## 1belea2020001

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### Context and political environment
- Belgium without a full-fledged government for more than a year following the fall of the Michel government coalition in December 2018 and the May 2019 election.
- Government formation in 2010–11 required 1½ years, illustrating risks of protracted formation.
- Coronavirus context as of early March 2020:
  - Belgium had over 300 cases as of March 12.
  - Main stock index had declined by about 23 percent since end-February.
- Policymaking paralysis since end-2018: budgets for 2019 and 2020 were not approved and key measures under the planned jobs deal were not implemented.

### Recent macroeconomic developments (selected indicators)
- Growth and labor market
  - Average growth revised to 1.7 percent over 2014–18.
  - Real GDP growth in 2019: 1.4 percent.
  - Unemployment in 2019: 5.4 percent (record-low).
  - Private-sector credit growth in 2019: 5.5 percent (average).
- Inflation
  - CPI in 2019: 1.2 percent.
  - Core inflation in 2019: 1.5 percent.
- Public finances and external position
  - Fiscal deficit: 2019 estimated at 1.7 percent of GDP (widened from 0.7 percent in 2018).
  - Primary driver: 1 percent of GDP fall in tax revenues.
  - Public debt: close to 100 percent of GDP.
  - Current account deficit in 2019: estimated at 1.2 percent of GDP.
  - EBA model current account norm for 2019: 2.4 percent of GDP; preliminary current account gap: 3.5 percent below the norm.
  - ULC-based REER appreciated by 2.7 percent since 2016; nominal effective exchange rate appreciated by 1.5 percent.
- Financial markets and confidence
  - Sovereign spreads remained low despite political uncertainty; past caretaker episode (2010–11) saw spreads widen sharply.
  - Household and business confidence indicators trended downward under gridlock.

### Outlook and risks
- Near-term projections
  - Growth expected to decline to 0.8 percent in 2020 due to the coronavirus outbreak.
  - The outbreak expected to shave off some 0.5 percent of growth in 2020.
  - Inflation projected at around 1.1 percent in 2020.
  - Baseline assumes normalization of the political situation during 2020.
- Medium-term projections
  - Potential growth: around 1.3 percent (medium run).
  - Output gap (percent of potential GDP): 2018: 0.4, 2019: 0.5, 2020: 0.1, 2021: 0.0, 2022–2025: 0.0.
  - Real GDP (percent): 2018: 1.5; 2019: 1.4; 2020: 0.8; 2021: 1.2; 2022: 1.3; 2023: 1.3; 2024: 1.3; 2025: 1.3.
- Key downside risks (Annex III)
  - More prolonged and disruptive effects of the coronavirus outbreak.
  - Weaker-than-expected global and European growth.
  - Trade tensions and uncertainty about Brexit.
  - Sharp rise in risk premia and further build-up of financial vulnerabilities.
  - Continued policy uncertainty and paralysis from delayed government formation.

### Authorities’ views
- Authorities expected near-term growth of 1.2–1.4 percent, driven by stronger domestic demand offsetting weaker external contribution.
- National Bank of Belgium (NBB) saw medium-run growth remaining below potential of 1.3 percent due to subdued investment and continued loss of export market share.
- Authorities noted preparations for a no-deal Brexit and monitoring of coronavirus risks.

### Short-term policy priority: coronavirus response
- Priority: contain spread and economic effects via targeted temporary fiscal and financial support measures.
- Measures already taken by caretaker and temporary authorities:
  - Facilitate access to temporary unemployment.
  - Redistribute and defer direct tax payments.
  - Provide financial support to the self-employed.
  - Suspend penalties for delays by suppliers of the public sector.
  - Fiscal envelope of €8–10 billion (about 2 percent of GDP) announced for measures and new health spending.
  - Further €50 billion (about 10 percent of GDP) for federal guarantees for new bank loans to companies and self-employed.
  - Regional governments: guarantees, compensation schemes, suspensions of energy bill payments for the unemployed.
  - On March 19, Lower House approved a 1 billion EUR additional expenditures package.
  - Financial sector agreement: 50 billion EUR (about 10% of GDP) guarantee scheme for new credit with maximum duration of 12 months, extended until end-September 2020 for viable businesses.
  - Financial sector agreed to accept deferred payments to September 30 on all loans to viable businesses.
  - NBB released the countercyclical capital buffer of 0.5 percent of banks’ risk weighted assets.
  - Additional fiscal measures: enhanced temporary unemployment access; deferred payments of PIT, CIT, withholding tax, VAT, and social security contributions; exemptions of social security contributions; replacement incomes for the self-employed; suspension of penalties for public contractors.

### Medium-term policy mix and recommendations
- Overarching message: political gridlock raises the cost of inaction; immediate containment of coronavirus is priority; a newly mandated government should implement comprehensive reforms for resilience and higher inclusive growth.
- Rebuild fiscal buffers and safeguard sustainability
  - Implement a credible, sustained, and growth-friendly medium-term consolidation strategy.
  - Contain aging costs, improve spending efficiency, and reorient budget toward growth-friendly areas.
- Achieve higher, more inclusive, sustainable growth
  - Increase participation in the labor market, especially for vulnerable groups.
  - Labor-market reforms: strengthen work incentives (including for women), foster mobility, improve flexibility.
  - Reduce red tape, boost competition in key sectors, support financing of innovative firms.
  - Implement a comprehensive and coordinated policy strategy in support of climate targets.
- Guard against broader financial sector risks
  - Monitor elevated private-sector leverage and be ready to use macroprudential policies.
  - Improve reporting, bank resolution, and deposit insurance frameworks.

### Medium-term consolidation strategy and illustrative numerical scenarios
- Suggested stance
  - Target a broadly neutral structural stance in 2020 (net of emergency temporary coronavirus measures).
  - Followed by an average annual structural adjustment of around 0.6 percent of GDP during 2021–24 to help attain the MTO by 2024 and put debt on a declining path.
- Fiscal effort requirements
  - Around 0.4 percent of GDP in 2020 to finance tax reductions and spending increases not related to the coronavirus emergency.
  - Around 0.6–0.7 percent of GDP per year in 2021–24 relative to the baseline.
- Baseline fiscal projections (Percent of GDP) — 2019 to 2025 (year-by-year)
  - Revenue: 50.3, 50.0, 49.8, 49.8, 49.8, 49.8, 49.8
  - Expenditure: 51.9, 52.3, 52.4, 52.3, 52.5, 52.8, 53.0
  - Fiscal balance: -1.7, -2.3, -2.5, -2.5, -2.7, -3.0, -3.1
  - Primary balance: 0.2, -0.6, -0.9, -1.2, -1.4, -1.7, -1.8
  - Structural balance: -2.0, -2.3, -2.5, -2.5, -2.7, -3.0, -3.1
  - Gross government debt: 99.0, 99.5, 99.6, 99.6, 99.6, 99.7, 100.0
- Recommended (illustrative, expenditure-based) scenario — 2019 to 2025 (year-by-year)
  - Revenue: 50.3, 50.0, 49.8, 49.8, 49.8, 49.8, 49.8
  - Expenditure: 51.9, 52.0, 51.4, 51.0, 50.5, 50.1, 50.1
  - Fiscal balance: -1.7, -2.0, -1.6, -1.1, -0.7, -0.3, -0.2
  - Primary balance: 0.2, -0.2, 0.0, 0.2, 0.6, 0.9, 1.0
  - Structural balance: -2.0, -1.9, -1.4, -0.9, -0.3, 0.0, 0.0
  - Fiscal effort (annual): ..., 0.4, 0.7, 0.5, 0.7, 0.6, ...
  - Gross government debt: 99.0, 99.3, 98.9, 97.8, 96.2, 94.0, 91.6

### Fiscal outlook and risks
- Baseline: public debt remains high at 100 percent of GDP over the medium run and is on a rising trajectory in the long run.
- Risks to the deficit could be higher given calls for hiking minimum pensions, lowering VAT rates for electricity, and potential overspending on regional investment programs without offsets.
- Aging-related fiscal pressure: aging-related costs projected to increase by 1.4 percent of GDP during 2025–35.
- Long-run projection assumptions: other primary spending and revenue components constant relative to GDP after 2025; real growth constant at 1.3 percent; inflation at 2 percent; effective interest rate converges to 4.3 percent by 2040.
- Debt sustainability highlights (Annex V)
  - At end-2018: public debt €460 billion = 100 percent of GDP.
  - Baseline: debt projected to increase to 100 percent by 2025.
  - Gross financing needs expected to be 14.7 percent of GDP in 2020 and average around 15 percent over the medium term.
  - Sensitivity to shocks: growth shock, combined macro-fiscal shock, contingent liability shock materially worsen debt dynamics.

### Stress-test scenarios and outcomes (selected)
- Growth shock: real GDP growth reduced by 0.7 percentage points in 2021–22 -> debt-to-GDP increases to 102.6 percent in 2022.
- Interest rate shock: increase by 562 basis points starting in 2021 -> debt-to-GDP reaches about 105 percent in 2025; gross financing needs 3 percentage points of GDP higher in 2025 relative to baseline.
- Combined macro-fiscal scenario: aggregates shocks -> debt at 108.5 percent of GDP and gross financing needs about 18 percent of GDP at end of projection period.
- Contingent liability shock (banking sector): non-interest expenditures in 2021 increase by equivalent of 10 percent of banking sector assets and growth slows by 1 standard deviation in 2021–22 -> debt increases to 122 percent of GDP in 2021 and to 125 percent in 2025.

### Spending reforms to support growth-friendly consolidation (priority areas)
- Health care
  - Near term: ensure adequate resources for coronavirus emergency.
  - Medium run: contain costs via binding spending ceilings, promote preventive healthcare, focus reimbursements on generic medicines.
- Pensions
  - Consider accelerating increase in effective retirement age (now 61.1 compared to OECD average of 64.6).
  - Link minimum retirement age to gains in life expectancy (e.g., sustainability factor).
  - Revisit mechanism for real increases in pension and other social benefits.
- Other social benefits
  - Near term: temporary targeted measures for coronavirus-affected individuals.
  - Medium term: improve targeting; reform unemployment (increase degressivity, limit duration, align replacement rates with peers); tighten sickness/disability controls; better target family benefits to support women’s participation.
- Subsidies
  - Improve efficiency, including for R&D where overlapping schemes reduce returns.
  - Revisit costly company-car scheme.
- Wage bill and public administration
  - Reduce fragmentation and duplication across levels of government; streamline civil service, particularly at subnational level.

### Tax reforms to reduce labor tax wedge (budget-neutral options)
- Broaden tax bases and reduce exemptions; harmonize VAT rates to reduce VAT expenditures.
- Measures to simplify capital taxation and restore neutrality:
  - Increase dividend withholding taxes.
  - Consider a personal capital gains tax or deemed-distribution tax.
  - Tax actual rental income net of expenses.
  - Reduce tax privileges for savings accounts and life insurance.
- Background: Tax expenditures were 6.3 percent of GDP in 2016.

### Raising potential output: labor market, productivity, and competition reforms
- Structural constraints
  - Low participation rates for young, old, low-skilled, non-EU born, and women.
  - Labor-productivity growth averaged around 0.9 percent.
  - Decline in TFP growth due to weak business dynamism, restrictions to competition, low public investment, and ineffective R&D spending.
- Recommended labor-market reforms (medium run)
  - Integrate vulnerable groups via active labor-market policies, training, and dual-learning programs.
  - Revamp parental leave and reduce tax disincentives for secondary earners to bolster female participation.
  - Strengthen incentives through unemployment-benefit reform (increase degressivity, limit duration, align replacement rates with peers).
  - Support mobility: improve public transport across regions; reduce real-estate regulatory and tax barriers (e.g., shift from transaction to recurrent property taxes).
  - Increase wage flexibility: align wages with productivity at firm level (including opt-outs and reduced weight of seniority); increase flexibility of collective dismissals.
- Product-market reforms
  - Reduce red tape for start-ups, ease regulatory restrictions in retail trade and professional services.
  - Support innovation by rationalizing R&D tax incentives and using the Belgian Growth Fund for venture funding.
  - Increase infrastructure investment as fiscal space permits.

### Climate-change mitigation and green transition
- Commitments and performance
  - Under 2015 Paris Agreement: reduce greenhouse gas emissions by 80–95 percent by 2050; new Green Deal could frontload reductions by 50 percent by 2030.
  - Emissions pricing: 37 percent of emissions priced via EU ETS; 63 percent not subject to explicit carbon price (concentrated in transport and buildings, followed by agriculture and others).
  - Environmental tax burden: 2¼ percent of GDP; environmental subsidies: 1.4 percent of GDP.
  - OECD carbon pricing-gap measure: Belgium’s gap is 65 percent (highest among peers).
- Policy options to accelerate transition
  - Feebates or regulations to incentivize emissions reductions.
  - Introduce carbon taxes equitably, using revenues to compensate vulnerable households and boost green investment.
  - Extend ETS coverage to more sectors (e.g., industry).

### Financial-sector stability: resilience, vulnerabilities, and policy actions
- Resilience
  - Bank capital adequacy ratio: 18.3 percent.
  - Post-crisis deleveraging, de-risking, reorientation to domestic market; capital and liquidity buffers bolstered.
- Credit, leverage, and housing vulnerabilities
  - Household debt: 61 percent of GDP and 105 percent of disposable income by end-September 2019.
  - NFC debt: around 120 percent of GDP consolidated, and 64 percent of GDP adjusting for intragroup loans.
  - Credit growth to firms: 5.1 percent in 2019 (down from 7.6 percent in 2018).
  - House-price valuations: ECB overvaluation estimate ~15 percent; NBB overvaluation 5.3 percent at end-2019:Q2.
  - Share of new mortgage loans with high LTV (>90 percent) and/or DSTI (>30 percent) has increased; new households accounted for 43 percent of new loans in H12019, of which almost half had LTV >90 percent.
  - Household financial assets close to 170 percent of GDP, but uneven distribution leaves new households vulnerable.
- Macroprudential and supervisory measures (selected)
  - 2018: implied risk weight of mortgage loans increased from 10 to 18 percent on average.
  - June 2019: NBB activated CCyB at 0.5 percent (banks allowed until July 2020 to comply); later fully released in response to coronavirus.
  - October 2019: supervisory expectations set limits on high-risk mortgage lending; NBB LTV thresholds for new loans: 80/90 percent for buy-to-let/owner-occupied; limit 5 percent for new loan volumes with high LTV and high DSTI or debt-to-income ratios (>50 and >9 percent).
  - Decision to release CCyB to free capital buffers amid coronavirus.
- Credit-cycle assessment (Box 3)
  - BIS/ECB measures imply a large negative credit gap (~-19 to -24 percent at end-September 2019).
  - NBB resident-bank credit measure yields positive credit gap 1.5 percent at end-September 2019.
  - IMF alternative estimates: MVF approach gap 1.1 percent (Sept. 2019); ECM approach gap 7.3 percent (2018).
- Staff recommendations for financial sector
  - Near term: contain coronavirus outbreak; consider temporary capital relief and prudent loan restructuring if banks face losses.
  - Medium term: rebuild resilience; stand ready to use macroprudential policies; revisit macroprudential decision-making framework (e.g., grant NBB power to implement cyclical macroprudential policies directly); complete reporting standards for intragroup transactions, risk concentration, and capital adequacy; ensure feasible bank-resolution strategies and sufficient MREL; legislate segregation of Guarantee Fund from government funds once new government formed.
  - Encourage banks to rationalize costs, strengthen governance, adapt business models for digitalization and prolonged low rates.

### Annex I: Main recommendations of the 2019 Article IV (highlights)
- Fiscal policy
  - Pursue gradual fiscal consolidation to attain the MTO based on spending-efficiency reforms and pension reform.
  - Authorities: federal budgets for 2019–20 not approved; budget deteriorated in 2019; no new efficiency-enhancing spending or pension reforms initiated; no new revenue measures adopted.
- Structural reforms
  - Enhance labor force participation and implement Jobs Deal reforms; better link wages to productivity; streamline regulations; increase infrastructure investment; improve R&D efficiency; strengthen competition in services.
  - Authorities: selective Jobs Deal measures adopted; unemployment benefit reform delayed; salary-system reform agenda agreed with social partners but not initiated; competition authority mandate strengthened; NPSI investment strategy being developed.
- External sector assessment
  - 2019 actual CA: –1.2 percent of GDP; EBA CA norm: 2.4 percent of GDP; EBA CA gap: –3.5 percent of GDP.
  - Staff CA gap range: between -4.5 to -2.5 percent of GDP.

### Risk Assessment Matrix (selected risks and policy responses)
- Weaker-than-expected global growth — Likelihood: High
  - Policy response: Build fiscal buffers; implement reforms to improve productivity; utilize fiscal space if shock materializes while maintaining medium-term consolidation credibility.
- Rising protectionism — Likelihood: High
  - Policy response: Boost competitiveness via labor and product market reforms.
- Sharp rise in risk premia — Likelihood: High/Medium
  - Policy response: Monitor risks closely; use macroprudential tools proactively; rely on euro area monetary policy and backstops.
- More severe Covid-19 pandemic — Likelihood: High
  - Policy response: Use fiscal space to contain immediate effects; design medium-term consolidation; encourage contingency planning by firms.
- Domestic political uncertainty — Likelihood: High
  - Policy response: Reignite reforms where possible; seek consensus on priorities for next government.

*Source: IMF staff summary of "1. Political Fragmentation and Policy Uncertainty" (Belgium) and excerpts from the IMF staff report for the 2020 Article IV Consultation (March 25, 2020).*

### 1. Political Fragmentation and Policy Uncertainty _________________________________________________ 5

### 1. Political Fragmentation and Policy Uncertainty

### Context
- Belgium has been without a full-fledged government for more than a year following the fall of the Michel government coalition in December 2018 and the May 2019 election, which widened the political divide between Flemish and Walloon regions.
- Government formation in 2010–11 required 1½ years, illustrating that protracted formation can occur and may have negative consequences for consumer and market confidence.
- The global coronavirus pandemic adds an urgent challenge: Belgium had over 300 cases as of March 12, and the main stock index had declined by about 23 percent since end-February.
- Policymaking has been virtually paralyzed since end-2018: budgets for 2019 and 2020 were not approved and key measures under the planned jobs deal were not implemented.

### Recent developments and macroeconomic context
- Growth and labor market
  - Belgium’s average growth was revised to 1.7 percent over 2014–18.
  - Real GDP growth in 2019: 1.4 percent.
  - Unemployment fell to a record-low of 5.4 percent in 2019.
  - Private-sector credit growth averaged 5.5 percent in 2019.
- Inflation
  - CPI in 2019: 1.2 percent.
  - Core inflation in 2019: 1.5 percent.
- Public finances and external position
  - Fiscal deficit widened to an estimated 1.7 percent of GDP in 2019 from 0.7 percent in 2018.
  - The primary driver was a 1 percent of GDP fall in tax revenues (lower PIT related to the tax-shift reform and a normalization in CIT receipts).
  - Public debt is close to 100 percent of GDP.
  - Current account deficit in 2019 is estimated at 1.2 percent of GDP.
  - External-balance assessment (EBA) model current account norm for 2019: 2.4 percent of GDP, implying a preliminary estimated current account gap of 3.5 percent below the norm.
  - Unit labor costs (ULCs) increased; ULC-based real effective exchange rate (REER) appreciated by 2.7 percent since 2016, while the nominal effective exchange rate appreciated by 1.5 percent.
- Financial markets and confidence
  - During the 2010–11 caretaker episode sovereign spreads widened sharply; in the current period spreads have remained at low levels but prolonged political uncertainty could put upward pressure on them.
  - Household and business confidence indicators have trended downward under the current gridlock.

### Outlook and risks
- Near-term growth
  - Growth is expected to decline to 0.8 percent in 2020 due to the coronavirus outbreak.
  - The outbreak is expected to shave off some 0.5 percent of growth in 2020.
  - Inflation is projected at around 1.1 percent in 2020.
  - Baseline assumes normalization of the political situation during 2020.
- Medium-term
  - Over the medium run, growth is projected to stabilize at potential of around 1.3 percent.
  - Potential growth decomposition indicates capital and labor contributions with total factor productivity expected to rebound modestly but contribute only modestly without additional structural reforms.
- Key downside risks (Annex III)
  - More prolonged and disruptive effects of the coronavirus outbreak.
  - Weaker-than-expected global and European growth.
  - Trade tensions and uncertainty about Brexit.
  - A sharp rise in risk premia and further build-up of financial vulnerabilities.
  - Continued policy uncertainty and paralysis from delayed government formation.

### Authorities’ views
- Authorities expected slightly higher near-term growth (1.2–1.4 percent) driven by somewhat stronger domestic demand offsetting weaker external contribution.
- The National Bank of Belgium (NBB) saw medium-run growth remaining below potential of 1.3 percent due to subdued investment and continued loss of export market share.
- Authorities noted preparations for a no-deal Brexit and monitoring of coronavirus risks.

### Policy discussions and recommendations
- Overarching message: political gridlock raises the cost of inaction; near-term priority is containing the coronavirus and its economic effects; a newly mandated government should implement comprehensive reforms to strengthen resilience and support higher, more inclusive growth.
- Near-term policy priority
  - Contain the spread and damaging effects of the coronavirus through targeted temporary fiscal and financial support measures.
- Medium-term policy mix
  - Rebuild fiscal buffers and safeguard sustainability:
    - Implement a credible, sustained, and growth-friendly medium-term consolidation strategy to put the deficit and debt on a firm downward path by containing aging costs, improving spending efficiency, and reorienting the budget toward growth-friendly areas.
  - Achieve higher, more inclusive, sustainable growth:
    - Additional reforms to increase participation in the labor market, especially for vulnerable groups.
    - Further labor-market reforms to strengthen work incentives (including for women), foster mobility, and improve flexibility.
    - Complementary reforms to reduce red tape, boost competition in key sectors, and support financing of innovative firms.
    - Implement a comprehensive and coordinated policy strategy in support of climate targets.
  - Guard against broader financial sector risks:
    - Continue close monitoring of elevated private-sector leverage and readiness to use macroprudential policies.
    - Continue efforts to improve reporting, bank resolution, and deposit insurance frameworks.

### Fiscal outlook (selected figures and projections)
- Fiscal outcomes and projections
  - Overall balance: 2018: 0.7 percent of GDP (implicit from text), 2019: estimated deficit 1.7 percent of GDP.
  - Fiscal deficit in 2020 is expected to reach 2.3 percent of GDP (on account of pre-legislated CIT and employers’ social contributions reductions and rising aging-related social spending).
  - The fiscal deficit is projected to widen to around 3 percent of GDP in the medium run.
  - By 2025 the deficit is expected to be just above 3 percent of GDP (relative to the MTO of balance), representing a structural deterioration of the overall and primary balances of 1.2 (percent of GDP) [sentence in source truncated].
- Growth projections from the staff table (Real GDP, percent)
  - 2018: 1.5
  - 2019: 1.4
  - 2020: 0.8
  - 2021: 1.2
  - 2022: 1.3
  - 2023: 1.3
  - 2024: 1.3
  - 2025: 1.3
- Selected projected components (percent change)
  - Private consumption: 2018: 1.5, 2019: 1.1, 2020: 1.0, 2021: 1.5, 2022: 1.6, 2023: 1.5, 2024: 1.5, 2025: 1.5
  - Gross fixed investment: 2018: 4.0, 2019: 3.1, 2020: 0.9, 2021: 2.0, 2022: 1.8, 2023: 2.3, 2024: 2.5, 2025: 1.8
  - Exports of goods and services: 2018: 1.2, 2019: 1.0, 2020: 1.6, 2021: 3.9, 2022: 3.9, 2023: 3.8, 2024: 3.5, 2025: 3.5
  - CPI (year average): 2018: 2.3, 2019: 1.2, 2020: 1.1, 2021: 1.2, 2022: 1.6, 2023: 1.8, 2024: 1.8, 2025: 1.8
  - Output gap (percent of potential GDP): 2018: 0.4, 2019: 0.5, 2020: 0.1, 2021: 0.0, 2022–2025: 0.0

*Source: IMF staff summary of "1. Political Fragmentation and Policy Uncertainty" (Belgium).*

### 1.8 percent of GDP, respectively. There are risks that the deficit could be even higher, given calls for

### 1belea2020001 - 1.8 percent of GDP, respectively. There are risks that the deficit could be even higher, given calls for

### Fiscal outlook and risks
- Baseline: public debt remains high at 100 percent of GDP over the medium run and is on a rising trajectory in the long run.
- Risks to the deficit could be higher given calls for hiking minimum pensions, lowering VAT rates for electricity, and potential overspending on regional investment programs without offsetting budgetary measures.
- Vulnerabilities: debt dynamics are currently supported by a negative interest-growth differential but are vulnerable to macro-fiscal or contingent liability shocks.
- Aging-related fiscal pressure: aging-related costs are projected to increase by 1.4 percent of GDP during 2025–35 (as in the 2018 EC Aging Report).
- Long-run projection assumptions (as stated): other primary spending and revenue components are constant relative to GDP after 2025; real growth is constant at 1.3 percent; inflation at 2 percent; and the effective interest rate converges gradually to its steady-state level of 4.3 percent by 2040.

### Short-term policy priority: coronavirus response
- Priority: contain damaging effects of the coronavirus through targeted temporary support measures.
- Measures already taken by caretaker authorities include:
  - facilitate access to temporary unemployment,
  - redistribute and defer direct tax payments,
  - provide financial support to the self-employed,
  - suspend penalties for delays by suppliers of the public sector.
- Recommended continuation: monitor closely and take further temporary measures as needed, including bolstering health system capacity and resources by making full use of the (recently increased) health envelope, and continue to support vulnerable groups and firms, while allowing automatic fiscal stabilizers to work.

### Medium-term consolidation strategy and numerical scenarios
- Policy recommendation: design and implement a credible medium-term consolidation strategy once a new government is formed, balancing near-term and long-term sustainability concerns.
- Suggested stance:
  - Target a broadly neutral structural stance this year (net of emergency temporary coronavirus measures).
  - Followed by an average annual structural adjustment of around 0.6 percent of GDP during 2021–24 to help attain the MTO by 2024 and put debt on a firm declining path.
- Fiscal effort requirements:
  - Around 0.4 percent of GDP this year to finance tax reductions and spending increases not related to the coronavirus emergency.
  - Around 0.6–0.7 percent of GDP per year in 2021–24 relative to the baseline.
- Emphasis on preserving policy credibility, including specifying (and pre-legislating, to the extent possible) future medium-term reforms to safeguard deficit and debt sustainability objectives.

### Fiscal projections (selected figures from IMF staff calculations)
- Baseline forecast (Percent of GDP) — 2019 to 2025 (values listed year-by-year as in source):
  - Revenue: 50.3, 50.0, 49.8, 49.8, 49.8, 49.8, 49.8
  - Expenditure: 51.9, 52.3, 52.4, 52.3, 52.5, 52.8, 53.0
  - Fiscal balance: -1.7, -2.3, -2.5, -2.5, -2.7, -3.0, -3.1
  - Primary balance: 0.2, -0.6, -0.9, -1.2, -1.4, -1.7, -1.8
  - Structural balance: -2.0, -2.3, -2.5, -2.5, -2.7, -3.0, -3.1
  - Change in structural balance: -0.5, -0.4, -0.2, 0.0, -0.2, -0.3, -0.2
  - Gross government debt: 99.0, 99.5, 99.6, 99.6, 99.6, 99.7, 100.0
- Recommended policies (illustrative scenario; assumes expenditure-based adjustment) — 2019 to 2025 (values listed year-by-year as in source):
  - Revenue: 50.3, 50.0, 49.8, 49.8, 49.8, 49.8, 49.8
  - Expenditure: 51.9, 52.0, 51.4, 51.0, 50.5, 50.1, 50.1
  - Fiscal balance: -1.7, -2.0, -1.6, -1.1, -0.7, -0.3, -0.2
  - Primary balance: 0.2, -0.2, 0.0, 0.2, 0.6, 0.9, 1.0
  - Structural balance: -2.0, -1.9, -1.4, -0.9, -0.3, 0.0, 0.0
  - Change in structural balance: -0.5, 0.0, 0.5, 0.5, 0.5, 0.4, 0.0
  - Fiscal effort (annual): ..., 0.4, 0.7, 0.5, 0.7, 0.6, ...
  - Gross government debt: 99.0, 99.3, 98.9, 97.8, 96.2, 94.0, 91.6

### Spending reforms to support growth-friendly consolidation
- Context: public spending was over 52 percent of GDP at end-2018; spending on social benefits, subsidies, and the wage-bill exceeds that of peers.
- Recommended focus areas:
  - Health care:
    - Near term: ensure adequate resources to deal with the coronavirus emergency.
    - Medium run: contain costs through binding spending ceilings, promoting preventive healthcare, and focusing reimbursements on generic medicines.
  - Pensions:
    - Consider measures to limit aging costs, including accelerating the pace of increase in the effective retirement age (now 61.1 compared to the OECD average of 64.6) and linking the minimum retirement age to gains in life expectancy (e.g., introducing a sustainability factor linked to life expectancy).
    - Revisit the mechanism governing real increases in pension and other social benefits.
  - Other social benefits:
    - Near term: temporary and targeted measures for coronavirus-affected individuals.
    - Medium term: improve targeting of social benefits while protecting the most vulnerable; reform the unemployment system (options include increasing degressivity, limiting duration of benefits, bringing replacement rates closer in line with peers); tighten controls on sickness and disability benefits; better target family benefits to support women’s participation in the labor force.
  - Subsidies:
    - Improve efficiency of subsidies, including for R&D where overlapping schemes lead to decreasing returns.
    - Revisit the company-car scheme, which is costly and adds to pollution.
  - Wage bill:
    - Reduce fragmentation and duplication in public administration; streamline the civil service, particularly at the subnational level.

### Tax reforms to reduce the labor tax wedge (budget-neutral)
- Belgium’s tax burden remains among the highest in Europe.
- Reform focus: broaden tax bases and reduce exemptions; reduce value-added tax expenditures by harmonizing rates.
- Suggested measures to simplify taxation on capital and restore neutrality:
  - Increase dividend withholding taxes (to address neutrality between salary and dividends).
  - Consider a personal capital gains tax or a deemed-distribution tax (to address distributed profits vs retained earnings).
  - Tax actual rental income net of expenses (to align rental and other income taxation).
  - Reduce tax privileges for savings accounts and life insurance (to align taxation across asset classes).
- Background: Tax expenditures were 6.3 percent of GDP in 2016.

### Raising potential output: labor market, productivity, and competition reforms
- Structural constraints:
  - Employment and labor-force participation rates remain among the lowest in Europe for the young, old, low-skilled, non-EU born, and women.
  - Labor-productivity growth has slowed, averaging around 0.9 percent (less than half its historical trend).
  - Decline in TFP growth driven by common advanced-economy trends and Belgium-specific factors: weak business dynamism, restrictions to competition (among the highest relative to peers), low public investment, and ineffective R&D spending.
- Recommended labor-market reforms:
  - Near term: temporary support for coronavirus-affected individuals and firms.
  - Medium run:
    - Integrate vulnerable groups via active labor-market policies and more effective training and dual-learning programs.
    - Bolster female labor force participation by revamping parental leave policies and reducing tax disincentives for secondary earners.
    - Strengthen work incentives through unemployment-benefit reform (options include increasing degressivity, limiting duration, bringing replacement rates closer to peers).
    - Support labor mobility by improving public transport across regions and reducing real-estate regulatory and tax barriers (e.g., shift from real-estate transaction to recurrent property taxes).
    - Boost flexibility by aligning wages with productivity at the firm level (including via opt-outs and reducing weight of seniority) and increasing flexibility of collective dismissals.
- Business dynamism and competition:
  - Continue reforms to reduce red tape for start-ups, ease regulatory restrictions in retail trade and professional services, support innovation by reducing tax incentives for safe assets and using the Belgian growth fund to support venture funding, and improve efficiency of R&D tax incentives.
  - Increase infrastructure investment, fiscal space permitting.

### Climate-change mitigation and green transition
- Belgium’s commitments and current performance:
  - Under the 2015 Paris Agreement, Belgium committed to reduce greenhouse gas emissions by 80–95 percent by 2050; new Green Deal could frontload reductions by 50 percent by 2030.
  - So far, Belgium has lagged behind targets; only 37 percent of its emissions are priced via the EU Emissions Trading System (ETS); the remaining 63 percent are not subject to an explicit carbon price and are concentrated in transport and buildings, followed by agriculture and others.
  - Belgium’s environmental tax burden is 2¼ percent of GDP and environmental subsidies are 1.4 percent of GDP (both relatively low compared to peers).
  - OECD carbon pricing-gap measure: Belgium’s gap is 65 percent (highest among peers).
- Policy options to accelerate transition (as noted in the source):
  - Feebates or regulations to incentivize emissions reductions.
  - Introduce carbon taxes in an equitable manner, using revenues to compensate vulnerable households and boost green investment.
  - Extend the ETS to cover more sectors (e.g., industry).

*Source: IMF staff analysis and projections as presented in the supplied content.*

### 23.      The authorities agreed that boosting labor force participation and productivity growth

### 1belea2020001 - 23.      The authorities agreed that boosting labor force participation and productivity growth

### Main findings on growth and labor
- Boosting labor force participation and productivity growth is critical to lift potential growth and support fiscal sustainability in the medium run.
- Employment gains have followed past reforms, but more is needed to integrate vulnerable groups and address skills mismatches.
- Positive results were noted in improving access to venture capital, including through the Belgian Growth Fund, but further efforts are needed to reduce red tape and regulations.
- A clear strategy is needed to achieve emission reduction targets, with strong coordination across regions and with European partners and institutions.

### Financial-sector stability: resilience and emerging challenges
- Post-crisis deleveraging, de-risking, and reorientation to the domestic market strengthened banks’ resilience; capital and liquidity buffers have been bolstered.
- Bank capital adequacy ratio: 18.3 percent (well-above regulatory requirements).
- Low interest rates have pressured profitability, prompting banks to ease credit standards and insurers to reallocate assets toward corporate and mortgage-lending products.
- Persistently low interest rates could raise concerns about risk pricing, future loan performance, and sustainability of smaller banks’ business models, especially with limited diversification and digitalization capacity.
- The coronavirus outbreak could exacerbate risks if individuals and firms face difficulties in repaying loans.

### Credit, leverage, and housing-market vulnerabilities
- Household debt: increased to 61 percent of GDP and 105 percent of disposable income by end-September 2019, driven by strong mortgage lending.
- Credit-growth to firms: 5.1 percent in 2019 (slower than 7.6 percent in 2018).
- Belgium’s non-financial corporate (NFC) debt: around 120 percent of GDP on a consolidated basis, and 64 percent of GDP when adjusting for intragroup loans.
- Staff assessment: bank credit to the non-financial private sector relative to GDP in 2019 was above its trend.
- House-price valuations remain stretched: ECB estimates prices are overvalued by about 15 percent, while the NBB estimates an overvaluation of 5.3 percent at end-2019:Q2.
- Share of new mortgage loans with high LTV (>90 percent) and/or DSTI (>30 percent) has steadily increased; new households accounted for 43 percent of new loans in H12019, of which almost half had an LTV ratio exceeding 90 percent.
- Sizable household financial assets (close to 170 percent of GDP) mitigate risks, but assets may be unevenly distributed, leaving new households more vulnerable.
- The coronavirus outbreak could have a material impact on bank asset quality.

### Macroprudential and supervisory measures taken
- 2018 measures increased implied risk weight of mortgage loans from 10 to 18 percent on average.
- June 2019: NBB activated the countercyclical capital buffer (CCyB) at a rate of 0.5 percent, allowing banks until July 2020 to comply.
- October 2019: supervisory expectations issued setting limits on the share of high-risk mortgage loans banks and insurers can issue; NBB set LTV thresholds for new loans at 80/90 percent for buy-to-let/owner-occupied housing and a limit of 5 percent for new loan volumes with high LTV and high DSTI or debt-to-income ratios (>50 and >9 percent). Mortgage lenders expected to comply or explain.
- Decision to release the CCyB in response to the coronavirus outbreak to free up capital buffers and help preserve financial stability.

### Credit-cycle assessment (Box 3): gap estimates and methods
- Standard BIS/ECB measures imply a large negative credit gap (around -19 to -24 percent at end-September 2019).
- NBB’s measure (resident-bank credit only) yields a positive credit gap of 1.5 percent at end-September 2019, down from a peak of 2 percent in June 2019.
- IMF alternative estimates:
  - MVF approach: small positive gap of 1.1 percent (Sept. 2019).
  - Model-based empirical approach (ECM): positive gap of 7.3 percent (2018).
- NBB’s financial condition index (FCI) comoves closely with the MVF credit gap, indicating lingering cyclical systemic risks in 2019.

### Authorities’ views
- Authorities concurred with staff’s assessment and policy recommendations.
- They acknowledged challenges from low interest rates, digitalization, and private sector leverage, while noting mitigating factors: strong bank and household balance sheets, limited house price misalignment, and recent loan pricing normalization after supervisory scrutiny.
- NBB committed to follow up on remaining FSAP recommendations.

### Staff recommendations and appraisal
- Near-term priority: contain the coronavirus outbreak with targeted temporary support to affected firms and individuals and ensure healthcare system resources.
- If banks face coronavirus-related losses, supervisory authorities could consider additional temporary measures on capital relief and encourage prudent loan restructuring in line with existing guidelines.
- Medium-term priorities: rebuild resilience and address structural challenges—high public and rising private debt, an aging population, slowing productivity growth, and climate change.
- Fiscal strategy: a credible medium-term consolidation aiming to reach structural fiscal balance by 2024.
  - Avoid further deterioration in the structural balance this year (net of emergency measures).
  - Aim for a structural adjustment of ½ percent of GDP during 2021–24 to balance near- and long-term considerations.
- Growth-friendly spending reforms should underpin adjustment: contain medium-term healthcare costs, bolster pension sustainability, improve targeting and labor-market incentives of social benefits, strengthen subsidy efficiency, reduce public administration duplication.
- Complementary tax base-broadening reforms could create space to lower the labor tax wedge in the medium run.
- Labor-market reforms needed to boost participation for young, low-skilled, non-EU born, and women—focus on active labor-market policies and training, bolster female participation, mobility, and labor-market flexibility.
- Product-market reforms to reverse declining productivity: reduce red tape for startups, lower regulatory barriers to competition, support access to venture capital, and boost public investment in infrastructure as fiscal space permits.
- Continue to bolster financial-sector resilience: stand ready to use macroprudential policies, revisit the macroprudential decision-making framework (e.g., grant NBB power to implement cyclical macroprudential policies directly), complete technical reporting standards for intragroup transactions/risk concentration/capital adequacy, ensure feasibility and effectiveness of bank-resolution strategies and sufficient MREL allocation, strengthen deposit insurance by legislating segregation of the Guarantee Fund from government funds once a new government is formed.
- Encourage banks to rationalize costs (staffing and dense branch networks), strengthen governance, and adapt business models for profitability, digitalization, and a potentially prolonged period of low interest rates.

*Source: IMF staff report (excerpts provided).*

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

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

### Proposed Decision
- The Executive Board endorses the thrust of the staff appraisal in the report for the 2020 Article IV consultation with Belgium.
- It is expected that the next Article IV consultation with Belgium will take place on the standard 12-month cycle.

### Real economy: key projections (2018–25)
- Real GDP: 1.5, 1.4, 0.8, 1.2, 1.3, 1.3, 1.3, 1.3
- Domestic demand: 2.2, 1.5, 1.1, 1.6, 1.6, 1.6, 1.7, 1.6
- Private consumption: 1.5, 1.1, 1.0, 1.5, 1.6, 1.5, 1.5, 1.5
- Public consumption: 0.9, 1.6, 1.7, 1.2, 1.3, 1.3, 1.4, 1.5
- Gross fixed investment: 4.0, 3.1, 0.9, 2.0, 1.8, 2.3, 2.5, 1.8
- Stockbuilding (contribution): 0.3, -0.2, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
- Foreign balance (contribution): -0.7, -0.1, -0.2, -0.3, -0.3, -0.3, -0.4, -0.3
- Exports, goods and services: 1.2, 1.0, 1.6, 3.9, 3.9, 3.8, 3.5, 3.5
- Imports, goods and services: 2.1, 1.2, 1.9, 4.3, 4.3, 4.1, 3.9, 3.7
- Household saving ratio: 11.8, 12.5, 12.6, 12.6, 12.4, 12.3, 12.4, 12.5
- Potential output growth: 1.3, 1.3, 1.2, 1.3, 1.3, 1.3, 1.3, 1.3
- Potential output growth per working age person: 1.0, 1.2, 1.2, 1.2, 1.3, 1.3, 1.3, 1.3
- Output gap (in percent): 0.4, 0.5, 0.1, 0.0, 0.0, 0.0, 0.0, 0.0

### Employment and prices
- Unemployment rate (in percent): 6.0, 5.4, 5.6, 5.5, 5.5, 5.5, 5.4, 5.4
- Employment growth: 1.4, 1.5, 0.3, 0.5, 0.6, 0.6, 0.6, 0.6
- Consumer prices (HICP): 2.3, 1.2, 1.1, 1.2, 1.6, 1.8, 1.8, 1.8
- GDP deflator: 1.5, 1.6, 1.3, 1.4, 1.5, 1.6, 1.7, 1.7

### Public finance (percent of GDP)
- Revenue: 51.4, 50.3, 50.0, 49.8, 49.8, 49.8, 49.8, 49.8
- Expenditure: 52.1, 51.9, 52.3, 52.4, 52.3, 52.5, 52.8, 53.0
- General government balance: -0.7, -1.7, -2.3, -2.5, -2.5, -2.7, -3.0, -3.1
- Structural balance: -1.5, -2.0, -2.3, -2.5, -2.5, -2.7, -3.0, -3.1
- Structural primary balance: 0.6, -0.1, -0.6, -0.9, -1.2, -1.4, -1.7, -1.8
- Primary balance: 1.4, 0.2, -0.6, -0.9, -1.2, -1.4, -1.7, -1.8
- General government debt: 100.0, 99.0, 99.5, 99.6, 99.6, 99.6, 99.7, 100.0

### Balance of payments (percent of GDP)
- Goods and services balance: -0.2, 0.0, 0.2, 0.3, 0.1, -0.1, -0.2, -0.2
- Current account: -1.0, -1.2, -1.0, -0.9, -1.1, -1.2, -1.3, -1.2
- Exports of goods and services: 82.6, 81.6, 80.6, 81.0, 81.8, 82.5, 82.9, 83.2
- Imports of goods and services: -82.7, -81.6, -80.4, -80.7, -81.7, -82.6, -83.2, -83.4
- Balance on financial account: -1.6, -1.2, -1.0, -0.9, -1.1, -1.2, -1.3, -1.2
- Direct investment, net: 1.9, 2.2, 2.4, 2.6, 2.8, 3.0, 3.2, 3.4
- Portfolio investment, net: -0.7, 0.5, 0.2, 0.0, -0.8, -1.4, -1.9, -2.1
- Other investment, net: -4.0, -3.8, -3.6, -3.4, -3.2, -2.9, -2.7, -2.5

### Key memorandum items
- Gross national savings (in percent of GDP): 24.5, 24.3, 24.4, 24.4, 24.5, 24.5, 24.6, 24.8
- Gross national investment (in percent of GDP): 25.5, 25.5, 25.4, 25.5, 25.6, 25.7, 25.9, 26.0
- Nominal GDP (in billions of euros): 459.8, 473.6, 484.0, 497.1, 511.2, 526.5, 542.8, 559.2
- Population (in millions): 11.4, 11.5, 11.5, 11.6, 11.6, 11.7, 11.8, 11.8

### General Government Statement of Operations (highlights)
- Revenue composition (percent of GDP): Taxes 30.9, 29.9, 29.6, 29.6, 29.6, 29.6, 29.6, 29.6
  - Personal income tax: 12.1, 11.7, 11.7, 11.7, 11.7, 11.7, 11.7, 11.7
  - Corporate income tax: 4.4, 3.9, 3.7, 3.6, 3.6, 3.6, 3.6, 3.6
  - VAT: 6.9, 6.8, 6.8, 6.8, 6.8, 6.8, 6.8, 6.8
- Social contributions: 15.5, 15.5, 15.4, 15.4, 15.4, 15.4, 15.4, 15.4
- Expenditure breakdown (percent of GDP): Compensation of employees ~12.3 across years; Social benefits 24.6, 24.8, 25.2, 25.4, 25.6, 25.8, 26.0, 26.2
- Net lending/borrowing: -0.7, -1.7, -2.3, -2.5, -2.5, -2.7, -3.0, -3.1
- Primary balance (memorandum): 1.4, 0.2, -0.6, -0.9, -1.2, -1.4, -1.7, -1.8
- Gross government debt: 100.0, 99.0, 99.0, 99.5, 99.6, 99.6, 99.7, 100.0

### Financial sector: consolidated banking indicators (2010–2019Q3)
- Return on assets: 0.5, 0.0, 0.1, 0.3, 0.5, 0.6, 0.6, 0.6, 0.5, 0.6
- Return on equity: 10.7, 0.7, 3.0, 5.9, 7.7, 10.1, 9.1, 8.7, 8.0, 8.7
- Cost/income ratio: 66.0, 67.3, 73.4, 62.4, 61.2, 58.6, 58.4, 58.2, 61.3, 60.7
- Total assets (in percent of GDP): 323.2, 310.2, 278.7, 251.0, 249.0, 236.5, 266.1, 227.3, 225.9, 242.5
- Loans to customers (percent of total assets): 44.0, 44.4, 48.1, 53.9, 54.1, 56.4, 55.4, 59.4, 62.3, 59.6
- Mortgage loans (in billions euros): 178.5, 183.9, 188.3, 190.8, 202.4, 216.1, 229.7, 227.4, 241.5, 254.7
- Customer deposits (percent of total assets): 46.0, 46.5, 49.3, 54.7, 58.5, 61.0, 58.4, 62.2, 63.9, 62.7
- Non-performing loans (NPL) as percent of gross loans: 2.8, 3.2, 3.2, 3.1, 2.7, 2.6, 2.4, 2.1, 1.9, 1.9
- Regulatory capital to risk-weighted assets: 19.3, 18.5, 18.1, 18.7, 17.3, 18.7, 18.8, 19.0, 18.8, 18.3

### Main Recommendations from the 2017 FSAP mission — status summary
- Systemic risk analysis: ST — NBB worked on credit risk and net interest income models; second top-down stress test for 11 LSIs; shadow banking monitoring framework developed; subscription to CRE data source in March 2019; collaboration to continue in 2020.
- Approve new macroprudential measure and enhance timely implementation: ST — Macroprudential measure enacted by royal decree in May 2018 runs until May 2020; NBB intends to prolong for one year; CCyB activated and supervisory expectations on mortgage lending (LTV, DTI, DSTI) issued.
- Strengthen bank supervision (internal models, loan classifications): C — NBB participation in SSM TRIM; on-site inspections; implemented two EBA guidelines on NPEs; contributed to EBA guidelines on loan origination and monitoring.
- Adjust to insurers’ evolving risk profiles: ST — New Insurance Law article introduced to suspend or spread lapses; NBB increased resources for insurance supervision; no further measures needed after assessment of capital instruments.
- Enhance FC supervision (governance, intra-group monitoring): ST — ECB draft FC supervisory guidance; draft technical standards on reporting intra-group transactions and capital adequacy under preparation.
- Enhance SWIFT oversight: ST — NBB submitted options to G10 SWIFT OG; onsite inspections added to moral suasion methodology (adopted December 2019); extended Forum operational as of 2019.
- Resolution planning and feasibility for systemic groups and LSIs: MT — Resolution plans including binding MREL adopted for all LSIs; solo MREL for Belgian subsidiaries under SRB in process; internal MREL to be set in 2020 cycle.
- Strengthen deposit insurance scheme (DIS): ST — New DGS law allows gradual reduction of repayment period to seven working days (until December 31, 2023); Guarantee Fund manual finalized; draft bill on segregation of Guarantee Fund to be submitted to new government.
- AML/CFT — beneficial ownership transparency: MT — Centralized publicly accessible BO register administered by MOF fully operational.

### Macroeconomic and sectoral context (visual highlights)
- Growth driven by investment and increasingly private consumption; muted impact of weak external demand on industrial production.
- Household consumption lagged disposable income; saving ratio rose.
- Headline inflation lowered by fuel and food; core inflation subdued but steady.
- Unemployment reached historical low; employment at new highs.
- Fiscal context: primary surplus declined as revenues reversed gains and primary expenditure picked up; fiscal easing since late 2018 driven by lower direct tax receipts; social benefit spending, particularly in kind, contributed to higher primary expenditure.
- Competitiveness: current account surplus turned to deficit due to deteriorating trade and income balances; unit labor costs increased in line with peers but remain above Germany; wages rebounded while labor productivity stagnated; NEER and REER declined recently but remain above 2017 levels; Belgium lost export market share since early 2000s though stabilized more recently.
- Structural barriers: unfavorable demographics and low labor force participation; highest job vacancy rate in the euro area indicating labor market frictions (skills mismatches, barriers to mobility); excessive regulation in retail and service sectors and regulatory barriers in network industries (except energy) above euro area average.
- Housing market vulnerabilities: housing price-to-rent and price-to-income ratios at historically high levels; some models suggest only modest overvaluation; mortgage lending driving household debt growth; large household financial assets mitigate risks; household debt as share of income relatively low.

*Sources: Haver Analytics, Belgian authorities, National Bank of Belgium (NBB), European and IMF staff projections and calculations.*

### Annex I. Main Recommendations of the 2019 Article IV

### Annex I. Main Recommendations of the 2019 Article IV

### Fiscal policy
- Fund recommendations:
  - Pursue gradual fiscal consolidation to attain the MTO based on reforms to make public spending more efficient and reforming the pension system.
  - Additional measures to safeguard revenues and promote economic efficiency should be pursued.
- Authorities’ response / policy actions:
  - Federal budgets for 2019–20 were not approved, with fiscal policy guided by the 1/12th rule on current spending.
  - The budget deteriorated in 2019.
  - No new efficiency-enhancing spending or pension reforms have been initiated.
  - No new revenue measures have been adopted.

### Structural reforms
- Fund recommendations:
  - Enhance labor force participation and address the fragmentation of the labor market by implementing the Jobs Deal reform, including the unemployment system, closing educational gaps, improving training and lifelong learning, and reducing barriers to mobility.
  - Better link wages to productivity by revising the wage-setting framework.
  - Further streamline and harmonize regulations, increase investment in infrastructure, improve the efficiency of R&D spending, and strengthen competition in services.
- Authorities’ response / policy actions:
  - Selective measures under the 2018 Jobs Deal to stimulate hiring and training in professions facing shortages have been adopted, but the unemployment benefit reform has been delayed.
  - An agenda for the reform of the salary system linking pay to skills and productivity rather than seniority has been agreed with social partners, but no reform has been initiated yet.
  - The mandate and functioning of the competition authority have been strengthened.
  - An investment strategy for the next decade under the National Pact for Strategic Investment (NPSI) is being developed.

### Financial sector policy
- Fund recommendations:
  - Stand ready to tighten macroprudential conditions further should risks intensify.
  - Continue to implement FSAP recommendations.
- Authorities’ response / policy actions:
  - In 2019, the NBB: (i) activated the countercyclical capital buffer (CCyB) at a rate of 0.5 percent; and (ii) issued supervisory expectations regarding credit standards in banks’ and insurers’ mortgage lending.
  - See Table 6 for FSAP implementation status.

### External Sector Assessment — Overall
- Overall assessment:
  - Based on preliminary data and EBA model results, the external position in 2019 is estimated to have been weaker than medium-term fundamentals and desirable policies would imply.
  - The external deficit is projected to deteriorate modestly in the medium term relative to 2018, as the trade deficit widens.
  - Despite a projected decline in the NIIP, its still large and positive value mitigates vulnerabilities associated with the high external public debt.
- Potential policy responses:
  - Steady fiscal consolidation, structural reforms — in the near term focused on supporting labor force participation and linking wages to productivity, followed by reforms to improve the business environment, simplify regulations, and strengthen competition in services and regulated professions — can help bring the external position more in line with fundamentals.

### Foreign Asset and Liability Position and Trajectory
- Background statistics (2019:Q3):
  - NIIP: 48.5 (% GDP)
  - Gross Assets: 452.1 (% GDP)
  - Debt Assets: 162.2 (% GDP)
  - Gross Liab.: 403.6 (% GDP)
  - Debt Liab.: 171.7 (% GDP)
- Additional background:
  - The NIIP remains strong at 49 percent of GDP at 2019Q3, up from 41 percent at end-2018, reflecting the continued positive net financial wealth of households.
  - Gross foreign assets were large at 452 percent of GDP, inflated by intragroup corporate treasury activities.
  - Gross foreign assets of the banking sector stood at 85 percent of GDP, down considerably from the pre-crisis peak.
  - External public debt was 70 percent of GDP, predominantly denominated in euros.
  - Target 2 balances averaged –€27.4 billion (–5.8 percent of GDP) in 2019, up from –€9.9 billion in 2018.
- Assessment:
  - Belgium’s large gross international asset and liability positions are inflated by the presence of corporate treasury units, which do not appear to create macro-relevant mismatches.
  - Based on the projected current account and growth paths, the NIIP-to-GDP ratio is expected to decline going forward.
  - The large and positive NIIP and its trajectory do not raise sustainability concerns.

### Current Account
- Background and projections:
  - Since the global financial crisis, the CA balance has averaged 0.4 percent of GDP over 2010–18.
  - In 2018, the CA registered a deficit of 1 percent of GDP for the first time since 2012.
  - The CA deficit is estimated to have widened slightly in 2019 to 1.2 percent of GDP and is projected to remain around 1.2 percent of GDP over the medium term.
- 2019 metrics:
  - Actual CA: –1.2 (% GDP)
  - Cycl. Adj. CA: –1.1 (% GDP)
  - EBA CA Norm: 2.4 (% GDP)
  - EBA CA Gap: –3.5 (% GDP)
  - Staff Adj.: 0.0
  - Staff CA Gap: –3.5 (% GDP)
- Assessment:
  - Preliminary EBA model estimates yield a CA gap of –3.5 percent of GDP for 2019, based on a cyclically adjusted CA balance of –1.1 percent (relative to an estimated norm of 2.4 percent).
  - This is within the range estimated by staff for the CA gap of between -4.5 to -2.5 percent of GDP.

### Real Exchange Rate (REER)
- Background:
  - The REER (both ULC- and CPI-based) appreciated by nearly 20 percent during 2000–09.
  - Wage moderation contributed to a 6 percent depreciation of both the ULC- and CPI-based REER in 2014–15, which has since been largely reversed.
  - In 2019, the ULC- and CPI-based REER depreciated by 1.9 and 1.5 percent relative to the 2018 average.
- Assessment:
  - Preliminary EBA model estimates point to an REER overvaluation of between 9 and 17 percent, based on the CPI-based REER index and level models.
  - The REER overvaluation resulting from the staff CA gap model is 8.3 percent, using an elasticity of 0.42.
  - Staff assesses the REER to be overvalued in the range of 6 to 11 percent, using standard error bands.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Gross financial outflows and inflows were on an upward trend during the pre-crisis period as banks expanded their cross-border operations; since the crisis, these flows have shrunk and become more volatile as banks have deleveraged.
  - Short-term external debt accounted for 29 percent of gross external debt at end-2019: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.
  - The large and positive NIIP reduces the vulnerabilities associated with high external public debt.

### FX Intervention and Reserves Level
- 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 — Key Risks, Likelihood, Impact, Policy Response
- Weaker-than-expected global growth — Likelihood: High
  - Impact: Weak growth in partner countries would negatively impact Belgian exports and discourage export-related investment; protracted slowdown could lower potential growth, raise structural unemployment, and complicate fiscal adjustment.
  - Policy response: Build fiscal buffers and implement reforms to improve productivity and raise potential growth; utilize available fiscal space if shock materializes while designing a credible medium-term consolidation strategy.
- Rising protectionism and retreat from multilateralism — Likelihood: High
  - Impact: Loss in external demand and more difficult fiscal and structural reforms.
  - Policy response: Boost competitiveness through labor and product market reforms.
- Sharp rise in risk premia exposing financial vulnerabilities — Likelihood: High/Medium
  - Impact: Tighter financial conditions could weigh on confidence and strain leveraged firms, households, and the sovereign; banks and insurers exposed to sudden interest rate shock; financial market stress elsewhere in Europe could have spillover effects.
  - Policy response: Monitor risks closely and utilize macro-prudential tools proactively; Euro area monetary policy is first line of defense, supported by activation of backstops and resolution mechanism.
- More severe Covid-19 pandemic causing prolonged disruptions — Likelihood: High
  - Impact: Supply chain disruptions, weaker external demand, and confidence effects would negatively affect exports, investment, and growth.
  - Policy response: Utilize available fiscal space to contain immediate effects, design medium-term consolidation strategy, and encourage contingency planning by firms that source inputs from affected or at-risk jurisdictions.
- Domestic political uncertainty related to protracted federal government formation — Likelihood: High
  - Impact: Could weigh on confidence and domestic demand, impede fiscal and structural adjustment; cost of policy inaction will rise.
  - Policy response: Reignite reforms even as speed depends on political developments, while seeking consensus on priorities for the next government.

### Benchmarking and Prioritizing Spending Reforms in Belgium — Key Findings
- Overall spending gap:
  - Belgium spends close to 6 percent of GDP more than its EU peers (EU14).
  - This reflects a 9.4 percent of GDP gap in three areas: social benefits, subsidies, and compensation of employees, partly offset by lower spending on goods and services, investment, and other outlays.
- Gap decomposition (major categories, Percent of GDP):
  - Total: 5.8
  - Social benefits: 5.4
  - Subsidies: 2.1
  - Compensation of employees: 1.9
  - Investment: –0.5
  - Consumption of goods and services: –1.9
  - Other spending: –1.2
- Details on major spending categories:
  - Social benefits:
    - Gap with peers is 5.4 percent of GDP, concentrated in health (4.2 percent), mainly outpatient and hospital services, and social protection (1.2 percent), principally sickness and disability, unemployment, and family and child benefits.
    - When accounting for transfers to hospitals classified outside general government, the total health-sector gap is lower (3.2 percent), and the total gap reduces to 2.2 percent of GDP.
  - Subsidies:
    - Belgium spends 2.1 percent of GDP more than peers on subsidies, most of which (1.9 percent) is provided to support the economy.
  - Compensation of employees:
    - Spending on employees’ compensation is 1.9 percent of GDP higher than the average of EU peers, driven by higher spending on teachers’ compensation (2.1 percent gap in education) and other civil servants’ compensation (0.6 percent in General public services, and 0.5 percent in Economic affairs).

### Health spending — Efficiency and recommendations
- Context:
  - Health spending was at 7.7 percent of GDP in 2017 and is estimated to increase by 2 percent on average per year during 2015–30 (OECD 2019), and by 1.6 percent of GDP between 2013–60 (EC 2015).
  - Belgium’s health spending efficiency is somewhat below the frontier according to the DEA approach; closer to EU14 peers under the SFA approach that controls for initial conditions and a composite of health outcomes.
- Pockets of inefficiency and suggested measures:
  - OECD (2017) indicates more than half of emergency department visits in Belgium were unwarranted.
  - EC (2017) notes avoidable hospitalizations for chronic conditions in Belgium are above the EU average.
  - Possible measures: foster home care for some chronic conditions, support preventive healthcare, make healthcare spending ceilings binding by strengthening cost controls, and focus reimbursements on generic medicines.

### Social protection efficiency and reform priorities
- Efficiency:
  - Belgium’s social protection spending is above that of the EU14.
  - According to the SFA approach, Belgium’s spending efficiency is somewhat above the EU14 but appears less efficient in delivering social outcomes than selected EU peers.
- Areas for efficiency gains and reforms:
  - Pensions:
    - Total pension expenditure is somewhat below peers, but outcomes are mixed: old-age poverty is 8.2 percent compared to less than 4 percent in France and the Netherlands.
    - Recommendations: revisit the pace of increase of the effective retirement age, link minimum retirement age to gains in life expectancy, and revisit the mechanism governing real increases in pension and other social benefits to contain automatic drift.
  - Family and child benefits:
    - Spending is slightly above peers and benefits are not means tested (unlike peer countries), contributing to a relatively high poverty rate for children in vulnerable households and a relatively low female labor-force participation rate.
    - Recommendation: better target family benefits to improve outcomes and labor-force participation.
  - Sickness and disability benefits:
    - Real spending increased by 10 percent since 2011, partly due to substitution effects after tightening early retirement schemes.
    - Recommendation: tighten controls of spending in this area to contain spending drift.
  - Unemployment benefits:
    - Spending is somewhat higher than peers due to generous replacement rates, low degressivity, and unlimited duration.
    - Long-term unemployed account for some 55 percent of unemployment benefit recipients against an EU average of 26 percent.
    - Recommendation: reform the unemployment system to strengthen incentives to return to work, supporting public finances and growth.

*Source: Annex I. Main Recommendations of the 2019 Article IV*

### 5. Subsidies, which are largely in the form of tax exemptions, could be made more

### 5. Subsidies, which are largely in the form of tax exemptions, could be made more

### Subsidies: level, purpose, and efficiency
- Subsidies are 2.5 times higher in Belgium than the average European level.
- A large part of subsidies is intended to encourage employment of low-skilled workers, given their low labor force participation.
- Tax incentives supporting business R&D remain among the highest worldwide, and the combination of various exemptions and deductions reduces their effectiveness (EC, 2019, OECD 201–20, and Dumont 2019).
- Policy implication: Widening the tax base by rationalizing subsidies would help improve efficiency and support growth.

### Compensation of employees: trends and consolidation role
- The federal government reduced its wage bill by 25 percent since 1995.
- The total general government’s wage bill increased by almost 7 percent during the same period due to decentralization of powers to state and local governments (IMF, 2015).
- Spending on compensation of employees highlighted as an area that could contribute to consolidation.

### Spending composition and benchmarking
- Teachers’ compensation represents more than 40 percent of total compensation of employees in Belgium.
- Education compensation is higher than the EU14 average, with gaps of:
  - 1 percent of GDP in secondary education
  - 0.6 percent of GDP in primary education
- These gaps are attributed to low student-teacher ratios.
- According to the DEA approach, Belgium’s education spending is somewhat below the efficiency frontier given outcomes broadly in line with advanced and OECD peers.
- Educational performance is weaker for socio-economically disadvantaged individuals and first- and second-generation immigrants.
- Policy recommendations for education:
  - Align student-teacher ratios with peers.
  - Provide incentives to attract strong teachers to regions with disadvantaged students and immigrants, and where grade repetition is high.
  - Address grade repetition, especially in the French Community, which is reported as a major cause of both poor performance and excessive spending in primary and secondary education.

### Public administration and transportation employment
- Belgium spends 1.1 percent of GDP more than peers on compensation of employees in public administration and transportation.
- Excess spending is due to a relatively high and increasing level of employment, especially at the sub-national level.
- Policy recommendations:
  - Reduce fragmentation and duplication in the public administration between Entities I and II, as well as within Entity II.
  - Control growth in Entity II’s employment (for instance through attrition) to support consolidation.

### Overall conclusion on public spending efficiency
- Belgium has some room to rationalize and improve the efficiency of its public spending.
- Specific areas identified for rationalization: subsidies and the wage bill.
- Efficiency of spending could be further increased in health, education, and other social protection benefits.
- Cautions when interpreting the analysis:
  - Efficiency frontiers are difficult to estimate and dependent on the choice of peer countries.
  - Outcomes are imprecise, difficult to measure, and represent only a subset of public policies’ targets.
  - Differences in levels of public spending reflect countries’ social choices with respect to public versus private spending.

### Box 1. Efficiency Frontier Estimation Methodologies
- Two main approaches used:
  - Non-parametric method (Data Envelopment Analysis, DEA): links direct measures of inputs with direct measures of outputs; derives a convex best-practice frontier by enveloping countries that produce the best output with a given amount of input.
  - Parametric method (Stochastic Frontier Analysis, SFA): estimates a production technology f(Xi, α) using inputs Xi to produce optimal output yi* = f(Xi, α). Model assumes observed yi = f(Xi, α) εi exp(vi), where 0 < εi ≤ 1 is efficiency and vi is a random shock. With a log-linear production function and εi = exp(−ui) ≤ 1, the SFA estimates:
    - ln(yi) = α0 + Σ_{j=1}^k αj ln(xij) + vi − ui.
- In both methods:
  - Public spending in percent of GDP is used as the input variable.
  - A composite index (weighted average of several standardized measures of output) is used as the output indicator.
  - SFA models control for private spending, the level of development, and other relevant determinants of the outcomes (e.g., demographics).
  - The SFA model is used to compute efficiency scores as one minus the proportional amount by which the output could be increased without additional spending.

### Annex V. Debt Sustainability — key points
- Public debt sustainability risks remain high over the medium run.
- Baseline projection: public debt-to-GDP ratio is projected to increase marginally to 100 percent by 2025 under broadly unchanged policies and steady, but moderate, growth, while interest rates remain low.
- Gross financing needs are expected to be 14.7 percent of GDP in 2020 and to average around 15 percent over the medium term.
- The projected medium-term public debt path is sensitive to a real GDP growth shock, a combined macro-fiscal shock, and a contingent liability shock.
- Long-run outlook: debt under the baseline scenario is on a rising trajectory due to growing aging costs.

- At end-2018:
  - Belgium’s public debt was equal to €460 billion, or 100 percent of GDP.
  - Around 85 percent of the debt was owed by the federal government; the remainder was owed by regions, communities, local authorities, social security, and other federal entities.
  - All federal debt was denominated in euros.
  - 9.4 percent of federal debt was short-term debt.
  - 9.7 percent of federal debt carried a variable interest rate.
  - The average weighted duration of federal debt was 9.6 years, up from 9.3 years at end-2017.
  - The average weighted interest rate was 2.2 percent, down from 2.3 percent the previous year.

- Baseline scenario assumptions and projections:
  - Macroeconomic assumptions:
    - Growth declines to 0.8 percent this year and gradually recovers to 1.3 percent over the medium term, broadly in line with potential growth, while the output gap remains closed.
    - Inflation rises to close to 2 percent by 2025.
  - Fiscal assumptions:
    - The fiscal deficit widens to 2.3 percent in 2020 due to weaker revenues and social benefit spending drift.
    - The deficit widens to 3.1 percent over the medium term under the assumption of broadly unchanged policies.
    - With a small positive output gap closing, the structural deficit moves in step, while the primary deficit widens to 1.8 percent by 2025.
  - Debt levels and gross financing needs:
    - After peaking at 107.0 percent of GDP in 2014, debt has declined gradually to an estimated 99 percent in 2019.
    - Debt is projected to increase to 100 percent by 2025.
    - Gross financing needs average 15 percent of GDP over the medium term.
    - Belgium’s high level of government debt calls for using the higher scrutiny framework (criteria include debt-to-GDP above 60 percent, gross financing needs above 15 percent, or exceptional access to Fund resources).

- Realism of baseline assumptions:
  - Median forecast errors (2010–18): real GDP growth (0.11 percent), primary balance (-0.31 percent), inflation (0.33 percent).
- Heat map and risk assessment:
  - Risks from the debt level are deemed high, given that the relevant 85 percent threshold is breached under baseline and all stress test scenarios.
  - Belgium’s external financing requirement was 85 percent of GDP in 2019, significantly above the upper threshold.
  - The share of debt held by foreigners is relatively high at 53 percent of total.

*International Monetary Fund — Belgium country analysis (excerpts).*

### 4.      Stress tests suggest that debt levels are sensitive to a real GDP growth shock and a

### 4.      Stress tests suggest that debt levels are sensitive to a real GDP growth shock and a combined macro-fiscal shock. Debt would increase significantly under a financial sector contingent liability shock.

### Scenario descriptions and quantitative outcomes
- Growth shock:
  - Real GDP growth is reduced by one standard deviation in 2021–22, i.e., 0.7 percentage points each year relative to the baseline scenario.
  - Assumed decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth).
  - Debt-to-GDP ratio increases to 102.6 percent of GDP in 2022 and remains broadly stable thereafter.
- Interest rate shock:
  - Increase in interest rates by 562 basis points starting in 2021 (calibrated based on a historical high in interest rates observed in 1995).
  - Debt-to-GDP ratio increases more rapidly, reaching about 105 percent in 2025.
  - Gross financing needs are 3 percentage points of GDP higher in 2025 relative to the baseline scenario.
- Exchange rate shock:
  - Assumes 13 percent depreciation in the real exchange rate in 2021.
  - This shock results in small effects relative to the baseline.
- Primary balance shock:
  - Revenue shock and a rise in interest rates leading to a cumulative 0.8 percentage points of GDP deterioration in the primary balance (one standard deviation shock) in 2021–22.
  - Leads to a modest deterioration in the debt-to-GDP ratio relative to the baseline scenario.
- Combined macro-fiscal scenario:
  - Aggregates shocks to real growth, the interest rate, the exchange rate, and the primary balance while avoiding double-counting the effects of individual shocks.
  - Under this scenario, debt stands at 108.5 percent of GDP and gross financing needs equal about 18 percent of GDP at the end of the projection period.
- Contingent liability shock:
  - Non-interest expenditures in 2021 increase by the equivalent of 10 percent of banking sector assets, and growth slows by 1 standard deviation for two years (2021–22).
  - Debt increases to 122 percent of GDP in 2021 and increases marginally over the medium term, reaching 125 percent in 2025.

### Baseline context and key baseline figures (as reported)
- Nominal gross public debt: 99.0–103.7 percent range across historical and projection years (table shows 2018: 103.7; 2019: 100.0; 2020: 99.0; 2025: 100.0).
- Public gross financing needs: 4.1–16.8 percent of GDP in projection years (Est. 2018: 12.0; 2019: 14.5; 2025: 14.0).
- Real GDP growth (baseline): 0.8–1.5 percent across 2018–2025 (2018: 1.2; 2019: 1.5; 2020: 1.4; 2021: 0.8; 2025: 1.3).
- Inflation (GDP deflator): 1.3–1.7 percent (2018: 1.5; 2019: 1.5; 2020: 1.6; 2025: 1.7).
- Effective interest rate (baseline): 1.8–1.3 percent across projections (2018: 3.2; 2019: 2.1; 2020: 2.0; 2025: 1.4).
- Cumulative change in gross public sector debt (projection horizon displayed): 1.0 percent of GDP (cumulative entry in table).

### Risk assessment highlights
- Real GDP growth shock and combined macro-fiscal shock push debt well above baseline levels (examples: 102.6 percent in 2022 under growth shock; 108.5 percent of GDP under combined shock).
- Contingent liability shock tied to banking sector liabilities produces the largest near-term increase in debt (122 percent of GDP in 2021, rising to 125 percent in 2025).
- Interest rate shock materially raises gross financing needs (3 percentage points of GDP higher in 2025 relative to baseline) and increases debt through higher effective interest rates.

### Underlying assumptions (selected)
- Growth shock calibration: one standard deviation reduction in real GDP growth = 0.7 percentage points per year in 2021–22.
- Inflation response: 0.25 percentage points decline in inflation per 1 percentage point decrease in GDP growth.
- Interest rate shock calibration: 562 basis points increase starting in 2021 (based on historical high in 1995).
- Exchange rate shock calibration: 13 percent real depreciation in 2021.
- Primary balance shock calibration: cumulative 0.8 percentage points of GDP deterioration in 2021–22.
- Contingent liability calibration: non-interest expenditures increase in 2021 by the equivalent of 10 percent of banking sector assets; growth slows by 1 standard deviation for two years (2021–22).

### Implications for monitoring and policy (drawn from stress-test outcomes and related staff discussion)
- Real GDP growth shocks and combined macro-fiscal shocks are key vulnerabilities for public debt dynamics; close monitoring of growth prospects is critical.
- Large contingent liabilities tied to the banking sector can substantially and rapidly increase public debt; resilience of the financial sector and contingent-liability management are important for fiscal sustainability.
- Interest rate risk remains a channel for higher gross financing needs and rising public debt; managing interest-rate exposure and debt maturities can mitigate risks to financing needs.

*Source: IMF staff.*

### 1.       The coronavirus outbreak has continued, taking a toll on human life

### 1belea2020001 - 1.       The coronavirus outbreak has continued, taking a toll on human life

### Human impact and containment measures
- Confirmed cases increased to 4,937, with 178 fatalities registered until March 25.
- Containment measures implemented:
  - school and retail shop closures,
  - a ban on all gatherings,
  - limiting movement to essential needs,
  - ban of non-essential travel abroad.

### Political developments and emergency powers
- A temporary government was formed on March 17 to deal with the coronavirus emergency.
- New minority government led by Prime Minister Wilmès composed of the three parties from the former caretaker government, supported by six opposition parties.
- Enhanced executive powers granted for a period of three months (renewable once for another period up to three months) to take exceptional measures by decree.
- On March 19, a vote of confidence garnered a large majority in the Lower House.
- On March 26, the Lower House delegated exceptional legislative powers encompassing public health, social policy, labor law, public order, and economic policy; acts adopted can enter into effect immediately and must be submitted to the Lower House for ex post validation within three months upon enactment.

### Fiscal and financial policy response
- Fiscal envelope of €8–10 billion (about 2 percent of GDP) announced to cover previously announced measures and new health spending.
- A further €50 billion (about 10 percent of GDP) will cover federal guarantees for new bank loans to companies and self-employed.
- Regional governments announced additional measures including guarantees for affected firms, compensation schemes for affected businesses, and suspensions of energy bill payments for the unemployed.
- On March 19, the Lower House approved a 1 billion EUR additional expenditures package to combat the COVID-19 crisis.
- With the support of the National Bank of Belgium (NBB), the Federal Government agreed with the financial sector on a 50 billion EUR (about 10% of GDP) guarantee scheme for all new credit with a maximum duration of 12 months, extended up till end September 2020 to viable businesses.
- The financial sector agreed to accept deferred payments to September 30 on all loans to viable businesses.
- On March 11, the NBB entirely released the countercyclical capital buffer of 0.5% of banks’ risk weighted assets; this release will remain in force for at least a year.
- Additional fiscal measures adopted include enhanced access to temporary unemployment, deferred payment of personal income and corporate taxes, withholding tax, VAT, and social security contributions, exemptions of social security contributions, replacement incomes for the self-employed, and suspension of penalties for public contractors, as well as several sector-specific support measures.

### Monetary and European support
- Authorities welcome the Eurogroup statement of March 16 on flexibility under the Stability and Growth Pact and guidance of the European Commission on state aid.
- Authorities welcome the actions of the European Central Bank (ECB) to support all sectors and its commitment to do everything, as much as necessary and for as long as needed.
- Authorities welcome the ECB Banking Supervision’s announcement on temporary capital and operational relief measures to stimulate bank lending.

### Macroeconomic outlook and risks
- Staff notes GDP growth was 1.4% in 2019 prior to the COVID-19 outbreak.
- Significant downward revisions are expected for 2020; risks to growth are firmly to the downside.
- Key external risks include a hard outcome from EU–UK negotiations on future trading relationship and continued global trade uncertainty.
- The broader economic impact depends on the duration and depth of the outbreak in Belgium and globally and on the policy response.

### Policy recommendation and medium-term fiscal stance
- Staff strongly supports the authorities’ policy response and recommends:
  - use the available fiscal space to provide targeted support to affected individuals and firms,
  - support financial sector intermediation.
- Once the COVID-19 crisis abates and temporary targeted fiscal measures run their course, a return to the medium-term objective of a structural equilibrium is the top priority.
- A credible, sustained, and growth-friendly medium-term consolidation strategy is needed to put the deficit and debt on a firm downward path.
- Medium-term strategy elements endorsed by authorities:
  - containing aging costs,
  - reorienting the budget toward growth-enhancing areas,
  - improving spending efficiency,
  - allowing flexibility with regards to investment given needs for infrastructure and green investments.
- Guaranteeing sustainability of public finances is a task for both the federal state and the Regions and Communities.

### Structural reforms, labor market, and productivity
- Prior to COVID-19, Belgian labor market indicators:
  - unemployment rate at 5.4% in 2019,
  - employment rate at 70.5% in 2019 (compared to 67.2% in 2015).
- Authorities and staff agree more efforts are needed to increase labor force participation, especially among vulnerable groups.
- Regional active labor market policies implemented by the three regional governments are key tools.
- Working age population is set to shrink due to population ageing.
- Belgium has the highest vacancy rate in the euro area (Staff Report, figure 5, p. 35).
- Belgium’s labor shortage can prevent firms from investing and mute productivity growth; productivity gains are essential to generate sustainable growth.
- Policy emphasis:
  - render the economic fabric more dynamic,
  - step up investments in growth-enhancing infrastructure in line with the National Pact on Strategic Investments,
  - boost growth potential by increasing productivity and the number of people at work to generate purchasing power, income creation, and social inclusion.

### Financial sector resilience and reforms
- Belgian financial sector characterized by high levels of capitalization and solid liquidity buffers.
- NBB has adopted macroprudential measures in the residential real estate sector and released the CCyB due to the COVID-19 crisis.
- Authorities agree supervision of systemic financial conglomerates should be further operationalized given their weight in the Belgian financial sector.
- Authorities welcome development of technical standards on reporting of intragroup transactions, risk concentration, and capital adequacy for systemic financial conglomerates.
- Authorities agree that feasibility and effectiveness of bank-resolution strategies should be ensured, including maintaining a sufficient and consistent allocation of MREL across banking groups.
- A compliant implementation of Basel 3.5 in European law is deemed crucial to ensure financial stability.

### Climate
- Authorities thank staff for the intention to dedicate a specific section in next year’s Article IV staff report on the climate transition.

*Source: Belgium — Staff Report for the 2020 Article IV Consultation (March 25, 2020)*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1belea2020001.pdf_