, 51.8, 51.8, 51.9 (2017–24)
- General government balance: -0.9, -0.8, -1.2, -1.4, -1.4, -1.4, -1.5, -1.6 (2017–24)
- Structural balance: -1.4, -1.6, -1.4, -1.5, -1.5, -1.5, -1.5, -1.6 (2017–24)
- Structural primary balance: 1.1, 0.7, 0.7, 0.5, 0.4, 0.4, 0.4, 0.3 (2017–24)
- Primary balance: 1.6, 1.5, 0.9, 0.6, 0.5, 0.5, 0.4, 0.4 (2017–24)
- General government debt: 103.4 (2017), 101.0 (2018), 99.2 (2019), 97.7 (2020), 96.0 (2021), 94.4 (2022), 92.7 (2023), 90.7 (2024)

### Balance of payments (percent of GDP)
- Current account: 0.7 (2017), 0.4 (2018), 0.3 (2019), 0.6 (2020), 0.6 (2021), 0.6 (2022), 0.5 (2023), 0.5 (2024)
- Goods and services balance: 1.0, 0.9, 0.8, 1.1, 1.1, 1.1, 1.0, 1.0 (2017–24)
- Exports of goods and services: 85.6, 87.9, 88.1, 87.6, 87.3, 86.6, 85.9, 85.2 (2017–24)
- Imports of goods and services: -84.6, -87.0, -87.3, -86.5, -86.2, -85.5, -84.9, -84.2 (2017–24)
- Income, net: 1.2, 1.2, 1.2, 1.2, 1.3, 1.3, 1.4, 1.4 (2017–24)
- Current transfers, net: -1.5, -1.7, -1.7, -1.8, -1.8, -1.8, -1.9, -1.9 (2017–24)
- Balance on financial account: -0.9 (2017), 0.5 (2018), 0.4 (2019), 0.7 (2020), 0.7 (2021), 0.6 (2022), 0.6 (2023), 0.6 (2024)
- Direct investment, net: 6.1, 6.3, 6.5, 6.5, 6.7, 6.9, 7.1, 7.3, 7.5 (series across years as reported)

### General government operations (selected items, percent of GDP)
- Taxes: 30.3 (2015), 30.0 (2016), 30.7 (2017), 30.7 (2018), 30.7 (2019), 29.8 (2020–24)
  - Personal income tax: 12.9, 12.4, 12.4, 12.2, 12.1, 12.0 (2015–24)
  - Corporate income tax: 3.4, 3.5, 4.2, 4.4, 3.9, 3.7 (2015–24)
  - VAT: 6.7, 6.8, 6.8, 6.8, 6.8, 6.8 (2015–24)
- Social contributions: 16.5 (2015), 15.9 (2016), 15.8 (2017–24)
  - Actual social contributions: 14.3, 13.7, 13.6, 13.6, 13.6, 13.6 (2015–20)
  - Imputed social contributions: 2.2 (consistent)
- Expenditure composition highlights:
  - Compensation of employees: 12.4 (2015), 12.3 (2016), 12.3 (2017), 12.2 (2018–24)
  - Interest: 3.0 (2015), 2.8 (2016), 2.5 (2017), 2.3 (2018), 2.1 (2019), 2.0 (2020), 1.9 (2021–24)
  - Social benefits: 25.2 (2015), 25.1 (2016), 25.0 (2017), 25.0 (2018), 25.0 (2019), 25.2 (2020), 25.4 (2021), 25.5 (2022), 25.5 (2023), 25.6 (2024)
- Gross operating balance: 1.1 (2015), 0.8 (2016), 2.3 (2017), 2.5 (2018), 2.1 (2019), 1.9 (2020), 1.9 (2021), 2.0 (2022), 1.9 (2023), 1.8 (2024)
- Net lending/borrowing: -2.5 (2015), -2.4 (2016), -0.9 (2017), -0.8 (2018), -1.2 (2019), -1.4 (2020–22), -1.5 (2023), -1.6 (2024)
- Gross government debt: 106.5 (2015), 106.1 (2016), 103.4 (2017), 101.0 (2018), 99.2 (2019), 97.7 (2020), 96.0 (2021), 94.4 (2022), 92.7 (2023), 90.7 (2024)

### Financial soundness indicators (banking sector, selected items)
- Return on assets: 0.5 (2010), 0.0 (2011), 0.1 (2012), 0.3 (2013), 0.5 (2014), 0.6 (2015–18)
- Return on equity: 10.7 (2010), 0.7 (2011), 3.0 (2012), 5.9 (2013), 7.7 (2014), 10.1 (2015), 9.1 (2016), 8.7 (2017), 8.1 (2018Q2)
- Net interest income to total income: 68.3, 71.2, 71.6, 62.6, 70.2, 67.7, 66.0, 61.2, 63.3 (series across years)
- Interest margin: 1.2, 1.2, 1.3, 1.2, 1.6, 1.8, 1.8, 1.9, 1.9 (2010–2018Q2)
- Average cost of funding: 1.6, 1.7, 1.7, 1.4, 1.1, 0.8, 0.6, 0.5, 0.5 (2010–2018Q2)
- Cost/income ratio: 66.0, 67.3, 73.4, 62.4, 61.2, 58.6, 58.4, 58.2, 65.6 (2010–2018Q2)
- Total assets (in percent of GDP): 323.2 (2010), 310.2 (2011), 278.7 (2012), 251.0 (2013), 249.0 (2014), 236.5 (2015), 266.1 (2016), 227.3 (2017), 235.6 (2018)
- Loans to customers (percent of total assets): 44.0, 44.4, 48.1, 53.9, 54.1, 56.4, 55.4, 59.4, 59.0 (2010–2018)
- Mortgage loans (in billions euros): 178.5 (2010), 183.9 (2011), 188.3 (2012), 190.8 (2013), 202.4 (2014), 216.1 (2015), 229.7 (2016), 227.4 (2017), 235.0 (2018)
- Customer deposits (percent of total assets): 46.0, 46.5, 49.3, 54.7, 58.5, 61.0, 58.4, 62.2, 61.5 (2010–2018)
- Liquid assets: 32.5, 34.3, 36.4, 36.8, 32.8, 32.2, 32.5, 31.7, 32.2 (2010–2018)
- Non-performing loans (NPL) as percent of gross loans: 2.8 (2010), 3.2 (2011), 3.2 (2012), 3.1 (2013), 2.7 (2014), 2.6 (2015), 2.4 (2016), 2.1 (2017), 1.9 (2018)
- Provisions and write-offs as percent of NPL: 53.0, 49.4, 53.0, 54.1, 57.1, 54.3, 55.7, 57.2, 60.4 (2010–2018)
- Regulatory capital to risk-weighted assets: 19.3, 18.5, 18.1, 18.7, 17.3, 18.7, 18.8, 19.0, 18.4 (2010–2018)
- Regulatory Tier 1 capital to risk-weighted assets: 15.5, 15.1, 15.8, 16.4, 15.1, 16.0, 16.2, 17.0, 16.3 (2010–2018)

### Main recommendations from the 2017 FSAP mission (Table 6) — selected entries, timing, and status
- Systemic risk analysis: Enhance the risk analytical framework by: (i) incorporating bank stress testing; (ii) extending horizon of insurance stress tests; (iii) intensifying monitoring of insurers’ mortgage loan portfolios; (iv) further develop shadow banking monitoring framework; (v) enhance coverage and quality of commercial real estate data. (NBB) — Timing: ST
  - Status (selected actions): (i) NBB initiated review of credit risk and net interest income satellite models. (ii) EIOPA to begin work in 2019 on formalizing methodologies for insurance stress tests. (iii) New reporting methodology launched to capture micro- and macroprudential risks of residential mortgage lending by Belgian insurers. (iv) October 2018 update of joint NBB-FSMA report on asset management and shadow banking; new Belgian reporting requirements for certain public investment funds entered into force. (v) Work ongoing including to comply with ESRB recommendation on closing data gaps in real estate.
- Prudential policy, supervision, and oversight: Approve promptly the new macroprudential measure proposed by the NBB and enhance NBB’s ability to implement cyclical macroprudential tools. (MoF) — Timing: ST
  - Status: New macroprudential measure enacted by royal decree in May 2018, applicable for two years; NBB plans to intensify informal communication with the Ministry of Finance.
- Strengthen bank supervision: (i) ensure reliability and consistency of internal models; (ii) proactively assess loan classifications to ensure prudent provisioning. (NBB/SSM) — Timing: C (continuous)
  - Status: TRIM expected completed by 2019; NBB Governance Manual amended in October 2018; NBB ready to implement ECB and EBA guidance once finalized in 2019; draft modification of the Banking Law submitted to require banks to take account of total indebtedness of entities.
- Insurers: Address increasing liquidity risk; analyze reinsurance growth; improve quality of insurers’ capital. (NBB) — Timing: ST
  - Status: Draft article to allow NBB to forbid lapses in case of run; increased budget and 8 additional staff for insurance supervision; analysis concluded no Belgian insurers with high reliance on low-capital instruments.
- Financial conglomerates (FC): Set supervisory expectations for FC governance and risk management; enhance monitoring of intra-group transactions and regulatory arbitrage. (NBB/SSM) — Timing: ST
  - Status: NBB asked ECB to set expectations; draft technical standards on reporting intra-group transactions and risk concentration submitted to EBA, EIOPA, and ESMA.
- SWIFT oversight: Complement moral suasion with regulatory/supervisory powers; broaden SWIFT Oversight Forum membership; improve information sharing. (NBB) — Timing: ST
  - Status: NBB submitted options to G10 SWIFT oversight group; central banks of Argentina, Brazil, Indonesia, Mexico and Spain invited to join SWIFT Oversight Forum; initiatives to increase reporting, sessions, and international participation undertaken.
- Resolution planning and DIS: Ensure feasibility of resolution strategies for banking groups with systemically important subsidiaries; prioritize resolution planning for two LSIs with highest share of insured deposits. (NBB) — Timing: MT
  - Status: Preparatory work launched November 2018 on service level agreement; modifications to ELA framework and service level agreement in April 2018; draft provisions to amend Banking Law prepared to eliminate or expedite ex ante judicial review of resolution measures.
- Deposit Insurance Scheme (DIS): Publicly commit to seven-day pay-out by 2019; establish credit lines with MoF; segregate Guarantee Fund from government funds. (MoF) — Timing: ST
  - Status: Authorities working on new DGS law and revisiting 2009 royal decree to allow faster information flows; Guarantee Fund developing manual for on-time credit line, manual to be finalized end-February 2019; no legislative steps yet to segregate Guarantee Fund pending EU clarification.
- AML/CFT: Ensure adequate transparency of beneficial ownership of legal persons and arrangements. (MoF) — Timing: MT
  - Status: Regulations adopted July 2018 require legal entities incorporated in Belgium and trustees of foreign legal arrangements administered in Belgium to submit beneficial ownership information to a centralized publicly accessible register by March 31, 2019, and to update within one month of change.

### Macroeconomic context (highlights from figures)
- Recovery characterized by strong job creation; investment the key driver of growth while net exports turned negative.
- Output gap has closed; business confidence deteriorated in 2018.
- Annual HICP inflation above 2 percent driven by food and energy; core inflation subdued.
- Current account close to balance; NIIP remains strong.

### Fiscal context (highlights from figures)
- Structural balance has not returned to pre-crisis levels even as output gap closed.
- Fiscal deficit narrowed but remains higher than euro area average.
- Government spending among highest in Europe despite low levels of investment.
- Tax shift reform exerted downward pressure on revenues.
- Public debt is the fifth highest in the euro area.

### Labor market developments (highlights from figures)
- Unemployment at lowest level in four decades; employment at new highs.
- Labor force participation among lowest in euro area.
- Job vacancy rate and unit labor costs rising; older workers’ employment improved while youth employment remains low.
- Significant regional disparities in unemployment.

### Housing market and household debt (highlights from figures)
- Housing price-to-rent and price-to-income ratios at historically high levels.
- Some valuation models indicate only modest overvaluation.
- Mortgage lending driving up household debt, but large financial assets mitigate associated risks.
- Household debt as share of gross disposable income relatively low compared to some peers.

### Structural obstacles to growth (highlights from figures)
- TFP growth lags EU average.
- Skill mismatches: many job seekers lack requisite skills; weak educational outcomes.
- R&D expenditures broadly in line with peers.
- Infrastructure quality weaker than neighboring countries.
- Most sectors more heavily regulated than OECD average; Doing Business indicators show weaknesses in electricity supply and registration of property.

*Sources: Haver Analytics, Belgian authorities, National Bank of Belgium, ECB, Eurostat, IMF staff projections and calculations.*

### Annex I. Main Recommendations of the 2018 Article IV

### Annex I. Main Recommendations of the 2018 Article IV Consultation and Authorities’ Response

### Fiscal policy
- Fund recommendation: Continue to pursue gradual fiscal consolidation based on deeper reforms to make public spending more efficient.
- Authorities’ response / policy actions and context:
  - The fiscal deficit is estimated to have narrowed further in 2018, although this is in large part due to temporary factors (e.g. advanced payments).
  - Plans to reach structural balance by 2020 have been postponed.
  - Create space for more public investment. While the authorities have developed a Strategic Investment Pact, reforms to finance it have not yet been identified.
  - Complement CIT reform with additional measures to safeguard revenues and promote economic efficiency. No significant revenue measures have been introduced since the CIT reform.

### Structural reforms
- Fund recommendations:
  - Step up efforts to upgrade infrastructure, particularly transport and energy.
  - Enhance competition in services by lowering regulatory barriers.
  - Integrate vulnerable groups into the labor market by addressing educational gaps, improving training, and reducing barriers to mobility.
  - The wage-setting process should reflect productivity developments as well as local and sectoral labor market conditions.
- Authorities’ response / policy actions:
  - The government has announced a plan to scale up investment over the next decade, including in infrastructure.
  - Efforts have focused on supporting the financing and ecosystem for start-ups and high-growth firms.
  - The planned job deal includes various tax advantages for unemployed people pursuing training for professions experiencing labor shortages; its legislation and implementation remain uncertain.
  - The planned jobs deal also calls on the government and social partners to examine the implications of linking salary scales to productivity and skills rather than to seniority.

### Financial sector
- Fund recommendation: Stand ready to tighten macroprudential policy if balance sheet risks grow significantly.
- Authorities’ response: The NBB introduced a new macroprudential measure targeting riskier mortgage loan portfolios.

### Foreign asset and liability position and trajectory (overall assessment and key statistics)
- Background and key figures:
  - Net international investment position (NIIP) remains strong at 51 percent of GDP as of 2018:Q3 compared to 51 percent a year earlier.
  - Gross foreign assets: 461 percent of GDP.
  - Gross foreign assets of the banking sector: 78 percent of GDP (down considerably from the pre-crisis peak).
  - External public debt: 63 percent of GDP as of 2018:Q3, predominantly denominated in euros.
  - Target 2 balances: -€12.2 billion (-2.7 percent of GDP) as of 2018:Q3.
- Assessment and outlook:
  - Large gross international asset and liability positions are inflated by corporate treasury units, without creating macro-relevant mismatches.
  - Remaining asset-side risks mostly relate to financial sector claims; liability-side risks relate to external public debt.
  - Based on projected current account and growth paths, the NIIP to GDP ratio is expected to decline gradually going forward.
  - The strongly positive NIIP and its trajectory do not raise sustainability concerns.
- Overall assessment summary:
  - The external position in 2018 was moderately weaker than medium-term fundamentals and desirable policy settings would imply.
  - Recent measures to improve competitiveness, together with an improving investment income balance, should support the external position over the medium term.
  - The strong NIIP mitigates vulnerabilities associated with the high external public debt.
- Potential policy responses:
  - Steady fiscal consolidation, reductions in labor taxes, and wage moderation.
  - Productivity-enhancing structural reforms, especially to address severe labor market fragmentation.

### Current account
- Background and key figures:
  - Since the global financial crisis, the current account averaged -0.3 percent of GDP over 2009–2017.
  - 2017 current account: surplus of 0.7 percent of GDP.
  - 2018 estimated current account: 0.4 percent of GDP.
  - The current account is projected to remain slightly positive over the medium term, supported by an improving investment income balance as monetary conditions normalize.
- Assessment (EBA and staff estimates for 2018):
  - Actual CA: 0.4
  - Cycl. Adj. CA: 0.5
  - EBA CA Norm: 2.4
  - EBA CA gap: -2.0
  - Staff Adj.: 0.0
  - Staff CA gap: -2.0
- Interpretation: Preliminary EBA model estimates yield a CA gap of -2.0 percent of GDP for 2018; staff estimates a CA gap of -2.0 percent of GDP, within staff’s range of between -3 to -1 percent of GDP.

### Real exchange rate (REER)
- Historical and 2018 movements:
  - The REER (both ULC- and CPI-based) appreciated by nearly 20 percent between 2000–09.
  - Wage moderation contributed to an 8 percent depreciation of both the ULC- and CPI-based REER in 2014–15, which has since been reversed.
  - In 2018, the ULC-based REER appreciated by 1.0 percent and the CPI-based REER appreciated by 2.0 percent relative to the 2017 average.
- Valuation assessments:
  - Preliminary EBA model estimates point to an REER overvaluation of between 12 and 21 percent, based on the CPI-based REER index and level models; the REER overvaluation resulting from the EBA CA gap model is 3 percent.
  - Staff’s assessment is an overvaluation in the range of 2½ to 7 percent, using an elasticity of 0.42.

### Capital and financial accounts; FX intervention and reserves
- Capital and financial flows:
  - Gross financial outflows and inflows were on an upward trend pre-crisis as banks expanded cross-border operations; since the crisis, these flows have shrunk and become more volatile as banks deleveraged.
  - Short-term external debt accounted for 28 percent of gross external debt as of 2018:Q3.
  - The capital account is open.
  - Assessment: Belgium remains exposed to financial market risks, but the structure of financial flows does not point to specific vulnerabilities; strong NIIP reduces vulnerabilities associated with high public debt.
- FX intervention and reserves:
  - Background: the euro has the status of a global reserve currency.
  - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating.

### Risk Assessment Matrix — principal risks, likelihood, impact, and policy responses
- Medium likelihood — Structurally weak growth in key advanced economies due to low productivity growth, failure to fully address crisis legacies and undertake structural reforms, and persistently low inflation.
  - Impact if realized: High — Weak growth in partner countries would negatively impact Belgian exports and discourage export-related investment; protracted shortfall could lower potential growth, raise structural unemployment, and complicate fiscal adjustment.
  - Policy response: Implement reforms to improve productivity and raise potential growth.
- High likelihood — Policy and geopolitical uncertainties (e.g., a no-deal Brexit, spreading protectionism, retreat from multilateralism, political tensions in Europe).
  - Impact if realized: High — Loss in external demand and more difficult fiscal and structural reform environment.
  - Policy response: Gradual fiscal adjustment to reduce public debt; pursue complementary reforms in product markets and reduce regulatory burden.
- High likelihood — Tighter global financial conditions due to continued monetary policy normalization, changes in global risk appetite, and policy uncertainty in some parts of Europe.
  - Impact if realized: Medium — Limited exposure of domestic banks to global risks; sovereign-bank nexus gradually unwinding; effects mainly indirect through spillovers; stress elsewhere in Europe could have spillovers.
  - Policy response: Euro area monetary policy as first line of defense, supported by activation of backstops and resolution mechanism.
- High likelihood — Political uncertainty related to the 2019 federal elections.
  - Impact if realized: High — Reforms could stall if election results are inconclusive and lead to a protracted delay in formation of a new government.
  - Policy response: Seek early consensus on priorities for the next government.
- Medium likelihood — Rapid and disruptive housing price correction.
  - Impact if realized: Medium — Direct impact on banks mitigated by higher capital buffers but could affect asset encumbrance and funding costs if coupled with an income shock.
  - Policy response: The NBB should stand ready to tighten macroprudential policy further.

### Annex IV — Analysis of Regional Wage and Productivity Differentials in Belgium: key findings and methodology
- Purpose and context:
  - Despite recent reforms, Belgium’s labor market remains rigid and fragmented with persistent disparities across regions and socio-economic groups and emerging labor shortages.
  - The annex examines whether the wage-setting mechanism limits flexibility needed for wages to adjust to regional productivity differentials, using firm-level econometric analysis.
- Wage-setting framework summary:
  - Collective bargaining conducted at three levels: national, industry, and firm, with a pyramidal basis (an agreement at one level cannot be less favorable than agreements at a higher level).
  - Negotiations occur every two years; national agreements set a floor on minimum wages and an upper bound on wage increases that may be negotiated at lower levels.
  - Industry Joint Committees set industry standards (minimum wages by category) within national parameters; firm-level agreements complement industry agreements but cannot be less favorable than industry agreements.
  - Key national mechanisms: automatic indexation to the health index and the “wage norm.”
    - Indexation: all gross wages automatically rise with consumer prices (health index).
    - Wage norm: sets an overall maximum margin for growth of nominal hourly labor costs based on expected increases in nominal labor costs in Germany, France, and the Netherlands, produced by the Central Economic Council (CCE).
    - Indexation was suspended during 2015–16 to correct accumulated deviations; in 2017 the wage norm law was amended to include (i) a factor to correct for wage gaps with trading partners and (ii) a safety margin to account for forecasting errors.
  - Belgium’s collective bargaining system is among the most centralized and coordinated in Europe.
- Regional competitiveness and productivity patterns:
  - Aggregate indicators show regional differences, with Wallonia lagging: ULC of Wallonia has grown faster relative to ULC of Flanders, especially since 2010; Brussels shows a similar but smaller pattern.
  - In Wallonia this appears mainly driven by lower labor productivity relative to Flanders.
  - Sectoral patterns: Brussels experienced slower labor productivity growth relative to Flanders in services (notably financial and insurance; real estate; professional, scientific and technical; administrative and support service activities); Wallonia lagged Flanders in construction and services; since 2011, Wallonia had slower labor productivity growth in manufacturing.
- Firm-level econometric approach:
  - Following Konings and Marcolin (2014) and Rycx et al. (2016), three equations estimated at firm level for value-added per worker, wage per worker, and the competitiveness gap (log ratio of value-added per employee to average wage per employee).
  - Main regressors: dummies for firm location (Flanders, Wallonia, Brussels), controls for sector (NACE Rev. 2), year dummies, firm age (years since incorporation), firm size (total sales), and stock of tangible assets per employee (Cap).
  - Data source: ORBIS database of Bureau van Dijk, compiled by IMF research department (Gal and Hijzen, 2016); sample covers active firms over 2002–2015 in industrial, construction, and services sectors (2015 distribution: 70 percent Flanders, 19 percent Wallonia, 11 percent Brussels).
- Empirical findings (2002–2015):
  - Productivity differentials:
    - Firms located in Brussels: estimated productivity premium of 10 percent relative to Flanders.
    - Firms located in Wallonia: estimated productivity discount of about 19 percent relative to Flanders.
  - Wage differentials:
    - Brussels: estimated wage premium of 9.6 percent relative to Flanders.
    - Wallonia: estimated wage discount of 8.8 percent relative to Flanders.
  - Competitiveness gap:
    - Wallonia exhibits a competitiveness gap of about 10 percent relative to Flanders (gap declines to about 6 percent for the sample of firms with at least 10 employees).
    - This gap appears driven by regional productivity differentials, particularly in the services sector.
- Sensitivity and caveats:
  - Excluding firms with total assets above the 75th percentile (largest firms) produces a productivity-wage gap of about 9 percent for Wallonia relative to Flanders, indicating results are not driven by larger firms (by total sales).
  - Results should be interpreted with caution due to data limitations: analyses do not control for composition effects (worker and job characteristics), and results could be sensitive to heterogeneity in cost of living across regions, which would amplify differences in real terms.

*Annex I. Main Recommendations of the 2018 Article IV Consultation and Authorities’ Response — IMF*

### 9.      A key question is whether the wage-setting framework contributes to regional

### 9. A key question is whether the wage-setting framework contributes to regional competitiveness gaps

### Methodology
- Approach: Methodology developed by Vamvakidis (2008) to assess the impact of collective bargaining system characteristics (e.g., coordination or centralization) on regional wage differentiation (dispersion) across countries.
- Sample: 196 regions covering 12 European countries for the period 2003–2015.
- Dependent variable: the difference between the average country and regional wage, divided by the average country wage (measured as the absolute value of 1 minus the ratio of the wage in a region with the national wage).
- Key explanatory variables:
  - Lagged regional labor productivity differential (measured like the regional wage differential).
  - Lagged regional unemployment differential (measured like the regional wage differential).
  - Lagged regional activity differential (measured like the regional wage differential).
  - OECD index of coordination of wage bargaining (same for all regions within a country).
  - OECD index of centralization of wage bargaining (same for all regions within a country).
  - Interaction terms between the OECD indices (coordination/centralization) and the productivity differential.
- Regions definition: Eurostat (NUTS2).
- Countries in sample: Belgium, Denmark, Germany, Spain, France, Italy, Netherlands, Austria, Portugal, Finland, Sweden and the UK.

### Empirical findings
- Productivity and wages:
  - Wage differentiation is positively associated with productivity differentials.
  - From Table IV.4 (Fixed-effects estimation, period 2003-2015, annual data; dependent variable: regional wage differentiation):
    - Lagged productivity differential coefficients: 0.285***, 0.279***, 0.263***, 0.255*** (standard errors: 0.078, 0.079, 0.081, 0.081 respectively).
    - Lagged activity rate differential coefficients: 0.081 and 0.080 (standard errors: 0.071 and 0.073).
    - Lagged unemployment differential coefficients: 0.000, 0.002, 0.001, 0.003 (standard errors: 0.007, 0.006, 0.007, 0.006).
- Role of bargaining coordination/centralization:
  - Index of coordination in wage bargaining coefficients: 0.004 and 0.003 (standard errors: 0.003 and 0.003).
  - Index of centralization in wage bargaining coefficients: 0.002 and 0.001 (standard errors: 0.005 and 0.005).
  - Interaction effects (Index * Productivity differential):
    - Index of coordination * Productivity differential: -0.049* and -0.047* (P-values indicate statistical significance at 10 percent).
    - Index of centralization * Productivity differential: -0.054 and -0.050 (significance indicated at 10 percent in at least one specification).
  - Interpretation: In countries with a high degree of coordination or centralization in their collective bargaining system, regional wages reflect productivity differentials to a smaller extent than otherwise.
- Model fit and sample details:
  - Number of observations: 2,315 (or 2,315 / 2,232 in alternative reported columns).
  - Number of regions: 196 (or 189 in alternative reported columns).
  - R-square reported: 0.55, 0.52, 0.48, 0.48 in different specifications.
  - Time dummies: YES in all reported specifications.
- Firm-level evidence (Belgium-specific):
  - OLS estimation in Table IV.3 shows region-specific value-added and wage differences:
    - Brussels relative to Flanders: Value added per worker coefficients around 0.101*** and 0.072***; Wage per worker coefficients around 0.096*** and 0.073***; Value added-wage gap small (e.g., 0.005, -0.002).
    - Wallonia relative to Flanders: Value added per worker negative coefficients around -0.188*** and -0.146***; Wage per worker negative coefficients around -0.088*** and -0.086***; Value added-wage gap negative and significant (e.g., -0.099***, -0.060***).
  - Sectoral breakdowns (Table 3):
    - Industry: Brussels positive and significant value-added and wage gaps (e.g., 0.196***, 0.153***); Wallonia negative and significant (e.g., -0.068***, -0.033***).
    - Manufacturing: Brussels positive and significant (e.g., 0.240***, 0.163***); Wallonia negative and significant (e.g., -0.055***, -0.022***).
    - Services: Brussels modest positive coefficients (e.g., 0.073***, 0.078***); Wallonia large negative coefficients (e.g., -0.244***, -0.122***).
  - Robust standard errors reported in italics. Significance levels: ***p-value<0.01, **p-value<0.05, *p-value<0.1.

### Conclusions (from the annex)
- Evidence points to the existence of regional competitiveness gaps, particularly in Wallonia.
- One possible explanation: the current wage-setting framework does not establish a formal link between wages and productivity trends.
- Cross-country empirical analysis suggests that more centralized bargaining systems could lead to less responsiveness of regional wages to productivity, which could:
  - Contribute to regional competitiveness gaps.
  - Lead to regional unemployment differentials.
  - Cause employment to adjust instead of wages, potentially increasing regional disparities over time.
- Additional factors exacerbating regional disparities: barriers to labor mobility (e.g., language), gaps in education and training for certain groups, and other disincentives for work exacerbated by regional differences in income.
- Potential aggregate consequences: depressed labor demand, inefficient allocation of resources, and depressed aggregate productivity and competitiveness.

### Policy recommendations and considerations
- Revisit the wage-setting framework to establish a formal link between wages and domestic productivity trends (current setting links wage growth to productivity developments of main trading partners).
- Authorities’ intention to better link wage developments to productivity is a step in the right direction and requires concrete proposals on implementation.
- Revisit the wage indexation mechanism to minimize or remove terms-of-trade effects (e.g., from increases in energy prices) on domestic competitiveness.
- Strengthen labor mobility, cross-regional training programs, and coordination of public employment services to:
  - Facilitate job matching.
  - Reduce regional unemployment disparities.
- In the medium and long term, assess changes needed in the education system to address new labor demands.

*International Monetary Fund — Annex content on regional wage-setting and competitiveness gaps (sample: 196 regions; 12 countries; 2003–2015).*

### Annex V. Debt Sustainability Analysis

### Annex V. Debt Sustainability Analysis

### Public debt outlook and key metrics
- Public debt sustainability risks remain high.
- Under the baseline scenario, the public debt-to-GDP ratio is projected to decline to 92.7 percent by 2023 under broadly unchanged policies and steady, but moderate, growth.
- Gross financing needs are estimated at 15 percent of GDP in 2019 and are expected to average around 14 percent over the medium term.
- At end-2017:
  - Public debt = €452 billion, or 103.0 percent of GDP.
  - Around 85 percent of the debt was owed by the federal government; the remainder by regions, communities, local authorities, social security, and other federal entities.
  - All federal debt was denominated in euros.
  - 9.7 percent of federal debt was short-term.
  - 10.7 percent of federal debt carried a variable interest rate.
  - Average weighted duration of federal debt = 9.3 years (up from 8.7 years at end-2016).
  - Average weighted interest rate of federal debt = 2.3 percent (down from 2.6 percent the previous year).
- At 87 percent of GDP in 2017, the external financing requirement was significantly above the upper threshold of early warning benchmarks.
- The share of debt held by foreigners = 52 percent of total.

### Baseline scenario and realism of projections
- Baseline narrative: the ratio of public debt to GDP declines gradually over the medium term under the assumption of continued primary surpluses, moderate growth, and low real interest rates.
- Macroeconomic assumptions:
  - Growth continues at about 1½ percent over the medium term, in line with potential growth, and the output gap remains closed.
  - Inflation rises to 2 percent by 2023.
- Fiscal assumptions:
  - The fiscal deficit widens to 1.2 percent in 2019 as revenues weaken.
  - The deficit widens to 1½ percent over the medium term under broadly unchanged policies.
  - The structural deficit stays at around 1½ percent.
  - The primary surplus narrows to ½ percent by 2023.
- Debt levels and gross financing needs:
  - Government gross debt peaked at 107.0 percent of GDP in 2014, declined gradually thereafter, and is projected to fall to 92.7 percent by 2023.
  - Gross financing needs average 14 percent of GDP over the medium term.
- Forecast realism:
  - Median forecast errors (2009–2017): real GDP growth = 0.11 percent; primary balance = -0.31 percent; inflation = 0.33 percent.

### Stress tests — scenarios and outcomes
- Overall: stress tests show sensitivity to a real GDP growth shock and a combined macro-fiscal shock; a financial sector contingent liability shock yields a large increase in debt.
- Growth shock:
  - Real GDP growth reduced by one standard deviation starting in 2018–19, i.e., 1.4 percentage points relative to baseline.
  - Assumed decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth).
  - Under this scenario, debt-to-GDP ratio increases to 104 percent of GDP in 2020 and declines thereafter.
- Interest rate shock:
  - Increase in interest rates by 511 basis points starting in 2019 (calibrated on historical high in 1995).
  - Debt-to-GDP ratio continues to decline but at a slower rate.
  - Gross financing needs are 2½ percentage points of GDP higher in 2023 relative to baseline.
- Exchange rate shock:
  - Assumes 13 percent depreciation in the real exchange rate in 2019.
  - Results in small effects relative to the baseline.
- Primary balance shock:
  - Revenue shock and rise in interest rates leading to cumulative 1.2 percentage points of GDP deterioration in the primary balance in 2018–19 (one standard deviation).
  - Leads to a modest deterioration in the debt-to-GDP ratio relative to baseline.
- Combined macro-fiscal scenario:
  - Aggregates shocks to real growth, interest rate, exchange rate, and primary balance while avoiding double-counting.
  - Under this scenario, debt stands at 104 percent of GDP and gross financing needs equal 17 percent of GDP at the end of the projection period.
- Contingent liability shock:
  - Non-interest expenditures in 2019 increase by the equivalent of 10 percent of banking sector assets, and growth slows by 1 standard deviation for two years.
  - Debt increases to 122 percent of GDP before declining slowly.

### Composition, dynamics, and vulnerability indicators
- Figure V.1 baseline values (selected):
  - Nominal gross public debt: 2016 = 100.5; 2017 = 106.1; 2018 = 103.4; 2019 = 101.0; 2020 = 99.2; 2021 = 97.7; 2022 = 96.0; 2023 = 94.4; projected = 92.7.
  - Public gross financing needs: 2016 = 10.8; 2017 = 9.8; 2018 = 17.1; 2019 = 14.8; 2020 = 15.2; 2021 = 13.7; 2022 = 12.6; 2023 = 15.5; 2019 noted as 15.5 and 2023 noted as 13.0 in different table cells.
  - Real GDP growth (in percent): 2016 = 1.1; 2017 = 1.5; 2018 = 1.7; 2019 = 1.4; 2020 = 1.3; 2021 = 1.4; 2022 = 1.5; 2023 = 1.5.
  - Inflation (GDP deflator, in percent): 2016 = 1.5; 2017 = 1.8; 2018 = 1.7; 2019 = 1.3; 2020 = 1.8; 2021 = 1.6; 2022 = 1.7; 2023 = 1.8; 2023 also shown as 1.9 in parts of figure.
  - Effective interest rate (in percent): 2016 = 3.8; 2017 = 2.8; 2018 = 2.4; 2019 = 2.3; 2020 = 2.1; 2021 = 2.1; 2022 = 2.0; 2023 = 2.0; cumulative effective interest rate contributions and changes shown.
- Contributions to change in gross public sector debt (selected cumulative totals):
  - Change in gross public sector debt (cumulative) = -10.2 (percent of GDP).
  - Identified debt-creating flows (cumulative) = -8.5.
  - Primary deficit (cumulative) = -2.6.
  - Automatic debt dynamics (cumulative) = -5.9.
  - Real interest rate contribution (cumulative) = 2.3 (annual component in table).
  - Real GDP growth contribution (cumulative) = -8.2.
  - Residual, including asset changes (cumulative) = -1.8.
- Debt composition and scenarios (Figure V.2 highlights):
  - Alternative scenarios shown: Baseline, Historical, Constant Primary Balance.
  - By maturity: medium and long-term vs short-term composition by year.
  - By currency: local currency-denominated vs foreign currency-denominated composition by year.
  - Public gross financing needs charted (percent of GDP) with projections.
- Realism diagnostics (Figure V.3):
  - Belgium median forecast error, 2009–2017:
    - Real GDP growth forecast error = 0.11 (percent), percentile rank 77%.
    - Primary balance forecast error = -0.31 (percent of GDP), percentile rank 52%.
    - Inflation (deflator) forecast error = -0.33 (percent), percentile rank 50%.
  - 3-year CAPB adjustment percentile ranks:
    - 3-year CAPB adjustment has a percentile rank of 49%.
    - 3-year average level of CAPB has a percentile rank of 58%.

### Stress-test graphs and outcomes (summary of Figure V.4)
- Under the Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and Combined Shock, projected impacts on:
  - Gross nominal public debt (in percent of GDP) rise relative to baseline in adverse scenarios, reaching up to about 104 percent under some shocks and 122 percent under the contingent liability shock.
  - Public gross financing needs (in percent of GDP) increase under shocks, with combined scenarios and contingent liabilities pushing needs materially higher (e.g., 17 percent under combined macro-fiscal scenario).
- Scenario parameter examples listed in figure tables:
  - Real GDP growth paths and inflation paths under each shock.
  - Primary balance trajectories and effective interest rate trajectories under each shock.

### Risk assessment heat map and vulnerabilities
- Risks from the debt level are deemed high given the relevant threshold of 85 percent is breached under baseline and all stress test scenarios.
- Gross financing needs are below the benchmark of 20 percent of GDP in 2018 and decline slightly over the medium term.
- Belgium faces risks relating to:
  - External financing requirement (at 87 percent of GDP in 2017).
  - Large share of public debt held by foreigners (52 percent of total).
- Heat map indicators (selected thresholds and country values):
  - Debt burden benchmark = 85 percent (Belgium exceeds).
  - Bond spread (EMBIG) shown as 33 basis points in figure notes.
  - External financing requirement benchmarks: lower/upper early warning thresholds at 17 and 25 percent of GDP; Belgium’s value = 87 percent of GDP (noted as significantly above threshold).
  - Public debt held by non-residents thresholds: 30 and 45 percent; Belgium = 52 percent (above upper benchmark).

*Source: IMF staff.*

### 0.05 percent has to go to actions for youth.

### 1belea2019001 - 0.05 percent has to go to actions for youth.

### Youth employment and sectoral supplementary experience
- "0.05 percent has to go to actions for youth."
- Implemented September 1, 2015: Supplementary efforts at sectorial level for so called “ingrown” jobs for youth < 26 years without work-experience.
- Sectorial plans to offer supplementary job experience for youth in ingrown-jobs (total budget of €12 million), only accessible for sectors that have foreseen an effort of at least 0.05 percent (see previous line).
- 13 plans approved — implementation in 2015-2016. New series of plans approved for the period 2017-2018.
- July 2018: Launch of “coup de poing pénuries” in the Walloon Region — tailor-made training by FOREM or IFAPME and partly carried out in-company. Implemented.
- Measure “Incitant +” in the Walloon Region: aims to encourage job seekers to seek training in sectors where labor shortages exist; comprises a financial incentive for job seekers who successfully complete their training and line up a job interview. In draft law.
- “Formation-Insertion” plan: dual objective of enabling job seekers to develop competences while being employed with a fixed term contract and enabling companies to train future employees; underutilized due to administrative constraints despite high insertion rates. Proposed reform to make it more flexible and aligned with corporate needs. In draft law.

### Temporary unemployment, allowances, and penalties
- Government subsidy for temporary unemployment: Implemented January 1, 2012; strengthened April 1, 2016.
- Without employer penalty → Employers will pay a penalty if there is excess use of the system. Implemented and strengthened from 2016 on.
- January 1, 2015: Allowance for temporary unemployment is 70 percent of last salary → Reduced to 65 percent of salary. Implemented.
- January 1, 2012 / April 1, 2016: No limits on the use by employers of temporary unemployment → Stronger penalty in case of excessive use. Implemented.

### Time-credit, career break, and related subsidies
- Government subsidy for time-credit and career break system: series of changes with multiple dates of implementation (January 1, 2012; September 1, 2012; January 1, 2015; April 1, 2017).
- 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 years old).
- 2015: Removal of the rights to benefits for one-year non-motivated break. Implemented.
- Rights to a one-year non-motivated break are maintained, but without any payment. For childcare, one supplementary year of break with benefits. Implemented.
- 2017: Abrogation of the rights to a one-year non-motivated break. Credit for studies prolonged from 36 to 48 months. Draft law approved November 2018.
- 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). All exceptions beyond the age of 60 are abrogated. Implemented; implemented with some exceptions (age limit 55) for long periods of night- and shiftwork; Draft royal decree approved by the government in November 2018.
- January 1, 2012: 72-month duration in public sector → 60-month duration in public sector. Implemented.
- Progressive harmonization of career break in the public sector with time credit in the private sector (full harmonization by 2020). Planned by the government. Draft law submitted to social dialogue end-2017.
- September 2, 2016: Since the 6th state reform, career break system in the public sector devolved to regions. In Flanders, career break for public sector workers over 55 abolished and replaced by system based on care motives: eligible for 18 months full-time leave, 36 months halftime, or 90 months of 1/5th working time reduction. Implemented.

### Pension benefits and reforms
- Supplementary pensions: Law of February 18, 2018 — possibility of installing a supplementary pension (second pillar) available to self-employed workers who are not company managers. Implemented.
- 2018: Employees will have the opportunity to voluntarily invest in a supplementary pension in the second pillar through payroll deductions made by the employer. Submitted to Parliament.
- Pre-pension benefits (renamed to “unemployment benefits with employer top-up”):
  - January 1, 2012 / January 1, 2015: Minimum age and career length: 60/30 (men) 60/26 (women) → 2012/13: 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). Implemented.
  - 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). Implemented.
  - January 1, 2015: Or: 58/35 for heavy jobs → 58/35 for heavy jobs. Minimum age 58 for new entrants in case of hardship jobs (60 on a date to be fixed by the National Labor Council). Special schemes 56/33 become 58/33 (60 on a date to be fixed by the National Labor Council). Implemented – transitional period 2015–2017 with possibility to maintain 60 instead of 62.
- SPF Pensions: Pre-pension years count fully towards pension rights at the last wage level → Pre-pension years below the age of 60 do not count towards pension rights at last wage level but on a lower fictive level. Implemented.
- January 1, 2016 and January 1, 2017: Reduced social security contributions on employer’s top-up payment → Employer social security contributions will be higher and linked to age of worker entering pre-pension. Implemented.
- January 1, 2015: 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 59 in 2019 and 60 in 2020. Implemented.
- January 1, 2016: Top-up from the employer is submitted to taxation → No taxation during periods of work by another employer. Implemented.
- Part-time pre-pension system: No new entries from 2012. Implemented.
- Government subsidy for working time reduction to part time (time-credit with unlimited duration):
  - January 1, 2012: Minimum age 50 → 2013: Minimum age 55 (with exceptions for physically demanding jobs). Implemented.
  - January 1, 2015: 2015: Minimum age 60 (with exceptions for physically demanding jobs). Only for the benefits (not the rights). Planned by the new government. All exceptions beyond the age of 60 are abrogated. Draft royal decree approved by the government in November 2018.
- Statutory early retirement benefit:
  - 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 2015. Exceptions for long career: 61/41 or 60/42 in 2016. Implemented. Program Act of December 19, 2014.
  - From 2015 onwards: 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 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). Implemented. Program Act of December 19, 2014.
- Pension bonus: introduced previously then phased out. Only people who met conditions for early retirement by December 31, 2014 or were 65 years old and had a career of 40 before December 31, 2014 were still eligible. Implemented. Law of April 28, 2015.
- Diploma bonus for career condition early retirement: years spent to get a bachelor or a master’s degree required to become civil servants accounted for in career condition for early retirement. Diploma bonus being phased out since the start of 2016. Implemented.
- Law of October 2, 2017: Harmonization of the diploma bonus for the pension calculation — abolished from December 1, 2017; same system of paid regularization of the study period applicable to all pension regimes. Implemented.
- January 1, 2020: Introduction of “heavy jobs” in the pension system—will replace the so-called “tantièmes” in the civil servants’ scheme; preferential regimes for military and mobile personnel of the national railway company abolished; introduction of specific pension measures for “heavy jobs” (“zwaar werk”/”métier lourd” = particularly demanding and tough jobs). Will be applicable from January 1, 2020 onwards. Principles confirmed by the Council of Ministers on October 25, 2018.
- Employer obligations towards older workers: January 1, 2013 — Draw up a plan to retain older workers. Implemented by collective agreement n° 104.

### Social security contributions, wage subsidies, and hiring incentives
- Social security reductions and wage subsidies: phased reductions and extensions:
  - January 1, 2014; January 1, 2015; January 1, 2016; January 1, 2017: Reduction for small SME’s → 2014: First hiring in SMEs extended to 4 and 5; 2015: strengthening for first three; 2016: First hirings extended to 6+, strengthening for 1–5 hirings (complete exemption for 1st employee during unlimited period); 2017: further strengthening (period of advantage extended to 3 years for 4th to 6th employees). Fully implemented.
- July 1, 2016: Following the 6th state reform, reductions in social security contributions for target groups became a regional competence. In Flanders, reductions for youth, older workers, and the long-term unemployed were reformed into two major reductions: for hiring young workers (<25) without a higher education degree and with a low wage, and for older workers (55+), with a higher reduction when hiring older jobseekers. Policy expanded as of January 1, 2019. Young workers without a secondary education degree, and jobseekers over 55 who are hired, are exempt from employers’ social security contributions during the first two years of their employment. Implemented.

### Encouraging longer employment via pension system changes
- Law of August 10, 2015: Legal pension age of 65 is increased to 66 in 2025 and 67 in 2030. Implemented.
- Survivors’ pension changes: Previous rules for survivors’ pension for widow(er)s and transition allowance (12 months if no children, 24 months if children) with automatic access to unemployment benefit and guidance. Eligibility age of 45 increased gradually to 50 by 2025. Current government: as for 2025, the eligibility age of 50 will increase gradually by one year each year to reach 55 in 2030. Partially overturned by the Constitutional Court in November 2017.
- Royal decree of January 20, 2015: For pensioners aged 65 or more, ceiling on permitted earned incomes abolished for those with careers spanning more than 42 years. From 2015 onwards: no limits to income for pensioners who are 65 years old or have a career of 45 years. Implemented.
- January 1, 2019: Previously full valorization of assimilated periods in pension calculation at last wage earned (unemployment, unemployment with company top-up and time credit). From 2019 onwards, assimilated periods of the 2nd and 3rd period of unemployment as well as unemployment with company top-up, regardless of age, at pension minimum wage. Exceptions noted for unemployment after age 50 and specified company situations. Applicable from January 1, 2019 onwards.
- Royal decree of December 30, 2014: Unmotivated time credit is no longer taken into account for pension calculation from 2015 onwards, as an unemployment benefit is no longer granted for this type of time credit. Implemented.
- Law of December 5, 2017: From January 1, 2019 onwards: all days that are effectively worked will result in pension rights, even if they exceed the reference career of 14.040 days. Days of unemployment or pre-pension that exceed the reference career of 14.040 days will no longer result in supplementary pension rights. Implemented.
- July 1, 2019: Introduction of the partial pension — allows taking up a part of the pension rights while accumulating pension rights for the (partially) continued activity. Applicable from July 1, 2019, onwards.
- Law of December 18, 2015: Access to the second pillar pension adapted to be in line with the statutory retirement age: second pillar pension accessible only when conditions for legal pension are met. Implemented.
- Program Act of December 19, 2014: Measures to decrease pension expenditure, including changes to pension complements for frontier or seasonal workers as of 2015. Implemented.
- Royal decree of December 9, 2014: Minimum pension career condition — from 2015, at least 52 days in a year are required to obtain 1/45th of the minimum pension. Implemented.
- Law of March 30, 2018: (Mentioned; content context in source.)

*Source: 1belea2019001 - 0.05 percent has to go to actions for youth.*

### Introduction of the “mixed pension”: the periods during which

### Introduction of the “mixed pension”: the periods during which

### Pension legal and structural changes
- Introduction of the “mixed pension”: the periods during which a civil servant worked as an employee and not as a statutory member of the personnel will no longer be taken into account for the statutory pension but create a pension as employee.
- The legal framework for supplementary pensions will be adapted to encourage public administrations and companies to offer a supplementary pension scheme to their employees.
- The federal government will install a supplementary pension system, financed by sufficient contributions, for its employees.
- Status: Implemented (supplementary pension system installation noted as implemented in the source).

### Reform of the pension for physical incapacity
- The procedure for the pension for physical incapacity, which exists only in the public sector, will be adapted.
- Objective: act as a stimulus for the professional reintegration of the civil servant; reduce the current inactivity trap.
- Key procedural change: instead of deciding immediately about the pension for physical incapacity as is the case today, the civil servant cannot be declared inapt after the first examination.
- Timing rule: the second examination can take place only after a minimum interval of 2 years (exception in case of definitive incapacity after 36 years of career).
- Status: Draft law approved by the Council of Ministers.

### Structural reform: points-based pension system
- A points-based pension system will be implemented by 2030.
- Rationale: allow a closer and more transparent monitoring of the financial sustainability and equilibrium of the Belgian pension system.
- Status: Preparatory work continues.

### Labor market and macroeconomic context (relevant interactions with pension reform)
- 2018 macro outcomes: annualized growth rate of 1.4 percent and a 1.2 percent expansion of employment.
- Labor supply and participation:
  - 70percent of the Belgian population in the 20-64 age group is now at work.
  - This is 2 percentage points higher than at the start of the global financial crisis.
  - Over the past four years, the labor force has expanded by around 120,000 units, of which more than half is due to an increase in the participation rate.
- Unemployment:
  - Over the same period, the number of unemployed dropped by around 100,000 units.
  - Unemployment rate declined to 6 percent, the lowest level since the 1970s.
- Job creation: 220,000 jobs were created in Belgium during the last four years, and mainly in the business sector rather than in the public or state-aided sectors.
- Policy initiatives influencing labor supply and pensions:
  - Federal Parliament discussing the “Jobs Deal”; expected agreement in the coming weeks on measures including tighter eligibility requirements for early retirement schemes and incentives for job training.
  - Authorities emphasize extending the working life and activating job-seekers to support labor supply.

### Policy implications and priorities
- Pension measures aim to:
  - Clarify pension entitlements when employment status changes between statutory civil service and employee roles (mixed pension).
  - Encourage development of supplementary pensions via legal framework adaptation and a federally installed system with sufficient contributions.
  - Reduce incentives for inactivity by modifying the pension-for-physical-incapacity procedure and instituting a minimum 2-year interval before second examination (with specified exception).
  - Improve transparency and monitoring of fiscal sustainability via implementation of a points-based pension system by 2030.
- Complementary reforms and fiscal context:
  - Continued focus on increasing labor force participation to raise revenues over the medium term.
  - Need to free fiscal space for productive public investments given aging costs and to complete fiscal consolidation toward a structurally balanced budget.

*Prepared by European Department; 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.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1belea2019001.pdf_