## 1. The Twin Crises Have Worsened Public Finances ## Source details **Canonical URL:** [1. The Twin Crises Have Worsened Public Finances](https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023064.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023064.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023064.pdf.json) --- ### Overview of recent fiscal deterioration - Belgium entered the pandemic with debt-to-GDP just below 100 percent in 2019; subsequent shocks worsened public finances. - The pandemic and the energy crisis led to a structural deterioration: Belgium experienced the largest increase in the structural primary deficit (about 2 percentage points) among high-debt euro area countries compared to the pre-pandemic counterfactual. - Staff baseline (absent policy change) projects: - Fiscal deficit (net lending/borrowing) rising from 3.5 percent of GDP in 2022 to about 5½ percent of GDP in 2028. - Public debt rising to about 115 percent of GDP in 2028. - Key expenditure drivers: wage and social benefit indexation, aging costs, and higher interest expenses. ### Fiscal positions by government level and heterogeneity - Federal government: - Fiscal deficit narrowed to 2.6 percent of GDP in 2022 from 7.1 percent in 2020, but remains above 1.9 percent of GDP in 2019. - Federal public debt moderated to 86 percent of GDP in 2022 from 93 percent in 2020; still 3.7 percentage points higher than 2019. - Communities and regions: - Overall deficit declined to 0.9 percent of GDP in 2022 from 2.2 percent of GDP in 2020, but above 0.2 percent of GDP in 2019. - Public debt of communities and regions: 17.3 percent of GDP (€95.8 billion) in 2022; accounted for 16.6 percent of total public debt (104.3 percent of GDP or €578.1 billion) in 2022. - Debt burden (debt-to-total revenue ratio) in 2022 ranged from 50-60 percent in Flanders and French Communities to 205-210 percent in Wallonia and Brussels (Brussels-Capital Region). - Institutional context: decentralization of expenditure responsibilities outpaced revenue authority; lack of hierarchical federal system and weak implementation of the 2013 Cooperative Agreement complicate coordinated consolidation. ### Macro-fiscal risks and financing conditions - Rising debt amplifies sensitivity to market sentiment and interest costs. - Public gross financing needs projected to increase to 21 percent of GDP in 2028 from 16 percent of GDP in 2022 under no policy change. - Belgium’s government bonds had an average residual maturity of 10.9 years in 2022; favorable debt dynamics may dissipate as lower-cost debt matures. - Debt service costs projected: from 1.5 percent of GDP in 2022 to 1.8-2.7 percent of GDP in 2023-28. - Aging costs: +0.3 ppt of GDP per year from 2022-70 (FPB Study Committee on Aging projection). ### Inflation and monetary policy interaction - Inflation indicators: - Headline inflation: 0.7 y/y in September 2023. - Core inflation: 6.7 percent y/y in September 2023. - Rationale: More ambitious fiscal consolidation would complement monetary policy by moderating demand and preventing entrenched inflation that would require tighter monetary policy and risk recession and reduced fiscal space. ### Why consolidation is needed (summary) - Lower inflation and support monetary policy effectiveness. - Rebuild fiscal buffers eroded by pandemic and energy crisis to face aging, climate, and geopolitical risks. - Reduce debt and financing vulnerabilities. - Preserve Belgium’s social contract and the sustainability of social protection given low labor force participation, aging, and weak productivity. ### Magnitude of the problem and projection nuances - Change 2019–2023: structural primary deficit widened by 2 percentage points of GDP; contributed to ~8 percentage point increase in public debt-to-GDP by 2023. - WEO baseline 2023–28 shows insufficient reduction in structural primary deficit: from —3.1 percent of GDP in 2023 to —2.8 percent of GDP in 2028. - Debt-stabilizing primary balance in 2028 is —0.4 percent of GDP (Box 1 discussion). ### Lessons from past consolidations and international evidence - Common successful consolidation pace: improving the cyclically-adjusted primary balance by 1-2 percent of GDP per year for 3-4 years. - Successful episodes often combine both expenditure and revenue measures; historical Belgian episodes suggest spending cuts played a larger role. - Belgium’s past consolidations: - 1982–87: mainly cutting primary expenditures. - 1993–98: raising revenues and reducing interest burden; public debt fell from close to 140 percent of GDP in 1993 to 87 percent of GDP in 2007 (a 52 ppt decline over 14 years). - 2011–17: cutting expenditure and reducing interest costs. - Political economy: credible medium-term frameworks, transparency, and broad-based political support increase success probability. ### Strategic priorities and policy recommendations - Design a front-loaded and significant consolidation to achieve a medium-term structural balance and reduce public debt toward the 60 percent debt threshold. - Core consolidation measures should focus on: - Rationalizing and increasing the efficiency of social benefits. - Containing the public wage bill. - Fiscal governance and coordination: - All federal entities should share the burden of adjustment in a coordinated manner, with accountability at all levels. - Implement a credible and clear multi-year consolidation plan. - Conduct comprehensive spending reviews to target budgetary savings. - Mitigating growth impact and supporting potential growth: - Preserve public investment to avoid near-term growth losses. - Pair consolidation with structural reforms to increase labor force participation and productivity. ### Trade-offs and consolidation paths - EC’s proposed 4- or 7-year horizons require, among other criteria, the fiscal deficit to remain or to be brought and maintained below 3 percent of GDP and debt at the end of the adjustment period to be lower and continue on a downward path or stay at prudent levels for another 10 years. - For a high-debt country like Belgium, the resulting debt path would remain above a 60 percent of GDP threshold, implying trade-offs: - A smaller cumulative fiscal adjustment may have less immediate impacts on growth, but would entail a higher debt level and vulnerabilities to adverse market sentiment for longer, with higher debt-servicing costs that could crowd out investment with a longer-term impact on growth. ### Ambitious consolidation scenario: target debt-to-GDP toward 60 percent - Objective: reduce debt-to-GDP towards 60 percent to significantly reduce vulnerabilities and rebuild buffers. - Required adjustments: - 0.6 percent of GDP in 2024. - 0.8 percent of GDP (or more) annually from 2025 to reach structural balance in 2030 (Belgium’s previous EU medium-term objective or MTO). - Fiscal arithmetic and implications: - Adjustment would translate into a cumulative reduction in the structural balance of about 5½ ppts of GDP in 2024-30. - Assuming no policy changes that lead to greater revenue mobilization, this would require a cumulative permanent primary expenditure reduction of 5½ ppts of GDP. - Achievable by limiting nominal spending growth to an average of 1.3 percent annually in 2025-2030. - Interactions with aging and growth: - The cumulative adjustment would more than offset the estimated increase in aging outlays of 4 ppts of GDP (2022-41). - Debt-to-GDP would decline steadily towards 60 percent of GDP by the early 2040s under this scenario. - Growth impact: Growth would be lower—about 0.2 ppt lower than in the baseline for a small open economy with relatively large automatic stabilizers—absent reforms to increase productivity. ### Where can savings be achieved? - Revenue vs spending mix: - Adjustment will need to rely mostly on reducing spending rather than increasing revenues due to the high level of taxation; room for mobilizing additional tax revenue appears limited, although efficiency-enhancing tax reforms should proceed. - General government expenditure overview: - General government spending was 53 percent of GDP in 2022. - Composition in 2022: social outlays 25 percent of GDP; wage bill 12 percent of GDP; subsidies 4 percent of GDP. - Primary expenditure in 2022 was higher by 1.7 percentage points of GDP compared to 2019. - With no policy changes, primary expenditure is expected to increase by another 2.3 ppt in 2023-28. - Social benefits: - Increased by 0.8 ppt of GDP in 2019-22. - Likely to increase by another 2.0 ppt in 2023-28 via increases in pensions and health spending. - Compared to pre-pandemic projection (January 2020 WEO forecast), primary expenditure is about 1 ppt higher in 2022 and 2 ppt higher in 2025; a large part of the 2025 increase is coming from social benefits at 0.9 ppt higher than pre-pandemic projection. - International comparisons and efficiency: - Belgium spends more than EU advanced economies on average on social benefits, compensation of employees, and subsidies. - Social protection spending was 27 percent of GDP; social protection efficiency score slightly above the peer average—suggesting scope to reduce spending to about 24 percent of GDP while maintaining the current efficiency score. - Target areas for savings: - Social benefits (notably unemployment benefits of unlimited duration and generous disability support). - Disability benefits recipients rose to about 5½ percent of the population in 2018 from slightly above 3 percent in 10 years. - Increase targeting via means-tested programs: - Share of total social protection spending that is means-tested was 16.7 percent in Belgium as of 2017 (comparators: U.K. 64.4 percent; Ireland 62.5 percent; Netherlands 59.5 percent). - Public wage bill savings: - Review automatic wage indexation, conduct functional reviews, compare number of public employees and public-sector wages with peers and the private sector. - Regional/state-level spending and duplication: - Communities and regions now account for close to 40 percent of general government expenditure. - By function, 90 percent of spending in education and more than half of spending in environmental protection, economic affairs, and housing and communities are implemented at the community/region/local level. - Four functions—education, social protection, economic affairs, and general public services—made up close to 90 percent of spending by state (regional and community) governments. - Real primary expenditure grew by 1.7 percent during 2015-23, exceeding real GDP growth of 1.5 percent. ### Principles and institutional measures for consolidation - Burden sharing and accountability: - Deficit reduction plans should be underpinned by concrete adjustment efforts by all federal entities. - Federal government’s 2024 draft budget seeks to reduce the overall deficit to 4.2 percent of GDP for 2024. - Belgium’s 2023-26 stability program aims to reduce the deficit to 3.3 percent and 2.9 percent of GDP in 2025 and 2026, respectively. - The 2024 combined budget of regions and communities plans a deficit that is 0.4 ppt of GDP larger than the target of -1.1 percent of GDP. - Coordination, burden sharing, and accountability for all federal entities should be strengthened; regions and communities should implement spending limits consistent with their deficits. - Suggested institutional measure: reinvigoration and implementation of the 2013 Cooperative Agreement to improve federal-regional coordination given the institutional setting of no hierarchy among federal government, regions, and communities. - Multi-year credible consolidation plan: - Adopting a credible, multi-year consolidation plan is critical to avoid ad hoc year-by-year adjustments, reduce uncertainty, and limit risks of adopting measures that could be more costly over the long run. - A carefully-designed and committed multi-year plan would provide a clear, transparent and accountable roadmap to secure buy-in from the population and markets. - Avoid abrupt, disorderly expenditure-cutting responses—these would be costly and should be avoided. - Spending reviews: - Comprehensive spending reviews can help target budgetary savings. - Since 2019, spending reviews have been piloted at federal and regional levels but were limited to 2-3 selected areas per year and narrow in scope. - Recommendation: move to comprehensive spending reviews covering a larger share of government spending, designed to identify savings that reduce the rate of growth or the level of public expenditure, create fiscal space for new priorities, and identify inefficient or redundant spending. - Protect and scale up public investment: - Public investment was 2.7 percent of GDP in 2022 despite some increases; authorities’ investment-spending target: 4 percent of GDP by 2030 (notwithstanding NGEU grants). - Preserve—and where possible scale up—public investment to mitigate the growth impact of consolidation, boost potential growth, and facilitate the green transition. - Complement consolidation with structural reforms: - Key reforms needed: social benefits, pensions, and health to contain aging costs and improve benefits targeting. - Advance tax reforms to reduce tax burden on labor and address work disincentives via changes to tax rates and brackets and better alignment with social benefits. - Labor market reforms to lift labor force participation and product-market reforms to increase productivity, boost potential growth, and increase tax revenues and job opportunities. ### Key statistics and fiscal indicators - EC fiscal rule thresholds and horizons: deficit below 3 percent of GDP; debt path consistent with lower debt and downward path or prudent levels for another 10 years. - Ambitious adjustment path: 0.6 percent of GDP in 2024; 0.8 percent of GDP (or more) annually from 2025; cumulative structural balance reduction about 5½ ppts of GDP in 2024-30; nominal spending growth limited to 1.3 percent annually in 2025-2030. - Aging outlays estimated increase: 4 ppts of GDP (2022-41). - Growth impact: about 0.2 ppt lower than baseline absent productivity reforms. - General government spending: 53 percent of GDP in 2022. - Social outlays: 25 percent of GDP in 2022. - Wage bill: 12 percent of GDP in 2022. - Subsidies: 4 percent of GDP in 2022. - Primary expenditure higher by 1.7 percentage points of GDP in 2022 vs 2019. - Primary expenditure expected increase in 2023-28: 2.3 ppt. - Social benefits increases: 0.8 ppt in 2019-22; likely 2.0 ppt in 2023-28. - Pre-pandemic projection deviations: primary expenditure about 1 ppt higher in 2022 and 2 ppt higher in 2025; social benefits 0.9 ppt higher in 2025 vs pre-pandemic projection. - Social protection spending: 27 percent of GDP; potential reduction to about 24 percent of GDP while maintaining efficiency. - Disability recipients: about 5½ percent of the population in 2018 (from slightly above 3 percent in 10 years). - Share of social protection spending that is means-tested: 16.7 percent in 2017 (comparators: U.K. 64.4 percent; Ireland 62.5 percent; Netherlands 59.5 percent). - Public investment: 2.7 percent of GDP in 2022; authorities’ target 4 percent of GDP by 2030. - Fiscal balance targets and deficits: - Draft budget 2024 overall deficit target: 4.2 percent of GDP for 2024. - Stability program deficits: 3.3 percent and 2.9 percent of GDP in 2025 and 2026, respectively. - Regions and communities planned deficit: 0.4 ppt of GDP larger than the target of -1.1 percent of GDP. - Selected consolidated gross debt figures (percent of GDP) from table: 97.6; 111.8; 108.0; 104.3; 106.7; 107.1; 108.3; 108.1. *Source: IMF staff chapter "1. The Twin Crises Have Worsened Public Finances" (sipea2023064).* ### 1. The Twin Crises Have Worsened Public Finances _________________________________ 3 ### 1. The Twin Crises Have Worsened Public Finances ### Overview of recent fiscal deterioration - Belgium entered the pandemic with debt-to-GDP just below 100 percent in 2019; subsequent shocks worsened public finances. - The pandemic and the energy crisis led to a structural deterioration: Belgium experienced the largest increase in the structural primary deficit (about 2 percentage points) among high-debt euro area countries compared to the pre-pandemic counterfactual. - Absent policy change, staff baseline projects: - Fiscal deficit (net lending/borrowing) rising from 3.5 percent of GDP in 2022 to about 5½ percent of GDP in 2028. - Public debt rising to about 115 percent of GDP in 2028. - Key expenditure drivers: wage and social benefit indexation, aging costs, and higher interest expenses. ### Fiscal positions by government level and heterogeneity - Federal government: - Fiscal deficit narrowed to 2.6 percent of GDP in 2022 from 7.1 percent in 2020, but remains above 1.9 percent of GDP in 2019. - Federal public debt moderated to 86 percent of GDP in 2022 from 93 percent in 2020; still 3.7 percentage points higher than 2019. - Communities and regions: - Overall deficit declined to 0.9 percent of GDP in 2022 from 2.2 percent in 2020, but above 0.2 percent of GDP in 2019. - Public debt of communities and regions: 17.3 percent of GDP (€95.8 billion) in 2022; accounted for 16.6 percent of total public debt (104.3 percent of GDP or €578.1 billion) in 2022. - Debt burden (debt-to-total revenue ratio) in 2022 ranged from 50-60 percent in Flanders and French Communities to 205-210 percent in Wallonia and Brussels (Brussels-Capital Region). - Institutional context: decentralization of expenditure responsibilities outpaced revenue authority; lack of hierarchical federal system and weak implementation of the 2013 Cooperative Agreement complicate coordinated consolidation. ### Macro-fiscal risks and financing conditions - Rising debt amplifies sensitivity to market sentiment and interest costs. - Public gross financing needs projected to increase to 21 percent of GDP in 2028 from 16 percent of GDP in 2022 under no policy change. - Belgium’s government bonds had an average residual maturity of 10.9 years in 2022, but favorable debt dynamics may dissipate as lower-cost debt matures. - Debt service costs projected: from 1.5 percent of GDP in 2022 to 1.8-2.7 percent of GDP in 2023-28. - Aging costs: +0.3 ppt of GDP per year from 2022-70 (FPB Study Committee on Aging projection). ### Inflation and monetary policy interaction - Inflation context: - Headline inflation: 0.7 y/y in September 2023. - Core inflation: 6.7 percent y/y in September 2023. - Rationale: More ambitious fiscal consolidation would complement monetary policy by moderating demand and preventing entrenched inflation that would require tighter monetary policy and risk recession and reduced fiscal space. ### Why consolidation is needed (summary) - Lower inflation and support monetary policy effectiveness. - Rebuild fiscal buffers eroded by pandemic and energy crisis to face aging, climate, and geopolitical risks. - Reduce debt and financing vulnerabilities. - Preserve Belgium’s social contract and the sustainability of social protection given low labor force participation, aging, and weak productivity. ### Magnitude of the problem and projection nuances - Change 2019–2023: structural primary deficit widened by 2 percentage points of GDP; contributed to ~8 percentage point increase in public debt-to-GDP by 2023. - WEO baseline 2023–28 shows insufficient reduction in structural primary deficit: from —3.1 percent of GDP in 2023 to —2.8 percent of GDP in 2028 (insufficient to reverse debt trajectory). - Stabilizing the debt ratio implies reducing primary deficits toward near zero; the debt-stabilizing primary balance in 2028 is —0.4 percent of GDP (Box 1 discussion). ### Lessons from past consolidations and international evidence - Empirical evidence and past Belgian episodes indicate: - Common successful consolidation pace: improving the cyclically-adjusted primary balance by 1-2 percent of GDP per year for 3-4 years. - Successful episodes often combine both expenditure and revenue measures; case studies suggest spending cuts played a larger role. - Belgium’s past consolidations: - 1982–87: mainly cutting primary expenditures. - 1993–98: raising revenues and reducing interest burden; public debt fell from close to 140 percent of GDP in 1993 to 87 percent of GDP in 2007 (a 52 ppt decline over 14 years). - 2011–17: cutting expenditure and reducing interest costs. - Political economy: credible medium-term frameworks, transparency, and broad-based political support increase success probability. ### Strategic priorities and policy recommendations - Design a front-loaded and significant consolidation to achieve a medium-term structural balance and reduce public debt toward the 60 percent debt threshold. - Core consolidation measures should focus on: - Rationalizing and increasing the efficiency of social benefits. - Containing the public wage bill. - Fiscal governance and coordination: - All federal entities should share the burden of adjustment in a coordinated manner, with accountability at all levels. - Implement a credible and clear multi-year consolidation plan. - Conduct comprehensive spending reviews to target budgetary savings. - Mitigating growth impact and supporting potential growth: - Preserve public investment to avoid near-term growth losses. - Pair consolidation with structural reforms to increase labor force participation and productivity. *Source: IMF staff chapter "1. The Twin Crises Have Worsened Public Finances" (sipea2023064).* ### 10. Designing an appropriate fiscal consolidation path involves trade-offs. As illustrated by ### 10. Designing an appropriate fiscal consolidation path involves trade-offs. As illustrated by ### Trade-offs and consolidation paths - EC’s proposed 4- or 7-year horizons require, among other criteria, the fiscal deficit to remain or to be brought and maintained below 3 percent of GDP and debt at the end of the adjustment period to be lower and continue on a downward path or stay at prudent levels for another 10 years. - For a high-debt country like Belgium, the resulting debt path would remain above a 60 percent of GDP threshold, implying trade-offs: - A smaller cumulative fiscal adjustment may have less immediate impacts on growth, but would entail a higher debt level and vulnerabilities to adverse market sentiment for longer, with higher debt-servicing costs that could crowd out investment with a longer-term impact on growth. ### Ambitious consolidation scenario: target debt-to-GDP toward 60 percent - Objective: reduce debt-to-GDP towards 60 percent to significantly reduce vulnerabilities and rebuild buffers. - Required adjustments: - 0.6 percent of GDP in 2024. - 0.8 percent of GDP (or more) annually from 2025 to reach structural balance in 2030 (Belgium’s previous EU medium-term objective or MTO). - Fiscal arithmetic and implications: - Adjustment would translate into a cumulative reduction in the structural balance of about 5½ ppts of GDP in 2024-30. - Assuming no policy changes that lead to greater revenue mobilization, this would require a cumulative permanent primary expenditure reduction of 5½ ppts of GDP. - Achievable by limiting nominal spending growth to an average of 1.3 percent annually in 2025-2030. - Interactions with aging and growth: - The cumulative adjustment would more than offset the estimated increase in aging outlays of 4 ppts of GDP (2022-41). - Debt-to-GDP would decline steadily towards 60 percent of GDP by the early 2040s under this scenario. - Growth impact: Growth would be lower—about 0.2 ppt lower than in the baseline for a small open economy with relatively large automatic stabilizers—absent reforms to increase productivity. ### Where can savings be achieved? - Revenue vs spending mix: - Adjustment will need to rely mostly on reducing spending rather than increasing revenues due to the high level of taxation; room for mobilizing additional tax revenue appears limited, although efficiency-enhancing tax reforms should proceed. - General government expenditure overview: - General government spending was 53 percent of GDP in 2022. - Composition in 2022: social outlays 25 percent of GDP; wage bill 12 percent of GDP; subsidies 4 percent of GDP. - Primary expenditure in 2022 was higher by 1.7 percentage points of GDP compared to 2019, reflecting high inflation indexation on social benefits and public wages and permanent measures taken during COVID-19. - With no policy changes, primary expenditure is expected to increase by another 2.3 ppt in 2023-28. - Social benefits: - Increased by 0.8 ppt of GDP in 2019-22. - Likely to increase by another 2.0 ppt in 2023-28 via increases in pensions and health spending. - Compared to pre-pandemic projection (January 2020 WEO forecast), primary expenditure is about 1 ppt higher in 2022 and 2 ppt higher in 2025; a large part of the 2025 increase is coming from social benefits at 0.9 ppt higher than pre-pandemic projection. - International comparisons and efficiency: - Belgium spends more than EU advanced economies on average on social benefits, compensation of employees, and subsidies. - Social protection spending was 27 percent of GDP; social protection efficiency score slightly above the peer average—suggesting scope to reduce spending to about 24 percent of GDP while maintaining the current efficiency score. - Target areas for savings: - Social benefits (notably unemployment benefits of unlimited duration and generous disability support). - Disability benefits recipients rose to about 5½ percent of the population in 2018 from slightly above 3 percent in 10 years. - Increase targeting via means-tested programs: - Share of total social protection spending that is means-tested was 16.7 percent in Belgium as of 2017. - Comparators: U.K. 64.4 percent; Ireland 62.5 percent; Netherlands 59.5 percent. - Public wage bill savings: - Review automatic wage indexation, conduct functional reviews, compare number of public employees and public-sector wages with peers and the private sector. - Regional/state-level spending and duplication: - Communities and regions now account for close to 40 percent of general government expenditure. - By function, 90 percent of spending in education and more than half of spending in environmental protection, economic affairs, and housing and communities are implemented at the community/region/local level. - Four functions—education, social protection, economic affairs, and general public services—made up close to 90 percent of spending by state (regional and community) governments. - Real primary expenditure grew by 1.7 percent during 2015-23, exceeding real GDP growth of 1.5 percent. ### Principles and institutional measures for consolidation - Burden sharing and accountability: - Deficit reduction plans should be underpinned by concrete adjustment efforts by all federal entities. - Federal government’s 2024 draft budget seeks to reduce the overall deficit to 4.2 percent of GDP for 2024. - Belgium’s 2023-26 stability program aims to reduce the deficit to 3.3 percent and 2.9 percent of GDP in 2025 and 2026, respectively. - The 2024 combined budget of regions and communities plans a deficit that is 0.4 ppt of GDP larger than the target of -1.1 percent of GDP. - Coordination, burden sharing, and accountability for all federal entities should be strengthened; regions and communities should implement spending limits consistent with their deficits. - Suggested institutional measure: reinvigoration and implementation of the 2013 Cooperative Agreement to improve federal-regional coordination given the institutional setting of no hierarchy among federal government, regions, and communities. - Multi-year credible consolidation plan: - Adopting a credible, multi-year consolidation plan is critical to avoid ad hoc year-by-year adjustments, reduce uncertainty, and limit risks of adopting measures that could be more costly over the long run. - A carefully-designed and committed multi-year plan would provide a clear, transparent and accountable roadmap to secure buy-in from the population and markets. - Avoid abrupt, disorderly expenditure-cutting responses—these would be costly and should be avoided. - Spending reviews: - Comprehensive spending reviews can help target budgetary savings. - Since 2019, spending reviews have been piloted at federal and regional levels but were limited to 2-3 selected areas per year and narrow in scope. - Recommendation: move to comprehensive spending reviews covering a larger share of government spending, designed to identify savings that reduce the rate of growth or the level of public expenditure, create fiscal space for new priorities, and identify inefficient or redundant spending. - Protect and scale up public investment: - Public investment remains relatively low at 2.7 percent of GDP in 2022 despite some increases; limits gains in productivity and potential growth. - Authorities’ investment-spending target: 4 percent of GDP by 2030 (notwithstanding NGEU grants). - Preserve—and where possible scale up—public investment to mitigate the growth impact of consolidation, boost potential growth, and facilitate the green transition. - Complement consolidation with structural reforms: - Key reforms needed: social benefits, pensions, and health to contain aging costs and improve benefits targeting. - Advance tax reforms to reduce tax burden on labor and address work disincentives via changes to tax rates and brackets and better alignment with social benefits. - Labor market reforms to lift labor force participation and product-market reforms to increase productivity, boost potential growth, and increase tax revenues and job opportunities. ### Key statistics and fiscal indicators (as presented) - EC fiscal rule thresholds and horizons: deficit below 3 percent of GDP; debt path consistent with lower debt and downward path or prudent levels for another 10 years. - Ambitious adjustment path: 0.6 percent of GDP in 2024; 0.8 percent of GDP (or more) annually from 2025; cumulative structural balance reduction about 5½ ppts of GDP in 2024-30; nominal spending growth limited to 1.3 percent annually in 2025-2030. - Aging outlays estimated increase: 4 ppts of GDP (2022-41). - Growth impact: about 0.2 ppt lower than baseline absent productivity reforms. - General government spending: 53 percent of GDP in 2022. - Social outlays: 25 percent of GDP in 2022. - Wage bill: 12 percent of GDP in 2022. - Subsidies: 4 percent of GDP in 2022. - Primary expenditure higher by 1.7 percentage points of GDP in 2022 vs 2019. - Primary expenditure expected increase in 2023-28: 2.3 ppt. - Social benefits increases: 0.8 ppt in 2019-22; likely 2.0 ppt in 2023-28. - Pre-pandemic projection deviations: primary expenditure about 1 ppt higher in 2022 and 2 ppt higher in 2025; social benefits 0.9 ppt higher in 2025 vs pre-pandemic projection. - Social protection spending: 27 percent of GDP; potential reduction to about 24 percent of GDP while maintaining efficiency. - Disability recipients: about 5½ percent of the population in 2018 (from slightly above 3 percent in 10 years). - Share of social protection spending that is means-tested: 16.7 percent in 2017 (comparators: U.K. 64.4 percent; Ireland 62.5 percent; Netherlands 59.5 percent). - Public investment: 2.7 percent of GDP in 2022; authorities’ target 4 percent of GDP by 2030. - Fiscal balance targets and deficits: - Draft budget 2024 overall deficit target: 4.2 percent of GDP for 2024. - Stability program deficits: 3.3 percent and 2.9 percent of GDP in 2025 and 2026, respectively. - Regions and communities planned deficit: 0.4 ppt of GDP larger than the target of -1.1 percent of GDP. - Selected consolidated gross debt figures (percent of GDP) from table: 97.6; 111.8; 108.0; 104.3; 106.7; 107.1; 108.3; 108.1. *Source: IMF staff calculations and analysis as presented in the chapter.* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023064.pdf_