## _cr08111

## Source details

**Canonical URL:** [_cr08111](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08111.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08111.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08111.pdf.json)

---

### Headline assessment and political context
- Headwinds from a more testing international environment and domestic political tensions are challenging Belgium’s economic performance.
- Economic growth is expected to decelerate to 1.6 percent in 2008 (staff view); the authorities’ budget framework uses 1.9 percent for 2008.
- The general government is likely to record a deficit of 0.1 percent of GDP in 2007 instead of the targeted surplus of 0.3 percent of GDP.
- Federal policy making has been at a standstill broadly since April 2007; an interim federal government was formed on December 21, 2007, with a regular federal government expected by March 23, 2008.
- Political tensions have been associated with widening sovereign spreads.

### Outlook: growth, risks, and transmission
- 2007 performance:
  - GDP rose by 2.7 percent in 2007.
  - Employment: 55,000 jobs were added during the first 9 months of 2007.
  - Unemployment declined to the lowest level since 2002.
- Staff baseline projection for 2008:
  - Real GDP growth: 1.6 percent (staff); authorities use 1.9 percent in budget.
  - Quarterly profile (annualized quarterly growth): 2008 Q1–Q4: 1.6, 1.4, 1.4, 1.4.
- Demand components expected to slow:
  - Private consumption, gross fixed capital formation, and exports all expected to decelerate.
  - Residential construction to ease from historic highs though it accounts for 5.7 percent of GDP in 2007.
- Employment dynamics and risks:
  - Employment growth in 2007 benefited from a sharp increase in the self-employed and a government-subsidized voucher program for domestic services.
  - Labor shortages have started to appear in some regions and sectors.
  - Risks to the baseline include persistent tightening of financing conditions; 10 percent euro appreciation; 1 percent drop in foreign demand; boost in domestic confidence if reform agenda progresses; a US recession and a disorderly unwinding of global imbalances.
- Policy stance:
  - Automatic fiscal stabilizers should operate; no discretionary fiscal stimulus beyond automatic stabilizers was deemed necessary.
  - Consolidation must resume in earnest; broad fiscal support could be counterproductive given widespread indexation practices.

### Inflation: recent drivers, distributional effects, and outlook
- Recent developments:
  - Liberalization of gas and electricity markets in Brussels and Wallonia initially reduced energy consumer prices through summer 2007.
  - Sharp increase in energy and food prices pushed inflation up to 3.1 percent in December 2007.
- 2008 outlook:
  - Inflation is expected to peak in early 2008, remain high during Q1 because of base effects and increases in distribution margins in the energy sector in January, and decline gradually to around 2 percent by year-end.
  - The year average inflation for 2008 is projected at about 2.9 percent.
- Distributional impact and policy response:
  - Low-income households are disproportionately affected by food and energy price increases.
  - Authorities increased subsidies to low-income households for purchases of heating oil through a generally well-targeted mechanism with capped budgetary implications.
- Text Table 2 (Inflation Impact on Lowest Income Group):
  - Inflation: 1997-1998 = 2.4; 1999-2003 = 9.7; 2004-2006 = 6.9; 2007 = 1.8
  - Inflation first decile: 1997-1998 = 2.9; 1999-2003 = 8.8; 2004-2006 = 7.8; 2007 = 2.0
  - Implicit gain (+)/loss (-) in purchasing power for lower income: 1997-1998 = -0.5; 1999-2003 = 0.8; 2004-2006 = -0.9; 2007 = -0.2

### Financial sector and supervision
- Systemic assessment:
  - Impact of financial turmoil on the financial system appears contained; supervisors judged institutions to remain sound, though downside surprises cannot be ruled out in a severe and prolonged downturn.
  - Increased transparency on exposures and valuation assumptions would dampen market volatility.
  - High-quality prudential supervision is being further enhanced; rise in cross-border integration requires stronger coordination with host country authorities.
- Key indicators and exposures:
  - Bank exposure to subprime mortgages is limited to less than 1 percent of total assets.
  - Estimated exposures to ABS and CDOs appear moderate (vary by bank).
  - ABCP conduits experienced rollover difficulties; some banks brought these vehicles back on their books; size small relative to total on-balance sheet assets.
  - Participation in ECB liquidity operations does not seem affected.
  - Exposure to emerging markets is modest at less than 4 percent of total assets.
- Resilience and buffers:
  - Banks remain well capitalized; solvency and coverage ratios of insurance companies and pension funds have been increasing.
  - Liquidity vulnerability mitigated by a large customer deposit base relative to the loan book and a large securities portfolio deployable for secured wholesale financing.
  - Household sector buffers: gross financial assets amount to over 400 percent of gross disposable income; financial liabilities are around 80 percent of gross disposable income.
- Transparency and supervisory coordination:
  - Supervisors encourage improved transparency, including early and clear disclosure of exposures, valuation assumptions, and methods.
  - Authorities support an international tier to supervision for regionally and globally systemic institutions and coordinated efforts to address and prevent further financial turbulence.

### Fiscal consolidation, aging, and structural priorities
- Aging and fiscal outlook:
  - Population aging will raise public expenditures by close to 6 percentage points of GDP by 2050.
  - In the absence of fiscal adjustment, public debt-to-GDP is set to move onto an unsustainable path.
  - Belgium’s revenue-to-GDP ratio is close to 50 percent of GDP, limiting room for revenue increases; durable primary expenditure restraint is needed.
- 2007–2009 fiscal profile and projections (selected figures):
  - General government balance: 2003: 0.0; 2004: 0.0; 2005: -2.3; 2006: 0.4; 2007: -0.1; 2008: -0.5; 2009: -0.5
  - Structural balance: 2003: -1.0; 2004: -0.6; 2005: 0.4; 2006: -0.1; 2007: -0.1; 2008: -0.2; 2009: -0.2
  - Public debt: 2003: 98.7; 2004: 94.4; 2005: 92.2; 2006: 88.1; 2007: 84.5; 2008: 81.7; 2009: 79.2
  - Memorandum: Real GDP growth: 2003: 1.0; 2004: 2.8; 2005: 2.0; 2006: 2.9; 2007: 2.7; 2008: 1.6; 2009: 1.8
- Staff recommendations on consolidation:
  - Resume fiscal consolidation in 2008; target a structural improvement of ½ percent of GDP in 2008 as feasible and consistent with the Stability and Growth Pact.
  - Avoid one-off measures and public-private partnerships being used to circumvent fiscal adjustment; ensure transparency of associated risks and future spending obligations.
  - Deliver structural adjustment through concerted effort at all government levels; little room for new spending initiatives or tax cuts absent compensation within a tighter budget envelope.
  - Any savings from a declining interest bill should be set aside.
  - Regions and communities will need to contribute more than envisaged in the 2008 budgets; sustaining a surplus of at least 0.3 percent of GDP, as achieved in 2007, seems feasible.
  - Social security surplus should be maintained at about 0.5 percent of GDP.
  - Scope to slow spending growth on priority federal budget items and curb discretionary spending through streamlining functions, efficiency gains from retirements, outsourcing, and cutting subsidies.
  - Partly reverse subsidy increases (subsidies rose by ½ percentage point of GDP over the past five years) and tighten tax exemptions.

### Fiscal federalism and governance reforms
- Vertical and horizontal imbalances:
  - Current arrangements lead to widening imbalances between Entity I (federal government and social security) and Entity II (regional and local governments); most aging-related spending increases will fall on Entity I.
  - Entity II will need to share more of the adjustment burden; any resolution should be neutral from a consolidated budget perspective, provide incentives for regions to narrow income differences, and be fully transparent about intergovernmental solidarity mechanisms.
- Strengthening coordination, accountability, and transparency:
  - Strengthen High Finance Council (HFC): fix targets for different government levels on a rolling multi-year horizon, embed targets in published internal stability pacts, expand HFC mandate to assess compliance at budget submission, and strengthen HFC analytic capacity.
  - Further devolution of competencies necessitates stronger coordination and accountability.

### Structural reforms: labor market and productivity
- Policy priorities to raise employment and productivity:
  - Raise investment in human capital: continue R&D initiatives; strengthen on-the-job and life-long training; increase efficiency of secondary and higher education.
  - Remove inactivity traps and keep older workers in the labor force: conduct comprehensive review of the tax-benefit system; consider phasing out unemployment benefits with stricter time limits and phased benefits; include out-of-work benefits in taxable income; introduce a higher earned income tax credit; phase out early retirement regimes; extend activation policies to older workers.
  - Sustain wage moderation and increase wage flexibility: shift wage-bargaining focus from job preservation to job creation; extend “all-in” wage agreements; allow larger margins for wage differentiation to reflect productivity differentials.
  - Increase competition in product markets by reducing administrative burden, implementing EU directives on market liberalization, and removing obstacles to competition.

### Key macro and fiscal projections and scenarios (selected exact indicators)
- GDP growth (percentage change from previous year): 2007: 2.7, 2008: 1.6, 2009: 1.8.
- EU harmonized unemployment rate (percent of the labor force): 2007: 7.5, 2008: 7.4, 2009: 7.5.
- Structural balance (percent of GDP), current policies: 2008: -0.2, 2009: -0.2.
- Staff-recommended scenario: structural balance (percent of GDP): 2008: 0.4, 2009: 0.8.
- Gross public debt (percent of GDP), current policies: 2008: 79.8, 2009: 77.3; staff-recommended scenario: 2008: 78.2, 2009: 74.3.
- Primary balance (percent of GDP), staff-recommended scenario: 2008: 4.3, 2009: 4.1.
- Output gap (percent of potential GDP), current policies: 2008: -0.4, 2009: -0.3; staff-recommended scenario: 2008: -0.5, 2009: -0.4.
- Public finances (2007 actual, percent of GDP): Revenue 48.2, Expenditure 48.7, Fiscal balance -0.5, Primary balance 3.2, Structural balance -0.2, Gross public debt 82.2.

### Financial sector near-term developments (Supplementary Information and PIN highlights)
- Revised growth and inflation:
  - Staff projects GDP growth: 1.4 percent in 2008 (revised from 1.6 percent).
  - Headline inflation rose to 3.5 percent in January 2008.
- Financial sector:
  - Additional subprime-related losses disclosed; credit default swap spreads have increased sharply for all Belgian banks.
  - Institution-specific notes: Fortis reported a 45 percent decline in Q4 profits and has further shored up its capital; Dexia’s CDS spreads continued to increase.
- 2008 budget developments:
  - Authorities agreed on balancing the 2008 general government budget.
  - Federal budget measures free up €340 million (0.1 percentage point of GDP) for well-targeted initiatives to support purchasing power, including an increase in small pensions and a tax reduction for low-income workers.
  - Regional authorities: aim for a surplus of 0.2 percent of GDP in 2008.
  - Staff view: achieving a balanced budget would imply essentially no structural adjustment on the authorities’ macro assumptions; use of one-off measures (slightly less than 0.1 percent of GDP) reduces somewhat the quality of the underlying adjustment.

### Institutional and surveillance notes
- Mission and staff: Brussels, December 6–17, 2007 and January 23-28, 2008; staff team: Everaert (Head), Christou, Luzio, Yontcheva, De Broeck (FAD).
- Belgium is on the 12-month Article IV consultation cycle; previous consultation completed February 16, 2007.
- Exchange arrangements: Belgium’s currency is the euro, which floats freely and independently.
- FSAP: IMF Country Report No. 06/75; overall high degree of compliance with international standards; emerging issues include heavy exposure abroad and potential vulnerability to global developments and contagion.

*IMF staff — EXECUTIVE SUMMARY and selected chapters/excerpts (CR08111) from provided PDF content.*

### EXECUTIVE SUMMARY

### _cr08111 - EXECUTIVE SUMMARY

### Headline assessment and political context
- Headwinds from a more testing international environment and domestic political tensions are challenging Belgium’s economic performance.
- Economic growth is expected to decelerate to 1.6 percent in 2008 (staff view); the authorities’ budget framework uses 1.9 percent for 2008.
- The general government is likely to record a deficit of 0.1 percent of GDP in 2007 instead of the targeted surplus of 0.3 percent of GDP.
- Federal policy making has been at a standstill broadly since April 2007, delaying fiscal consolidation and structural reforms; an interim federal government was formed on December 21, 2007, with a regular federal government expected by March 23, 2008.
- Political tensions have been associated with widening sovereign spreads (Figure 1), with specific peaks when government formation negotiations failed and over the BHV electoral district dispute.

### Outlook: growth, risks, and transmission
- 2007 performance:
  - GDP rose by 2.7 percent in 2007.
  - Employment: 55,000 jobs were added during the first 9 months of 2007.
  - Unemployment declined to the lowest level since 2002.
- Staff baseline projection for 2008:
  - Real GDP growth: 1.6 percent (staff); authorities use 1.9 percent in budget.
  - Text Table 1 quarterly profile shows 2008 Q1–Q4: 1.6, 1.4, 1.4, 1.4 (annualized quarterly growth sequence shown in table).
- Demand components expected to slow:
  - Private consumption, gross fixed capital formation, and exports all expected to decelerate (Text Table 1).
  - Residential construction to ease from historic highs though it accounts for 5.7 percent of GDP in 2007.
- Employment dynamics:
  - Employment growth in 2007 benefited from a sharp increase in the self-employed (linked to labor immigration following EU enlargement) and a government-subsidized voucher program for domestic services.
  - Labor shortages have started to appear in some regions and sectors.
- Risks to the baseline (Figure 6) include:
  - persistent tightening of financing conditions;
  - 10 percent euro appreciation;
  - 1 percent drop in foreign demand;
  - boost in domestic confidence if reform agenda progresses;
  - a US recession and a disorderly unwinding of global imbalances.
- Policy stance:
  - Authorities and staff agreed that automatic fiscal stabilizers should operate; no discretionary fiscal stimulus beyond automatic stabilizers was deemed necessary.
  - Staff cautioned consolidation must resume in earnest and that broad fiscal support could be counterproductive given widespread indexation practices.

### Inflation: recent drivers, distributional effects, and outlook
- Developments:
  - Liberalization of gas and electricity markets in Brussels and Wallonia initially reduced energy consumer prices through summer 2007; inflation was below euro area average for most of 2007.
  - Sharp increase in energy and food prices pushed inflation up to 3.1 percent in December 2007.
- 2008 outlook:
  - Inflation is expected to peak in early 2008, remain high during Q1 because of base effects and increases in distribution margins in the energy sector in January, and decline gradually to around 2 percent by year-end.
  - The year average inflation for 2008 is projected at about 2.9 percent.
- Distributional impact and policy response:
  - Low-income households are disproportionately affected by food and energy price increases due to consumption pattern differences.
  - NBB study (2004–06 and applicable since September 2007) indicates greater loss of purchasing power for lower-income households when energy and food rise above-average.
  - Authorities increased subsidies to low-income households for purchases of heating oil through a generally well-targeted mechanism with capped budgetary implications.
- Text Table 2 (Inflation Impact on Lowest Income Group):
  - Inflation: 1997-1998 = 2.4; 1999-2003 = 9.7; 2004-2006 = 6.9; 2007 = 1.8
  - Inflation first decile: 1997-1998 = 2.9; 1999-2003 = 8.8; 2004-2006 = 7.8; 2007 = 2.0
  - Implicit gain (+)/loss (-) in purchasing power for lower income: 1997-1998 = -0.5; 1999-2003 = 0.8; 2004-2006 = -0.9; 2007 = -0.2

### Financial sector and supervision (summary from Executive Summary)
- The impact of financial turmoil on the financial system appears contained; financial institutions were judged by supervisors to remain sound, though downside surprises cannot be ruled out in a severe and prolonged downturn.
- Increased transparency on exposures and valuation assumptions would dampen market volatility.
- High-quality prudential supervision is being further enhanced, but the rise in cross-border integration requires stronger coordination with host country authorities.

### Fiscal and structural policy priorities
- Fiscal consolidation:
  - Fiscal consolidation is set to resume in 2008 without significant one-off measures, but plans fall short of staff advice.
  - Urgent reform of fiscal federalism arrangements is required and must be executed without fiscal costs.
  - Greater accountability, more transparency, and stronger coordination among federal and sub-federal entities are key to building the required medium-term fiscal surpluses.
- Aging and long-term challenges:
  - The window to tackle implications of population aging—through fiscal pre-funding and higher growth—is closing rapidly.
  - Timely delivery of the well-known policy agenda to address aging and fiscal federalism imbalances is uncertain.
- Structural reforms:
  - Structural reforms need to resume without delay to boost employment rates and productivity.

*IMF staff — EXECUTIVE SUMMARY (CR08111) from provided PDF content*

### 9.      More general income support measures would not be justified, especially since

### _cr08111 - 9.      More general income support measures would not be justified, especially since

### Income support and wage indexation
- Public and private sector wages are indexed to a core inflation index, the so-called “health index,” though some increases are subject to a lower cap.
- These mechanisms will boost wages by 3 percent in 2008.
- The mission cautioned against broader wage increases, noting they would evoke past episodes of mishandled supply shocks and subsequent painful adjustment.
- Labor union leaders emphasized the need to stick to existing wage agreements, while recognizing that recent price increases had raised social tensions.
- Authorities indicated no intention to provide broad income support and would consider the mission’s advice to:
  - seek ways to contain prices by further promoting competition, especially in the retail sector, and
  - review distribution margins in the energy sector.

### Competitiveness assessment
- Authorities agreed various indicators suggest the current level of the real effective exchange rate (REER) is broadly appropriate.
- Export performance remains relatively robust; the trend decline in export shares (except for a brief episode in 2006) is in line with expectations for a mature economy.
- CGER-based staff estimates of the REER range:
  - between a 2 percent undervaluation (reduced-form estimation) and
  - a 4 percent overvaluation (external sustainability approach).
- The reduced-form approach evaluates the difference between the current REER and an equilibrium REER derived from a panel regression where fundamentals are at trend levels.
- The external sustainability approach checks consistency of the exchange rate with maintaining a benchmark level of net foreign assets as a share of GDP, chosen here to be the 2006 level.

### Saving–investment balances (Text Table 3: Belgium)
- (in percent of GDP)
  - Private savings: 2002 24.0; 2003 23.3; 2004 23.7; 2005 23.8; 2006 24.9; 2007 Est. 26.0
  - Private investment: 2002 17.6; 2003 17.1; 2004 18.1; 2005 18.6; 2006 19.1; 2007 Est. 19.2
  - Private saving surplus: 2002 6.4; 2003 6.1; 2004 5.6; 2005 5.2; 2006 5.8; 2007 Est. 6.8
  - Government saving surplus: 2002 -1.7; 2003 -1.7; 2004 -1.7; 2005 -1.8; 2006 -1.7; 2007 Est. -2.1
  - National saving surplus: 2002 4.7; 2003 4.4; 2004 3.9; 2005 3.4; 2006 4.1; 2007 Est. 4.7
- The current account surplus reflects net savings of the private sector more than offsetting public sector deficits.
- High corporate savings drive the surplus, while Ricardian equivalence considerations have led to a decline in household savings.

### Wages, labor costs, and unit labor costs (Text Table 4: Belgium, 2003-08)
- (Percentage change from previous year, adjusted for seasonal and calendar effects)
  - Gross wages per hour worked: 2003 2.1; 2004 2.5; 2005 2.4; 2006 3.3; 2007 2.4; 2008 3.0
  - Collectively-agreed wages (1/ IPA): 2003 1.9; 2004 2.4; 2005 2.3; 2006 2.3; 2007 1.9; 2008 2.7
    - Agreed real wage increases: 2003 0.4; 2004 1.0; 2005 0.3; 2006 0.5; 2007 0.2; 2008 0.6
    - Indexations: 2003 1.5; 2004 1.4; 2005 2.0; 2006 1.8; 2007 1.6; 2008 2.1
  - Wage drift (2/): 2003 0.2; 2004 0.1; 2005 0.1; 2006 1.0; 2007 0.5; 2008 0.3
  - Employers' social security contributions (3/): 2003 0.0; 2004 -0.1; 2005 -0.5; 2006 -0.1; 2007 0.0; 2008 0.0
  - Labor costs per hour worked: 2003 2.1; 2004 2.4; 2005 1.9; 2006 3.2; 2007 2.4; 2008 3.0
    - In France, Germany, and the Netherlands: 2003 3.2; 2004 1.9; 2005 1.7; 2006 2.3; 2007 2.5; 2008 3.3
  - Labor productivity (4/): 2003 2.1; 2004 2.3; 2005 1.1; 2006 1.6; 2007 1.1; 2008 1.1
  - Unit labor costs: 2003 0.0; 2004 0.1; 2005 0.8; 2006 1.6; 2007 1.3; 2008 1.9
- Investment in Belgium remains attractive, but the high level of labor costs underscores the importance of preserving competitiveness through wage moderation.
- Authorities eased business regulation and cut corporate income taxes to support corporate profitability.
- 2007-08 wage agreements aimed to keep wage growth well below key trading partners, but higher-than-expected inflation will trigger wage indexation in 2008 and lift wages above the envisaged path.
- Labor costs will evolve in line with partner countries, albeit from a higher starting level; additional wage moderation will be necessary.
- Continuing labor and product market reforms would help boost productivity.

### Financial sector: turbulence and stability
- Impact of ongoing financial turbulence on the financial sector appears manageable.
- Major banks’ balance sheets have deteriorated since mid-2007 and synthetic credit default insurance spreads have risen significantly.
- Bank exposure to subprime mortgages is limited to less than 1 percent of total assets.
- Credit risk stress tests for subprime-related exposures do not result in a significant impact.
- Estimated exposures to asset-backed securities (ABS) and collateralized debt obligations (CDO) appear moderate (vary by bank).
- ABCP conduits sponsored by some of the largest banks experienced rollover difficulties; some banks brought these vehicles back on their books, but their size is small relative to total on-balance sheet assets.
- Supervisors judged the financial system to have remained sound despite some write-offs.
  - Banks remain well capitalized.
  - Solvency and coverage ratios of insurance companies and pension funds have been increasing.
  - Participation in ECB liquidity operations does not seem affected.
  - Banks have taken liquidity-enhancing measures and reinforced contingency funding plans and liquidity procedures.
- Banks’ vulnerability to liquidity shocks is mitigated by:
  - a traditionally large customer deposit base relative to the loan book, and
  - a large securities portfolio deployable to obtain secured financing in wholesale markets.
- Exposure to emerging markets is modest at less than 4 percent of total assets.

### Transparency, disclosure, and supervisory coordination
- Recent volatility in equity prices of financial institutions indicates the need for more transparent disclosure of exposures and their implications for banks’ earnings and capital.
- Supervisory authorities encourage financial institutions to improve transparency, including early and clear disclosure of exposure, valuation assumptions, and methods.
- Authorities support:
  - an international tier to supervision for regionally and globally systemic institutions, and
  - coordinated efforts to address and prevent further financial turbulence.

### Real economy implications and buffers
- Repercussions of financial turbulence on the real economy have so far been limited.
- Unlike the euro area as a whole, there is no tightening trend in lending criteria applied by Belgian banks.
- Bank credit demand by non-financial corporations increased in late 2007 and was expected to stabilize in early 2008.
- Household appetite for credit was robust in late 2007 and anticipated to hold up in early 2008, despite a slowdown in the mortgage market.
- Authorities agreed that continued market turbulence or a severe and protracted slowdown of economic activity could strain financial sector balance sheets and affect credit conditions.
- Household sector buffers:
  - Gross financial assets amount to over 400 percent of gross disposable income.
  - Financial liabilities are around 80 percent of gross disposable income.
  - These contribute to one of the highest levels of accumulated net worth in industrialized countries.
- Risks and vulnerabilities:
  - Household borrowing has sharply increased in recent years, driven by a buoyant mortgage market.
  - With housing and equity prices moderating, net wealth creation is expected to slow.
  - Households increasing claims on institutional investors raises the risk profile of household assets.
  - Sensitivity of private consumption to changes in real income is comparatively high in Belgium; a slowdown in private demand is likely.
- Corporate sector:
  - Deleveraging has reduced debt-financing risks in the short term.
  - Profit margins of nonfinancial corporations continued to rise through mid-2007, allowing internal funds to finance investment.
  - The notional interest rate deduction for corporate equity (implemented in 2006) led to a surge in equity financing.
  - Corporate sector’s healthy balance sheets suggest resilience to a credit squeeze, but slowdown in domestic and global demand could pressure profit margins and delay investment plans.

### Enhancing financial stability: progress and challenges
- Commendable progress in prudential supervision has helped safeguard financial stability:
  - The supervisory framework continues to be upgraded in line with 2005 FSAP recommendations.
  - The management committee of the Banking, Insurance and Finance Commission (CBFA) has been streamlined.
  - Synergies between the CBFA and the National Bank of Belgium (NBB) have been further developed.
  - Regular stress tests promote systematic dialogue between supervisory authorities and market participants.
  - A thorough test of detailed procedures for financial crisis management yielded a satisfactory outcome.
  - Prudential supervision of the insurance sector has been upgraded and regulation of the pension funds sector reinforced.
- Ongoing challenges:
  - Financial innovations and cross-border consolidation are substantially modifying the financial landscape.
  - Increasing sophistication of financial instruments and complexity of bancassurance conglomerates require vigilance to ensure risk-identification capacity keeps pace with market developments.
  - Authorities favor more disclosure of exposures, risks, and valuation assumptions and methodologies.
  - With the cross-border dimension growing (notably following the recent Fortis-ABN AMRO transaction), deeper coordination with host country authorities will be needed.

*Source: IMF staff report (excerpts).*

### 21.      Fiscal adjustment should be at the core

### 21.      Fiscal adjustment should be at the core

### Aging-related costs and fiscal outlook
- Population aging will raise public expenditures by close to 6 percentage points of GDP by 2050 (Figure 12).
- In the absence of fiscal adjustment, the public debt-to-GDP ratio is set to move onto an unsustainable path.
- There is broad public support for significant pre-funding of the rise in aging-related spending to address intergenerational fairness and avoid activity-discouraging tax increases or drastic future spending cuts.
- The High Finance Council (HFC) strategy: build surpluses gradually and use savings from declining public debt to finance part of aging costs (Figure 13).
- Belgium’s revenue-to-GDP ratio is close to 50 percent of GDP, limiting room for revenue increases; durable primary expenditure restraint is thus needed to deliver required primary surpluses.

### 2007–2008 fiscal performance and projections
- The 2007 budget is now estimated to post a small deficit instead of the planned surplus of 0.3 percent of GDP (Text Table 5).
- Fiscal slippage was mostly due to a hiatus in policy making since April 2007, partly offset by higher revenue from higher-than-anticipated economic growth.
- With elimination of one-off measures, fiscal policy was broadly neutral; the structural balance remained close to balance.
- On current policies, the fiscal position is set to deteriorate, raising concerns about medium and long-term sustainability (Figure 14).
- HFC-recommended objective: reach a surplus of ½ percent of GDP in 2008 — staff view this as unrealistic given only a provisional budget was in place in Q1 2008.
- Staff recommended targeting a structural improvement of ½ percent of GDP in 2008 as feasible and consistent with the Stability and Growth Pact; with authorities’ macro assumptions this would imply a nominal budget surplus of nearly 0.2 percent of GDP.
- Authorities regard balancing the budget in nominal terms in 2008 as their minimum objective but noted constitutional reform uncertainty and 2009 regional elections pose significant fiscal consolidation risks.

### Fiscal indicators (selected figures from Text Table 5)
- General government balance: 2003: 0.0; 2004: 0.0; 2005: -2.3; 2006: 0.4; 2007: -0.1; 2008: -0.5; 2009: -0.5
- Nonstructural measures: 2003: 1.2; 2004: 0.8; 2005: -2.0; 2006: 0.7; 2007: -0.1; 2008: -0.1; 2009: 0.0
- Structural balance: 2003: -1.0; 2004: -0.6; 2005: 0.4; 2006: -0.1; 2007: -0.1; 2008: -0.2; 2009: -0.2
- Interest charges: 2003: 5.3; 2004: 4.7; 2005: 4.2; 2006: 4.0; 2007: 3.8; 2008: 3.7; 2009: 3.5
- Structural primary balance: 2003: 4.3; 2004: 4.2; 2005: 4.5; 2006: 3.8; 2007: 3.8; 2008: 3.5; 2009: 3.3
- Change in structural balance: 2003: -0.8; 2004: 0.5; 2005: 0.9; 2006: -0.5; 2007: 0.1; 2008: -0.1; 2009: 0.0
- Public debt: 2003: 98.7; 2004: 94.4; 2005: 92.2; 2006: 88.1; 2007: 84.5; 2008: 81.7; 2009: 79.2
- Memorandum: Real primary spending growth (in percent) 2003: 4.9; 2004: -0.2; 2005: 8.9; 2006: -3.7; 2007: 3.7; 2008: 2.0; 2009: 2.0
- Memorandum: Real GDP growth 2003: 1.0; 2004: 2.8; 2005: 2.0; 2006: 2.9; 2007: 2.7; 2008: 1.6; 2009: 1.8

### Policy stance on consolidation instruments
- Authorities committed to resuming structural fiscal adjustment in 2008; staff emphasized a significant effort to restore credibility.
- Authorities prefer structural measures and avoid one-off measures; they see one-offs as postponing adjustment and non-transparent claims on future resources.
- Staff cautioned public-private partnerships should not be used to circumvent fiscal adjustment needs; risks and future spending obligations from such arrangements should be transparently reported.

### Required actions across levels of government
- Delivering structural adjustment requires concerted effort at all government levels; little room exists for new spending initiatives or tax cuts absent compensation within a tighter budget envelope.
- High tax pressure, especially on labor, rules out further increases in overall tax burden; adjustment must focus on expenditure restraint.
- Essential measures and targets:
  - Any savings from a declining interest bill will have to be set aside.
  - Regions and communities will need to contribute more than envisaged in the 2008 budgets; sustaining a surplus of at least 0.3 percent of GDP, as achieved in 2007, seems feasible.
  - Social security surplus should be maintained at its current level (about 0.5 percent of GDP).
  - Scope to slow spending growth on priority federal budget items and curb discretionary spending through streamlining functions, efficiency gains from retirements, outsourcing, and cutting subsidies.
  - Subsidies (including tax expenditure) rose by ½ percentage point of GDP over the past five years; partly reversing this (e.g., lowering subsidies for service vouchers) and tightening tax exemptions can help adjustment and raise efficiency and fairness.

### Fiscal accounts by level of government (selected figures from Text Table 6)
- Revenue (2007, in percent of GDP): Federal: 10.7; Social security: 19.5; Local government: 6.6; Regions and communities: 11.8
- Primary expenditure (2007, in percent of GDP): Federal: 8.1; Social security: 18.9; Local government: 6.5; Regions and communities: 11.4
- Balance (2007, in percent of GDP): Federal: -0.9; Social security: 0.5; Local government: 0.0; Regions and communities: 0.3

### Medium-term framework and debt reduction
- Authorities argued 2008 measures plus fiscal federalism reforms should deliver the HFC-recommended surplus of 1.1 percent of GDP by 2011, consistent with a primary structural surplus of close to 4½ percent of GDP.
- Staff noted future surpluses will need to exceed this path to make up for recent slippage and catch up with required reduction in public debt; interest savings from favorable debt dynamics would further increase nominal surpluses.
- Refocusing the fiscal framework on a medium-term path for the primary surplus would anchor sustainable consolidation; a multi-year expenditure framework and performance-oriented budgeting are advocated to guide annual budgets and improve efficiency.

### Fiscal federalism: vertical and horizontal imbalances
- Current arrangements lead to widening imbalances between Entity I (federal government and social security) and Entity II (regional and local governments); most aging-related spending increases will fall on Entity I (Figure 15).
- To avoid unsustainable federal expenditure squeeze, Entity II will need to share more of the adjustment burden, possibly via shifting some aging-related expenditure responsibilities from Entity I to Entity II; regional entities must be fully accountable for decisions impacting social security.
- Horizontal imbalances within Entity II reflect regional income and growth differentials linked to distribution of intergovernmental revenue sharing tied to personal income tax growth (Figure 16); equalization tempers but does not eliminate concerns.
- Any resolution should be neutral from a consolidated budget perspective, provide incentives for regions to narrow income differences, and be fully transparent about intergovernmental solidarity mechanisms.

### Strengthening coordination, accountability, and transparency
- Greater accountability, transparency, and coordination among government entities are needed for successful medium-term adjustment.
- High Finance Council coordination has been effective but could be strengthened: fix targets for different government levels on a rolling multi-year horizon, embed them in published internal stability pacts, expand HFC mandate to assess compliance at budget submission, and strengthen HFC analytic capacity.
- Authorities agreed further devolution of competencies necessitates stronger coordination and accountability, but no agreement yet on specific mechanisms.

### Structural reforms: raising employment and productivity
- Demographic trends will dampen long-term growth by curbing labor supply and raising dependency ratios; employment rates remain among the lowest in the industrialized world, especially among older and low-skilled workers (Figure 17).
- Key labor market reforms recommended:
  - Raise investment in human capital: continue R&D initiatives, strengthen on-the-job and life-long training, and increase efficiency of secondary and higher education.
  - Remove inactivity traps and keep older workers in the labor force: conduct comprehensive review of the tax-benefit system; consider phasing out unemployment benefits with stricter time limits and phased benefits, include out-of-work benefits in taxable income, or introduce a higher earned income tax credit; phase out early retirement regimes and extend activation policies to older workers.
  - Sustain wage moderation and increase wage flexibility: shift wage-bargaining focus from job preservation to job creation, extend “all-in” wage agreements, and allow larger margins for wage differentiation to reflect productivity differentials across regions, sectors, and enterprises.
- Increase competition in product markets by reducing administrative burden on businesses and households, implementing EU directives on market liberalization, and removing obstacles to competition; progress has been hampered by the hiatus in federal policy making and lack of coordination between regional and federal levels.

*Source: IMF staff chapter "21.      Fiscal adjustment should be at the core" from the provided PDF content.*

### 34.      With growth slowing and the window to address population aging closing

### With growth slowing and the window to address population aging closing

### Growth outlook and policy urgency
- Growth is expected to slow significantly after several years of robust performance, "mostly owing to external factors."
- Risks to the outlook are "tilted to the downside."
- The window to address population aging is "closing rapidly," making a return to an ambitious reform agenda urgent.
- Recent political difficulty in creating consensus around fiscal federalism reforms "has so far prevented the emergence of a full-fledged government and diverted attention from these priorities."
- Further delays in building fiscal surpluses and boosting employment rates and productivity "cannot be afforded."

### Fiscal policy: cyclical response and consolidation
- It is appropriate to address the cyclical downturn through automatic fiscal stabilizers; the authorities' intention to allow stabilizers to operate fully and abandon procyclical use of one-off measures is welcomed.
- Response to energy price spikes should be limited to an "increase in well-targeted and capped income support for the lowest-income households"; broader measures would be counterproductive given "widespread partial indexation."
- Maintaining credibility requires resuming ambitious fiscal consolidation and improving fiscal frameworks and federalism arrangements urgently.
- Staff recommendations and priorities:
  - Resume fiscal consolidation in 2008, and consider a more ambitious effort "amounting to an improvement in the structural balance by ½ percent of GDP" to better underpin credibility and bolster confidence.
  - Deliver structural adjustment through a concerted effort at all levels of government; "no room for new spending initiatives or tax cuts," and high tax pressure, especially on labor, "rules out further increases in the overall tax burden."
  - Expenditure restraint should be the primary source of adjustment.
  - Refocus the fiscal framework on a medium-term path for the primary surplus; avoid recourse to one-off measures and restrain recourse to public-private partnerships.
  - Revise fiscal federalism arrangements under a broad consensus; new arrangements should be neutral from a consolidated budgetary perspective, provide incentives for regions to narrow income differences, and be accompanied by strengthened accountability and stronger coordination of economic policies across all levels of government.

### Financial system stability and supervision
- Financial institutions "have remained resilient in the face of the ongoing financial turbulence," but market conditions have not returned to normal and a stronger-than-expected slowdown could be taxing.
- Institutions need to "uphold capital buffers."
- Supervisory actions to promote early disclosure of exposures and losses and enhanced transparency practices would help dampen market volatility and underpin confidence.
- High-quality prudential supervision is being further enhanced, but the rise in the cross-border dimension of the financial system requires stronger coordination with host country authorities.

### Structural reforms, labor market, and productivity
- Implementing a new round of structural reforms is essential to reap synergies with fiscal adjustment and to raise employment rates and productivity growth.
- Progress noted:
  - Employment rates have risen owing to "better activation policies."
  - Initiatives in training, education, and R&D "are likely to pay off in terms of productivity."
  - The wage bargaining framework "continues to deliver wage moderation."
- Remaining challenges:
  - Labor market performance "is still lagging well behind the OECD average."
  - Large geographical differences in unemployment rates "reflect deep-rooted structural problems."
- Priority reform areas:
  - Remove inactivity traps.
  - Raise low employment rates of older workers.
  - Foster labor mobility.
- Further goods and services market reforms "would boost productivity growth and consumer welfare."

### Fiscal and macroeconomic projections and scenarios (selected indicators preserved exactly as in source)
- GDP growth (percentage change from previous year): 2007: 2.7, 2008: 1.6, 2009: 1.8.
- EU harmonized unemployment rate (percent of the labor force): 2007: 7.5, 2008: 7.4, 2009: 7.5.
- Structural balance (percent of GDP), current policies: 2008: -0.2, 2009: -0.2.
- Staff-recommended scenario: structural balance (percent of GDP): 2008: 0.4, 2009: 0.8.
- Gross public debt (percent of GDP), current policies: 2008: 79.8, 2009: 77.3; staff-recommended scenario: 2008: 78.2, 2009: 74.3.
- Primary balance (percent of GDP), staff-recommended scenario: 2008: 4.3, 2009: 4.1.
- Output gap (percent of potential GDP), current policies: 2008: -0.4, 2009: -0.3; staff-recommended scenario: 2008: -0.5, 2009: -0.4.
- Public finances (2007 actual, percent of GDP): Revenue 48.2, Expenditure 48.7, Fiscal balance -0.5, Primary balance 3.2, Structural balance -0.2, Gross public debt 82.2.

### Institutional recommendation
- It is proposed that the next Article IV consultation be held on the standard "12-month cycle."

*Source: IMF staff report excerpt: "With growth slowing and the window to address population aging closing."*

### APPENDIX I. BELGIUM: FUND RELATIONS

### APPENDIX I. BELGIUM: FUND RELATIONS (As of January 31, 2008)

### Mission and Staff
- Mission: Brussels, December 6–17, 2007 and January 23-28, 2008.
- Staff team: Messrs. Everaert (Head), Christou (first mission only), Luzio (second mission only), Ms. Yontcheva (all EUR), and Mr. De Broeck (FAD, first mission only).
- Country interlocutors: The prime minister, the vice-prime minister for the budget, the governor of the National Bank of Belgium, the director of the Treasury, the chairman of the Finance, Banking and Insurance Commission, the Head of the Federal Planning Bureau, the chairman of the public borrowing section of the High Finance Council, and their staffs; staff of the federal ministry of finance, the health care administration, the regional ministries of the budget for Flanders, Brussels and Wallonia, respectively; representatives of labor unions, employer organizations, and the financial sector.
- IMF representation: Mr. Kiekens (Executive Director) or Mr. Rottier (Advisor to the Executive Director) attended the meetings.

### Fund Relations and Membership
- Previous Article IV consultation: February 16, 2007.
- Belgium accepted obligations under Article VIII and, apart from certain security restrictions, maintains an exchange system free of restrictions.
- Data dissemination: Belgium subscribes to the Fund’s Special Data Dissemination Standard; comprehensive economic data are available on a timely basis (Appendix II).

### I. Membership Status
- Joined 12/27/45; Article VIII

### II. General Resources Account (SDR Million; Percent of Quota)
- Quota: 4,605.20 — 100.00
- Fund holdings of currency: 4,303.11 — 93.44
- Reserve position in Fund: 302.130 — 6.56

### III. SDR Department (SDR Million; Percent of Allocation)
- Net cumulative allocation: 485.25 — 100.00
- Holdings: 387.00 — 79.75
- [Designation            plan]

### IV. Outstanding Purchases and Loans
- None

### V. Latest Financial Arrangements
- None

### VI. Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- Forthcoming principal: (no amounts listed)
- Charges/interest:
  - 2008: 3.18
  - 2009: 3.06
  - 2010: 3.06
  - 2011: 3.06
  - 2012: 3.06
- Total:
  - 2008: 3.18
  - 2009: 3.06
  - 2010: 3.06
  - 2011: 3.06
  - 2012: 3.06

### VII. Article IV Consultations
- Belgium is on the 12-month cycle; the last consultation was completed on February 16, 2007 (EBM/07/14).

### VIII. Exchange Rate Arrangements
- Belgium’s currency is the euro, which floats freely and independently against other currencies.
- Belgium maintains an exchange system free of restrictions on payments and transfers for current international transactions, except for restrictions maintained solely for security reasons. These measures are established by European Union regulations and have been notified to the Fund pursuant to Executive Board Decision No. 144-(52/51) (see EBD/90/251 (8/17/90), EBD/94/187 (11/29/94), EBD/92/139 (7/7/92) and EBD/06/133 (11/6/2006)).

### IX. FSAP Participation
- FSAP Assessment: IMF Country Report No. 06/75.
- Summary findings and vulnerabilities:
  - Strengths: financial system resilient; cautious bank risk attitudes; large holdings of government securities; extremely low holdings of equity by banks; stable funding sources aided by generous tax incentives; high standard of banking supervision; stable macroeconomic policy framework.
  - Compliance: overall high degree of compliance with international standards.
  - Near-term vulnerability: low, reflecting sound banking system, benign financial environment, strong corporate sector condition, and relatively healthy household sector.
  - Stress testing: financial institutions withstand adverse macroeconomic stress; diversification in the bancassurance model is beneficial.
  - Emerging issues: heavy exposure abroad, open economy, importance of the Euroclear Group globally — potential vulnerability to global developments and financial contagion; risks may increase with a downturn, increased cross-border operations, and deeper links with global money centers.
  - Supervisory enhancements: follow-up to 2005 FSAP recommendations — strengthened supervisory framework; streamlined CBFA management committee; improved synergies between CBFA and NBB; regular stress tests; tested crisis management procedures; upgraded prudential supervision of insurance sector; reinforced pension fund regulation.

---

### APPENDIX II. BELGIUM: STATISTICAL ISSUES

### Overview and Data Quality
- Belgium’s economic and financial statistics are adequate for surveillance purposes.
- National Bank of Belgium (NBB) publishes a full range of economic and financial data and provides calendar dates of main statistical releases.
- On-line access: Belgostat data search engine.
- Belgium is an SDDS subscriber.
- International Financial Statistics: banking institutions and monetary aggregates prepared monthly and timely.

### National Accounts and Public Finance Statistics
- Belgium adopted ESA95 in 1999.
- Revisions of national accounts started in November 2005 to comply with EUROSTAT requirements and to prepare for adoption of chain-linked national accounts.
- NBB is responsible for compiling national accounts statistics (unlike other countries).
- Quarterly accounts published within a lag of three months.
- Data quality: annual and quarterly accounts of good quality; shortcomings mainly related to export and import deflators based on unit values rather than directly collected prices from exporters and importers.
- General government revenue, expenditure, and balance on an accrual basis (ESA95) are published annually.
- NBB publishes monthly central government operations and quarterly general government operations since April 2007.

### Financial Sector Indicators (FSIs)
- Overall quality and availability of financial indicators are good.
- Authorities provide quarterly updates of FSIs in a timely manner.

### Key publicly accessible websites (as listed in the source)
- National Statistical Portal: www.belgostat.be
- National Statistics Institute: www.statbel.fgov.be
- Institute for National Accounts: www.inr-icn.fgov.be
- National Bank of Belgium: www.nbb.be
- Federal Planning Bureau: www.plan.be
- Banking, Finance, and Insurance Commission: www.cbfa.be
- High Finance Council: www.docufin.be
- Central Economic Council: www.ccecrb.fgov.be

---

### BELGIUM: TABLE OF COMMON INDICATORS REQUIRED FOR SURVEILLANCE (As of February 14, 2008)

- Exchange Rates: Latest Observation 2/14/08; Date Received 2/14/08; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: Latest Observation 11/07; Date Received 1/14/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Reserve/Base Money: Latest Observation 12/07; Date Received 1/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Broad Money: Latest Observation 12/07; Date Received 1/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Central Bank Balance Sheet: Latest Observation 12/07; Date Received 1/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Consolidated Balance Sheet of the Banking System: Latest Observation 12/07; Date Received 1/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Interest Rates2: Latest Observation 2/14/08; Date Received 2/14/08; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D
- Consumer Price Index: Latest Observation 12/07; Date Received 1/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Revenue, Expenditure, Balance and Composition of Financing3 — General Government4: Latest Observation 2006; Date Received 6/30/07; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A
- Revenue, Expenditure, Balance, and Composition of Financing3 — Central Government: Latest Observation 2006; Date Received 6/30/07; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A
- Stocks of Central Government and Central Government-Guaranteed Debt5: Latest Observation 12/07; Date Received 1/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- External Current Account Balance: Latest Observation Q3 2007; Date Received 12/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- Exports and Imports of Goods and Services: Latest Observation Q3 2007; Date Received 12/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- GDP/GNP: Latest Observation Q3 2007; Date Received 12/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- Gross External Debt: Latest Observation Q3 2007; Date Received 12/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q

Footnotes as presented in source:
- 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
- 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
- 3 Foreign, domestic bank, and domestic nonbank financing.
- 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- 5 Including currency and maturity composition.
- 6 Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available (NA).

---

### Supplementary Information (Staff Report for the 2007 Article IV Consultation — Supplementary Information; Approved March 19, 2008)

### Summary (key points)
- Growth forecast: dip to 1.4 percent in 2008, somewhat lower than anticipated in the staff report due to a further weakening of the global environment.
- Inflation: headline inflation has risen more than expected in January, given higher oil and food prices.
- Financial sector: has absorbed further write-downs linked to the ongoing financial turmoil.
- Fiscal: the government reached agreement on balancing the 2008 general government budget.
- A fiscal ROSC is being issued separately; supplement does not alter thrust of staff appraisal.

### Output and inflation
- Staff projects GDP growth: 1.4 percent in 2008 (revised from 1.6 percent in the Staff Report).
- Revision drivers:
  - Slower growth in the U.S. and Europe.
  - Evenhanded reductions in growth among Belgium’s main economic partners.
  - Higher inflation and larger-than-expected impact of global financial market turmoil.
  - Significant downside risks related to international environment and financial turmoil.
- Domestic sentiment: consumer and business confidence remained strong in January, encouraged by continued credit supply.

### Financial sector developments
- Additional subprime-related losses disclosed by the financial sector.
- Market indicators:
  - Volatility in equity prices and widening of credit default spreads indicate continuing market concerns about asset valuations and implications for banks’ earnings and capital.
  - Credit default swap spreads have increased sharply for all Belgian banks, in line with other euro area banks.
  - Possible related exposure to emerging Europe, whose vulnerabilities have risen.
- Institution-specific notes:
  - Fortis: reported a 45 percent decline in Q4 profits and has further shored up its capital.
  - Dexia: Moody’s reaffirmed the AAA rating of Dexia’s U.S bond insurance unit, FSA; Dexia’s CDS spreads continued to increase; if spreads remain high or widen further, additional accounting impacts on Dexia’s first quarter results may be expected.

### 2008 budget
- Authorities agreed on balancing the 2008 general government budget.
- Federal budget measures:
  - Frees up €340 million (0.1 percentage point of GDP) for well-targeted initiatives to support purchasing power, notably through an increase in small pensions and a tax reduction for low-income workers.
  - Revenue-raising measures: a special tax for power companies, sale of vacant government-owned buildings, and increased efforts to reduce tax fraud.
- Regional authorities: agreed to aim for a surplus of 0.2 percent of GDP in 2008.
- Political context: discussions on the economic program for the follow-up full-fledged federal government — to take office before end-March — continue and will be reflected in the new budget.
- Staff assessment:
  - Achieving a balanced budget would imply essentially no structural adjustment on the basis of the authorities’ macroeconomic assumptions.
  - Use of one-off measures (slightly less than 0.1 percent of GDP) reduces somewhat the quality of the underlying adjustment.
  - Budget agreement does not materially alter the staff’s appraisal.

### Text Table 1. Belgium: General Government Fiscal Indicators, 2003-2009 (In percent of GDP, unless otherwise indicated)
- Years: 2003 2004 2005 2006 2007 2008 2009
- General government balance 2/ : 0.0 0.0 -2.3 0.4 -0.1 -0.3 -0.7
- Nonstructural measures : 1.2 0.8 -2.0 0.7 -0.1 0.1 0.0
- Structural balance : -1.0 -0.6 0.4 -0.1 -0.1 0.0 0.0
- Interest charges : 5.3 4.7 4.2 4.0 3.8 3.7 3.6
- Structural primary balance : 4.3 4.2 4.5 3.8 3.7 3.6 3.6
- Change in structural balance : -0.8 0.5 0.9 -0.5 0.0 0.0 0.0
- Public debt 2/ : 98.7 94.4 92.2 88.1 85.1 82.0 80.3
- Memorandum items:
  - Real primary spending growth (in percent) 2/ : 4.9 -0.2 8.9 -3.7 3.7 1.7 1.8
  - Real GDP growth : 1.0 2.8 2.0 2.9 2.7 1.4 1.2
- Sources: National Bank of Belgium; and IMF staff.
- Notes:
  - 1/ Based on unchanged policy assumption.
  - 2/ Assumes Eurostat's treatment of the national railway company debt transfer in 2005.

*International Monetary Fund — BELGIUM: Staff Report for the 2007 Article IV Consultation — Supplementary Information (Approved March 19, 2008).*

### 4.      Belgium broadly meets, and in several areas exceeds, the requirements of the fiscal

### 4.      Belgium broadly meets, and in several areas exceeds, the requirements of the fiscal

### Fiscal transparency assessment
- Budget formulation is supported by medium-term macroeconomic forecasts and clearly formulated medium-term fiscal policy goals.
- Expenditure side: "there is room to clarify objectives and targets to help gear decision-making toward the medium term."
- Budget could include more information on tax expenditures and fiscal risks.
- Institutional arrangements for fiscal policy coordination could be strengthened.
- A detailed assessment is presented in the accompanying Report on The Observance of Standards and Codes: Fiscal Transparency Module.

### Main economic indicators (selected, 2003–09; percentage change from previous year unless otherwise indicated)
- GDP: 1.0 (2003), 2.8 (2004), 2.0 (2005), 2.9 (2006), 2.7 (2007), 1.4 (2008), 1.2 (2009)
- Private consumption: 0.7 (2003), 1.4 (2004), 1.4 (2005), 2.1 (2006), 2.5 (2007), 1.6 (2008), 1.2 (2009)
- Public consumption: 2.1 (2003), 1.8 (2004), -0.2 (2005), 0.0 (2006), 1.8 (2007), 2.3 (2008), 2.0 (2009)
- Gross fixed investment: -0.3 (2003), 7.5 (2004), 6.7 (2005), 4.2 (2006), 4.9 (2007), 1.4 (2008), 1.1 (2009)
- Exports of goods and nonfactor services: 2.9 (2003), 6.3 (2004), 4.1 (2005), 2.6 (2006), 4.6 (2007), 4.3 (2008), 3.7 (2009)
- Imports of goods and nonfactor services: 2.8 (2003), 6.5 (2004), 4.9 (2005), 2.5 (2006), 5.0 (2007), 5.0 (2008), 3.7 (2009)
- Output gap (in percent of potential GDP): -0.9 (2003), 0.0 (2004), -0.2 (2005), 0.2 (2006), 0.5 (2007), -0.4 (2008), -1.2 (2009)
- EU harmonized unemployment rate (percent of labor force): 8.2 (2003), 8.4 (2004), 8.4 (2005), 8.2 (2006), 7.5 (2007), 7.6 (2008), 8.3 (2009)
- GDP deflator: 1.6 (2003), 2.4 (2004), 2.4 (2005), 2.0 (2006), 1.7 (2007), 2.8 (2008), 1.7 (2009)
- Consumer price index (harmonized): 1.5 (2003), 1.9 (2004), 2.5 (2005), 2.3 (2006), 1.8 (2007), 3.1 (2008), 1.9 (2009)
- Private saving (percent of GDP): 23.3 (2003), 23.7 (2004), 23.8 (2005), 24.9 (2006), 25.6 (2007), 25.3 (2008), 25.3 (2009)
- Private investment (percent of GDP): 17.1 (2003), 18.1 (2004), 18.6 (2005), 19.1 (2006), 19.3 (2007), 19.1 (2008), 19.0 (2009)
- Government revenue (percent of GDP): 51.1 (2003), 49.2 (2004), 49.4 (2005), 48.7 (2006), 48.5 (2007), 48.3 (2008), 48.1 (2009)
- Government expenditure (percent of GDP): 51.1 (2003), 49.2 (2004), 51.6 (2005), 48.4 (2006), 48.7 (2007), 48.7 (2008), 48.9 (2009)
- Fiscal balance (percent of GDP): 0.0 (2003), 0.0 (2004), -2.3 (2005), 0.4 (2006), -0.1 (2007), -0.3 (2008), -0.7 (2009)
- Primary balance (percent of GDP): 5.3 (2003), 4.7 (2004), 1.9 (2005), 4.3 (2006), 3.7 (2007), 3.4 (2008), 2.9 (2009)
- Structural balance: -1.0 (2003), -0.6 (2004), 0.4 (2005), -0.1 (2006), -0.1 (2007), 0.0 (2008), 0.0 (2009)
- Gross public debt (percent of GDP): 98.7 (2003), 94.4 (2004), 92.2 (2005), 88.1 (2006), 85.1 (2007), 82.0 (2008), 80.3 (2009)
- Current account balance (in billions of euros): 11.4 (2003), 10.2 (2004), 7.9 (2005), 8.4 (2006), 10.7 (2007), 10.0 (2008), 10.0 (2009)
- Current account (percent of GDP): 4.1 (2003), 3.5 (2004), 2.6 (2005), 2.7 (2006), 3.2 (2007), 2.9 (2008), 2.8 (2009)

### Fiscal scenarios (Table 2, selected projections, 2004–13)
- Current policies (A) projections (Revenue / Expenditure / Balance / Debt):
  - Revenue: 49.2 (2004), 49.4 (2005), 48.7 (2006), 48.5 (2007), 48.3 (2008), 48.1 (2009), 48.1 (2010), 48.0 (2011), 48.0 (2012), 47.9 (2013)
  - Expenditure: 49.2 (2004), 51.6 (2005), 48.4 (2006), 48.7 (2007), 48.7 (2008), 48.9 (2009), 48.3 (2010), 48.1 (2011), 48.0 (2012), 47.8 (2013)
  - Balance 1/: 0.0 (2004), -2.3 (2005), 0.4 (2006), -0.1 (2007), -0.3 (2008), -0.7 (2009), -0.2 (2010), -0.1 (2011), 0.0 (2012), 0.1 (2013)
  - Debt 1/: 94.4 (2004), 92.2 (2005), 88.1 (2006), 85.1 (2007), 82.0 (2008), 77.3 (2009), 77.1 (2010), 74.3 (2011), 71.6 (2012), 68.9 (2013)
- Staff-recommended scenario (B) projections:
  - Revenue: same as current policies series
  - Expenditure: 49.2 (2004), 51.6 (2005), 48.4 (2006), 48.7 (2007), 48.2 (2008), 48.0 (2009), 47.2 (2010), 46.7 (2011), 46.4 (2012), 46.0 (2013)
  - Balance 1/: 0.0 (2004), -2.3 (2005), 0.4 (2006), -0.1 (2007), 0.2 (2008), 0.2 (2009), 0.9 (2010), 1.3 (2011), 1.6 (2012), 1.9 (2013)
  - Debt 1/: 94.4 (2004), 92.2 (2005), 88.1 (2006), 85.1 (2007), 81.5 (2008), 79.0 (2009), 74.6 (2010), 70.5 (2011), 66.4 (2012), 62.1 (2013)

### Background and near-term outlook (PIN No. 08/40, March 28, 2008)
- 2007 developments:
  - GDP estimated to have grown by 2.7 percent in 2007.
  - Unemployment declined to its lowest level since 2002.
  - Private consumption and business investment strengthened; political tensions and worsening international environment slowed activity toward year-end.
- Near-term risks and projections:
  - Staff projects output growth to weaken to 1.4 percent in 2008.
  - Headwinds: spike in oil prices, euro appreciation, spillovers from global financial turmoil, dimmer prospects in partner countries.
  - Downside risks: depth and persistence of ongoing financial market turmoil.
- Inflation and wages:
  - Headline inflation rose to 3.5 percent in January 2008.
  - Partial wage indexation will boost wages and drive up hourly labor costs relative to earlier expectations.
  - Authorities raised targeted income support for energy needs of low-income households.
- Financial sector:
  - Limited direct exposure to U.S. subprime market; bank capitalization strong; liquidity shocks absorbed.
  - Volatility in equity prices and widening credit default spreads indicate ongoing market concerns.
  - Cross-border consolidation noted, with a partial merger between a Belgian and Dutch bank.

### Executive Board assessment and policy recommendations
- Fiscal policy and institutions:
  - Directors commended the prudent 2008 budget and well-targeted response to inflation.
  - Encouraged adopting a program of medium-term fiscal consolidation and reforms to raise employment rates and productivity.
  - Recommended allowing fiscal stabilizers to operate fully around a medium-term consolidation path and avoiding one-off measures to meet nominal budget targets.
  - Urged prompt adoption of structural expenditure restraint to return consolidation path to that recommended by the High Finance Council.
  - Supported revision of fiscal federalism arrangements to address imbalances; new agreements should be neutral for the consolidated budget, provide incentives for regions to narrow income differences, and be transparent about intergovernmental solidarity mechanisms.
  - Recommended strengthened accountability and coordination among federal and sub-federal entities; fiscal institutions may need strengthening.
- Labor and product markets:
  - Recommended comprehensive reforms: streamlining and coordinating labor market policies across regions, improving training and education, revising the tax-benefit system, and phasing out early retirement schemes.
  - Suggested making the wage bargaining framework more conducive to achieving higher employment rates.
- Financial sector resilience:
  - Encouraged early and transparent disclosure by financial institutions.
  - Saw the need to ensure financial institutions maintain adequate capital buffers.
  - Supported enhancing high-quality supervision and deeper coordination with host country authorities amid cross-border consolidation.

### Selected social and other indicators (as provided)
- Per capita GDP (2006): $37,301
- Income distribution (ratio of income received by top and bottom quintiles, 2005): 4.1
- Life expectancy at birth (2005): male: 76.7, female: 82.4
- Gender pay gap (as percent of male pay, 2005): 7
- Passenger car ownership (2000): 467 per thousand inhabitants
- Greenhouse gas emissions (2003): kg CO2 per capita: 11.2
- Population density (2006): 343.6 inhabitants per sq. km.
- At-risk-of-poverty rate (2005): 15 percent

*Source: IMF staff report and Public Information Notice (PIN) No. 08/40, March 28, 2008.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08111.pdf_