## 1belea2023001 - 2023. The labor market has remained tight, with record-high job creation and low

## Source details

**Canonical URL:** [1belea2023001 - 2023. The labor market has remained tight, with record-high job creation and low](https://www.imf.org/-/media/files/publications/cr/2023/english/1belea2023001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2023/english/1belea2023001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2023/english/1belea2023001.pdf.json)

---

### Key findings — context and economic developments
- Post-pandemic recovery slowed due to spillovers from Russia’s war in Ukraine, high inflation, tightening financial conditions, and elevated uncertainty.
- Fiscal support and automatic indexation of wages and benefits helped shield household incomes but increased fiscal costs.
- The labor market remained tight with record-high job creation and low unemployment.
- The external current account swung to a large deficit in 2022, due largely to higher energy imports and lower vaccine exports.
- A resilient financial sector is facing challenges from a weaker macro-financial environment.
- Some important structural reforms took place in 2022.

### Outlook and risks
- Growth projections:
  - Growth is expected to slow from 3.0 percent in 2022 to 0.2 percent in 2023, before returning to potential of 1.2 percent over the medium term.
  - Potential output growth: 3.9 (2021), 1.8 (2022), 1.2 (2023).
- Inflation projections:
  - Consumer prices: 3.2 (2021), 10.3 (2022), 5.5 (2023).
  - Inflation should decelerate from 10.3 percent in 2022 to 5.5 percent in 2023, as energy prices ease.
- Risks (tilted to the downside):
  - Escalation of the war in Ukraine.
  - A sharper-than-expected tightening of financial conditions.
- Upside/mitigating factors:
  - Lower energy prices would reduce fiscal pressures.
  - Progress on structural reforms before elections in 2024 would boost confidence.

### Key statistics (selected indicators, preserved exactly as reported)
- Real GDP growth: 6.1 (2021), 3.0 (2022), 0.2 (2023 Proj.).
- Domestic demand: 5.6 (2021), 2.8 (2022), 0.9 (2023 Proj.).
- Foreign balance (contribution to GDP growth): 0.6 (2021), 0.3 (2022), -0.6 (2023 Proj.).
- Exports, goods and services: 11.3 (2021), 4.7 (2022), 1.1 (2023 Proj.).
- Imports, goods and services: 10.7 (2021), 4.4 (2022), 1.9 (2023 Proj.).
- Output gap (in percent): -0.5 (2021), 0.7 (2022), -0.2 (2023 Proj.).
- Unemployment rate (in percent): 6.3 (2021), 5.5 (2022), 6.0 (2023 Proj.).
- Employment growth: 1.8 (2021), 1.8 (2022), 0.2 (2023 Proj.).
- GDP deflator: 2.9 (2021), 5.7 (2022), 5.0 (2023 Proj.).
- Public finance:
  - Revenue: 49.9 (2021), 49.4 (2022), 50.8 (2023 Proj.).
  - Expenditure: 55.5 (2021), 54.2 (2022), 56.3 (2023 Proj.).
  - General government balance: -5.6 (2021), -4.8 (2022), -5.5 (2023 Proj.).
  - Structural balance: -5.1 (2021), -5.1 (2022), -5.3 (2023 Proj.).
  - Primary balance: -3.9 (2021), -3.3 (2022), -3.8 (2023 Proj.).
  - General government debt: 109.2 (2021), 106.8 (2022), 108.1 (2023 Proj.).
- Balance of payments:
  - Goods and services balance: 1.1 (2021), -3.8 (2022), -3.3 (2023 Proj.).
  - Current account: 0.4 (2021), -4.0 (2022), -3.5 (2023 Proj.).
- Memorandum items:
  - Nominal GDP (in billions of euros): 502.3 (2021), 547.0 (2022), 575.9 (2023 Proj.).
  - Population (in millions): 11.6 (2021), 11.7 (2022), 11.7 (2023 Proj.).

### Fiscal developments and vulnerabilities
- Energy shock and support measures raised the fiscal deficit: overall deficit 4.8 percent of GDP in 2022 versus 5.6 percent in 2021.
- Energy-price measures accounted for 1.0 percent of GDP and refugee support 0.2 percent of GDP in 2022; some measures (VAT reduction on gas and electricity from 21 to 6 percent, lower excise duties for petrol and diesel) were not targeted and did not maintain price signals.
- Measures are subject to quarter-by-quarter review; most were set to expire at end-Q1:2023.
- High inflation helped reduce the debt ratio from 109.2 percent to 106.8 percent of GDP in 2022, but debt remains elevated relative to pre-pandemic 97.6 percent of GDP in 2019.
- Without adjustment measures:
  - Structural fiscal deficit expected to remain elevated over the medium term at 5½ percent of GDP.
  - Public debt would rise to about 120 percent of GDP in 2028, increasing vulnerabilities.
- Aging costs estimated to add 0.2-0.3 ppt. per year to deficits if unaddressed.

### External sector and competitiveness
- Current account swing to deficit in 2022 driven by:
  - Higher energy net imports: 3.1 percent of GDP (Q1–Q3:2022 contribution).
  - Lower vaccine net exports: 1.6 percent of GDP (Q1–Q3:2022 contribution).
- Current account deficit expected to have reached 4.0 percent of GDP in 2022; staff’s preliminary assessment suggested the CA gap was -5.6 percent of GDP and the REER overvalued by 7.6 percent.
- Indexation and wage growth:
  - Automatic indexation protected households but yielded labor-cost increases above major trading partners, weighing on competitiveness.
  - Wage growth through Q3:2022 surpassed neighboring countries; an annual indexation in January 2023 produced a more-than-10-percent rise in labor costs for two-fifth of private-sector workers.
  - Indexation has opened a wage gap with key trading partners.
  - Robust corporate profit margins provide some scope to absorb higher labor costs, but risks of a wage-price spiral are noted.

### Labor market and social issues
- Labor market tightness:
  - Record-high job creation and low unemployment overall, with unemployment rate 5.5 percent in 2022.
  - High vacancies and low unemployment especially in Flanders and among skilled workers.
  - Unemployment is higher in Wallonia and Brussels and among low-skilled and younger workers; geographic mobility is limited.
- Temporary unemployment has increased recently as some firms paused production due to high energy prices.
- Employment growth: 1.8 (2021), 1.8 (2022), 0.2 (2023 Proj.).

### Financial sector and credit conditions
- Credit dynamics:
  - Mortgage lending: +5.7 percent y/y in November (most recent available).
  - Borrowing by non-financial corporations (NFCs): +6.1 percent y/y.
  - Bank lending surveys indicate slowing housing and corporate credit demand; banks have tightened credit standards.
- Financial sector resilience:
  - Profitability returned to pre-pandemic levels; elevated capital ratios; pandemic-related NPLs and bankruptcies did not materialize.
  - Sectoral credit and cyber risk concerns have led banks to strengthen loan-loss provisioning.
  - House prices showed signs of overvaluation and the market has started to cool.
  - Non-bank financial institutions show little sign of stress; occupational pension funds are relatively small; liquidity pressures from derivatives exposures appear contained.
- Macroprudential measures:
  - Sectoral systemic risk buffer (SSyRB) introduced May 2022: a 9 percent SSyRB affecting the largest lenders replaced mortgage risk-weight add-ons in place since 2013, keeping additional capital preserved at approximately €2 billion.
  - Maintain the CCyB at its 0 percent neutral level until uncertainty subsides.

### Executive Board and staff policy recommendations
- Fiscal policy (directors recommended):
  - Credible and ambitious multi-year, expenditure-led fiscal adjustment to put debt on a declining path, replenish buffers, and complement monetary policy in curbing inflation.
  - Rationalize current spending while increasing productive public investment.
  - Energy support measures should remain limited and temporary, be better targeted, and maintain price signals.
  - Improve coordination of spending across government levels.
  - Initiate tax reforms and enhance public investment management.
- Financial sector guidance:
  - Balance adequate credit provision, preserve resilience, and facilitate deployment of buffers to absorb losses when needed.
  - Close monitoring of financial stability risks given rising interest rates and slowing economy and housing market.
  - Most Directors supported a near-term hold on additional macroprudential tightening; some considered further tightening desirable if macro-financial conditions allow.
  - Strengthen AML/CFT framework and follow up on FSAP conclusions.
- Structural reform priorities:
  - Further labor and product market reforms to improve productivity and competitiveness and reinvigorate growth.
  - Facilitate labor reallocation, enhance labor market flexibility, and adjust incentive setting in social security and pension systems.
  - Pension reforms critical for Belgium to receive the Next Generation EU funds.
  - Consider revising the wage indexation framework once inflationary pressures subside.
  - Improve business environment, including restructuring and insolvency frameworks, and strengthen cyber risk monitoring and preparedness.
- Climate and energy:
  - Reach ambitious climate goals through broader initiatives, greater coordination and execution, aligning national policies with more ambitious EU targets, and considering raising carbon pricing.
  - Significant new investments in renewables were welcomed to enhance energy security.

### Box 1 — Belgium: Characteristics and Challenges of Belgium’s Wage Indexation Framework
- Legal design and mechanics:
  - Wage Law codified in 1996 obliges employers and trade unions to negotiate salary increases for the coming two years within:
    - a ceiling determined by projected hourly wage developments in key export markets; and
    - a floor determined by projected inflation in Belgium.
  - Wages are indexed to actual inflation via a “health index”, a basket of prices excluding alcohol, tobacco, and petrol.
  - Indexation trigger and timing:
    - Trigger: health index passes a 2-percent threshold.
    - Timing: immediate indexation for about half of private sector employees.
    - Public sector: indexation with a two-month delay.
    - Remaining workers: indexation takes effect at intervals of up to 12 months.
- Economic implications and current strains:
  - Rapid acceleration of actual inflation led to multiple rounds of wage indexation, far surpassing projected domestic inflation and projected wage developments in key export markets underlying the last negotiation round in early 2021.
  - Authorities’ latest estimates indicate the opening of a 2.9 percent wage gap at the end of 2022.
  - Consequence: space for real wage growth for the period 2022-24 is non-existent, as the Wage Law mandates real wage restraint until the wage gap is closed.
- Policy options and reform avenues (absent abolition of indexation):
  - Review the basis for indexation (health index), including exploring excluding volatile consumption-basket components like energy or food.
  - Increase temporary flexibility of the indexation regime during large and multiple shocks.
  - Incorporate productivity trends to capture deviations of labor costs between Belgium and key export markets.

### Fiscal adjustment: staff scenarios and recommendations (Annex IV)
- Authorities’ planned adjustment: 1.4 percent of GDP over 2021-24 (fixed 0.2 percent per year plus variable components).
- Staff recommended paths:
  - Alternative 1 (staff baseline recommendation):
    - Structural primary adjustment of 0.6 percent of GDP (or more) in 2023 and 0.8 ppts per year (or more) during 2024-30.
    - Debt: 2023 108.1; 2027 106.0; 2030 102.5.
  - Alternative 2 (faster path):
    - Reaching balance in 6 years implies lower cap for real spending growth (1 percent) and adjustment of more than 1 ppt of GDP per year.
    - Debt: 2023 107.6; 2027 102.7; 2030 (change vs. baseline) -4.7 ppts.
- IMF Baseline selected indicators (percent of GDP unless indicated):
  - Fiscal balance: 2021 -5.6; 2022 -4.8; 2023 -5.5; 2027 -5.5; 2030 -5.5.
  - Interest: 2021 1.7; 2022 1.6; 2023 1.7; 2027 2.8; 2030 2.9.
  - Primary balance: 2021 -3.9; 2022 -3.3; 2023 -3.8; 2027 -2.7; 2030 -2.6.
  - Structural primary balance: 2021 -3.5; 2022 -3.6; 2023 -3.6; 2027 -2.7; 2030 -2.6.
  - Debt: 2021 109.2; 2022 106.8; 2023 108.1; 2027 120.3; 2030 127.6.
- Implementation challenges:
  - Recommended measures: rationalize spending, apply strict spending limits, increase revenues via tax policy and revenue administration reforms, enhance growth and employment through decisive structural reforms, and enhance cooperation among federal, regional, and community governments.

### Financial sector policies and risks (selected from paragraph 31)
- Policy stance: "Placing a near-term hold on additional macroprudential policy tightening has been appropriate."
- Objectives: ensure adequate provision of credit, preserve resilience, facilitate deployment of buffers to absorb losses when needed.
- Vulnerabilities: weakening economy, cooling housing market, reemergence of sectoral credit concerns, exit from low-yield environment, large real estate exposures, NBFI visibility concerns.
- Preparedness: authorities should remain alert and may need to calibrate macroprudential policy toward release of available buffers if the macro-financial outlook worsens; continue tailored stress testing for interest rate, cyber, and climate risks.

### Structural reforms and policy priorities (summary)
- Labor market:
  - 2022 federal labor package: flexibility (easier e-commerce night-work, platform workers status, remote working), training (increased individual training rights, employer obligations), mobility (facilitating job switching).
  - Employment rate goal: increase from 72 percent to 80 percent by 2030.
  - Target groups: younger workers, job entrants, older workers, women, workers with an immigration background, those receiving disability benefits.
  - Recommended actions: reduce and cap duration of unemployment benefits; ease reduction of social benefits when recipients take jobs; enhance accreditation of foreign qualifications.
- Product-market and business environment:
  - Ongoing reforms: restructuring and insolvency frameworks, digitalizing judiciary, rolling out 5G, strengthening cyber-risk monitoring.
  - NGEU RRP: Belgium must meet 22 milestones before receiving the next tranche (€847 million); most met except budget-neutral pension reforms.
  - Additional efforts: ease entry barriers, reduce red tape, increase risk capital availability, improve R&D tax incentive efficiency.
- Wage indexation reforms suggested once shock passes:
  - Adjust health index to exclude additional volatile items.
  - Incorporate productivity trends and a wider set of peer countries.
  - Options: further exclusion of items, partial or smoothed indexation, indexation linked to an inflation target, differentiated indexation, or lump-sum increases.
- Climate and energy:
  - Align national policies with EU Fit-for-55 target (47 percent domestic emissions reduction by 2030 for sectors not covered by EU ETS).
  - NGEU-RRF targeted investments: building renovation 0.2 percent of GDP; low-carbon energy projects 0.1 percent of GDP; green mobility 0.2 percent of GDP.
  - Policy recommendations: increase carbon pricing as international energy prices fall; reduce subsidies; rationalize electricity network fees and levies; provide targeted social protection in cash; introduce real-time electricity metering and distance and congestion road charging; strengthen federal-regional coordination and step up climate-related public investment.
- Energy security steps in 2022:
  - Decision in March to extend operations of two nuclear power stations for ten years.
  - Secure alternative gas supplies via pipelines and LNG; investments in offshore windfarms, hydrogen, and other renewables.

### Selected longer-run projections (tables and text, preserved exactly)
- Real GDP growth (annual): 2019: 2.2; 2020: -5.4; 2021: 6.1; 2022: 3.0; 2023: 0.2; 2024: 1.3; 2025: 1.2; 2026: 1.2; 2027: 1.2; 2028: 1.3.
- Consumer prices (annual percent change): 2019: 1.2; 2020: 0.4; 2021: 3.2; 2022: 10.3; 2023: 5.5; 2024: 2.2; 2025: 1.8; 2026: 1.9; 2027: 2.0; 2028: 2.0.
- Unemployment rate (percent): 2019: 5.5; 2020: 5.7; 2021: 6.3; 2022: 5.5; 2023: 6.0; 2024: 5.9; 2025: 5.6; 2026: 5.6; 2027: 5.5; 2028: 5.5.
- General government balance (percent of GDP): 2019: -1.9; 2020: -9.0; 2021: -5.6; 2022: -4.8; 2023: -5.5; 2024: -5.4; 2025: -5.3; 2026: -5.4; 2027: -5.5; 2028: -5.5.
- General government debt (percent of GDP): 2019: 97.6; 2020: 112.0; 2021: 109.2; 2022: 106.8; 2023: 108.1; 2024: 109.8; 2025: 112.4; 2026: 115.1; 2027: 117.8; 2028: 120.3.
- Current account (percent of GDP): 2019: 0.1; 2020: 1.1; 2021: 0.4; 2022: -4.0; 2023: -3.5; 2024: -1.6; 2025: -1.2; 2026: -0.7; 2027: -0.4; 2028: 0.0.
- Net International Investment Position: 2019: 40.9; 2020: 46.7; 2021: 63.9; 2022: 54.9.
- Household saving ratio: 2019: 12.4; 2020: 20.6; 2021: 17.1; 2022: 14.7; 2023: 14.2; 2024: 13.7; 2025: 13.7; 2026: 13.8; 2027: 13.7; 2028: 13.7.
- Nominal GDP (in billions of euros): 2019: 478.6; 2020: 459.8; 2021: 502.3; 2022: 547.0; 2023: 575.9; 2024: 599.1; 2025: 616.8; 2026: 635.9; 2027: 655.4; 2028: 675.9.

*February 9, 2023 — IMF staff report for the 2022 Article IV consultation (excerpt).*

### 2023. The labor market has remained tight, with record-high job creation and low

### 1belea2023001 - 2023. The labor market has remained tight, with record-high job creation and low

### Key findings — context and economic developments
- Post-pandemic recovery slowed due to spillovers from Russia’s war in Ukraine, high inflation, tightening financial conditions, and elevated uncertainty.
- Fiscal support and automatic indexation of wages and benefits helped shield household incomes but increased fiscal costs.
- The labor market remained tight with record-high job creation and low unemployment.
- The external current account swung to a large deficit in 2022, due largely to higher energy imports and lower vaccine exports.
- A resilient financial sector is facing challenges from a weaker macro-financial environment.
- Some important structural reforms took place in 2022.

### Outlook and risks
- Growth projections:
  - Growth is expected to slow from 3.0 percent in 2022 to 0.2 percent in 2023, before returning to potential of 1.2 percent over the medium term.
  - Potential output growth: 3.9 (2021), 1.8 (2022), 1.2 (2023).
- Inflation projections:
  - Consumer prices: 3.2 (2021), 10.3 (2022), 5.5 (2023).
  - Inflation should decelerate from 10.3 percent in 2022 to 5.5 percent in 2023, as energy prices ease.
- Risks are tilted to the downside:
  - Escalation of the war in Ukraine.
  - A sharper-than-expected tightening of financial conditions.
- Upside/mitigating factors:
  - Lower energy prices would reduce fiscal pressures.
  - Progress on structural reforms before elections in 2024 would boost confidence.

### Key statistics (selected indicators, preserved exactly as reported)
- Real GDP growth: 6.1 (2021), 3.0 (2022), 0.2 (2023 Proj.).
- Domestic demand: 5.6 (2021), 2.8 (2022), 0.9 (2023 Proj.).
- Foreign balance (contribution to GDP growth): 0.6 (2021), 0.3 (2022), -0.6 (2023 Proj.).
- Exports, goods and services: 11.3 (2021), 4.7 (2022), 1.1 (2023 Proj.).
- Imports, goods and services: 10.7 (2021), 4.4 (2022), 1.9 (2023 Proj.).
- Output gap (in percent): -0.5 (2021), 0.7 (2022), -0.2 (2023 Proj.).
- Unemployment rate (in percent): 6.3 (2021), 5.5 (2022), 6.0 (2023 Proj.).
- Employment growth: 1.8 (2021), 1.8 (2022), 0.2 (2023 Proj.).
- GDP deflator: 2.9 (2021), 5.7 (2022), 5.0 (2023 Proj.).
- Public finance:
  - Revenue: 49.9 (2021), 49.4 (2022), 50.8 (2023 Proj.).
  - Expenditure: 55.5 (2021), 54.2 (2022), 56.3 (2023 Proj.).
  - General government balance: -5.6 (2021), -4.8 (2022), -5.5 (2023 Proj.).
  - Structural balance: -5.1 (2021), -5.1 (2022), -5.3 (2023 Proj.).
  - Primary balance: -3.9 (2021), -3.3 (2022), -3.8 (2023 Proj.).
  - General government debt: 109.2 (2021), 106.8 (2022), 108.1 (2023 Proj.).
- Balance of payments:
  - Goods and services balance: 1.1 (2021), -3.8 (2022), -3.3 (2023 Proj.).
  - Current account: 0.4 (2021), -4.0 (2022), -3.5 (2023 Proj.).
- Memorandum items:
  - Nominal GDP (in billions of euros): 502.3 (2021), 547.0 (2022), 575.9 (2023 Proj.).
  - Population (in millions): 11.6 (2021), 11.7 (2022), 11.7 (2023 Proj.).

### Fiscal developments and vulnerabilities
- The external energy shock and broad support measures raised the fiscal deficit: overall deficit remained high—4.8 percent of GDP in 2022 versus 5.6 percent in 2021.
- Energy-price measures accounted for 1.0 percent of GDP and refugee support 0.2 percent of GDP in 2022; some measures (VAT reduction on gas and electricity from 21 to 6 percent, lower excise duties for petrol and diesel) were not targeted and did not maintain price signals.
- Measures are subject to quarter-by-quarter review; most were set to expire at end-Q1:2023.
- High inflation helped reduce the debt ratio from 109.2 percent to 106.8 percent of GDP in 2022, but debt remains elevated relative to pre-pandemic 97.6 percent of GDP in 2019.
- With aging and social-benefit pressures and without adjustment measures:
  - The structural fiscal deficit is expected to remain elevated over the medium term at 5½ percent of GDP (stated elsewhere as structural deficit expected to remain elevated at 5½ percent of GDP).
  - Public debt would rise to about 120 percent of GDP in 2028, increasing vulnerabilities.
- Aging costs are estimated to add 0.2-0.3 ppt. per year to deficits if unaddressed.

### External sector and competitiveness
- The current account swung to a deficit in 2022 driven by:
  - Higher energy net imports: 3.1 percent of GDP (Q1–Q3:2022 contribution).
  - Lower vaccine net exports: 1.6 percent of GDP (Q1–Q3:2022 contribution).
- The current account deficit is expected to have reached 4.0 percent of GDP in 2022; staff’s preliminary assessment suggested the CA gap was -5.6 percent of GDP and the REER overvalued by 7.6 percent.
- Indexation and wage growth:
  - Automatic indexation protected households but yielded labor-cost increases above major trading partners, weighing on competitiveness.
  - Wage growth through Q3:2022 surpassed neighboring countries; an annual indexation in January 2023 produced a more-than-10-percent rise in labor costs for two-fifth of private-sector workers.
  - Indexation has opened a wage gap with key trading partners, posing challenges for competitiveness.
  - Robust corporate profit margins provide some scope to absorb higher labor costs, but risks of a wage-price spiral are noted.

### Labor market and social issues
- Labor market tightness:
  - Record-high job creation and low unemployment overall, with unemployment rate 5.5 percent in 2022.
  - High vacancies and low unemployment especially in Flanders and among skilled workers.
  - Unemployment is higher in Wallonia and Brussels and among low-skilled and younger workers; geographic mobility is limited.
- Temporary unemployment has increased recently as some firms paused production due to high energy prices.

### Financial sector and credit conditions
- Credit dynamics:
  - Mortgage lending: +5.7 percent y/y in November (most recent available).
  - Borrowing by non-financial corporations (NFCs): +6.1 percent y/y.
  - Bank lending surveys indicate slowing housing and corporate credit demand; banks have tightened credit standards.
- Financial sector resilience:
  - Profitability returned to pre-pandemic levels; elevated capital ratios; pandemic-related NPLs and bankruptcies did not materialize.
  - Sectoral credit and cyber risk concerns have led banks to strengthen loan-loss provisioning.
  - House prices showed signs of overvaluation and the market has started to cool.
  - Non-bank financial institutions show little sign of stress; occupational pension funds are relatively small; liquidity pressures from derivatives exposures appear contained.

### Executive Board and staff policy recommendations
- Directors recommended a credible and ambitious multi-year, expenditure-led fiscal adjustment to:
  - Put debt on a declining path.
  - Replenish buffers.
  - Complement monetary policy in curbing inflation.
- Specific fiscal policy guidance:
  - Rationalize current spending while increasing productive public investment.
  - Energy support measures should remain limited and temporary, be better targeted, and maintain price signals.
  - Improve coordination of spending across government levels.
  - Initiate tax reforms and enhance public investment management.
- Financial sector policy guidance:
  - Continue balancing adequate credit provision, preserving resilience, and facilitating deployment of buffers to absorb losses when needed.
  - Close monitoring of financial stability risks given rising interest rates and slowing economy and housing market.
  - Most Directors supported a near-term hold on additional macroprudential tightening; some considered further tightening desirable if macro-financial conditions allow.
  - Strengthen AML/CFT framework and follow up on FSAP conclusions.
- Structural reform priorities:
  - Further labor and product market reforms to improve productivity and competitiveness and reinvigorate growth.
  - Facilitate labor reallocation, enhance labor market flexibility, and adjust incentive setting in social security and pension systems.
  - Pension reforms are critical for Belgium to receive the Next Generation EU funds.
  - Consider revising the wage indexation framework once inflationary pressures subside.
  - Improve business environment, including restructuring and insolvency frameworks, and strengthen cyber risk monitoring and preparedness.
- Climate policy:
  - Reach ambitious climate goals through broader initiatives, greater coordination and execution, aligning national policies with more ambitious EU targets, and considering raising carbon pricing.
  - Significant new investments in renewables were welcomed to enhance energy security.

*February 9, 2023 — IMF staff report for the 2022 Article IV consultation.*

### Box 1. Belgium: Characteristics and Challenges of Belgium’s Wage Indexation Framework

### Box 1. Belgium: Characteristics and Challenges of Belgium’s Wage Indexation Framework

### Wage-setting framework: legal design and mechanics
- Wage Law codified in 1996 obliges employers and trade unions to negotiate salary increases for the coming two years within:
  - a ceiling determined by projected hourly wage developments in key export markets; and
  - a floor determined by projected inflation in Belgium.
- Wages are indexed to actual inflation via a “health index”, a basket of prices excluding alcohol, tobacco, and petrol.
- Indexation trigger and timing:
  - Trigger: health index passes a 2-percent threshold.
  - Timing: immediate indexation for about half of private sector employees.
  - Public sector: indexation with a two-month delay.
  - Remaining workers: indexation takes effect at intervals of up to 12 months, reflecting historical patterns of sales price indexation by firms.

### Economic implications and current strains
- Purpose: shield households from purchasing-power losses while protecting competitiveness of a highly open economy.
- Redistribution effects: wage indexation transfers the economic costs of a terms-of-trade shock (e.g., climb in commodity prices) to firms and the government, burdening public finances and corporate profitability or competitiveness.
- Recent developments:
  - Rapid acceleration of actual inflation led to multiple rounds of wage indexation, far surpassing projected domestic inflation and projected wage developments in key export markets underlying the last negotiation round in early 2021.
  - Authorities’ latest estimates indicate the opening of a 2.9 percent wage gap at the end of 2022.
  - Consequence: space for real wage growth for the period 2022-24 is non-existent, as the Wage Law mandates real wage restraint until the wage gap is closed.
  - To secure a deal between employers and trade unions, government intervention involving fiscal incentives was required.

### Challenges to competitiveness and political economy
- If actual inflation and wage indexation surpass projected inflation and projected wage growth in key competitors, a positive wage gap emerges; the Wage Law stipulates its reduction over time, possibly requiring a long period of real wage restraint that is politically sensitive and may weaken labor market efficiency.
- Potential outcomes of continued strain:
  - Weaker corporate profitability and competitiveness, particularly vis-à-vis non-EU competitors not facing similar energy-price pressures.
  - Possible burden on public finances through fiscal interventions to support negotiations or to offset distributive impacts.

### Policy options and reform avenues (absent abolition of indexation)
- Review the basis for indexation (health index):
  - Explore excluding price increases in highly volatile consumption-basket components like energy or food to prevent quick pass-through to wages that would necessitate prolonged real wage restraint if not mirrored in competitors’ wages.
- Increase temporary flexibility of the indexation regime:
  - Consider options to at least temporarily widen flexibility during large and multiple shocks to alleviate the burden on firms and preserve investment and employment.
- Account for productivity trends:
  - Incorporate productivity trends to capture deviations of labor costs between Belgium and key export markets, rather than basing adjustments solely on nominal wage costs.

*Source: Box 1. Belgium: Characteristics and Challenges of Belgium’s Wage Indexation Framework (excerpt).*

### 18.      The authorities agreed   that fiscal adjustment is needed but cautioned that

### 1belea2023001 - 18.      The authorities agreed   that fiscal adjustment is needed but cautioned that

### Fiscal adjustment and energy support
- Authorities agreed that fiscal adjustment is needed but cautioned that consolidation in 2023 should be balanced with energy support needs and slowing growth.
- If energy prices remain high, continued support will require a political decision, including on adjustment of measures and on budget mitigation.
- Authorities pointed to limited market pressures to date and uncertainty on new EU fiscal rules.
- Adjustment will be considered during a budget review planned for March.
- Energy measures are reiterated as temporary; authorities are considering ways to further improve targeting and incentives.
- New excises will be progressive and provide price signals for energy savings and the green transition.
- Authorities appreciated staff’s recommendation for the adjustment to be shared with regions and communities, but noted challenges given:
  - assigned federal, regional, and community competencies;
  - lack of federal-regional hierarchy;
  - a political landscape that limits consensus on coordination.
- Staff recommendations (Staff Appraisal):
  - Pursue multi-year, expenditure-led consolidation from 2023 to support efforts to reduce inflation, ease pressures and vulnerabilities, and begin rebuilding buffers.
  - Avoid a larger overall deficit this year; aim to reach the debt-stabilizing deficit level and overall balance going forward.
  - Focus adjustment on rationalization of current spending (energy-support measures, goods and services, and subsidies).
  - Energy support should be better targeted while maintaining price signals; it should remain temporary and limited.
  - Contain wage-bill, social-benefit, and aging costs (pensions, health) and improve benefit targeting and incentives.
  - Preserve and increase efficient and productive investment spending at the federal and regional levels.
  - Initiate tax reforms; improve federal-regional alignment, coordination, incentives, and burden-sharing.
  - A credible, expenditure-led fiscal consolidation combined with structural reforms would improve Belgium’s external position.

### Safeguarding financial stability
- Housing market and buffers:
  - Cooling of the housing market, characterized by elevated prices, calls for heightened vigilance and release of buffers, if needed.
  - Model-based estimates point to some overvaluation.
  - Bank mortgage exposures are relatively high; debt-service-to-income ratios are somewhat elevated.
  - Risks mitigated by prevalence of mortgages with full-recourse provisions that amortize fully over the maturity of the loan and by a high share of fixed-rate and longer-term (>15 years) loans.
  - Sectoral systemic risk buffer (SSyRB) against housing-related exposures introduced in May 2022:
    - A 9 percent SSyRB affecting the largest lenders replaced mortgage risk-weight add-ons in place since 2013.
    - Kept the level of additional capital preserved at approximately €2 billion.
  - Aggregate liquid assets of households exceed mortgage debt (Figure 3), cushioning debt-servicing capacity.
  - Recent slowdown of house-price momentum may herald a sharper market turn — careful monitoring and SSyRB deployment, if needed, advised.
  - Reactivating mortgage moratoria for October 2022-March 2023 was judged inappropriate despite limited use, strict eligibility criteria, and adequate provisioning.
  - NBB efforts to gather housing stock energy efficiency information are welcome and should continue.

- Macroprudential stance and risks:
  - War in Ukraine and energy crisis rekindled sectoral credit and cyber risk concerns.
  - Banks command considerable buffers; corporate credit risk appears manageable.
  - NPLs have improved across most sectors since 2019.
  - Cost pressures affect pandemic-hit sectors (hospitality, entertainment) and prominent lending sectors (manufacturing, trade); combined with a possible downturn in real estate, asset quality could deteriorate.
  - Maintain the CCyB at its 0 percent neutral level until uncertainty subsides.
  - Further weakening of the macro-financial environment may call for calibration of macroprudential policy to support banks’ capacity to absorb losses and safeguard credit provision.
  - Cyber risks: gather information on cyber-preparedness, conduct tailored stress-testing, and implement policy intervention to mitigate risks.
  - Heightened awareness of weaknesses in AML/CFT measures of some financial institutions should be complemented by concrete actions to rectify deficiencies.

- Interest-rate normalization and NBFI risks:
  - Higher and steeper yield curves should benefit financial intermediaries (improve interest margins, better match NBFI assets to long-term liabilities) but could expose vulnerabilities if adjustment is disorderly.
  - Big foreign bank presence adds complexity due to home-host supervision interplay.
  - Efforts to better understand NBFI interlinkages and risks are welcome.
  - Dedicated analysis and simulation of various interest-rate trajectories recommended to gauge potential financial-sector strains and inform buffers and policy levers.
  - Similar analysis recommended for climate risks.
  - The ongoing FSAP provides an opportunity for in-depth review of financial sector vulnerabilities and resilience.

- Authorities’ view on financial stability:
  - Authorities shared staff’s assessment of financial stability risks and showed readiness to take policy actions.
  - They consider the near-term halt to macroprudential tightening suitable, while willing to strengthen buffers once the macro-financial outlook is clearer.
  - Comfortable with resilience of the financial sector and housing market, but ready to release available buffers should risks materialize.
  - Working to improve appraisal of NBFI-related risks and to strengthen AML/CFT measures.
  - Committed to fully leveraging the IMF FSAP launched in November 2022.

### Building a stronger and more sustainable economy
- Labor market reforms and employment:
  - New federal labor package effective in 2022 focused on:
    - flexibility (easier e-commerce night-work, enhanced status for platform workers and remote working, recognition of compressed or varying schedules);
    - training (increased individual training rights, employer obligations for annual training plans);
    - mobility (facilitating job switching and redeployment during notice periods).
  - For 2023, federal government increased the allocation for minimum wages relative to unemployment benefits in the distribution of the “welfare envelope” to promote activation.
  - The measures modernize employment law but further efforts needed to increase employment rate from 72 percent to the goal of 80 percent by 2030.
  - Efforts should target younger workers and job entrants, older workers, women, workers with an immigration background, and those receiving disability benefits.
  - Recommended reforms include wage-setting, hiring and dismissal, employment protection, social benefits, and employer flexibility.
  - Reduce and cap duration of unemployment benefits; ease reduction of social benefits when recipients take jobs.
  - Enhance and speed accreditation of foreign education and professional qualifications.
  - Authorities acknowledged complexity from federal-regional division (training and activation regional; unemployment benefits federal).

- Product-market reforms and productivity:
  - Continued reforms needed to improve productivity, competition, and growth.
  - Ongoing reforms: enhancing restructuring and insolvency frameworks, digitalizing the judiciary, rolling out 5G networks, strengthening cyber-risk monitoring and preparedness.
  - Belgium’s NGEU recovery and resilience plan (RRP) focuses on mobility, innovation, and support to promising sectors.
  - Belgium must meet 22 milestones before receiving the next NGEU RRP tranche (€847 million); most milestones met except budget-neutral pension reforms.
  - Additional efforts: ease entry barriers (retail distribution/services), reduce red tape (startups), increase risk capital availability, improve efficiency of R&D tax incentives.

- Wage indexation:
  - Automatic wage indexation provides timely protection of household purchasing power, but may weaken corporate profitability, investment, competitiveness, and growth.
  - Wage Law balances indexation with a corrective mechanism to preserve external competitiveness, potentially resulting in prolonged periods of limited or no real wage increases after shocks.
  - Suggested modifications once present shock passes:
    - Adjust the health index to exclude additional items subject to high price volatility from terms-of-trade shocks and global commodity price swings (beyond alcohol, tobacco, and motor fuels currently excluded), with vulnerable groups compensated by well-targeted fiscal support.
    - Consider incorporating productivity trends and a wider set of peer countries when assessing competitiveness under the Wage Law.
    - Other reform options noted: further exclusion of items from the health index, partial or smoothed indexation, indexation linked (partly or fully) to an inflation target, differentiated indexation, or a lump-sum increase rather than a percentage rise.

- Climate and energy policy:
  - Reaching ambitious climate goals requires wider initiatives, stronger coordination, and attention to energy-security challenges.
  - Climate policies need alignment with more ambitious targets under the EU’s Fit-for-55 initiative (47 percent domestic emissions reduction by 2030 for sectors not covered by the EU emission trading system).
  - EU-identified gaps in the authorities’ 2019 plans include high transport and building-related emissions; federal-regional differences; need for more ambitious renewables and energy efficiency actions; greater attention to subsidies; limited quantified investment needs.
  - NGEU-RRF targeted investments include:
    - building renovation: 0.2 percent of GDP;
    - low-carbon energy projects: 0.1 percent of GDP;
    - green mobility: 0.2 percent of GDP.
  - Policy recommendations:
    - Increase carbon pricing as international energy prices fall, especially for sectors outside the EU ETS (transportation, buildings, excluded industrial emissions), with revenue recycling to protect vulnerable households and viable trade-exposed firms.
    - Complement higher carbon pricing with sectoral feebates and price floors/ceilings to provide abatement-cost certainty.
    - Reduce subsidies (fuel cards, commercial diesel, heating oil).
    - Rationalize electricity network fees and levies to reduce disincentives to use electricity over fossil fuels.
    - Provide targeted social protection with cash rather than energy-based support.
    - Introduce real-time electricity metering and distance and congestion road charging.
    - Strengthen federal-regional coordination and burden-sharing and bolster climate-related public investment.

- Energy security:
  - Authorities took important steps in 2022 to enhance energy security:
    - Decision in March to extend operations of two nuclear power stations for ten years.
    - Efforts to secure alternative gas supplies via pipelines and LNG deliveries, helping fill regional storage and increase electricity generation while neighboring nuclear plants were in maintenance.
    - Significant new investments in offshore windfarms, hydrogen, and other renewables, including support from the NGEU RRP.
  - These efforts should continue.

### Staff appraisal — overall outlook and policy priorities
- Belgium’s recovery from the pandemic has slowed with high inflation and tighter financial conditions; the outlook is marked by significant uncertainty and downside risks.
- A strong, timely response to higher energy prices and indexation eased impacts; labor market and financial sector have shown resilience.
- Challenges: slowing activity, high inflation, competitiveness challenges, elevated fiscal deficits and debt, continuing risks and uncertainty (especially escalation of the war and further spillovers).
- Opportunities: lower energy prices could ease fiscal pressures; progress on reforms could boost confidence.
- Policy priorities:
  - Fiscal policy: tighter stance to complement monetary policy in curbing inflation and to rebuild buffers via a credible medium-term adjustment path.
  - Multi-year, expenditure-led consolidation from 2023 focused on rationalization of current spending and preserving efficient investment.
  - Better targeting of energy support while maintaining price signals and keeping support temporary and limited.
  - Sustained efforts to contain wage-bill, social-benefit, and aging costs and to improve benefit targeting and incentives.
  - Structural reforms to strengthen competitiveness to improve Belgium’s external position, currently assessed as substantially weaker than implied by medium-term fundamentals and desirable policies.

*Source: 1belea2023001 - 18.      The authorities agreed   that fiscal adjustment is needed but cautioned that*

### 31.      In a fluid environment, financial sector policies should continue to balance ensuring

### 1belea2023001 - 31.      In a fluid environment, financial sector policies should continue to balance ensuring

### Financial sector policies and risks
- Policy stance:
  - "Placing a near-term hold on additional macroprudential policy tightening has been appropriate."
- Policy objectives to balance:
  - ensuring the adequate provision of credit,
  - preserving resilience,
  - facilitating deployment of buffers to absorb losses when needed.
- Current vulnerabilities and risks:
  - Financial intermediaries are challenged by a weakening economy, a cooling housing market, and reemergence of sectoral credit concerns.
  - Exit from long, low-yield environment heightens risks of a disorderly adjustment.
  - Large exposures in real estate warrant particular alertness.
  - Nonbank financial institutions (NBFIs) pose concerns given more limited visibility on interlinkages and balance sheet vulnerabilities.
- Policy actions and preparedness:
  - Authorities should remain alert to emerging weaknesses and may need to calibrate macroprudential policy toward release of available buffers if the macro-financial outlook worsens.
  - Ongoing efforts to gather information to enable more tailored stress testing and policy intervention regarding interest rate, cyber or climate risks are welcome and should continue.

### Structural reforms (labor, product markets, business environment)
- Importance:
  - "Further advancing of structural reforms is critical, especially labor and product market actions to enhance flexibility, productivity, and competitiveness."
- Labor market reform priorities:
  - Facilitate reallocation and meet ambitious employment goals following measures taken in 2022.
  - Target groups: younger and older workers, women, workers with an immigration background, and those receiving disability benefits.
  - Reform areas: wage-setting, hiring and dismissal, employment protection, social benefits, and employer flexibility.
  - Coaching and training will also help.
  - "Once inflationary pressures subside, options to revise the wage indexation framework should be explored with a review of the indexation basis a possible avenue of reform."
- Business environment and other reforms:
  - Restructuring and insolvency frameworks reforms.
  - Investments in mobility and green transition.
  - Actions to strengthen cyber risk monitoring and preparedness.

### Climate goals, energy, and public investment
- Key messages:
  - "Reaching ambitious climate goals will require a wider set of initiatives and greater focus on execution and coordination."
  - National climate policies need alignment with more ambitious EU targets, addressing gaps and shortcomings.
- Policy measures recommended:
  - Higher carbon pricing is needed, especially as international energy prices fall.
  - Reduce subsidies.
  - Introduce feebates.
  - Rationalize electricity fees and levies.
  - Provide social protection in cash rather than energy-based support.
  - Introduce real-time electricity metering and distance and congestion charging.
  - Strengthen federal-regional coordination and burden-sharing.
  - Step up climate-related public investment.
- Energy security and investments:
  - Belgium is an important energy hub in Western Europe; "important steps have been taken to enhance energy security."
  - Significant new investments are being made in offshore windfarms, hydrogen, and other renewable initiatives. "These important efforts should continue."

### Institutional scheduling
- "It is proposed that the next Article IV consultation take place on the standard 12-month cycle."

### Key macro-financial indicators and projections (selected exact figures from tables and text)
- Real GDP growth (annual):
  - 2019: 2.2
  - 2020: -5.4
  - 2021: 6.1
  - 2022: 3.0
  - 2023: 0.2
  - 2024: 1.3
  - 2025: 1.2
  - 2026: 1.2
  - 2027: 1.2
  - 2028: 1.3
- Consumer prices (annual percent change):
  - 2019: 1.2
  - 2020: 0.4
  - 2021: 3.2
  - 2022: 10.3
  - 2023: 5.5
  - 2024: 2.2
  - 2025: 1.8
  - 2026: 1.9
  - 2027: 2.0
  - 2028: 2.0
- Unemployment rate (percent):
  - 2019: 5.5
  - 2020: 5.7
  - 2021: 6.3
  - 2022: 5.5
  - 2023: 6.0
  - 2024: 5.9
  - 2025: 5.6
  - 2026: 5.6
  - 2027: 5.5
  - 2028: 5.5
- General government balance (percent of GDP):
  - 2019: -1.9
  - 2020: -9.0
  - 2021: -5.6
  - 2022: -4.8
  - 2023: -5.5
  - 2024: -5.4
  - 2025: -5.3
  - 2026: -5.4
  - 2027: -5.5
  - 2028: -5.5
- General government debt (percent of GDP):
  - 2019: 97.6
  - 2020: 112.0
  - 2021: 109.2
  - 2022: 106.8
  - 2023: 108.1
  - 2024: 109.8
  - 2025: 112.4
  - 2026: 115.1
  - 2027: 117.8
  - 2028: 120.3
- Current account (percent of GDP):
  - 2019: 0.1
  - 2020: 1.1
  - 2021: 0.4
  - 2022: -4.0
  - 2023: -3.5
  - 2024: -1.6
  - 2025: -1.2
  - 2026: -0.7
  - 2027: -0.4
  - 2028: 0.0
- Net International Investment Position:
  - 2019: 40.9
  - 2020: 46.7
  - 2021: 63.9
  - 2022: 54.9
- Household saving ratio:
  - 2019: 12.4
  - 2020: 20.6
  - 2021: 17.1
  - 2022: 14.7
  - 2023: 14.2
  - 2024: 13.7
  - 2025: 13.7
  - 2026: 13.8
  - 2027: 13.7
  - 2028: 13.7
- Nominal GDP (in billions of euros):
  - 2019: 478.6
  - 2020: 459.8
  - 2021: 502.3
  - 2022: 547.0
  - 2023: 575.9
  - 2024: 599.1
  - 2025: 616.8
  - 2026: 635.9
  - 2027: 655.4
  - 2028: 675.9

*Source: IMF staff report excerpts and tables included in the provided content.*

### Annex I. 2021 Article IV Recommendations

### Annex I. 2021 Article IV Recommendations

### Fiscal Policy
- Recommendation: Maintain fiscal support until recovery firms, targeted and focused on solvency needs and hard-hit households. Leverage private sector resources and expertise, coordinate measures across governments, and taper as risks abate. (ST)
  - Implementation note: Fiscal support was maintained. Tapering started in late 2021/early 2022, but events were overtaken by spillovers from Russia’s invasion of Ukraine and the provision of energy bill support to households. Coordination mechanisms continue to need improvement.
- Recommendation: Address recent expansions of social spending through reforms or offsetting adjustments. Consider fundamental reforms of unemployment, pension, and other social benefits, including to contain drift from indexation and real benefit increases. (ST/MT)
  - Implementation note: Events were overtaken by spillovers from Russia’s invasion of Ukraine and the provision of energy bill to households. Reforms to pension benefits have so far focused on gaps (flexible workers, periods of childcare) and not reducing costs.
- Recommendation: Rebuild fiscal space once recovery is secured, with ambitious, well-defined, upfront commitments to boast credibility and place debt on a downward trajectory from 2024. (ST/MT)
  - Implementation note: Events were overtaken by spillovers from Russia’s invasion of Ukraine and the provision of energy bill support to households. Fiscal adjustment not yet in place.
- Recommendation: Extend tax reforms: reduce consumption tax expenditures; update real estate taxation; address climate objectives; ensure additional revenue administration resources; put in place risk mitigation strategies (incl. for high-wealth individuals); improve access to third-party data. (ST/MT)
  - Implementation note: Tax reform blueprint issued in July 2022, focusing on personal income tax reforms. Proposals on carbon/climate taxation are under preparation/consideration. VAT GAP analysis recently completed with IMF FAD TA support.

### Financial and Macroprudential Policies
- Recommendation: Ensure policy flexibility to address near-term vulnerabilities and risks; avoid premature policy tightening by allowing use of existing buffers. (ST)
  - Implementation note: Events were affected by spillovers from Russia’s invasion of Ukraine and higher inflation and interest rates. Authorities have not adjusted macroprudential policy settings (as earlier considered) to allow flexibility and use of existing buffers.
- Recommendation: Mitigate stability risks through supervisory vigilance and possible use of macroprudential policies (e.g., tightening to constrain lending to highly leveraged borrowers, strengthen buffers). (ST)
  - Implementation note: Supervisors closely monitoring vulnerabilities and risks.
- Recommendation: Implement FSAP recommendations; continue reinforcement of the AML/CFT framework. (ST/MT)
  - Implementation note: See FSAP Annex VII.

### Structural Reforms
- Recommendation: As recovery strengthens, pivot from protecting jobs to facilitating reallocation (e.g., hiring subsidies, increased focus on retraining). Broad support should be replaced by targeted measures. (ST)
  - Implementation note: Pivot undertaken. Job-retention support phased out and new jobs deal put in place in 2022 with focus on training. More far-reaching reforms to facilitate reallocation are under consideration.
- Recommendation: More fundamental reforms of benefits, wage-setting, and employment-projection should be considered, including increasing UIB degressivity, revisiting the mechanism governing real benefit increases, allowing greater flexibility to align wages and productivity and reforming collective dismissals. (MT)
  - Implementation note: Not yet taken.
- Recommendation: Firm up plans to reduce red tape and ease entry barriers, especially in retail distribution and services. Reverse decline in productivity, by improving risk-capital availability and R&D incentive efficiency, increase infrastructure investment. (ST/MT)
  - Implementation note: Some measures were taken in the Federal Action Plan for administrative simplification (the Kafka Plan) and the 2022 jobs deal, including support for night and weekend work. Also, NGEU RRP is supporting increased infrastructure investment. More far-reaching measures are under consideration.
- Recommendation: Insolvency: accelerate strengthening of early warning mechanisms; introduce special SME out-of-court procedures; boost resources, allow creditors to initiate procedures; incentivize restructuring through tax relief/haircuts on government claims. (ST/MT)
  - Implementation note: Reforms ongoing in this area. Insolvency cases did not spike as anticipated during pandemic.
- Recommendation: Additional efforts/focus on federal-regional policy coordination and execution to meet ambitious climate targets (eliminate fuel subsidies and put in place a credible long-term carbon pricing framework. (ST/MT)
  - Implementation note: Events were affected by spillovers from Russia’s invasion of Ukraine and higher energy prices. Proposals on carbon/climate taxation are under consideration. Limited progress on policy coordination.

*Source: IMF staff; see IMF Country Report 21/209.*

### Annex IV. Fiscal Adjustment

### Annex IV. Fiscal Adjustment

### Adjustment needs and baseline assessment
- General government structural deficits remain elevated over the medium term, driven by recent structural spending increases and higher outlays on aging-related and other benefits.
- The primary deficit remains well above its debt-stabilizing level—by 2.9 ppts of GDP in 2027—and gross debt is on a high and rising trajectory (20 ppts above the pre-pandemic baseline by 2027).
- Belgium’s elevated and increasing medium-term primary deficit makes it an outlier among high-debt euro area countries.
- Interest expenses are expected to increase with rising yields, although costs are partly shielded by the long maturity of outstanding debt (average duration of federal debt was 10.5 years in October 2022; average interest rate 1.36 percent).
- Public finances are vulnerable to a credit-and-liquidity crisis event.

### Authorities’ planned adjustment and its implications
- Plans envisage adjustment of 1.4 percent of GDP over 2021-24, including annual fixed (0.2 percent of GDP) and variable components; the variable effort consists of about one-third each in expenditures reduction, additional revenues and miscellaneous items.
- Plans were overtaken by events in 2022 (war in Ukraine, energy crisis), stalling consolidation.
- The 2023-24 budgetary plan incorporates variable effort of about 0.6 percent of GDP in 2023-24.
- The authorities’ planned adjustment does not stabilize debt.

### Staff recommended adjustment paths and scenarios
- A more ambitious, sustained adjustment is needed to place debt on a downward path and reach structural balance by 2030 (previous EU MTO).
- Alternative 1 (staff baseline recommendation):
  - Structural primary adjustment of 0.6 percent of GDP (or more) in 2023 and 0.8 ppts per year (or more) during 2024-30.
  - Additional savings would be needed to facilitate higher investment spending.
- Alternative 2 (faster path):
  - Reaching balance in 6 years would mean a lower cap for real spending growth (1 percent) and adjustment of more than 1 ppt of GDP per year.
  - Both paths involve significant, sustained adjustment to reach the debt-stabilizing and overall balances in a relatively short period.
- The IMF Departmental Paper (DP/2022/014) calls for upgrading national MTFFs and fiscal councils (endorse projections, undertake DSAs, assess fiscal risks, indicate consistency of expenditure ceilings and plans with targets/risks).

### Implementation challenges and policy recommendations
- The size and duration of the proposed adjustment are demanding and will require a comprehensive approach.
- Recommended policy measures:
  - Rationalize spending, including systematically incorporating spending reviews in budgetary processes.
  - Apply strict spending limits.
  - Increase revenues via tax policy and revenue administration reforms.
  - Enhance growth and employment through decisive structural reforms.
  - Enhance cooperation and burden sharing among federal, regional, and community governments for consolidation.
- The consolidation should be credible and systematic; Belgium has undertaken sustained, large fiscal adjustments in the 1980s and in 1993-2007, both under external policy pressures.

### Illustrative medium-term fiscal paths and key statistics (selected figures from Table IV.1 and Annex)
- IMF Baseline (selected indicators, in percent of GDP unless indicated):
  - Fiscal balance: 2021 -5.6; 2022 -4.8; 2023 -5.5; 2027 -5.5; 2030 -5.5.
  - Interest: 2021 1.7; 2022 1.6; 2023 1.7; 2027 2.8; 2030 2.9.
  - Primary balance: 2021 -3.9; 2022 -3.3; 2023 -3.8; 2027 -2.7; 2030 -2.6.
  - Structural primary balance: 2021 -3.5; 2022 -3.6; 2023 -3.6; 2027 -2.7; 2030 -2.6.
  - Debt: 2021 109.2; 2022 106.8; 2023 108.1; 2027 120.3; 2030 127.6.
- Alternative 1 (illustrative):
  - Structural primary balance: 2023 -1.7; 2024 -0.8; 2025 -0.1; 2026 0.8; 2027 1.7; 2030 6.3.
  - Effort: cumulative end-2023 5.9 (effort defined as deviation of the change of the structural balance from its change under the baseline).
  - Debt: 2023 108.1; 2027 106.0; 2030 102.5 (change vs. baseline: -5.1 ppts by end-2030).
- Alternative 2 (faster adjustment):
  - Structural primary balance: 2023 -1.3; 2024 -0.1; 2025 0.8; 2026 1.9; 2027 3.1; 2030 5.9.
  - Effort: cumulative end-2023 5.8.
  - Debt: 2023 107.6; 2027 102.7; 2030 (change vs. baseline) -4.7 ppts.
- Government (2023 Budgetary Plan, projections for general government):
  - Fiscal balance: 2021 -5.2; 2022 -5.8.
  - Interest: 2021 1.5; 2022 1.7.
  - Structural primary balance: 2021 -3.4; 2022 -3.2.
  - Effort by federal government (deficit-reducing structural measures): 2021 0.2; 2022 0.4; 2023 0.4; 2024 0.5 (fixed 0.2 per year; variable 0.2–0.3).
- Annex notes on aging and social spending:
  - Social benefit costs projected to increase due to ageing by 1 ppt of GDP in 2022 (vs. 24.5 percent of GDP in 2019), by 3 ppts by 2030, 5.2 ppts by 2049, and 5 ppts by 2070 (Study Committee on Ageing).
- Debt-stabilizing primary balance:
  - The debt stabilizing primary balance is -0.1 percent of GDP, if key variables remain at 2027 levels.
- Debt profile and financing risks:
  - Average duration of federal debt: 10.5 years (October 2022).
  - Average interest rate on federal debt: 1.36 percent.
  - Authorities’ assessed refinancing risks at 12 and 60 months: 12.8 percent and 36.4 percent, respectively; risk limits 17.5 percent and 42.5 percent (Belgium Debt Agency).

### Comparison with broader IMF analysis and fiscal adjustment magnitude
- The proposed adjustment path is more gradual than implied by IMF DP/2022/014, reaching balance in 8 rather than 6 years (with the escape clause operating in 2023).
- Simulations by the FPB based on the EU proposed Economic Governance Framework (November 2022) suggested adjustment that could reach 4.0 percent of GDP (i.e., 1.0 percent additional adjustment per year) in 4 years, or up to 4.8 percent of GDP (i.e., 0.7 percent additional adjustment per year) in 7 years, contingent on proposing reforms and investments aiming at economic growth and debt sustainability.

*Source: Annex IV. Fiscal Adjustment (IMF staff).*

### Annex VII. Main Recommendations from the 2017 FSAP:

### Annex VII. Main Recommendations from the 2017 FSAP: Follow-up

### Overview
- The authorities have continued to follow up on recommendations from the 2017 FSAP, including on systemic risk analysis, including stress testing, and monitoring of non-bank financial institutions; prudential policy, supervision and oversight, including macroprudential tools and implementation; on the financial safety net and crisis management.
- On AML/CFT, recommendations have already been implemented.
- A new FSAP was launched in late 2022.

### Systemic Risk Analysis
- Recommendation: Enhance the risk analytical framework by:
  - (i) incorporating bank stress testing into the toolkit for systemic risk assessment and macroprudential policy. (NBB)
  - (ii) extending the horizon of insurance stress tests.
  - (iii) intensifying monitoring of insurers’ mortgage loan portfolios and related underwriting standards.
  - (iv) in cooperation with the FSMA, further developing the shadow banking monitoring framework.
  - (v) enhancing the coverage and quality of commercial real estate (CRE) data. (NBB)
- Timing*: ST
- Status:
  - (i) In 2021, the NBB undertook a full top-down stress test for Belgian LSIs and, in 2021 and 2022, a top-down NII stress tests for Belgian SIs and LSIs in “low for long” and “high” interest rate environments. In 2022, the NBB also redeveloped a top-down credit risk tool for all Belgian banks (incl. subsidiaries).
  - (ii) In the 2021 EIOPA and 2021 and 2022 NBB stress tests, the concept of reactive management actions was introduced, a first step into the development of a multi-period scenario. A fully-fledged multi-period stress test scenario has yet to be put into practice at national and European level.
  - (iii) No new actions taken.
  - (iv) An update of the NBB-FSMA report on asset management and non-bank financial intermediation in Belgium is in progress.
  - (v) The NBB is pursuing further work on closing data gaps for CRE analysis, in line with the ESRB Recommendation on Closing Data Gaps in real estate.

### Prudential Policy, Supervision, and Oversight
- Recommendation: Approve promptly the new macroprudential measures proposed by the NBB and enhance the NBB’s ability to implement cyclical macroprudential tools in a timely manner. (MoF)
- Timing*: ST
- Status:
  - (i) The macroprudential measure dedicated to risks in the residential real estate market was replaced by a Sectoral Systemic Risk Buffer from May 1, 2022, calibrated at 9%, and enacted by Royal Decree.
  - (ii) The CCyB remained de-activated and supervisory expectations regarding credit standards for new mortgage lending (LTV, DTI, DSTI) remain in place.

- Recommendation: Continue to strengthen bank supervision by:
  - (i) ensuring the reliability and consistency of internal models and
  - (ii) proactively assessing loan classifications to ensure prudent provisioning practices. (NBB/SSM)
- Timing*: C
- Status:
  - (i) NBB continues the follow-up of TRIM, including the review of banks’ preparedness to EBA Repair implementation.
  - (ii) The IFRS 9 benchmarking exercise, piloted in 2019, is becoming an integral part of the annual benchmarking exercises conducted by EBA, making them mandatory and covering the entire balance sheet of banks, thereby working towards a harmonization of provisioning practices.

- Recommendation: Adjust to insurers’ evolving risk profiles by:
  - (i) seeking to address the sector’s increasing liquidity risk;
  - (ii) continuing to analyze the business growth of reinsurance operations; and
  - (iii) engaging with the industry to gradually improve the quality of insurers’ capital. (NBB)
- Timing*: ST
- Status:
  - (i) In 2022, the NBB published a circular on liquidity risk management for the (re)insurance sector, based on the principles of liquidity risk management as introduced in the ICPs. It imposes measures around liquidity risk management and mitigation with reporting commencing in April 2023.
  - (ii) Supervision and risk mitigation of reinsurance operations has been enhanced by the introduction of EIOPA principles on the use of risk mitigation techniques by insurance undertakings in the ORSA circular and the governance circular.
  - (iii) No new actions taken.

- Recommendation: Enhance FC supervision by:
  - (i) setting supervisory expectations for FC governance and risk management; and
  - (ii) enhancing monitoring of intra-group transactions at FC level and the risk of regulatory arbitrage between insurance and banking sectors. (NBB/SSM)
- Timing*: ST
- Status:
  - (i) No new actions taken.
  - (ii) The NBB stands ready to contribute to the ECB’s mapping of potential or proven cases of regulatory arbitrage.

- Recommendation: Enhance SWIFT oversight by:
  - (i) aiming at complementing the NBB’s use of moral suasion in the oversight of SWIFT with additional regulatory and supervisory powers;
  - (ii) broadening membership in the SWIFT Oversight Forum; and
  - (iii) improving information sharing on SWIFT oversight and assurance reports. (NBB)
- Timing*: ST
- Status:
  - (i) Exclusive use of moral suasion for SWIFT oversight is under reconsideration due to evolving geopolitical, regulatory, technological and competitive environments.
  - (ii) SWIFT oversight composition mirrors CPMI membership, participation of Bank of Russia has been suspended.
  - (iii) Information sharing remains embedded in SWIFT oversight activities.

### Financial Safety Net and Crisis Management
- Recommendation:
  - (i) Ensure the feasibility of resolution strategies for banking groups with systemically important subsidiaries (SRM);
  - (ii) prioritize resolution planning for the two less significant institutions with the highest share of insured deposits. (NBB)
- Timing*: MT
- Status:
  - (i) Work by the Single Resolution Board to operationalize single point of entry strategies has started.
  - (ii) Resolution plans of LSIs have been approved and are subject to a two-year cycle except for some LSIs requiring a yearly plan.

- Recommendation: Strengthen the DIS by:
  - (i) publicly committing to shortening the DIS pay-out period to seven days by 2019;
  - (ii) establishing credit lines with the MoF and segregating the Guarantee Fund from government funds. (MoF)
- Timing*: ST
- Status:
  - (i) Repayment period is gradually reduced to seven working days by 31 December 2023.
  - (ii) A draft bill is in train to allow the Guarantee Fund to request advances from the Treasury and segregating it from the Treasury.

### AML/CFT
- Recommendation: Ensure adequate transparency of beneficial ownership of legal persons and arrangements. (MoF)
- Timing*: MT
- Status:
  - No new actions taken, the national UBO register is fully operational.

*Legend: C=continuous; I=immediate (within one year); ST=short term (within 1–2 years); MT=medium term (within 3–5 years)*

_Annex VII. Main Recommendations from the 2017 FSAP — Follow-up (from the IMF Staff Report for the 2022 Article IV Consultation — Informational Annex)_

---


_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1belea2023001.pdf_