## _cr0674

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---

### Executive Summary — Economic Background and Outlook
- Recent performance
  - Growth in 2004–05 has been "slightly better than in the euro area."
  - Drivers in 2004: low interest rates, permanent tax cuts → lower household savings and housing investment; enterprises increased capital formation (rising profits, low cost of funding, catch-up from earlier depressed levels).
  - Late 2004/early 2005: oil price increase and sudden decline in external demand caused near stagnation of activity.
  - Since early 2005: private consumption and exports have been gaining strength; investment remained resilient → modest acceleration in growth.
- Quarterly contributions to 2005 growth (percent change from previous period)
  - Real GDP growth: 0.8, 0.5, 0.8, 0.3, 0.1, 0.3, 0.4, 0.5
  - Domestic demand: 1.5, 0.5, 0.7, -0.5, 0.8, 1.9, -1.2, 0.4
  - Private consumption: 0.6, 0.3, 0.2, 0.0, 0.4, 0.6, 0.2, 0.4
  - Net exports (contribution to GDP growth): -0.6, 0.0, 0.2, 0.8, -0.7, -1.6, 1.6, 0.2
  - Exports: 1.2, 1.4, 1.9, 2.3, -1.6, -0.4, 2.1, 2.1
  - Imports: 1.9, 1.4, 1.7, 1.4, -0.9, 1.4, 0.3, 2.0
- Inflation and labor costs
  - Harmonized consumer price inflation peaked at 3 percent in September 2005; underlying inflation about 1.4 percent.
  - Private sector hourly wages estimated to have risen by about 2.3 percent in 2005.
  - Unit labor costs grew by 2.1 percent in 2005.
- Policy stance and outlook
  - Monetary and fiscal conditions: low interest rates supportive; fiscal balanced-budget pursuit moderated by one-off measures (masked automatic stabilizers).
  - Staff projection: GDP growth to increase from 1.5 percent in 2005 to about 2.1 percent in 2006 (0.1 percentage point less than assumed in the 2006 budget).
  - Harmonized consumer price inflation projected to average 2.4 percent in 2006.
  - Domestic developments supporting outlook: income tax cuts offsetting oil-price effects; residential construction expected to remain resilient based on approved building permits.
  - Risks: oil/commodity shocks, faltering European growth, disorderly euro appreciation, wage agreement implementation exceeding partner wage growth, residential property price developments.

### Executive Summary — Housing Market and Structural Pressures
- Housing market (Box 1)
  - Residential real estate prices real terms increases: 44 percent since previous peak and 86 percent since previous trough.
  - Contributing factors: low interest rates; 2004 tax amnesty → investment in secondary homes; frontloading of tax deductibility of interest payments; reductions in transactions costs; Flanders region carry-over of first-home tax benefits.
  - Financial exposure and risk assessment:
    - Mortgage debt to GDP: 47 percent (Belgium); France 26 percent; United Kingdom 75 percent; United States 69 percent.
    - Mortgage loans constitute about 10 percent of banks’ assets.
    - Residential construction makes up roughly 5 percent of GDP.
    - Conclusion: If interest rates increased, residential construction could slow significantly, but economy-wide risks are limited because household and bank exposure to real estate is not high and there is little evidence of equity withdrawal.
- Structural pressures and public finances
  - Authorities project aging to add 3.6 percentage points of GDP to budgetary outlays by 2030 (assuming employment rates can reach Lisbon targets).
  - Public debt reported at 95 percent of GDP; debt declining but level remains high and vulnerable to growth shocks.
  - Labor force and employment: employment rate (15–64 years) about 60 percent in 2003, almost 7 percentage points less than the unweighted average of three key trading partners.
  - Authorities’ strategy: further debt reduction and use of interest-savings to cover most aging costs.

### Policy Issues — Broad Priorities and Recommended Reforms
- Broad policy focus
  - Achieve necessary fiscal consolidation, promote higher potential growth, and uphold financial stability.
  - Staff view: need to broaden reforms, enhance effectiveness, and ensure reforms do not jeopardize required buildup of fiscal surpluses.
- Strategy to cope with aging
  - Authorities’ stated strategy: up-front fiscal adjustment, durable balancing of social security accounts, and structural reforms to raise trend growth.
  - Consensus exists on objectives though specifics differ; decentralized policymaking requires regions and communities to contribute; social partner agreements are necessary.
- Fund recommendations on fiscal policy
  - Reduce primary spending growth durably to achieve fiscal consolidation and tax burden reduction.
  - Adopt a multi-year expenditure-based framework to lock in structural fiscal adjustment and achieve budgetary surpluses for aging.
- Fund recommendations on labor and product markets
  - Reform labor market institutions: phase out early retirement, modify wage-bargaining to ensure cuts in social security contributions lower labor costs, curb duration of unemployment benefits, enforce job search requirements.
  - Continue product market deregulation and liberalization.
- Fund recommendations on financial sector
  - Adapt supervisory arrangements to market developments; enhance macro-prudential supervision and central bank–supervisor cooperation; upgrade insurance supervision; strengthen pension supervision.

### Staff Judgement — Fiscal Consolidation and Growth Trade-offs
- Fiscal objectives and path
  - 2006: budget targeted to be again in balance.
  - 2007: small surplus of 0.3 percent of GDP envisaged.
  - Thereafter: surplus built up gradually by 0.2 percent of GDP per year until it reaches 1.5 percent of GDP; surplus expected to be maintained through around 2020, after which it will be allowed to decline to fund incremental aging costs.
  - Technical assumption: assures fiscal sustainability (stable debt-to-GDP ratio in 2030 at about 25 percent), provided the employment rate rises by several percentage points as envisaged under the Lisbon strategy.
- Implementation weaknesses and one-off measures
  - Reliance on one-off measures (takeover of pension fund assets, sale and lease-back of real estate, tax securitization, compression of public investment) implies future outlays and do not constitute gains in net present value terms.
  - Medium-term tax and social security contribution reduction programs are not matched by medium-term expenditure-curbing or revenue-raising plans.
  - Achieving surplus targets beyond 2006 without one-off measures would require discretionary spending to fall by ¾ percent per year in real terms.
- 2006 balancing measures and outlook
  - Federal-level spending (excluding pensions) expected to be limited to 0.3 percent real growth.
  - Final stage of the 2001 income tax reform and ongoing reductions in social security contributions will lower revenues by about 0.8 percentage point of GDP.
  - Tax increases yielding 0.5 percentage point of GDP are being implemented: about half from taxes on certain types of life insurance policies and mutual funds invested in government securities; the other half from securitization of VAT tax arrears and an income tax regularization.
  - Staff projections: under current policies a deficit of 0.4 percent of GDP remains to be filled for 2006. If planned measures are not structural, the underlying balance will deteriorate by more than ½ of one percentage point of GDP in 2006.

### Fiscal Indicators and Projections (selected, percent of GDP unless noted)
- Headline balance (1999–2006): 1999 -0.5; 2000 0.1; 2001 0.6; 2002 0.0; 2003 0.1; 2004 0.0; 2005 0.0; 2006 -0.4.
- Adjusted structural primary balance (1999–2006): 1999 6.0; 2000 5.3; 2001 5.6; 2002 5.1; 2003 4.6; 2004 4.2; 2005 4.6; 2006 3.8.
- Real primary expenditure growth (memorandum): 1999 3.9; 2000 2.0; 2001 1.3; 2002 5.0; 2003 4.9; 2004 0.1; 2005 3.1; 2006 2.1.
- Public debt (1999–2006): 1999 113.6; 2000 107.7; 2001 106.3; 2002 103.2; 2003 98.5; 2004 94.7; 2005 94.0; 2006 90.4.

### Jobs, the Generation Pact, and Labor Market Policy
- Generation Pact (implementation starts in 2006)
  - Additional cuts in employers’ social security contributions targeted at young and older workers and shift and night work for up to about 0.4 percentage point of GDP.
  - Reform of early retirement regimes: raising eligibility age from 58 to 60 and minimum career length to 35 years.
  - Tightening job search requirements for older workers; strengthening training; bonuses for rapid return to work.
  - Pensions topping up for those working beyond age 60; public sector to allow more vacancies for first-time jobs.
- Labor tax reductions and competitiveness
  - During 2002–10, the tax burden on labor is expected to be lowered by the equivalent of nearly 3 percentage points of GDP.
  - Targeted SSC cuts are more effective for employment; to increase employment rates substantially (e.g., by 5 percentage points), such cuts would need to be large, implying an annual fiscal cost of about 1.5 percent of GDP in the current wage-bargaining framework if targeted.
  - SSC cuts implemented so far and those envisaged in the Generation Pact total about 2 percent of GDP and can be expected to raise employment by 1½ percentage points in steady state.
  - Personal income tax cuts will reach 1 percent of GDP with the last stage of the reform in 2006, without significant effects on employment.
- Wage-setting framework limitations
  - Indexation places a floor under domestic wage increases; tying wage increases to key trading partners with lower labor costs and higher employment is not conducive to catching up.
  - Recommendation: wage-bargaining model could be refocused on job creation by explicitly taking employment rate developments into account when setting the room for wage increases; consider "all-in" agreements later as an intermediate step.

### Structural Reforms and Business Environment
- Measures in place and progress
  - Notional interest rate deduction introduced for equity capital.
  - Administrative simplification reduced associated costs of doing business from 3.4 percent of GDP in 2002 to 2.6 percent of GDP in 2004 (authorities’ estimate).
  - Liberalization of network industries (electricity, postal services) ongoing; backlog of EU directives eliminated.
  - Competition authority strengthened; public spending reallocated to foster a knowledge-based society and encourage R&D.
  - OECD: Belgium is ahead of neighbors and at the EU average on overall product market regulation following recent progress.

### Financial Sector Assessment and FSAP Findings
- Financial sector performance and structure
  - 2004 performance improved; overall vulnerability declined as financial soundness indicators and bank profitability picked up.
  - Bank profit increase driven mainly by rising noninterest income and lower provisioning; interest income squeezed by competition.
  - Deleveraging by enterprises shifted bank activity toward mortgage lending and expansion abroad; recently domestic corporate borrowing has picked up.
  - Mortgage loans as percent of total loans: 20.3 (2000), 20.5 (2001), 22.3 (2002), 27.6 (2003), 27.4 (2004), 26.2 (2005, Sept.).
- Key financial soundness indicators (selected)
  - Regulatory capital as percent of risk-weighted assets: 12.0 (2000), 12.9 (2001), 13.2 (2002), 12.9 (2003), 12.9 (2004), 11.8 (2005, Sep).
  - NPLs to total gross loans: 2.8 (2000), 2.9 (2001), 3.0 (2002), 2.6 (2003), 2.3 (2004), 2.2 (2005, Sep).
  - Household debt (percent of GDP): 40.3 (2000), 38.7 (2001), 39.4 (2002), 40.3 (2003), 40.6 (2004), 41.9 (2005, Sep).
- FSAP conclusions and recommendations
  - Financial system generally sound and resilient; stress tests confirm system resilience.
  - Recommendations:
    - Continue upgrading banking supervision for Basel II and complexity of financial groups.
    - Strengthen insurance and pension supervision.
    - Establish effective consolidated supervision for bank-insurance conglomerates.
    - Devote adequate capacity to oversight and prudential supervision of payments and securities settlement systems; ensure seamless coordination among entities.
    - Enhance macroprudential analysis and coordination between NBB and CBFA.
- Authorities’ response
  - Authorities were in broad agreement with FSAP recommendations and have initiated measures: upgrading supervision of insurance and pension funds; strengthening oversight of payment and securities settlement systems; adjusting CBFA internal structure; coordination steps between NBB and CBFA.

### Staff Appraisal — Macro Outlook, Fiscal and Structural Policy Recommendations
- Macroeconomic outlook
  - Staff: economy performing reasonably well; achieving growth of somewhat more than 2 percent in 2006 appears realistic.
  - Risks: domestic wage increases set to exceed those of key trading partners; rising interest rates would dampen housing price growth.
- Fiscal recommendations
  - Complement debt reduction with medium-term spending restraint.
  - Replace reliance on one-off measures with specific plans to curb expenditure (example: health care).
  - Save revenue windfalls; adopt a more comprehensive approach to tax reform; abandon securitization of tax arrears and tax amnesties.
  - Strengthen fiscal institutions; bring path toward fiscal surpluses in line with HFC recommendations; continue internal stability pact.
- Labor market and wage policy recommendations
  - Further reforms needed to improve labor utilization; limit duration of unemployment benefits; phase out early retirement regimes; gear wage bargaining toward job creation; social partners should agree on wage moderation; abandon indexation; avoid using tax/SSC reductions to boost take-home pay.
- Financial sector recommendations
  - Strengthen insurance and pension supervision; ensure consolidated supervision of conglomerates; ensure capacity for oversight of payments and securities settlement systems; continue shaping CBFA supported by NBB macroprudential analysis.

### Article IV Timing, Data, and Fund Relations
- Proposed Article IV timing: next Article IV Consultation on the standard 12-month cycle.
- Mission: Brussels, November 10–21, 2005. Staff team: Mr. Everaert (Head) and Mmes. Allard, Yelten, and Zhou (all EUR) and Mr. Ouanes (MFD).
- Fund relations and IMF membership data (as of December 31, 2005)
  - Joined 12/27/45; Article VIII.
  - Quota: 4,605.20 (SDR Million) = 100.00 percent of quota.
  - Fund holdings of currency: 3,827.33 (SDR Million) = 83.11 percent of quota.
  - Reserve position in Fund: 777.89 (SDR Million) = 16.89 percent of quota.
  - SDR Department net cumulative allocation: 485.25 (SDR Million) = 100.00 percent allocation; holdings: 219.90 = 45.32 (SDR Million/% Allocation notation preserved).
  - Outstanding Purchases and Loans: None.
  - Latest Financial Arrangements: None.
  - Projected Payments to Fund (SDR Million): Charges/interest: 8.10 (2006), 8.07 (2007), 8.10 (2008), 8.07 (2009), 8.07 (2010).
- Statistical assessment
  - Belgium is a SDDS subscriber; national accounts and financial statistics are timely and generally of good quality; NBB publishes quarterly accounts within a lag of three months.
  - Revisions to national accounts started in November 2005 to comply with EUROSTAT and prepare for chain-linked national accounts.

### Selected Key Indicators (selected entries preserved exactly)
- GDP growth (percent): 2002 1.5; 2003 0.9; 2004 2.4; 2005 1.5; 2006 (Proj.) 2.1.
- CPI (percent): 2002 1.6; 2003 1.5; 2004 1.9; 2005 2.5; 2006 2.4.
- Unemployment rate (percent): 2002 7.3; 2003 8.0; 2004 7.9; 2005 8.3; 2006 8.2.
- General government debt (percent of GDP): 2002 103.2; 2003 98.5; 2004 94.9; 2005 94.0; 2006 90.4.
- Household debt (percent of GDP): 2000 40.3; 2001 38.7; 2002 39.4; 2003 40.3; 2004 40.6; 2005 (Sep) 41.9.
- Mortgage loans growth (percent, 12-month): 2000 7.7; 2001 2.7; 2002 8.0; 2003 11.8; 2004 11.8; 2005 15.4.
- Public sector debt (percent of GDP, baseline projections): 2006 90.4; 2007 87.8; 2008 85.7; 2009 84.1; 2010 83.1.
- Exchange rate: 40.3399 Belgian francs to the euro.
- Population (2004): 10.4 million.
- GDP per capita (2003): $33,866.

*Source: _cr0674 - Executive Summary and chapter content as provided.*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Economic Background and Outlook

- Recent performance
  - Growth in 2004–05 has been "slightly better than in the euro area."
  - Drivers in 2004: low interest rates, permanent tax cuts → lower household savings and housing investment; enterprises increased capital formation (rising profits, low cost of funding, catch-up from earlier depressed levels).
  - Late 2004/early 2005: oil price increase and sudden decline in external demand caused near stagnation of activity.
  - Since early 2005: private consumption and exports have been gaining strength; investment remained resilient → modest acceleration in growth.

- Quarterly contributions to 2005 growth (percent change from previous period; contribution to GDP growth noted where applicable)
  - Real GDP growth: 0.8, 0.5, 0.8, 0.3, 0.1, 0.3, 0.4, 0.5 (Q1–Q4 2005 split across two rows in source table)
  - Domestic demand: 1.5, 0.5, 0.7, -0.5, 0.8, 1.9, -1.2, 0.4
  - Private consumption: 0.6, 0.3, 0.2, 0.0, 0.4, 0.6, 0.2, 0.4
  - Net exports (contribution to GDP growth): -0.6, 0.0, 0.2, 0.8, -0.7, -1.6, 1.6, 0.2
  - Exports: 1.2, 1.4, 1.9, 2.3, -1.6, -0.4, 2.1, 2.1
  - Imports: 1.9, 1.4, 1.7, 1.4, -0.9, 1.4, 0.3, 2.0

- Inflation and labor costs
  - Harmonized consumer price inflation peaked at 3 percent in September 2005; underlying inflation about 1.4 percent.
  - Private sector hourly wages estimated to have risen by about 2.3 percent in 2005.
  - Unit labor costs grew by 2.1 percent in 2005.

- Policy stance and outlook
  - Monetary and fiscal conditions: low interest rates supportive; fiscal balanced-budget pursuit moderated by one-off measures (masked automatic stabilizers).
  - Staff projection: GDP growth to increase from 1.5 percent in 2005 to about 2.1 percent in 2006 (0.1 percentage point less than assumed in the 2006 budget).
  - Harmonized consumer price inflation projected to average 2.4 percent in 2006.
  - Domestic developments supporting outlook: income tax cuts offsetting oil-price effects; residential construction expected to remain resilient based on approved building permits.
  - Risks: oil/commodity shocks, faltering European growth, disorderly euro appreciation, wage agreement implementation exceeding partner wage growth, residential property price developments.

- Housing market (Box 1: Buoyant Housing Market)
  - Residential real estate prices have increased strongly; real terms increases: 44 percent since previous peak and 86 percent since previous trough.
  - Contributing factors: low interest rates; 2004 tax amnesty → investment in secondary homes; frontloading of tax deductibility of interest payments; reductions in transactions costs; Flanders region carry-over of first-home tax benefits.
  - Financial exposure and risk assessment:
    - Mortgage debt to GDP: 47 percent (Belgium)
    - Mortgage debt to GDP comparisons: France 26 percent; United Kingdom 75 percent; United States 69 percent.
    - Mortgage loans constitute about 10 percent of banks’ assets.
    - Residential construction makes up roughly 5 percent of GDP.
    - Conclusion: If interest rates increased, residential construction could slow significantly, but economy-wide risks are limited because household and bank exposure to real estate is not high and there is little evidence of equity withdrawal.

- Structural pressures and public finances
  - Population aging and international competition are interrelated challenges.
  - Authorities project aging to add 3.6 percentage points of GDP to budgetary outlays by 2030 (assuming employment rates can reach Lisbon targets).
  - Public debt was reported at 95 percent of GDP; debt declining but level remains high and vulnerable to growth shocks.
  - Demographics: dependency ratio rising; labor force projected to increase for next five years then demographic effects would lower potential growth by almost 1 percentage point annually under unchanged policies.
  - Employment: overall employment rate (15–64 years) was about 60 percent in 2003, almost 7 percentage points less than the unweighted average of its three key trading partners.
  - Constraints on pension reform: regular pension system reformed but limited further scope in pay-as-you-go component (replacement rates already among the lowest in the EU; pensions indexed to prices only). Authorities’ strategy: further debt reduction and use of interest-savings to cover most aging costs.

- Competitiveness and wages
  - Wage-bargaining framework aimed to maintain competitiveness versus trade-weighted France, Germany, Netherlands; however wages have outpaced this average since 2001 while productivity broadly kept pace.
  - For 2005–06, partial indexation to higher-than-expected inflation and lower-than-expected wage increases in Germany and the Netherlands imply competitiveness is set to erode more substantially.

### II. Policy Issues

- Broad policy focus
  - Achieve necessary fiscal consolidation, promote higher potential growth, and uphold financial stability.
  - Staff view: need to broaden reforms, enhance effectiveness, and ensure reforms do not jeopardize required buildup of fiscal surpluses.

- Strategy to cope with aging
  - Authorities’ stated strategy: up-front fiscal adjustment, durable balancing of social security accounts, and structural reforms to raise trend growth.
  - Consensus exists on objectives though specifics differ; decentralized policymaking requires regions and communities to contribute; social partner agreements are necessary.

- Policy dialogue effectiveness (Box 2)
  - Authorities and staff generally agree on objectives; implementation constrained by tradition of consensus-building, federal structure, and interregional sensitivities → slow-paced and incomplete adoption of Fund recommendations.
  - Fund recommendations on fiscal policy:
    - Reduce primary spending growth durably to achieve fiscal consolidation and tax burden reduction.
    - Adopt a multi-year expenditure-based framework to lock in structural fiscal adjustment and achieve budgetary surpluses for aging.
  - Policy developments: budget in balance since 2000; public debt steadily falling; recent primary surplus decline as interest savings used for tax cuts and spending increases; authorities focus on annual nominal balance targets.
  - Fund recommendations on labor and product markets:
    - Reform labor market institutions: phase out early retirement, modify wage-bargaining to ensure cuts in social security contributions lower labor costs, curb duration of unemployment benefits, enforce job search requirements.
    - Continue product market deregulation and liberalization.
  - Policy developments: reliance on active labor market programs, cuts in labor tax wedge; strengthened employment services; Generation Pact adopted with measures for young and old employment; product market deregulation progress and reduced administrative/regulatory burden; competition authority strengthened.
  - Fund recommendations on financial sector:
    - Adapt supervisory arrangements to market developments; enhance macro-prudential supervision and central bank–supervisor cooperation; upgrade insurance supervision; strengthen pension supervision.
  - Policy developments: banking and insurance supervisors merged; central bank begun publishing financial stability reviews; Financial Stability Committee established; an FSAP is being completed with this consultation.

- Financial sector assessment
  - Authorities concurred with findings of the FSSA (Financial Sector Stability Assessment) accompanying the report and intend to implement most recommendations.

- Key policy trade-offs and implementation challenges
  - Need to balance fiscal consolidation with measures to boost employment and growth.
  - Decentralization and consensus-driven policymaking slow implementation of reforms.
  - Authorities favor strengthened EU-level cooperation to sustain reform momentum.

### III. Staff Appraisal

- Summary appraisal points (drawn from staff discussions and findings)
  - The staff supports the authorities’ strategy of combining fiscal consolidation, social security balancing, and structural reforms, but emphasizes broader and more effective reforms.
  - Fiscal consolidation should be durable and oriented toward building fiscal surpluses to prepare for aging-related costs.
  - Labor market reforms should increase utilization (raise employment rates) by addressing high labor costs, tax wedge on labor, unemployment benefit duration, early retirement, and wage-bargaining mechanisms.
  - Product market deregulation should continue to enhance flexibility and competitiveness.
  - Financial sector supervisory and macroprudential frameworks should be further strengthened and implemented as recommended by the FSSA.

*Source: _cr0674 - Executive Summary.*

### 12. In the staff’s view, the authorities’ policies, while guided by a coherent set of

### 12. In the staff’s view, the authorities’ policies, while guided by a coherent set of

### Overview and staff judgement
- Authorities pursue coherent medium-term objectives but current policies are not sufficient to jointly achieve the envisaged fiscal consolidation and increase in trend growth.
- Fiscal consolidation requires public expenditure restraint and would benefit from higher growth; higher growth requires more flexible labor markets (including a lower labor tax wedge) and more competitive product markets.
- Authorities prioritize cuts in taxes and social security contributions and other budgetary measures to promote job creation and growth, supported by some structural reforms, but they have not tackled key labor market rigidities directly.
- Fund simulations (Global Economic Model) indicate comprehensive labor market reforms, which do not rely on up-front tax cuts, could raise GDP by about 6 percent in the long run. Further product and services market reforms combined could yield a similar increase.
- In such a scenario, the tax wedge on labor can fall appreciably without requiring additional expenditure restraint and without jeopardizing fiscal sustainability.

### A. Achieving Sustainable Public Finances and Higher Growth — Fiscal consolidation
- Authorities’ fiscal objective: shift the budget gradually into surplus.
  - For 2006, the budget is targeted to be again in balance.
  - For 2007, a small surplus of 0.3 percent of GDP is envisaged.
  - Thereafter, the surplus would be built up gradually by 0.2 percent of GDP per year until it reaches 1.5 percent of GDP.
  - This surplus is expected to be maintained through around 2020, after which it will be allowed to decline to fund the incremental costs of aging.
  - Technically, this assures fiscal sustainability (i.e., a stable debt-to-GDP ratio in 2030 at about 25 percent), provided the employment rate rises by several percentage points as envisaged under the Lisbon strategy.
- Historical and program context:
  - Up to 2003, stability program updates aimed for a surplus of ½ percent of GDP by 2005 and a further buildup of about 0.3 percentage point of GDP per year thereafter.
  - The High Finance Council (HFC) had set a budget surplus target of 1.5 percent of GDP by 2011.
  - The current stability program update envisages a slower buildup of the surplus; preliminary EU aging estimates show a slight increase in Belgium’s cost of aging.
- Risks from decentralization and divergent subnational performance:
  - Decentralization left central government in charge of public debt and social security and of funding rising costs of aging from the declining interest bill.
  - Subsequent policies have eroded the central government revenue base and increased its spending pressures while reducing pressures for regions ex ante, creating coordination challenges.
  - In 2005 the central government obtained a commitment from the regions to temporarily save some of their revenues to reach overall budget objectives.
- Social security and health spending adjustments:
  - Budget provides 0.06 percent of GDP per year for real increases in pensions and social assistance (indexed only to prices in practice).
  - Contribution base for social security broadened beyond labor to include some indirect taxes and 15 percent of the taxation of savings income.
  - Health care spending: allowed to increase by 4.5 percent per year in real terms through 2007, thereafter reduced to 3.1 percent per year in line with long-term aging projections.
  - Structural health measures: benchmarking to best practices, increasing copayments, promotion of the use of a referring doctor.
  - If approved health spending growth exceeds social security contribution revenue increases, other revenue sources will be tapped to avoid increases in the labor tax wedge.
- Implementation weaknesses and one-off measures:
  - Pursuit of nominal annual budget targets has led to continuing reliance on one-off measures, slightly stepped up in the 2006 budget.
  - Many one-offs (takeover of pension fund assets of public enterprises, sale and lease-back of real estate, tax securitization, compression of public investment) imply future outlays and do not constitute gains in net present value terms.
  - Medium-term tax and social security contribution reduction programs are not matched by medium-term expenditure-curbing or revenue-raising plans.
  - Achieving surplus targets beyond 2006 without one-off measures would require discretionary spending to fall by ¾ percent per year in real terms.
  - Tax reductions have absorbed a considerable amount of interest savings, eroding the primary surplus; ad hoc tax increases have increased tax-system uncertainty.
- 2006 balancing measures and outlook:
  - To compensate for ongoing tax reduction, balancing the budget in 2006 requires tight spending restraint and additional new tax measures.
  - Federal-level spending (excluding pensions) expected to be limited to 0.3 percent real growth.
  - Final stage of the 2001 income tax reform and ongoing reductions in social security contributions will lower revenues by about 0.8 percentage point of GDP.
  - Tax increases yielding 0.5 percentage point of GDP are being implemented:
    - About half from taxes on certain types of life insurance policies and mutual funds invested in government securities.
    - The other half from securitization of VAT tax arrears and an income tax regularization.
  - Tax administration and sanctions for tax evasion are being strengthened. Any windfall revenues from higher-than-projected growth will be saved.
  - Staff projections indicate that under current policies a deficit of 0.4 percent of GDP remains to be filled for 2006. If planned measures are not structural, the underlying balance will deteriorate by more than ½ of one percentage point of GDP in 2006.

- Selected budget indicators (Text Table 3, headline and structural figures, in percent of GDP):
  - Headline balance: 1999 -0.5; 2000 0.1; 2001 0.6; 2002 0.0; 2003 0.1; 2004 0.0; 2005 0.0; 2006 -0.4 (projections/actual as shown).
  - Effect of the cycle (-): 1999 -0.5; 2000 1.6; 2001 1.1; 2002 0.4; 2003 -0.4; 2004 -0.2; 2005 -0.6; 2006 -0.5.
  - Nonstructural measures (-)1/: 1999 -0.1; 2000 -0.2; 2001 0.4; 2002 0.2; 2003 1.2; 2004 0.8; 2005 0.4; 2006 0.5.
  - Adjusted structural balance: 1999 -0.9; 2000 -1.3; 2001 -0.8; 2002 -0.7; 2003 -0.8; 2004 -0.5; 2005 0.2; 2006 -0.4.
  - Interest payments (+): 1999 6.8; 2000 6.6; 2001 6.5; 2002 5.8; 2003 5.3; 2004 4.8; 2005 4.4; 2006 4.1.
  - Adjusted structural primary balance: 1999 6.0; 2000 5.3; 2001 5.6; 2002 5.1; 2003 4.6; 2004 4.2; 2005 4.6; 2006 3.8.
  - Memorandum: Real primary expenditure growth: 1999 3.9; 2000 2.0; 2001 1.3; 2002 5.0; 2003 4.9; 2004 0.1; 2005 3.1; 2006 2.1.
  - Public debt: 1999 113.6; 2000 107.7; 2001 106.3; 2002 103.2; 2003 98.5; 2004 94.7; 2005 94.0; 2006 90.4.
  - Note on nonstructural measures: pertain to sale of land and property, UMTS auctions (2001), takeover of Belgacom pension fund (2003), tax amnesty (2004), securitization of tax arrears (2005-06), timing shifts, payments to railways, and smaller items.

### Jobs and economic growth — policies, costs, and limits
- Generation Pact (implementation starts in 2006) to boost employment among young, low-skilled, and older workers, including:
  - Additional cuts in employers’ social security contributions targeted at young and older workers and shift and night work for up to about 0.4 percentage point of GDP.
  - Reform of early retirement regimes: raising eligibility age from 58 to 60 and minimum career length to 35 years.
  - Tightening job search requirements for older workers; strengthening training; better accompaniment of laid-off workers, including bonuses for rapid return to work.
  - Pensions topping up for those working beyond age 60; public sector to allow more vacancies to be filled with first-time jobs to lower youth unemployment.
- Labor tax reductions and competitiveness:
  - During 2002–10, the tax burden on labor is expected to be lowered by the equivalent of nearly 3 percentage points of GDP.
  - Further tax cuts to be made contingent on equivalent wage moderation to ensure effective decline in labor costs.
- Staff assessment of employment effects and fiscal costs:
  - Cuts in employers’ social security contributions (SSC) lower labor costs and generate employment; targeted cuts are more effective.
  - To increase employment rates substantially (e.g., by 5 percentage points), such cuts would need to be large, leading to an annual fiscal cost of about 1.5 percent of GDP in the current wage-bargaining framework if targeted.
  - Even if gross wages could be kept unchanged, the steady state budgetary cost would still be at least 1 percent of GDP.
  - SSC cuts implemented so far and those envisaged in the Generation Pact total about 2 percent of GDP and can be expected to raise employment by 1½ percentage points in steady state.
  - Personal income tax cuts will reach 1 percent of GDP with the last stage of the reform in 2006, without significant effects on employment.
  - Alternatives: financing SSC cuts from other revenue sources or through spending restraint is limited; targeted cuts to raise employment rate by 5 percentage points would imply discretionary spending real decrease of 2½ percent per year over 2007–10.
- Wage-setting framework limitations:
  - Current wage-setting impedes reform benefits for job creation and response to outsourcing pressures.
  - Cuts in the tax wedge are mostly used for higher take-home pay because unemployed and persons outside the labor force have little voice in social-partner discussions.
  - Indexation places a floor under domestic wage increases; tying wage increases to key trading partners with lower labor costs and higher employment is not conducive to catching up.
- Fiscal cost examples (Text Table 4: deviation from baseline in the long run; in percent of GDP):
  - Federal Planning Bureau, unchanged gross wages: Employers' contributions 4.5 → -2.9.
  - Federal Planning Bureau, targeted employers' contributions 1.8 → -1.4.
  - Federal Planning Bureau, wage bargaining: Employers' contributions 6.8 → -3.8; targeted employers' contributions 3.2 → -1.5.
  - National Bank of Belgium, unchanged gross wages: Employers' contributions 2.5 → -1.0.
  - Note: Employees' contributions 1/ ineffective or would have to be cut by much more than their current yield.
  - Sources: Federal Planning Bureau, National Bank of Belgium; and IMF staff calculations.

### Structural reforms and business environment
- Measures to promote investment and competitiveness:
  - Notional interest rate deduction introduced for equity capital to equalize fiscal treatment with debt financing.
  - Administrative simplification reduced associated costs of doing business from 3.4 percent of GDP in 2002 to 2.6 percent of GDP in 2004 (authorities’ estimate).
  - Backlog of adopting EU directives eliminated; liberalization of network industries (electricity, postal services) ongoing.
  - Competition authority strengthened; public spending reallocated to foster a knowledge-based society and encourage research and development.
  - On overall product market regulation, Belgium is ahead of neighbors and at the EU average following recent progress; OECD notes further reduction in state control and barriers to entrepreneurship would be desirable.

### Discussion and authorities’ stance
- Authorities and social partners acknowledge need for further reform while preserving main features of Belgium’s social model.
- Generation Pact seen as a milestone focusing on working longer, improved job search assistance, and tightened enforcement to address aging consequences.
- Wage-bargaining model could be refocused on job creation by explicitly taking employment rate developments into account when setting the room for wage increases.
- Consideration of more widespread “all-in” agreements (nominal wage growth set regardless of subsequent inflation) but not before the 2007–08 wage round.
- Authorities committed to further measures to balance the 2006 budget and believe sufficient spending restraint and scope to broaden nonlabor taxation exist to reach surplus targets in 2007 and beyond.
- Authorities agreed HFC should continue as independent assessor of public finance developments.

### B. Financial Sector Issues and Financial System Stability Assessment
- Financial sector performance improved in 2004 amid low-risk environment; overall vulnerability declined as financial soundness indicators and bank profitability picked up.
- Bank profit increase driven mainly by rising noninterest income and lower provisioning; interest income squeezed by competition for savings deposits and mortgage loans.
- Deleveraging by enterprises shifted bank activity toward mortgage lending and expansion abroad; recently domestic corporate borrowing has picked up.
- Banks report preparation for Basel II on track.
- Insurance: both nonlife and life insurance posted higher profits (nonlife from premium growth; life from rise in investment income); however, relatively high guaranteed rate of return contracts curb life-sector profitability in a low interest rate environment.
- Institutional and supervisory changes:
  - Banking and insurance supervisors merged into CBFA in early 2004.
  - NBB stepped up macroprudential supervision and regularly publishes Financial Stability Reviews.
  - Financial Stability Committee established consisting of combined boards of CBFA and NBB.
  - Bearer instruments being phased out to combat money laundering and align AML/CFT framework with international guidelines.
- FSAP findings and outlook:
  - Financial system generally sound and resilient; stress tests confirm system resilience.
  - System benefits from steady funding via savings deposits (partly tax-incentivized) largely invested in government securities.
  - Banks hold little equity and remain cautious toward risks; banking supervision is of very high quality.
  - Going forward, rising interest rates may slow mortgage lending activity while increased lending to enterprises is likely to continue, leading to a rebound of provisioning from current low levels.

*IMF staff report excerpt.*

### 30. The authorities were in broad agreement with the FSAP recommendations. They

### _cr0674 - 30. The authorities were in broad agreement with the FSAP recommendations. They

### Authorities' response and supervisory actions
- Authorities were in broad agreement with the FSAP recommendations.
- Actions under way:
  - Upgrading the supervision of insurance and pension funds.
  - Enhancing oversight and supervision of the globally important payment and securities settlement system located in Belgium.
  - Strengthening coordination between the NBB and CBFA in oversight of payment and securities settlement systems.
  - Adjusting the internal structure of the CBFA to enhance its effectiveness in supervising the bank-insurance conglomerates.
- Sector-specific concern:
  - In the life insurance sector, authorities recognize the risk of guaranteeing returns for the duration of the contract and the need for more adjustable rates of return.
  - Progress is hampered by the politically sensitive link between the minimum guaranteed interest rate on funded pensions and the maximum rate on life insurance products.

### Staff appraisal — macroeconomic performance and outlook
- Overall assessment:
  - The economy has been performing reasonably well.
  - Economic policies are guided by a coherent set of medium-term objectives to deal with population aging, but policies need to be strengthened to achieve these goals.
- Growth and demand:
  - With demand in trading partners recovering, achieving growth of somewhat more than 2 percent in 2006 appears realistic.
  - Recent economic performance and the near-term outlook are favorable, though they will continue to depend on external demand and domestic wage developments.
- Risks:
  - Domestic wage increases are set to exceed those of key trading partners, posing a downside risk to exports and investment in the medium term.
  - Rising interest rates would dampen housing price growth; impact on the economy expected to be gradual and limited as housing wealth does not directly affect consumption.
- Structural note:
  - An in-depth analysis of the financial system found the sector sound and stable, with a need to bring supervision of insurance and pension sectors at par with the high quality achieved for banking supervision.

### Fiscal policy assessment and recommendations
- Fiscal stance and objectives:
  - The emphasis of fiscal policy on reducing public debt and supporting growth needs to be complemented with medium-term spending restraint.
  - The balanced budget objective for 2006 is appropriate and within reach with few additional measures.
  - To help achieve surpluses beyond 2006 as intended, budget management should be complemented by a medium-term spending framework, or at a minimum shift to primary balance targets to ensure that the declining interest bill contributes to consolidation.
- Specific recommendations:
  - Replace reliance on one-off measures with specific plans to curb expenditure (example: health care).
  - The intention to save revenue windfalls is welcome.
  - The planned decline in the tax wedge on labor and on equity financing will help create jobs and foster investment.
  - A more comprehensive approach to tax reform should be instated to provide stability.
  - Abandon recourse to securitization of tax arrears and tax amnesties.

### Fiscal institutions
- Strengthening needed:
  - Fiscal institutions will need strengthening to ensure that medium-term fiscal consolidation objectives are adhered to.
  - The path toward fiscal surpluses should be brought in line with the recommendations of the HFC, and adjusted as estimates of aging costs are updated.
  - It will be essential for the HFC to resume its traditional role in providing recommendations on the fiscal outlook and assessing developments in public finance and adherence to the internal stability pact.
  - The internal stability pact should be continued to ensure that policies at various levels of government are consistent with overall consolidation objectives.

### Structural reforms and labor market policies
- Employment and labor utilization:
  - Further structural reforms are necessary to improve labor utilization and foster higher trend growth.
  - Employment rates are low by international comparison; focus should be on reforming labor market institutions.
- The Generation Pact:
  - Is a welcome step; increased emphasis on job search assistance and requirements together with targeted cuts in social security contributions will boost job creation, especially for the young and low-skilled.
  - To support its effectiveness, the duration of unemployment benefits should be limited in time.
  - Measures regarding early retirement regimes and employability of older workers will need to be taken further to meaningfully boost employment of older workers.
- Wage-bargaining and wage policy:
  - The wage-bargaining framework needs to be geared more toward job creation, by explicitly taking into account progress in raising the employment rate in setting wage increases.
  - Social partners should agree on wage moderation to prevent an erosion of competitiveness.
  - Reductions in taxes and social security contributions should not be used to boost take home pay.
  - Indexation should be abandoned.
- Other reform areas:
  - Commendable progress in reducing the administrative and regulatory burden needs to continue and be extended to economic deregulation and product market liberalization.

### Financial sector assessment and supervisory recommendations (FSAP findings)
- Overall FSAP conclusion:
  - A thorough assessment under the Fund’s FSAP program found the sector to be stable and resilient and recommends further strengthening of supervision.
- Key recommendations:
  - (i) Continue upgrading banking supervision to meet challenges posed by the move to Basel II and increasing complexity of financial groups and regulations in the context of European integration.
  - (ii) Strengthen insurance and pension supervision; monitor developments in the insurance sector closely in the context of a low interest rate environment.
  - (iii) Establish an effective mechanism to deal with the consolidated supervision of the bank-insurance conglomerates.
  - (iv) Devote adequate capacity to the oversight and prudential supervision of the payments and securities settlement systems while ensuring seamless coordination among the entities involved.
  - (v) Continue progress in shaping the Banking, Finance, and Insurance Commission supported by the NBB’s macroprudential analysis to preserve the record of financial stability.

*Source: IMF staff appraisal and FSAP findings as presented in the provided chapter.*

### 37. It is proposed that the next Article IV Consultation take place on the standard

### _cr0674 - 37. It is proposed that the next Article IV Consultation take place on the standard

### Proposed Article IV timing
- It is proposed that the next Article IV Consultation take place on the standard 12-month cycle.

### Economic developments (Figure 1; Table 1 highlights)
- GDP growth slowed considerably (annualized quarterly growth rates shown for 2000Q1–2005Q1 for Belgium, France, Germany).
- Private consumption held up relatively well.
- Exports declined recently; business investment remained volatile.
- Unemployment rate (in percent) rose: time series shown for 2000–2005 for Belgium, France, Germany, Netherlands.
- Employment growth weakened: time series 2000–2005 for Belgium, France, Germany, Netherlands.
- Selected national accounts and demand/output changes (2000–06; projections for 2006):
  - GDP (levels): 163.4 (2000) and 287.5 (2006) (both in billions; Table header indicates "Billions of Euros").
  - GDP growth (changes in percent): 3.7 (2000), 1.2 (2001), 1.5 (2002), 0.9 (2003), 2.4 (2004), 1.5 (2005), 2.1 (2006, Proj.).
  - Private consumption contributions (changes in percent): 3.6 (2000), 1.2 (2001), 0.8 (2002), 1.0 (2003), 1.3 (2004), 1.2 (2005), 1.6 (2006).
  - EU harmonized unemployment rate 2/: 6.9 (2000), 6.7 (2001), 7.3 (2002), 8.0 (2003), 7.9 (2004), 8.3 (2005), 8.2 (2006, Proj.).
  - NAIRU 2/: 8.5 (2000), 8.3 (2001), 7.9 (2002), 7.9 (2003), 7.8 (2004), 7.7 (2005), 7.7 (2006, Proj.).
- Output gap (in percent of potential GDP): 2.3 (2000), 1.2 (2001), 0.5 (2002), -0.6 (2003), -0.4 (2004), -0.9 (2005), -0.8 (2006, Proj.).

### Inflation analysis (Figure 2)
- HICP headline inflation and components (1997M1–2005M1 series for Belgium, Euro Area, Germany, France).
- Headline inflation rose relative to the euro area, mainly due to oil prices.
- The transitory (idiosyncratic) component, not the permanent (common) component, was the main culprit.
- Contributions of selected components (in percentage points) highlighted: Fuels and lubricants; Restaurants, travel, and cultural services; Telecommunications; Tobacco, electricity, and hospital services.

### Monetary and fiscal policy conditions (Figure 3)
- Monetary conditions index (MCI) defined as weighted average of the real effective exchange rate (weight=0.3) and the short-term real interest rate (weight=0.7).
- Real short-term and real long-term interest rate series shown for 1994M1–2006M1.
- Real effective exchange rate index based on normalized unit labor costs (2000=100, right scale).
- Euro Area interest rates series and money market/Main refinancing rates plotted.
- Budget balance and budget balance excluding one-offs series shown for 1999–2005 (percent of GDP).

### Public debt sustainability (Figure 4; Table 2)
- Baseline public sector debt (percent of GDP): 107.7 (2000), 106.3 (2001), 103.2 (2002), 98.5 (2003), 94.7 (2004), 94.0 (2005), 90.4 (2006), 87.8 (2007), 85.7 (2008), 84.1 (2009), 83.1 (2010).
- Debt-stabilizing primary balance: 1.2 (projections row indicates value).
- Of which: foreign-currency denominated debt (percent of GDP): 3.2 (2000), 2.6 (2001), 2.0 (2002), 1.4 (2003), 0.8 (2004), 0.8 (2005), 0.8 (2006), 0.8 (2007), 0.8 (2008), 0.8 (2009), 0.7 (2010).
- Change in public sector debt (percent of GDP): -5.9 (2000), -1.4 (2001), -3.1 (2002), -4.7 (2003), -3.8 (2004), -0.7 (2005), -3.6 (2006), -2.6 (2007), -2.1 (2008), -1.6 (2009), -1.0 (2010).
- Identified debt-creating flows (4+7+12) (percent of GDP): -5.5 (2000), -3.5 (2001), -3.6 (2002), -3.1 (2003), -4.7 (2004), -3.3 (2005), -3.7 (2006), -2.6 (2007), -2.1 (2008), -1.6 (2009), -1.0 (2010).
- Primary deficit (percent of GDP): -6.7 (2000), -7.1 (2001), -5.7 (2002), -5.4 (2003), -4.8 (2004), -4.4 (2005), -3.7 (2006), -3.3 (2007), -3.0 (2008), -2.6 (2009), -2.2 (2010).
- Revenue and grants (percent of GDP): 49.1 (2000), 49.7 (2001), 49.8 (2002), 51.2 (2003), 49.4 (2004), 49.8 (2005), 49.1 (2006), 49.0 (2007–2010).
- Primary (noninterest) expenditure (percent of GDP): 42.4 (2000), 42.6 (2001), 44.0 (2002), 45.8 (2003), 44.6 (2004), 45.4 (2005), 45.4 (2006), 45.7 (2007), 46.0 (2008), 46.4 (2009), 46.8 (2010).
- Automatic debt dynamics contribution (percent of GDP): 1.1 (2000), 3.6 (2001), 2.2 (2002), 2.3 (2003), 0.0 (2004), 1.1 (2005), 0.0 (2006), 0.7 (2007), 0.9 (2008), 1.0 (2009), 1.2 (2010).
- Contribution from interest rate/growth differential (percent of GDP): 0.5 (2000), 3.5 (2001), 2.3 (2002), 2.7 (2003), 0.2 (2004), 1.1 (2005), 0.0 (2006), 0.7 (2007), 0.9 (2008), 1.0 (2009), 1.2 (2010).
- Contribution from real interest rate (percent): 4.7 (2000), 4.6 (2001), 3.8 (2002), 3.6 (2003), 2.6 (2004), 2.2 (2005), 1.9 (2006), 2.8 (2007), 2.8 (2008), 2.9 (2009), 2.9 (2010).
- Contribution from real GDP growth (percent): -4.2 (2000), -1.1 (2001), -1.5 (2002), -0.9 (2003), -2.4 (2004), -1.2 (2005), -1.9 (2006), -2.1 (2007), -1.9 (2008), -1.8 (2009), -1.7 (2010).
- Residual, including asset changes (2-3) (percent of GDP): -0.3 (2000), 2.1 (2001), 0.5 (2002), -1.6 (2003), 0.9 (2004), 2.6 (2005), 0.1 (2006), 0.0 (2007–2010).
- Public sector debt-to-revenue ratio (percent): 219.2 (2000), 214.1 (2001), 207.4 (2002), 192.6 (2003), 191.8 (2004), 188.7 (2005), 184.0 (2006), 179.2 (2007), 175.0 (2008), 171.8 (2009), 169.7 (2010).
- Gross financing need (percent of GDP): 15.2 (2000), 12.9 (2001), 13.8 (2002), 11.9 (2003), 10.8 (2004), 10.5 (2005), 10.7 (2006), 11.0 (2007), 11.0 (2008), 11.1 (2009), 11.3 (2010).
- Gross financing need (in billions of U.S. dollars): 35.5 (2000), 29.9 (2001), 34.9 (2002), 37.1 (2003), 38.7 (2004), 39.2 (2005), 40.6 (2006), 43.5 (2007), 45.3 (2008), 47.5 (2009), 50.2 (2010).
- Scenario with no policy change (constant primary balance) in 2005-10: Baseline:3.2; Scenario:3.9; Historical:4.5 (contextual entries shown in figure caption).

### Labor and product market indicators (Figure 5)
- Employment is among the lowest (percent of population aged 15-64 years) compared across countries (OECD series).
- Employment particularly low for ages 55-64 years (percent of population aged 55-64 years).
- Unemployment displays regional disparity: Harmonized Unemployment Rates (percent) time series 1983–2003 for Belgium, Wallonia, Flanders.
- Tax burden indicators: Income tax plus employee and employer contributions as percent of labor costs (single persons without children) shown across countries.
- Product market regulation lowered appreciably: OECD index of overall product market regulation; harmonized unemployment rates for selected countries and years (1998, 2003).

### Fiscal developments (Figure 6; Table 3)
- General government balance, structural balance (change), and primary balance series for 1982–2004 (percent of GDP).
- General government expenditure, primary expenditure, and revenues series for 1982–2004 (percent of GDP).
- General government gross debt series and comparisons: Belgium, Euro area average, Other industrial countries average for 1982–2004.
- Table 3 (Operations of the General Government, 1998–2004; percent of GDP):
  - Revenue: 49.5 (1998), 49.6 (1999), 49.1 (2000), 49.7 (2001), 49.8 (2002), 51.2 (2003), 49.4 (2004).
  - Expenditure: 50.2 (1998), 50.1 (1999), 49.0 (2000), 49.8 (2001), 49.8 (2002), 51.1 (2003), 49.4 (2004).
  - Interest (percent of GDP): 7.3 (1998), 6.8 (1999), 6.6 (2000), 6.5 (2001), 5.8 (2002), 5.3 (2003), 4.8 (2004).
  - Overall balance: -0.8 (1998), -0.5 (1999), 0.1 (2000), 0.6 (2001), 0.0 (2002), 0.1 (2003), 0.0 (2004).
  - Gross public debt (Maastricht definition): 117.0 (1998), 113.6 (1999), 107.7 (2000), 106.3 (2001), 103.2 (2002), 98.5 (2003), 94.7 (2004).

### Fiscal scenarios and projections (Table 4)
- Current policies (A) projections (2002–10 series):
  - Revenue: 49.8 (2002), 51.2 (2003), 49.4 (2004), 49.8 (2005 Est.), 49.1 (2006 Proj.), 49.0 (2007–2010 Proj.).
  - Expenditure: 49.8 (2002), 51.1 (2003), 49.4 (2004), 49.8 (2005 Est.), 50.0 (2006 Proj.), 50.3 (2007), 50.6 (2008), 50.9 (2009).
  - Balance (percent of GDP): 0.0 (2002), 0.1 (2003), 0.0 (2004), 0.0 (2005 Est.), -0.4 (2006 Proj.), -1.1 (2007), -1.3 (2008), -1.6 (2009), -1.9 (2010).
  - Debt: 103.2 (2002), 98.5 (2003), 94.7 (2004), 94.0 (2005 Est.), 90.4 (2006 Proj.), 87.8 (2007), 85.7 (2008), 84.1 (2009), 83.1 (2010).
- Government scenario; stability program (B) and High Council for Finances and staff-recommended scenario (C) series provided with alternative debt and primary expenditure trajectories (see Table 4 for full series).

### Financial sector indicators (Figures 7; Tables 5–7)
- Bank credit to the private sector (billions of euros) increased 1999–2005; credit to households increased, driven by mortgage loans.
- Mortgage loans growth and levels: mortgage loans (billions of euros) and growth rate (percent) series for 1999–2005; mortgage loans as percent of total loans increased (Table 7: 20.3 (2000), 20.5 (2001), 22.3 (2002), 27.6 (2003), 27.4 (2004), 26.2 (2005, Sept.)).
- Profitability recovered partly due to a decline in risk and lower provisioning:
  - Return on assets (percent) and Return on equity (percent) series for 1999–2005.
  - NPLs to total gross loans (percent) reduced: 2.8 (2000), 2.9 (2001), 3.0 (2002), 2.6 (2003), 2.3 (2004), 2.2 (2005, Sept.).
  - Provisions (right scale, billions of euros) series shown; provisions and write-offs as percent of NPL: 57.0 (2000), 57.0 (2001), 51.8 (2002), 52.8 (2003), 54.2 (2004), 51.5 (2005, Sept.).
- Financial Soundness Indicators of the Banking Sector (2000–05; Table 6 core indicators, Sep 2005 where noted):
  - Regulatory capital as percent of risk-weighted assets: 12.0 (2000), 12.9 (2001), 13.2 (2002), 12.9 (2003), 12.9 (2004), 11.8 (2005, Sep).
  - Regulatory Tier I capital as percent of risk-weighted assets: 7.5 (2000), 8.2 (2001), 8.6 (2002), 8.8 (2003), 9.4 (2004), 8.5 (2005, Sep).
  - Nonperforming loans (NPL) as percent of gross loans: 2.8 (2000), 2.9 (2001), 3.0 (2002), 2.6 (2003), 2.3 (2004), 2.2 (2005, Sep).
  - Foreign exchange loans as percent of total loans: 22.3 (2000), 24.9 (2001), 22.3 (2002), 22.6 (2003), 26.4 (2004), 32.0 (2005, Sep).
  - Liquid assets as percent of total assets: 35.3 (2000), 35.3 (2001), 33.3 (2002), 33.2 (2003), 32.7 (2004), 31.0 (2005, Sep).
- Nonbanking sectors (Table 7; Sep 2005 data where noted):
  - Insurance sector coverage ratio: 265.0 (2000), 276.0 (2001), 254.1 (2002), 248.4 (2003), 252.1 (2004), ... (2005 Sep indicated with ellipses).
  - Household debt (percent of GDP): 40.3 (2000), 38.7 (2001), 39.4 (2002), 40.3 (2003), 40.6 (2004), 41.9 (2005, Sep).
  - Real estate: House price inflation (small- and medium-sized houses): 4.1 (2000), 5.3 (2001), 7.8 (2002), 7.6 (2003), 6.8 (2004), ... (2005 Sep ellipses).
  - Variable rate mortgages as percent of total new mortgages: 12.8 (2000), 6.2 (2001), 12.3 (2002), 25.9 (2003), 53.3 (2004), 40.7 (2005, Sep).

### External indicators and market vulnerability (Table 5)
- Current account balance (percent of GDP): 4.0 (2000), 3.4 (2001), 4.6 (2002), 4.1 (2003), 3.3 (2004).
- Exports (annual percentage change, in U.S. dollars): -0.8 (2000), -0.4 (2001), 6.3 (2002), 20.5 (2003), 19.3 (2004).
- Imports (annual percentage change, in U.S. dollars): 5.3 (2000), -0.6 (2001), 4.2 (2002), 21.2 (2003), 20.1 (2004).
- Official reserves (in billions of U.S. dollars, end-of-period): 10.0 (2000), 11.3 (2001), 11.9 (2002), 11.0 (2003), 10.4 (2004), 9.2 (2005).
- Exchange rate per U.S. dollar (period average): 1.0821 (2000), 1.1171 (2001), 1.0590 (2002), 0.8840 (2003), 0.8040 (2004), 0.801 (2005).
- Public sector debt (Maastricht definition): 107.8 (2000), 106.2 (2001), 103.2 (2002), 98.5 (2003), 94.9 (2004).
- Market interest rates: 3-month T-bill yield (percent): 4.0 (2000), 4.2 (2001), 3.2 (2002), 2.2 (2003), 2.0 (2004), 2.0 (2005).
- Bank credit growth (12-month): Credit to the private sector: 3.5 (2000), 1.4 (2001), 1.5 (2002), 3.0 (2003), 1.7 (2004), 4.7 (2005).
- Bank credit to households (12-month growth rates): 2.4 (2000), -1.1 (2001), 4.1 (2002), 6.8 (2003), 9.6 (2004), 14.7 (2005).
- Mortgages growth: 7.7 (2000), 2.7 (2001), 8.0 (2002), 11.8 (2003), 11.8 (2004), 15.4 (2005).

### Demographics and selected macro facts (Table 1 memorandum)
- Population (2004): 10.4 million.
- GDP per capita (2003): $33,866.
- Life expectancy at birth (2003): Male 75.1; Female 81.1.
- Infant mortality rate (2003): 5 per 1,000 live births.
- Population per physician (1995): 437.
- Population per sq. km. (1995): 335.

### Fund relations and mission (Appendix I)
- Mission: Brussels, November 10–21, 2005. Staff team: Mr. Everaert (Head) and Mmes. Allard, Yelten, and Zhou (all EUR) and Mr. Ouanes (MFD).
- Country interlocutors listed include: the minister of finance, the minister of labor, the governor of the central bank, the director of the treasury, staff of the cabinet of the prime minister, the Financial Stability Committee, the Finance, Banking, and Insurance Commission, the Central Economic Council, the Planning Bureau, ministries of the budget, social affairs and health, and the economy; representatives of labor unions, employer organizations, academia, and the financial sector.
- Fund relations:
  - Previous Article IV Consultation took place on February 18, 2005.
  - Belgium accepted the obligations under Article VIII and, apart from certain security restrictions, maintains an exchange system free of restrictions.
  - Belgium subscribes to the Fund’s Special Data Dissemination Standard; comprehensive economic data are available on a timely basis (Appendix II referenced).
- IMF membership and resources (as of December 31, 2005):
  - Joined 12/27/45; Article VIII.
  - Quota: 4,605.20 (SDR Million) = 100.00 percent of quota.
  - Fund holdings of currency: 3,827.33 (SDR Million) = 83.11 percent of quota.
  - Reserve position in Fund: 777.89 (SDR Million) = 16.89 percent of quota.
  - SDR Department net cumulative allocation: 485.25 (SDR Million) = 100.00 percent allocation; holdings: 219.90 = 45.32 (SDR Million/% Allocation notation preserved).
  - Outstanding Purchases and Loans: None.
  - Latest Financial Arrangements: None.
  - Projected Payments to Fund (SDR Million; forthcoming): Charges/interest: 8.10 (2006), 8.07 (2007), 8.10 (2008), 8.07 (2009), 8.07 (2010). Total row shows: 8.10 (2006), 8.07 (2007), 8.10 (2008), 8.07 (2009), 8.07 (2010).
- Exchange rate arrangement:
  - Until December 31, 1998, Belgium formed a monetary union with Luxembourg; Belgium entered the final stage of EMU on January 1, 1999 (contextual continuation in source).

*Source: IMF staff report content unit _cr0674 (figures, tables, and Appendix I material as provided).*

### 40.3399 Belgian francs to the euro.

### 40.3399 Belgian francs to the euro.

### Article IV Consultations
- Belgium is on the 12-month cycle; the last consultation was completed on February 18, 2005.
- On February 27, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belgium.
- Background findings:
  - After weakness in early 2005, growth picked up driven by revived exports, improved household confidence, and increased capital formation.
  - Inflation peaked in September 2005, boosted by oil price increases.
  - Wages rose faster than in key trading partners, supported by widespread, if partial, indexation.
  - Low interest rates and the depreciation of the euro from earlier peaks supported demand.
  - Procyclicality of fiscal policy has been limited by use of one-off measures despite a balanced budget rule.
- Staff and authorities projects:
  - GDP growth projected to strengthen into 2006 to somewhat more than 2 percent.
  - Private consumption projected to pick up in response to tax cuts.
  - Residential construction likely to remain resilient; house price growth likely to slow.
  - Business fixed investment expected to moderate after exceptional buoyancy in 2005.
  - Domestic wage increases likely to continue to outpace those of key trading partners if the 2005–06 wage agreement is implemented as envisaged, posing a medium-term downside risk to competitiveness.

### Statistical Issues
- Overall assessment:
  - Belgium’s economic and financial statistics are adequate for surveillance purposes.
  - The National Bank of Belgium (NBB) regularly publishes a full range of economic and financial data and provides calendar dates of main statistical releases.
  - Belgium is a SDDS subscriber.
- Data production and timeliness:
  - Statistics for International Financial Statistics on banking institutions and monetary aggregates are prepared on a monthly basis and are timely.
  - Belgium adopted the European System of Integrated Economic Accounts 1995 (ESA95) in 1999.
  - Revisions of national accounts started in November 2005 to comply with EUROSTAT requirements and prepare for adoption of chain-linked national accounts statistics.
  - The NBB is responsible for compiling national accounts statistics; quarterly accounts are published within a lag of three months.
  - Annual and quarterly accounts data are of good quality, with shortcomings mainly related to export and import deflators (based on unit values rather than prices collected directly from exporters and importers).
- Fiscal data:
  - General government revenue, expenditure, and balance on an accrual basis (ESA95) are published annually.
  - The NBB publishes monthly data on central government operations; recommendation: present these data quarterly on a national accounts basis to facilitate monitoring of public finances.
- Financial sector statistics:
  - The recent FSAP found overall quality and availability of financial indicators were good and suggested additional indicators for the insurance sector be developed.
  - Authorities provide quarterly updates of financial sector indicators (FSIs) in a timely manner.
- Key publicly accessible websites for macroeconomic data and analysis (listed in source).

### Table of Common Indicators Required for Surveillance (As of January 12, 2006) — selected entries
- Exchange Rates
  - Date of latest observation: 1/12/06
  - Date received: 1/12/06
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of latest observation: 11/05
  - Date received: 12/14/05
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Reserve/Base Money
  - Date of latest observation: 12/05
  - Date received: 1/11/06
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Broad Money
  - Date of latest observation: 12/05
  - Date received: 1/11/06
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Central Bank Balance Sheet
  - Date of latest observation: 11/05
  - Date received: 12/29/2005
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consolidated Balance Sheet of the Banking System
  - Date of latest observation: 11/05
  - Date received: 12/29/2005
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Interest Rates
  - Date of latest observation: 1/05/06
  - Date received: 1/05/06
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- Consumer Price Index
  - Date of latest observation: 12/05
  - Date received: 1/05/06
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- External Current Account Balance
  - Date of latest observation: Q3 2005
  - Date received: 01/04/06
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: M
- GDP/GNP
  - Date of latest observation: Q3 2005
  - Date received: 12/08/05
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Gross External Debt
  - Date of latest observation: Q3 2005
  - Date received: 10/18/2005
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q

### Executive Board Assessment and Policy Recommendations
- Executive Directors’ overall view:
  - Commended authorities for continued good performance and coherent medium-term objectives.
  - Noted measures to boost employment rates, deepen deregulation, and simplify administration are improving growth prospects.
  - Maintenance of balanced budgets for six consecutive years has improved market confidence and reduced risk premiums.
- Fiscal policy recommendations:
  - Strengthen and rebalance reforms to achieve both envisaged budget surpluses and higher labor utilization to address aging.
  - Diminish recourse to budgetary resources to promote job creation; deal with labor market rigidities more directly.
  - Complement emphasis on reducing public debt and supporting growth with medium-term spending restraint and comprehensive tax reform.
  - Adopt specific plans to curb spending; consider a formal medium-term spending framework or shift focus to primary balance targets so declining interest bill contributes to consolidation.
  - Discourage tax amnesties and ad hoc tax measures; support shift in tax burden away from labor within comprehensive reforms.
  - Urged HFC to resume role in assessing public finance developments and underpin internal stability pact.
- Labor market and wage policy:
  - Welcome Generation Pact to raise employment of young, low-skilled, and older workers; recommend extending measures to phase out early retirement regimes and improve employability of older workers.
  - To prevent erosion of competitiveness, social partners should moderate wage increases; avoid using reductions in taxes and social security contributions to boost take-home pay; discontinue indexation.
  - Use of “all-in” nominal wage agreements welcomed as an intermediate step.
  - Commended reductions in administrative and regulatory burdens; encouraged further economic deregulation and product market liberalization.
- Financial sector supervision:
  - Welcomed Financial System Stability Assessment findings that the financial sector was stable and resilient.
  - Supported adoption of its recommendations to strengthen supervision; raise insurance and pension supervision to the same quality as banking supervision.
  - Adequate capacity should be devoted to oversight and prudential supervision of payments and securities settlement systems, ensuring seamless coordination among entities.
  - Progress in shaping the Banking, Finance, and Insurance Commission (CBFA) supported by the NBB’s macroprudential analysis should continue.

### Selected Economic Indicators, 2002–06 (Belgium)
- Real economy (change in percent)
  - Real GDP: 2002: 1.5; 2003: 0.9; 2004: 2.4; 2005: 1.5; 2006: 2.1
  - Domestic demand: 2002: 0.8; 2003: 0.9; 2004: 2.8; 2005: 1.9; 2006: 1.6
  - CPI: 2002: 1.6; 2003: 1.5; 2004: 1.9; 2005: 2.5; 2006: 2.4
  - Unemployment rate (in percent): 2002: 7.3; 2003: 8.0; 2004: 7.9; 2005: 8.3; 2006: 8.2
- Public finance (percent of GDP)
  - General government balance: 2002: 0.0; 2003: 0.1; 2004: 0.0; 2005: 0.0; 2006: -0.4
  - Structural balance: 2002: -0.5; 2003: -1.3; 2004: 0.2; 2005: 0.6; 2006: 0.1
  - Primary balance: 2002: 5.7; 2003: 5.4; 2004: 4.8; 2005: 4.4; 2006: 3.7
  - General government debt: 2002: 103.2; 2003: 98.5; 2004: 94.9; 2005: 94.0; 2006: 90.4
- Interest rates (percent)
  - Money market rate (3 months): 2002: 3.3; 2003: 2.3; 2004: 2.1; 2005: 2.2; 2006: ...
  - Government bond yield: 2002: 5.0; 2003: 4.2; 2004: 4.1; 2005: 3.4; 2006: ...
- Balance of payments (percent of GDP)
  - Trade balance: 2002: 3.8; 2003: 3.5; 2004: 2.7; 2005: 3.0; 2006: 3.4
  - Current account: 2002: 4.6; 2003: 4.1; 2004: 3.3; 2005: 4.4; 2006: 4.7
  - Official reserves (US$ billion): 2002: 11.0; 2003: 11.0; 2004: 10.4; 2005: 9.3
- Exchange rate and competitiveness indicators
  - Exchange rate regime: Member of EMU
  - Euro per U.S. dollar (January 18, 2006): 0.827
  - Nominal effective rate (2000=100, ULC based): 2002: 100.5; 2003: 101.6; 2004: 105.7; 2005: 106.8
  - Real effective rate (2000=100, ULC based): 2002: 101.5; 2003: 104.5; 2004: 108.6; 2005: 110.6

*Source: IMF staff report and Public Information Notice (PIN) No. 06/22, March 1, 2006.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0674.pdf_