## _cr1570

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---

### Context
- Political and policy shift
  - New center-right coalition government in October 2014 with New Flemish Alliance (NVA) entering government and the socialist party moving to opposition.
  - Government priorities: competitiveness (fiscal devaluation and a one-time skip of wage indexation), deficit reduction (cuts in social transfers and current spending), and activation (higher retirement age, further limits to subsidized early retirement, and rebalancing of fiscal incentives in favor of work).
- Macroeconomic and labor-market context
  - Real GDP stands at 2 percent above its pre-crisis peak.
  - Negative output gap: 1.3 percent.
  - Exports contribute roughly 35 percent of domestic value added.
  - Employment rates: population 67 percent; 55–64 cohort 42 percent; non-EU immigrants 40 percent; low skilled workers 47 percent.
  - Non-subsidized private sector employment is low and shrinking.
- Public finances and fiscal consolidation
  - Cumulative primary structural adjustment of 1.8 percent of GDP over 2010–14 achieved entirely on the revenue front.
  - Exited the EU Excessive Deficit Procedure in 2014; structural fiscal adjustment stalled in 2014 pushing estimated deficit back above 3 percent of GDP.
  - 10–year spreads vs German rates: around 30 basis points at end-2014 and 15 basis points as of early February 2015.
  - Required primary structural adjustment of 2.9 percent of GDP in 2015 and beyond to meet the 2014 Stability Program medium-term surplus objective of 0.75 percent of GDP.
  - Projected added annual fiscal cost of ageing: nearly 6 percent of GDP by 2040.
  - Demographic ratio (working age to person 65+): from 3.2 today to 2.2 by 2060.
- Financial sector and housing
  - ECB comprehensive assessment: Belgian banks’ CET1 ratio 12.1 percent in the baseline and 7.4 percent in the adverse scenario; leverage 3.6 percent in the ECB’s baseline scenario.
  - State guarantees to Dexia equal 10.8 percent of GDP; government assets available for sale valued at 9.4 percent of GDP.
  - House price overvaluation assessed as small to moderate in the 0–25 percent range.

### Outlook and Risks
- Short- and medium-term projections
  - Growth projected at 1.0 percent in 2015.
  - Oil price drop boost equivalent to about 0.2 percent of GDP.
  - CPI Inflation expected to slow to near zero in 2015.
- Key risks (interconnected)
  - High exposure to euro area weakness: 56 percent of exports directed to the euro area (EA).
  - Risk of deflationary pressure from weaker growth and temporary de-indexation of salaries.
  - Financial sector vulnerabilities from lower profitability and high leverage.
  - Banks’ exposure to Belgian sovereign below 6 percent of total assets (end-2014).
  - Housing risks limited: real house prices peaked in 2013:Q3; overvaluation 0–25 percent.
  - Long-term risks from insufficient structural reforms undermining potential growth and raising fiscal risks.

### Policy Discussions and Major Reform Measures
- Broad alignment with Fund recommendations; disagreements focused on distribution of adjustment burdens.
- Consensus on importance of increasing working life duration, strengthening competitiveness, and repairing public finances.
- Areas emphasized for deeper reform:
  - Broader labor and product market reforms to enhance productivity.
  - Effective inter-government cooperation.
  - Opening sheltered sectors to competition and reducing regulatory burden.
  - Expansion of enterprise-level negotiation space over wage and work arrangements.
  - Parallel improvement of education, vocational training, and continuous skill development.

### A. Strengthening Potential Growth and Competitiveness
- Wage policy and competitiveness
  - Wage norm tracking labor costs relative to three partner countries since 1996.
  - Wage gap narrowed to 2.9 percent in 2014 after a government-imposed real wage freeze in 2013–14.
  - Government announced an “index jump” (suspension of indexation) equivalent to 2 percentage points of inflation.
  - Expected peer-country wage increases: 1.35 percent a year in 2015–16 (OECD).
- Labor tax wedge reduction
  - Phased reduction of employers’ social security contributions from 33 to 25 percent in a revenue-neutral way by consolidating job-specific cuts.
  - Major unions sought larger “tax shift”; staff cautioned against validating excessive wage increases.
- Product market reforms
  - Large share of services sheltered from competition (network industries, regulated professions, distribution).
  - Authorities committed to reduce red tape (reform legal codes; “only once” policy for company documents).

### B. Raising Employment Rates
- Activation and retirement priorities: higher retirement age and tighter early retirement access.
- Labor market distortions identified: generous pension and unemployment access, high labor taxes, early retirement schemes, high minimum wages.
- Program aims to rebalance fiscal incentives in favor of work and strengthen activation policies targeting 55–64 cohort, non-EU immigrants, and low skilled workers.

### Pension and Early-Retirement Reforms (Box 1 key elements)
- Retirement age
  - Increase legal retirement age from 65 to 66 in 2025 and 67 in 2030.
  - Eliminate pension reductions for working pensioners 65 years old and above.
  - Increase minimum age of eligibility of a survivor’s pension.
- Pre-pension benefits (subject to job search requirements)
  - Increase job search requirement until age 65 instead of 60.
  - Increase minimum age of eligibility from 60 to 62, with exceptions for hardship jobs and collective dismissals in firm restructuring.
- Early retirement benefit
  - Speed up planned increase of age eligibility from 60 to 63 (by 2018) subject to higher career lengths.
  - Phase out bonuses granted to civil servants (including credit for post-secondary degrees).
- Other pension measures
  - Eliminate pension complement for frontier or seasonal workers.
  - Phase out pension bonus for people who worked longer than needed for a full pension.
- Long-term design
  - Prepare a unified pension based on a point system to be implemented by 2030.

### Unemployment Benefits and Access Changes (Box 1 key elements)
- Address use of unemployment insurance as a bridge to retirement and generous eligibility for young entrants.
- Search requirements
  - Increase age floor exemption on search requirement from 60 to 65.
  - Eliminate exemption from search requirement for “social and family reasons”.
- Unemployment benefits
  - Eliminate seniority supplement granted above 50 years of age.
  - Rebase unemployment benefit on longer income history.
  - Introduce degressivity of unemployment benefits for part-time workers.
- Unemployment benefits for first-time job seekers
  - Reduce age limit for school leavers to request unemployment benefits from 30 to 25.
  - Eligibility conditional on completion of secondary education.
- Temporary unemployment subsidy
  - Reduce temporary unemployment benefit from 70 percent to 65 percent of salary.
  - Cap the number of days enterprises can avail themselves of temporary unemployment.
- Voluntary career breaks
  - Eliminate right to benefits for “non-motivated” career breaks.
  - Increase age eligibility for “motivated” unlimited career break benefits from 55 to 60.
  - Align public-sector career break rights to private sector by 2020.

### Labor Market Activation, Education, and Training
- Reforms must be accompanied by better active labor market policies and education.
- Identified shortcomings: life-long professional training lags peers; vocational training and school-to-work transition inadequacies.
- Social partners invited to negotiate improved continuous professional training.
- Responsibility for education and active labor market policies lies with regional and community governments; coordination is a major challenge.

### Fiscal Adjustment Plans and Key Figures
- Federal government structural adjustment target: 0.7 percent a year in 2015–16; aim for structural balance by 2018 (authorities’ estimates).
- Authorities’ planned revenue effort: 0.7 percent of GDP cumulatively over three years to be used to reduce labor taxes.
- Staff projection of structural adjustment: 0.6 percent of GDP a year in 2015–16.
- Staff underlying primary structural adjustment: 0.4 percent of GDP a year due to a declining interest bill.
- Debt dynamics: debt ratio would return to a downward path in 2016 under baseline; vulnerable under stagnation or deflation scenarios.
- Average maturity of debt lengthened to 7.8 years in 2014.

- Planned Fiscal Adjustment Measures in 2015–2018 (In percent of GDP)
  - Entity I (federal government and social security)
    - Federal government primary spending cuts: 0.7
    - Health care continued cap on annual real growth of health care expenditure of about 1.5 percent: 0.7
    - Other social security spending (tightened eligibility...): 0.5
    - Revenue increases (VAT, excise, and various income tax increases; new tax on financial sector and financial transactions): 0.7
    - Revenue cuts (Cuts in social security contributions and personal income tax): -0.7
  - Entity II (regions and communities)
    - Reduction of civil servants through attrition, delays of investment, tax expenditure cuts, and cuts to business subsidies: 0.9

- Belgium: Overall and Structural Balances in 2013–2018 (In percent of GDP) — figures preserved exactly
  - Structural adjustment (2014 Stability Program): 0.5 0.7 0.7 0.7
  - Authorities' program structural adjustment: 0.5 0.3 0.7 0.7 0.5 0.1
  - Staff projection structural adjustment: 0.6 0.0 0.6 0.6 0.6 0.3
  - Staff projections Primary structural adjustment: 0.3 0.0 0.4 0.4 0.4 0.2
  - Overall balance: -2.9 -3.2 -2.9 -2.2 -1.5 -1.1
  - Structural balance: -2.9 -2.9 -2.3 -1.7 -1.1 -0.8

### Tax System Reform Suggestions
- Staff suggestions to be explored by authorities:
  - Shift tax burden away from labor.
  - Harmonize taxation of capital income with labor income.
  - Narrow use of reduced VAT rates.
  - Increase environmental taxes to address high energy consumption.
  - Rebalance taxes on immovable property from transaction taxes to recurrent taxes.

### Financial Sector, Banking, and Macroprudential Measures
- Bank adjustment
  - Balance sheets largely de-risked from legacy assets; public banks’ legacy assets require protracted oversight.
  - Main difficulty: adjust to a challenging operating environment and more demanding regulatory framework.
  - Liquidity and capital positions strong to expand credit with recovery.
  - Profitability pressures likely to persist; supervisors must monitor bank business model adaptation.
- Banking sector indicators (selected)
  - Mortgages accounted for 37 percent of bank domestic assets at end-2013, up 10 percentage points since 2008.
  - Macro-prudential mandate given to the National Bank in April 2014.
  - April 2014 banking law: limits on proprietary trading and new requirements on corporate governance and depositor protection.
- Table 6 indicators (selected)
  - Return on assets: 2009: -0.1; 2010: 0.5; 2011: 0.0; 2012: 0.1; 2013: 0.3; 2014:H1: 0.5.
  - Return on equity: 2009: -2.7; 2010: 10.7; 2011: 0.7; 2012: 3.0; 2013: 5.9; 2014:H1: 7.9.
  - Cost/income ratio: 2009: 77.7; 2010: 66.0; 2011: 67.3; 2012: 73.4; 2013: 62.4; 2014:H1: 63.1.
  - Regulatory Tier 1 capital to risk-weighted assets: 2009: 13.2; 2010: 15.5; 2011: 15.1; 2012: 15.8; 2013: 16.4; 2014:H1: 15.5.
  - Non-performing loans (NPL) as percent of gross loans: 2009: 2.7; 2010: 2.8; 2011: 3.2; 2012: 3.2; 2013: 3.1; 2014:H1: 2.9.

### Public Debt Sustainability, Stress Tests, and Scenarios
- Public debt and financing
  - Public debt-to-GDP ratio projected to peak at 106.4 percent in 2015 and decline to 98.2 percent by 2020 under baseline.
  - Public debt estimated at 105.6 percent of GDP in 2014.
  - Gross financing needs estimated at 20.2 percent of GDP in 2015 and expected to remain around 13–20 percent in the medium term.
  - External financing requirement at 80 percent of GDP; share of public debt held by foreigners about 50 percent.
- Baseline macro projections (selected)
  - Growth: 1.0 percent in 2015, 1.3 percent in 2016.
  - Output gap projected to close in 2020.
  - Inflation: below 2 percent throughout projection period.
  - General government deficit: -2.9 percent of GDP in 2013 to -0.4 percent in 2020 (staff baseline).
  - Primary surplus: 0.3 percent of GDP in 2013 to 2.0 percent of GDP in 2020.
- Stress-test outcomes (selected)
  - Growth shock (real output growth lower by 1.6 percentage points): debt-to-GDP 112.2 percent in 2017 then declines.
  - High interest rate scenario (spreads +200 basis points): impact on financing needs in 2020 is 1.3 percent of GDP; debt ratio 2.0 percentage points higher than baseline by 2020.
  - Real exchange rate shock (15 percent devaluation in 2015): slight decrease in debt and financing needs via inflation channel.
  - Primary balance shock (2.1 percentage points deterioration in 2015–16): debt ratio deterioration of 2.2 percentage points relative to baseline in 2019.
  - Combined macro-fiscal scenario: debt reaches 113.5 percent of GDP in 2017 and remains close to 110 percent until 2020; financing needs average 19.3 percent of GDP in 2016–20.
  - Contingent fiscal shock (50 percent of state guarantees called in 2016): large debt and financing needs impact; assets available for sale valued at 9.4 percent of GDP could cover some costs.
  - Economic stagnation scenario (nominal GDP growth 1.5 percent; real growth 1 percent; inflation 0.5 percent 2016–20): debt reaches 110.0 percent of GDP in 2020; gross financing needs average above 20 percent of GDP, rising to 20.0 percent in 2017.
  - Deflation scenario (real growth 0.5 percent; inflation 0 percent): debt reaches 121.0 percent of GDP in 2020; gross financing needs peak at 21.5 percent of GDP in 2017.

- Quantitative baseline highlights (selected)
  - Nominal gross public debt: 96.3 (2013), 104.5 (2014), 105.6 (2015), 106.4 (2016), 105.9 (2017), 104.6 (2018), 102.8 (2019), 100.7 (2020), 98.2 (2020).
  - Public gross financing needs: 21.1 (2013), 22.4 (2014), 19.2 (2015), 20.2 (2016), 19.1 (2017), 18.7 (2018), 16.5 (2019), 14.6 (2020), 12.9 (2020).
  - Effective interest rate: 4.1 (2013), 3.1 (2014), 3.0 (2015), 2.8 (2016), 2.6 (2017), 2.5 (2018), 2.5 (2019), 2.5 (2020).

### External Sector Assessment (Appendix I)
- Overall assessment
  - External position moderately weaker than level consistent with medium-term fundamentals and desirable policy settings.
  - Offsetting strengths: NIIP of 53 percent of GDP at mid–2014; NIIP expected to remain roughly stable; "No sustainability concerns arise."
  - Gross foreign assets (mid–2014): 469 percent of GDP; financial sector gross foreign assets around 130 percent of GDP; private non-financial sector gross foreign assets over 300 percent of GDP; external public debt 65 percent of GDP.
- Current account and REER
  - 2014 CA revised to a surplus of 0.3 percent of GDP rather than a deficit of 1.3 percent.
  - Cyclically-adjusted CA balance: +0.7 percent of GDP vs norm of 1 percent (January 2015 EBA estimates).
  - Implied REER gap: zero; REER overvaluation assessed in 0–5 percent range.
- Policy response recommendations
  - Steady fiscal consolidation, reductions in labor taxes, and wage moderation to improve competitiveness.
  - Complementary productivity-enhancing labor and product market reforms.

### IMF Article IV Consultation and Executive Board Assessment
- Article IV (Press Release No. 15/111, March 12, 2015) key findings
  - Economy resilient but outlook weighed down by weak demand in Europe.
  - Critical policy challenges: preserving competitiveness; addressing fiscal cost of ageing (added annual cost of 6 percent of GDP by 2040).
  - New federal government measures: temporary wage de-indexation; modest shift of taxation away from labor; tightening eligibility to pension, pre-pension and unemployment benefits.
  - Need to complement measures with: opening sheltered sectors to competition; lowering regulatory costs; increasing labor market flexibility; improving education and training.
  - Fiscal adjustment to resume after 2014 pause; pace targeted for 2015–16 appropriate and underpinned by pro-growth expenditure measures.
  - Banks need to adapt further to low growth, low interest rates, and stricter regulation; additional efforts toward Basel III capital standards needed.
- Executive Board Assessment (selected)
  - Directors welcomed the authorities’ program emphasizing fiscal adjustment, competitiveness, and labor market activation.
  - Directors supported speeding up fiscal consolidation and shifting to an expenditure-based adjustment strategy.
  - Directors saw scope for further rebalancing tax burden away from labor toward indirect/environmental/capital taxes.
  - Directors advised enhanced coordination among federal, regional and community governments.
  - Directors welcomed pension, pre-retirement, and unemployment reforms to raise employment rates and recommended opening sheltered sectors, reducing regulatory burdens, facilitating job creation through flexible contracts, and strengthening education/training.

### Selected macroeconomic indicators (2010–20) — selected series preserved exactly
- Real GDP (percent change): 2010: 2.5; 2011: 1.6; 2012: 0.1; 2013: 0.3; 2014: 0.9; 2015: 1.0; 2016: 1.3; 2017: 1.4; 2018: 1.5; 2019: 1.5; 2020: 1.5.
- Unemployment rate (levels): 2010: 8.3; 2011: 7.2; 2012: 7.6; 2013: 8.4; 2014: 8.5; 2015: 8.4; 2016: 8.3; 2017: 8.2; 2018: 8.2; 2019: 8.1; 2020: 8.1.
- Consumer prices (percent): 2010: 2.3; 2011: 3.4; 2012: 2.6; 2013: 1.2; 2014: 0.5; 2015: 0.1; 2016: 0.9; 2017: 1.2; 2018: 1.3; 2019: 1.4; 2020: 1.5.
- Revenue (percent of GDP): 2010: 48.4; 2011: 49.3; 2012: 50.7; 2013: 51.5; 2014: 51.3; 2015: 51.0; 2016: 50.9; 2017: 50.9; 2018: 50.9; 2019: 50.9; 2020: 50.9.
- Expenditure (percent of GDP): 2010: 52.3; 2011: 53.2; 2012: 54.8; 2013: 54.4; 2014: 54.5; 2015: 53.9; 2016: 53.1; 2017: 52.4; 2018: 52.0; 2019: 51.6; 2020: 51.4.
- General government balance (percent of GDP): 2010: -4.0; 2011: -3.9; 2012: -4.1; 2013: -2.9; 2014: -3.2; 2015: -2.9; 2016: -2.2; 2017: -1.5; 2018: -1.1; 2019: -0.7; 2020: -0.4.
- General government debt (percent of GDP): 2010: 99.6; 2011: 102.1; 2012: 104.0; 2013: 104.5; 2014: 105.6; 2015: 106.4; 2016: 105.9; 2017: 104.5; 2018: 102.7; 2019: 100.6; 2020: 98.0.
- Nominal GDP (in billions of euros): 2010: 366; 2011: 380; 2012: 388; 2013: 395; 2014: 403; 2015: 410; 2016: 420; 2017: 430; 2018: 442; 2019: 455; 2020: 468.
- Population (in millions): 2010: 10.8; 2011: 11.0; 2012: 11.1; 2013: 11.2; 2014: 11.2; 2015: 11.2; 2016: 11.3; 2017: 11.4; 2018: 11.5; 2019: 11.5; 2020: 11.6.

*Source: IMF staff report chapter "1. Main Reforms of Unemployment Benefits and Pension" and associated sections of _cr1570.*

### 1. Main Reforms of Unemployment Benefits and Pension

### 1. Main Reforms of Unemployment Benefits and Pension

### Context
- Political and policy shift:
  - New center-right coalition government in October 2014, with conservative New Flemish Alliance (NVA) entering government and the socialist party moving to opposition.
  - Government priorities: competitiveness (fiscal devaluation and a one-time skip of wage indexation), deficit reduction (cuts in social transfers and current spending), and activation (higher retirement age, further limits to subsidized early retirement, and rebalancing of fiscal incentives in favor of work).
- Recent macroeconomic and labor-market context:
  - Real GDP stands at 2 percent above its pre-crisis peak.
  - Negative output gap remains sizable at 1.3 percent.
  - Exports contribute for roughly 35 percent of domestic value added.
  - Employment rate among the population: 67 percent.
  - Employment rate for the 55–64 age cohort: 42 percent.
  - Employment rate for non-EU immigrants: 40 percent.
  - Employment rate for low skilled workers: 47 percent.
  - Non-subsidized private sector employment is low and shrinking, narrowing the tax base.
- Fiscal consolidation and public finances:
  - Cumulative primary structural adjustment of 1.8 percent of GDP over 2010–14 achieved entirely on the revenue front.
  - Belgium exited the EU’s Excessive Deficit Procedure (EDP) in 2014 upon confirmation that the 2013 deficit had fallen below 3 percent of GDP, but structural fiscal adjustment stalled in 2014 pushing the estimated deficit back above 3 percent of GDP.
  - 10–year spreads vis-à-vis German rates: around 30 basis points at end-2014 and 15 basis points as of early February 2015.
  - Primary structural adjustment of 2.9 percent of GDP in 2015 and beyond is still needed to meet the 2014 Stability Program medium-term surplus objective of 0.75 percent of GDP.
  - Belgium’s projected added annual fiscal cost of ageing: nearly 6 percent of GDP by 2040.
  - Demographic ratio (working age population to person 65 and older): from 3.2 today to 2.2 by 2060.
- Financial sector and housing:
  - ECB comprehensive assessment: Belgian banks’ CET1 ratio of 12.1 percent in the baseline and 7.4 percent in the adverse scenario; leverage 3.6 percent in the ECB’s baseline scenario.
  - System-wide exposures: subsidiaries of foreign banks excluded from consolidated assessment; banking system well capitalized and liquid overall.
  - State guarantees to Dexia equal 10.8 percent of GDP; government assets available for sale valued at 9.4 percent of GDP.
  - House price overvaluation assessed as small to moderate in the 0–25 percent range.

### Outlook and Risks
- Short- and medium-term growth and inflation outlook:
  - Growth projected to remain stable at 1.0 percent in 2015 owing to weak demand in Europe, wage moderation and fiscal consolidation.
  - The boost from the recent drop in oil prices equivalent to about 0.2 percent of GDP.
  - CPI Inflation expected to slow to near zero in 2015.
- Key risks (interconnected and potentially joint in realization):
  - High exposure to euro area weakness and geopolitical tensions:
    - 56 percent of exports directed to the euro area (EA).
    - Risk that weaker growth and planned temporary de-indexation of salaries could push inflation further into deflation territory.
  - Financial sector vulnerabilities:
    - Limited exposure to global financial instability but risks from lower profitability and high leverage that could hamper banks’ ability to maintain capital buffers and improve leverage.
  - Public sector–bank cross exposures:
    - Banks’ exposure to the Belgian sovereign rose post-crisis and eased to below 6 percent of total assets (end-2014).
    - KBC repaid €5 billion of the €7 billion in public support received in 2009 and plans to repay the rest on an accelerated schedule.
    - State guarantees to Dexia could cover contingencies arising from cost of rolling over liabilities or valuation losses.
  - Housing sector risks limited but present:
    - Real house prices peaked in 2013:Q3 and are expected to decline gradually over the medium term.
    - Overvaluation assessed in the 0–25 percent range; risks of a disorderly correction are limited given strong household balance sheets, high owner occupancy and healthy lending standards.
  - Long-term fiscal and growth risks:
    - Insufficient structural reforms that fail to raise employment and restore competitiveness would undermine potential growth and raise fiscal risks.

### Policy Discussions and Major Reform Measures
- Broad alignment and political context:
  - New federal government program closely aligned to past Fund recommendations.
  - Article IV discussions occurred amid general strikes; disagreements centered on the distribution of adjustment burdens across generations and taxpayers rather than on the need for reform.
  - Consensus on importance of increasing working life duration, strengthening competitiveness, and repairing public finances.

- A. Strengthening Potential Growth and Competitiveness
  - Wage policy and competitiveness:
    - Continued use of a wage norm tracking labor costs relative to three partner countries since 1996.
    - Wage gap narrowed to 2.9 percent in 2014 following a government-imposed real wage freeze in 2013–14.
    - Government announced an “index jump”, i.e., a suspension of indexation equivalent to 2 percentage points of inflation.
    - Expectation that wage gap will continue to close in the next two years given projected increases in wages in the three peer countries of 1.35 percent a year in 2015–16 (OECD).
  - Need for more flexible wage setting:
    - Mission suggested greater differentiation at the enterprise level, review of sector minimum wages, and introduction of opting-out options for firms seeking to adjust or create new jobs.
  - Labor tax wedge reduction:
    - Government committed to lower taxes on labor income, including a phased reduction of employers’ social security contributions from 33 to 25 percent in a revenue-neutral way—largely by consolidating job-specific cuts into a generalized cut.
    - Major unions argued for a larger “tax shift”, including raising taxation of capital income to reduce labor taxes further and faster.
    - Staff cautioned that labor-cost reducing measures should not validate excessive wage increases.
  - Product market and productivity reforms:
    - Large share of service economy (network industries, regulated professions, distribution) sheltered from competition; inefficiencies raise costs for households and export industries.
    - Staff encouraged greater impetus to competition to promote productivity growth and coordination with regional governments to reduce high regulatory costs on SMEs.
    - Authorities committed to reduce red tape by reforming legal codes and implementing an “only once” policy for company-provided documents.

- B. Raising Employment Rates
  - Focus on activation and retirement:
    - Government priorities include higher retirement age and further limits to subsidized early retirement to increase duration of working life and improve employment rates.
  - Labor market distortions to address:
    - Generous access to pension and unemployment benefits, high labor taxes, early retirement schemes, and high minimum wages contribute to low employment rates.
  - Targeted measures implied by the program:
    - Rebalancing fiscal incentives in favor of work (through tax and benefit reforms and reduced social contributions).
    - Strengthening activation policies to increase participation of 55–64 cohort and vulnerable groups (e.g., non-EU immigrants and low skilled workers).

*Source: IMF staff report chapter "1. Main Reforms of Unemployment Benefits and Pension".*

### 16.      An increase in the retirement age and tighter access to early retirement. The measures

### 16.      An increase in the retirement age and tighter access to early retirement. The measures

### Pension and early-retirement reforms
- Main elements announced (see Box 1 and Appendix IV) expected to raise employment rates and reduce fiscal costs of ageing; fiscal impact not yet fully assessable pending negotiations with social partners on exceptions for hardship jobs and part-time pension conditions.
- Key pension policy changes listed in Box 1:
  - Retirement age
    - Increased the legal retirement age from 65 to 66 in 2025 and 67 in 2030
    - Eliminate pension reductions for working pensioners 65 years old and above
    - Increase the minimum age of eligibility of a survivor’s pension
  - Pre-pension benefits (subject to job search requirements)
    - Increase the job search requirement until the age of 65 instead of 60
    - Increase the minimum age of eligibility from 60 to 62, with exceptions for hardship jobs and for collective dismissals in the event of firm restructuring
  - Early retirement benefit
    - Speed up planned increase of age eligibility from 60 to 63 (by 2018) subject to higher career lengths
    - Phase out bonuses granted to civil servants (including credit for post-secondary degrees)
  - Other pension measures
    - Eliminate the pension complement for frontier or seasonal workers
    - Phase out pension bonus (for people who have worked longer than needed to receive a full pension)
  - Long-term design
    - Prepare a unified pension based on a point system to be implemented by 2030

### Unemployment benefits and access changes
- Reforms target two weaknesses: (i) use of unemployment insurance as a bridge toward retirement encouraging early labor-force withdrawal; (ii) generous eligibility for young workers first entering the labor force undermining work incentives and creating inactivity traps.
- Authorities expect limited short-term employment gains but important behavioral change over time.
- Unemployment measures in Box 1:
  - Search requirements
    - Increase age floor exemption on search requirement from 60 to 65
    - Eliminate exemption from search requirement for “social and family reasons”
  - Unemployment benefits
    - Eliminate seniority supplement granted above 50 years of age
    - Rebase unemployment benefit on longer income history
    - Introduce degressivity of unemployment benefits for part-time workers
  - Unemployment benefits for first-time job seekers
    - For school leavers, reduce the age limit to request unemployment benefits from 30 to 25
    - Eligibility of young school leavers to unemployment benefits conditional on completion of secondary education
  - Government subsidy for temporary unemployment
    - Reduce the temporary unemployment benefit from 70 percent to 65 percent of salary
    - Cap the number of days enterprises can avail themselves of temporary unemployment
  - Access to benefits for voluntary career breaks
    - Eliminate the right to benefits for “non-motivated” career breaks
    - Increase age eligibility for “motivated” unlimited career break benefits from 55 to 60
    - Alignment of career break rights of public-sector workers to those of private sector by 2020

### Labor market activation, education, and training
- Need to accompany benefit reforms with better active labor market policies and education to realize gains from increased work incentives.
- Identified shortcomings:
  - Life-long professional training is well behind peers.
  - Education system suffers from localized failures and generalized inadequacies in vocational training and school-to-work transition.
- Government invited social partners to negotiate and develop better instruments of continuous professional training.
- Responsibility for education and active labor market policies lies with regional and community governments; coordination across governments is a major challenge.

### Fiscal adjustment plans and key figures
- Federal government set structural adjustment target of 0.7 percent a year in 2015–16, aiming for structural balance by 2018 (authorities’ estimates).
- Authorities’ planned revenue effort: 0.7 percent of GDP cumulatively over three years to be used to reduce labor taxes rather than speed up adjustment.
- Staff projection of structural adjustment: 0.6 percent of GDP a year in 2015–16.
- Underlying primary structural adjustment (staff): 0.4 percent of GDP a year due to a declining interest bill.
- Debt dynamics: debt ratio would return to a downward path in 2016 under the baseline scenario; vulnerable under stagnation or deflation scenarios.
- Average maturity of debt lengthened to 7.8 years in 2014.

- Planned Fiscal Adjustment Measures in 2015–2018 (In percent of GDP) — summary items and exact figures as presented:
  - Entity I (federal government and social security)
    - Federal government primary spending cuts: 0.7
    - Health care continued cap on annual real growth of health care expenditure of about 1.5 percent: 0.7
    - Other social security spending (tightened eligibility to pensions, unemployment benefits, and sickness and disability benefits): 0.5
    - Revenue increases (VAT, excise, and various income tax increases; new tax on financial sector and financial transactions): 0.7
    - Revenue cuts (Cuts in social security contributions and personal income tax): -0.7
  - Entity II (regions and communities)
    - Reduction of civil servants through attrition, delays of investment, tax expenditure cuts (e.g. mortgage deductibility), and cuts to business subsidies: 0.9

- Belgium: Overall and Structural Balances in 2013–2018 (In percent of GDP) — staff and authorities figures preserved exactly:
  - Structural adjustment (2014 Stability Program): 0.5 0.7 0.7 0.7
  - Authorities' program structural adjustment: 0.5 0.3 0.7 0.7 0.5 0.1
  - Staff projection structural adjustment: 0.6 0.0 0.6 0.6 0.6 0.3
  - Staff projections Primary structural adjustment: 0.3 0.0 0.4 0.4 0.4 0.2
  - Overall balance: -2.9 -3.2 -2.9 -2.2 -1.5 -1.1
  - Structural balance: -2.9 -2.9 -2.3 -1.7 -1.1 -0.8

### Fiscal policy design and coordination
- Adjustment intended to shift from revenue- to expenditure-based measures consistent with past Fund advice.
- Burden sharing agreement: regional and community governments committed to maintain balanced budgets and absorb unfunded cost of transferred responsibilities as of 2015—totaling over 1 percent of GDP.
- Concern that adjustment may rely excessively on postponing public investment in transportation, energy, education, and social housing; staff urged preserving room for investment.
- Fiscal governance: HCF role reinforced to assess and monitor governments against nominal and structural targets; measuring structural adjustment at subnational level is difficult.

### Tax system reform suggestions
- High taxation heavily tilted toward labor income; federal program envisages net reduction in labor taxes and simplification of social security abatement schemes.
- Staff suggestions (to be explored by authorities):
  - Shift tax burden away from labor through tax reform.
  - Harmonize taxation of capital income to place it on a more equal footing with labor income.
  - Narrow use of reduced VAT rates.
  - Increase environmental taxes to address high energy consumption.
  - Rebalance taxes on immovable property from transaction taxes to recurrent taxes to stabilize tax collection and enhance labor mobility.

### Financial sector adjustment and risks
- Operating challenges in a low growth and low interest rate environment; banks adapting via new business lines and bank-insurance; consolidation may become necessary.
- Mortgages accounted for 37 percent of bank domestic assets at the end of 2013, up 10 percentage points since the beginning of 2008.
- Authorities and banks judged limited bank risk from a house-price correction due to prudent lending standards, low non-performance, and recourse loans.
- Macro-prudential mandate given to the National Bank in April 2014; new organizational framework for risk detection and policy calibration.
- Belgian banks’ ample liquidity position led to high holdings of sovereign paper; potential for increased cross-border redeployment with SSM and a more integrated euro-area banking market.
- Mission questioned rationale for favorable tax treatment of bank deposits given potential cross-border fiscal leakages.
- Regulatory changes: April 2014 banking law set limits on proprietary trading and new requirements on corporate governance and depositor protection; transition to SSM entails administrative burdens but also benefits.

### Staff appraisal, overarching conclusions, and recommendations
- Private balance sheets healthy and supportive of resilience; fiscal fragilities and rising cost of ageing pose medium-term risks.
- Preserving stability requires continued steady fiscal consolidation combined with reforms increasing incentives and opportunities to work and lengthening working lives.
- Federal government program provides comprehensive measures to strengthen cost competitiveness, activate underused labor resources, and accelerate fiscal adjustment.
- To improve success prospects, the strategy should be reinforced by:
  - Broader labor and product market reforms to enhance productivity and incentives to invest and create jobs.
  - Effective instruments of inter-government cooperation given shared responsibility for economic policies.
  - More aggressive opening of sheltered sectors to competition and reduction of regulation burden to stimulate innovation and productivity.
  - Expansion of enterprise-level negotiation space over wage and work arrangements to increase labor market adaptability.
- Social benefit reforms are central but must be implemented in parallel with education, vocational training, and continuous skill development improvements; policy coordination across governments is essential.
- Fiscal objectives (pace and instruments) considered sensible in the gradual recovery scenario; shift to expenditure-based adjustment favors sustainability and growth.
- Caution that currently envisaged measures may be insufficient to meet annual deficit targets if low inflation persists; avoid short-term revenue fixes or cuts to investment budgets.
- If growth and inflation underperform materially, fiscal adjustment could be eased by increasing growth-enhancing investment spending.

*Source: IMF staff report text provided in the content unit.*

### 34.      With balance sheet repair nearly completed, the main difficulty for banks is to adjust

### _cr1570 - 34.      With balance sheet repair nearly completed, the main difficulty for banks is to adjust

### Bank balance sheet repair
- Balance sheets have been largely derisked from legacy assets.
- The long shelf-life of the legacy assets in public banks will require protracted close oversight.

### Operating environment and regulatory framework
- The main difficulty for banks is to adjust to a challenging operating environment and a more demanding regulatory framework.

### Liquidity, capital, and credit prospects
- As a whole, the strength of liquidity and capital positions place banks in a strong position to expand credit in response to an eventual recovery of investment.

### Profitability and supervisory priorities
- Pressures to maintain adequate profitability levels are likely to persist.
- Supervisors will need to continue to pay close attention to how bank business models adapt to this challenge.

*Source: _cr1570 - 34.*

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

### _cr1570 - 35.      It is proposed that the next Article IV consultation take place on the standard

### Real sector: recovery, employment, inflation, and savings
- Recovery has been slow but compares favorably with the euro area average.
- Employment performance has been considerably better than the euro area average.
- Unemployment rates have been quite stable.
- As disposable income growth fell, consumption was supported by a declining household saving rate.
- Lower government deficits and a widening private saving-investment surplus since 2011 underlie the improvement of the current account.
- Core inflation has been very stable, only recently beginning to decline.
- Selected chart indicators (indexes/base years preserved in the source):
  - Real GDP: Index, 2008Q1=100 (Belgium relative to Germany, France, Netherlands, Euro area).
  - Employment: Index, 2008Q1=100.
  - Unemployment Rates: levels for "Less than one year", "Long-term", "Under 25 (right scale)" (2007–2014).
  - Savings-Investment Balances: Public savings investment gap and Private savings investment gap (In percent of GDP, 2002–2020 range shown).
  - Annual Inflation: HICP inflation and Core inflation (In percent, 2007–2014).
  - Households Disposable Income and Savings: Real disposable income growth and Saving rate (right scale) (In percent).

### Private sector balance sheets: net creditor position, household wealth, corporate debt
- Belgium remains an important creditor country; a strong net investment position is reported.
- Household balance sheets characterized as "very healthy."
- Household wealth has been supported by a steady increase in real estate prices, which remain rather low compared to similar countries.
- Nonfinancial corporate sector debt appears high by international standards but is moderate and stable when excluding inter-company loans and debt from related companies.
- Selected figures and comparisons preserved:
  - Households Financial Wealth and Indebtedness, 2013 (In percent of GDP): Net financial assets and Debt by country listing (Finland through Belgium).
  - Nonfinancial Corporate Debt, 2013 (In percent of GDP): Consolidated debt and Unconsolidated debt listings.
  - Belgium: Nonfinancial Corporate Debt (In percent of GDP) components: Bank loans and debt securities; Other debt, mostly from related companies; Inter-company debt (2000–2014).
  - Average Single Family Home Price, 2014Q2 (In thousands of euros) by country.
  - Belgium: Household Wealth (In percent of GDP) components: Total net assets, Financial assets, Financial liabilities, Real estate (2001–2014).
  - Net International Investment Position (In percent of GDP): 2000-2012 average and 2013 comparisons.

### External sector: exports, competitiveness, and concentration
- Over the last decade, a sharp deterioration in net exports of goods was partially offset by an increase in net exports of services.
- In recent years, Belgium’s exports performance has evolved in line with peers.
- Loss in cost competitiveness is identified as a handicap, reflecting higher wage growth and lower productivity growth than neighboring countries.
- Lack of innovation is reflected in an increasingly concentrated export sector.
- The real effective exchange rate appreciation since 2012 was partially reversed in 2014.
- Chart/indicator highlights:
  - Current Account by Components (In percent of GDP): Net exports of goods, Net exports of services, Income and transfers, Current account.
  - Unit Labor Cost (Index, 2005=100) and Relative Unit Labor Cost in the Private Sector (cumulative differences since 1996).
  - Breakdown of Total Exports: Number of firms, Average exports per firm, Total exports (Index, 1995=100).
  - Real Effective Exchange Rates Based on CPI (Index, 2008Q1 = 100).
  - Exports of Goods and Services (Share of world, index number, 2002Q1 = 100).

### Social expenditure and labor market outcomes: participation, aging, and fiscal pressures
- Generous access to social benefits carries large fiscal cost and contributes to low labor force participation.
- Pension system allows early retirement.
- Despite an increase in subsidized employment, employment rates for youth and senior workers remain low.
- Social spending will be under pressure due to rapid aging of the population, which will result in a decrease in working age population until 2040.
- Chart/indicator highlights:
  - Social Expenditure and Labor Force Participation, 2011 (Public social expenditure and Mandatory private social expenditure as percent of GDP; Labor force participation rate, 2013).
  - Effective Retirement Age, 2012 (In years) by country.
  - Employment by Type (Period averages) showing Public, Subsidized, Private non-subsidized shares for 1995-2000, 2001-2007, 2008-2012.
  - Employment Status by Age Group (Workers, Jobseekers, Inactive persons in thousands).
  - Age Distribution of Population (2013, 2040, 2060) and Projected Change in Working Age Population (20 to 64 years old) through 2060 (In thousands of persons).

### Fiscal developments and medium-term projections
- Historically, Belgium has an impressive track record of debt consolidation and has run considerable structural primary surpluses.
- Primary spending growth has outpaced GDP growth by large margins since 2008.
- Recent consolidation—modest compared with the overall euro area adjustment—was due to revenue increases only, unlike peer countries.
- Higher social spending contributed to about ⅔ of additional spending since 2007, especially on sickness and disability benefits, pensions, and healthcare.
- Belgium has a high level of taxation, reflecting the highest labor tax wedge among advanced countries.
- Chart/indicator highlights:
  - General Government Debt (In percent of GDP) and projections.
  - Real Primary Expenditure and Real GDP (Index, 1995=100) and projections.
  - Real Annual Growth in Social Spending (Deflated by GDP deflator, in percent) components: Pensions, Sickness and disability, Health care, Family allowance, Other benefits, Early retirement (comparisons 2002-07 vs 2011-13).
  - General Government Structural Balances (Structural balance and Structural primary balance as percent of GDP) and projections.
  - Structural Fiscal Adjustment (Change between 2009 and 2013, in percentage points of GDP): Cyclically adjusted revenues, Cyclically adjusted primary expenditures, Structural primary adjustment, Structural adjustment.
  - Total Tax Revenue and Tax Wedge (In percent) by country listing and comparisons.
- Table 1: Selected Economic Indicators, 2010–20 (percent changes and levels). Key data points preserved exactly:
  - Real GDP: 2010: 2.5; 2011: 1.6; 2012: 0.1; 2013: 0.3; 2014: 0.9; 2015: 1.0; 2016: 1.3; 2017: 1.4; 2018: 1.5; 2019: 1.5; 2020: 1.5.
  - Unemployment rate: 2010: 8.3; 2011: 7.2; 2012: 7.6; 2013: 8.4; 2014: 8.5; 2015: 8.4; 2016: 8.3; 2017: 8.2; 2018: 8.2; 2019: 8.1; 2020: 8.1.
  - Consumer prices: 2010: 2.3; 2011: 3.4; 2012: 2.6; 2013: 1.2; 2014: 0.5; 2015: 0.1; 2016: 0.9; 2017: 1.2; 2018: 1.3; 2019: 1.4; 2020: 1.5.
  - Revenue (percent of GDP): 2010: 48.4; 2011: 49.3; 2012: 50.7; 2013: 51.5; 2014: 51.3; 2015: 51.0; 2016: 50.9; 2017: 50.9; 2018: 50.9; 2019: 50.9; 2020: 50.9.
  - Expenditure (percent of GDP): 2010: 52.3; 2011: 53.2; 2012: 54.8; 2013: 54.4; 2014: 54.5; 2015: 53.9; 2016: 53.1; 2017: 52.4; 2018: 52.0; 2019: 51.6; 2020: 51.4.
  - General government balance (percent of GDP): 2010: -4.0; 2011: -3.9; 2012: -4.1; 2013: -2.9; 2014: -3.2; 2015: -2.9; 2016: -2.2; 2017: -1.5; 2018: -1.0; 2019: -0.7; 2020: -0.4.
  - Structural balance (percent of GDP): 2010: -3.9; 2011: -3.9; 2012: -3.4; 2013: -2.9; 2014: -2.9; 2015: -2.3; 2016: -1.7; 2017: -1.1; 2018: -0.8; 2019: -0.6; 2020: -0.4.
  - General government debt (percent of GDP): 2010: 99.6; 2011: 102.1; 2012: 104.0; 2013: 104.5; 2014: 105.6; 2015: 106.4; 2016: 105.9; 2017: 104.5; 2018: 102.7; 2019: 100.6; 2020: 98.0.
  - Nominal GDP (in billions of euros): 2010: 366; 2011: 380; 2012: 388; 2013: 395; 2014: 403; 2015: 410; 2016: 420; 2017: 430; 2018: 442; 2019: 455; 2020: 468.
  - Population (in millions): 2010: 10.8; 2011: 11.0; 2012: 11.1; 2013: 11.2; 2014: 11.2; 2015: 11.2; 2016: 11.3; 2017: 11.4; 2018: 11.5; 2019: 11.5; 2020: 11.6.

### Financial sector: lending rates, debt dynamics, and real rates
- Nominal lending rates to nonfinancial corporations (NFCs) have continued to fall and are at the lower end of the euro area distribution; similar pattern for loans to households.
- With falling inflation expectations, real lending rates rose in 2014.
- Household debt has continued to increase; NFC debt has stabilized, as has the share of market financing.
- Chart/indicator highlights:
  - Debt Liabilities of Households and Non-Financial Corporations (In billions of euros, 2007–2014).
  - Bank Lending Rates to Non-Financial Corporations and to Households (In percent, monthly averages, 2003–2014) showing Belgium relative to euro area minimum and maximum.
  - Real Interest Rates (In percent, adjusted for Belgium's one-year ahead inflation) including ECB's Main Refinancing Operations rate, 3-month EURIBOR, Belgium 12-month loans to NFC (2008–2014).

### Banking sector: capitalization, liquidity, deposits, and profitability
- Tier 1 capital ratios of Belgian banks compare favorably with those in other euro area countries.
- Banks’ liquidity margins are comfortable, supported by a strong and growing deposit base.
- Loan-to-deposit ratios and deposits-to-GDP ratios show comfortable funding positions relative to peers.
- Average cost-to-income ratio has fallen, but pressures on profits may require further cuts.
- Selected FDIs and indicators preserved:
  - Loan-to-Deposit Ratio (Peak 2003-2011 vs November 2014 by country).
  - Deposits-to-GDP Ratio (Peak 2003-2011 vs September 2014 by country).
  - Tier 1 Capital Ratios (In percent of risk-weighted assets) for 2008 and 2014Q2 comparisons.
  - Cost-to-Income Ratios (In percent) for 2012 and 2014Q2.
- Table 5 and Table 6 highlight structure and financial soundness indicators:
  - Table 5 key items (selected):
    - Number of credit institutions: 2009: 104; 2010: 107; 2011: 108; 2012: 104; 2013: 104; 2014:H1: 103.
    - Total banking sector assets (in billions of euros, consolidated): 2009: 1,191; 2010: 1,151; 2011: 1,147; 2012: 1,049; 2013: 961; 2014:H1: 1,018.
    - Insurance sector total assets (in billions of euros, company basis): 2009: 234; 2010: 249; 2011: 257; 2012: 265; 2013: 271; 2014:H1: 275.
  - Table 6 key indicators (selected, all percentages unless otherwise indicated):
    - Return on assets: 2009: -0.1; 2010: 0.5; 2011: 0.0; 2012: 0.1; 2013: 0.3; 2014:H1: 0.5.
    - Return on equity: 2009: -2.7; 2010: 10.7; 2011: 0.7; 2012: 3.0; 2013: 5.9; 2014:H1: 7.9.
    - Cost/income ratio: 2009: 77.7; 2010: 66.0; 2011: 67.3; 2012: 73.4; 2013: 62.4; 2014:H1: 63.1.
    - Total assets (in percent of GDP): 2009: 349.2; 2010: 323.2; 2011: 310.2; 2012: 278.7; 2013: 251.0; 2014:H1: 263.3.
    - Loans to customers (percent of total assets): 2009: 45.0; 2010: 44.0; 2011: 44.4; 2012: 48.1; 2013: 53.9; 2014:H1: 53.3.
    - Customer deposits (percent of total assets): 2009: 46.8; 2010: 46.0; 2011: 46.5; 2012: 49.3; 2013: 54.7; 2014:H1: 55.1.
    - Liquid assets (percent of total assets): 2009: 31.5; 2010: 32.5; 2011: 34.3; 2012: 36.4; 2013: 36.8; 2014:H1: 35.4.
    - Non-performing loans (NPL) as percent of gross loans: 2009: 2.7; 2010: 2.8; 2011: 3.2; 2012: 3.2; 2013: 3.1; 2014:H1: 2.9.
    - Regulatory capital to risk-weighted assets: 2009: 17.3; 2010: 19.3; 2011: 18.5; 2012: 18.1; 2013: 18.7; 2014:H1: 17.7.
    - Regulatory Tier 1 capital to risk-weighted assets: 2009: 13.2; 2010: 15.5; 2011: 15.1; 2012: 15.8; 2013: 16.4; 2014:H1: 15.5.

### Balance of payments and government operations (selected tables)
- Table 2 (Balance of Payments, 2010–20, In percent of GDP) key figures:
  - Balance on current account: 2010: 1.5; 2011: -1.3; 2012: -0.9; 2013: 0.1; 2014: 1.4; 2015: 1.7; 2016: 1.7; 2017: 1.7; 2018: 1.7; 2019: 1.7; 2020: 1.7.
  - Exports of goods and services: 2010: 76.1; 2011: 81.0; 2012: 82.1; 2013: 82.9; 2014: 82.5; 2015: 83.1; 2016: 85.1; 2017: 87.1; 2018: 89.2; 2019: 91.4; 2020: 93.5.
  - Imports of goods and services: 2010: -75.0; 2011: -81.7; 2012: -82.9; 2013: -83.0; 2014: -81.7; 2015: -82.0; 2016: -84.0; 2017: -86.0; 2018: -88.1; 2019: -90.4; 2020: -92.4.
- Table 3 (General Government Statement of Operations, 2010–20, In percent of GDP) key figures (reiterated from earlier section for fiscal context):
  - Revenue series and Expenditure series as in the fiscal developments section.
  - Primary balance and Gross operating balance series as presented in the table.
  - Net financial transactions and components noted in the table (some entries truncated in source with dots).

*Sources: National Bank of Belgium, Haver Analytics, OECD, KBC Research, Belgian authorities, Financial Services and Markets Authority, and IMF Staff calculations as presented in the source content.*

### Appendix I. External Sector Assessment

### Appendix I. External Sector Assessment

### Overall assessment
- The external position is moderately weaker than the level consistent with medium-term fundamentals and desirable policy settings.
- Contributing factors:
  - Fiscal deficits.
  - Recent losses in cost competitiveness.
- Offsetting strengths:
  - Strong net international investment position (NIIP) of 53 percent of GDP at mid–2014.
  - NIIP expected to remain roughly stable based on projected current account and growth paths; "No sustainability concerns arise."
- Structural context:
  - Belgium’s large gross external positions reflect its role as a center for treasury units for non-financial corporates; these create large mutually offsetting positions that should not be an important source of risk.
- Key stock figures (mid–2014):
  - Gross foreign assets: 469 percent of GDP.
  - Financial sector gross foreign assets: around 130 percent of GDP.
  - Private non-financial sector gross foreign assets: over 300 percent of GDP.
  - External public debt: 65 percent of GDP.

### Potential policy responses
- Planned and recommended measures:
  - Steady fiscal consolidation.
  - Reductions in labor taxes.
  - Wage moderation.
- Expected effects:
  - Improve competitiveness and ensure the current account gap remains closed over the medium term.
- Complementary actions:
  - Productivity-enhancing structural reforms in the labor and product markets to enhance the impact of the above policies.

### Current account
- Background and measurement revisions:
  - The current account (CA) had been in moderate surplus for two decades before the crisis, secularly declining and turning into a modest deficit in crisis years.
  - A significant recent revision to the income balance means 2014 CA is now expected to register a surplus of 0.3 percent of GDP rather than a deficit of 1.3 percent (September WEO).
  - By this revision, the cyclically-adjusted CA balance would be +0.7 percent of GDP, compared to a norm of 1 percent (January 2015 EBA estimates).
  - The implied Real Effective Exchange Rate (REER) gap is zero.
- Assessment:
  - Belgium’s status as a center of corporate activity raises uncertainty about EBA CA gap estimates.
  - Even though the cyclically-adjusted CA is close to the level consistent with fundamentals and desirable policy settings, staff gives greater weight to other indicators in assessing external stability.

### Real exchange rate
- Background:
  - Relative ULC developments point to a gradual loss of competitiveness since 2004 of about 9 percent relative to the euro area average.
  - The loss has been muted by increases in labor subsidies.
  - EBA model estimates of January 2015 point to an overvaluation of the REER of 5 percent.
  - The depreciation of the euro and fall in oil prices since then would likely reduce the estimated overvaluation.
- Assessment:
  - Real exchange rate overvaluation is assessed to be in the 0–5 percent range.

### Capital and financial accounts: flows and policy measures
- Background:
  - Gross financial outflows and inflows grew steadily during the pre-crisis period along the expansion of banks’ cross-border operations and shrunk since 2007 with bank deleveraging.
  - Short-term debt accounts for about 40 percent of the external liabilities and financing need.
  - The capital account is open.
- Assessment:
  - Belgium remains exposed to financial market risks but the structure of financial flows does not point to specific vulnerabilities.
  - The strong NIIP reduces vulnerabilities associated with the high public debt.

### FX intervention and reserves level
- Background:
  - The euro has the status of a global reserve currency.
- Assessment:
  - Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating.

*Source: _cr1570 - Appendix I. External Sector Assessment*

### 16.5 percent if leaving at 60 and if leaving at

### _cr1570 - 16.5 percent if leaving at 60 and if leaving at

### Pension policy changes and reform measures
- Legal age for full pension is 65; increased to 66 in 2025 and 67 in 2030. Planned by the new government.
- 16.5 percent if leaving at 60 and if leaving at 61 without legal pension 18 percent instead of 16.5 percent.
- Decrease pension expenditure (stated objective).
- Pension complement for frontier or seasonal workers in workers’ pension scheme:
  - Frontier or seasonal workers residing in Belgium granted pension complement to increase foreign pension to level of pension they would have received if they had worked in Belgium.
  - From July 1, 2014 no new rights to pension complements for frontier or seasonal workers will be constituted.
  - Pension complements granted paid out from July 1, 2014 modified on two points:
    - only awarded from moment person concerned fulfills receipt conditions of foreign pension
    - amount of pension complement will be based on all foreign pension benefits
  - Social partners have given positive advice – Law project is sent to the Parliament.
  - Pension complement for frontier or seasonal workers removed as from 2015. Law in preparation.
  - Pension complements granted from January 1, 2015 will be modified (not applicable to those who could have taken up their pension before that date) will be based on all foreign pension benefits. Law in preparation.
- Minimum pension: Career condition to benefit from 1/45th of the minimum pension is 30 years of 208 days. From 2015, at least 52 days in a year are required to obtain 1/45th of the minimum pension. Royal Decree in preparation.
- Structural reform of the pension scheme planned by the new government.

### Public debt sustainability: main findings
- Public debt-to-GDP ratio projected to peak at 106.4 percent in 2015 and decline to 98.2 percent by 2020 under the baseline scenario.
- Public debt estimated at 105.6 percent of GDP in 2014.
- Gross financing needs estimated at 20.2 percent of GDP in 2015 and expected to remain around 13–20 percent in the medium term.
- Projected decline in public debt described as fragile; modest adverse changes could rapidly push the public debt ratio above 110 percent.
- Major risks: a negative growth shock, a prolonged period of economic stagnation, realization of contingent fiscal liabilities from existing bank guarantees.

### Baseline macroeconomic and fiscal projections
- Growth: 1.0 percent in 2015, rising to 1.3 percent in 2016.
- Output gap projected to close in 2020.
- Inflation: projected to stay well below 2 percent throughout the period.
- General government deficit: from 2.9 percent of GDP in 2013 to 0.4 percent in 2020 (staff baseline).
- Primary surplus: from 0.3 percent of GDP in 2013 to 2.0 percent of GDP in 2020.
- Projected structural deficit of 0.4 percent in 2020.
- Consolidation measures past 2016 are yet to be elaborated upon.

### Debt levels, financing needs, and market indicators
- Government gross debt increased significantly since 2007 due to fiscal stimulus, declining growth, and banking sector support.
- Gross financing needs above benchmark: Belgium’s gross financing needs exceed the benchmark of 20 percent of GDP.
- External financing requirement at 80 percent of GDP; share of public debt held by foreigners about 50 percent.
- Heat map assessment: risks from the debt level deemed high (threshold compared to 85 percent breached under baseline and all stress test scenarios).

### Stress tests and shock scenarios: outcomes and key numbers
- DSA framework: government debt-to-GDP ratio remains below 115 percent and gross financing needs remain below 25 percent of GDP under all standard shocks; in all but the most extreme stagnation scenario the debt ratio returns to downward path by end of projection period.
- Growth shock:
  - Real output growth lower by one standard deviation starting in 2015–16, i.e. 1.6 percentage points relative to baseline.
  - Debt-to-GDP ratio increases to 112.2 percent of GDP in 2017 and declines thereafter.
- High interest rate scenario:
  - Increase in spreads by 200 basis points throughout projection period.
  - Impact on financing needs in 2020 is 1.3 percent of GDP.
  - Debt ratio would be 2.0 percentage points higher than baseline by 2020.
- Real exchange rate shock:
  - Assumes 15 percent devaluation in the real exchange rate in 2015.
  - Results in slight decrease in debt and gross financing needs ratios through inflation channel.
- Primary balance shock:
  - Cumulative 2.1 percentage points of GDP deterioration in the primary balance in 2015–16.
  - Leads to deterioration in the debt ratio of 2.2 percentage points relative to baseline in 2019 and slightly higher gross financing needs.
- Combined macro-fiscal scenario:
  - Aggregates shocks; debt would reach 113.5 percent of GDP in 2017 and remain close to 110 percent of GDP until 2020.
  - Impact on financing needs would raise them to an average of 19.3 percent of GDP in 2016–20.
- Contingent fiscal shock:
  - Assumes 50 percent of state guarantees to the financial sector are called upon in 2016.
  - Large debt and financing needs impact; assets available for sale valued at 9.4 percent of GDP could be used to cover some costs.
- Economic stagnation scenario:
  - Nominal GDP growth stagnates at 1.5 percent (annual real growth of 1 percent and inflation of 0.5 percent) throughout 2016–20.
  - Debt would reach 110.0 percent of GDP in 2020; gross financing needs would remain on average above 20 percent of GDP, rising to 20.0 percent of GDP in 2017.
- Deflation scenario:
  - Real GDP growth stagnates with annual growth of 0.5 percent and inflation at zero percent.
  - Debt would increase by an average of 2.9 percent of GDP each year to reach 121.0 percent of GDP in 2020.
  - Gross financing needs would remain on average above 20 percent of GDP, peaking at 21.5 percent of GDP in 2017.

### Quantitative baseline table highlights (selected series, in percent of GDP unless indicated)
- Nominal gross public debt: 96.3 (2013), 104.5 (2014), 105.6 (2015), 106.4 (2016), 105.9 (2017), 104.6 (2018), 102.8 (2019), 100.7 (2020), 98.2 (2020 in header projection).
- Public gross financing needs: 21.1 (2013), 22.4 (2014), 19.2 (2015), 20.2 (2016), 19.1 (2017), 18.7 (2018), 16.5 (2019), 14.6 (2020), 12.9 (2020).
- Real GDP growth (in percent): 1.5 (2013), 0.3 (2014), 0.9 (2015), 1.0 (2016), 1.3 (2017), 1.4 (2018), 1.5 (2019), 1.5 (2020).
- Inflation (GDP deflator, in percent): 2.1 (2013), 1.5 (2014), 1.1 (2015), 0.8 (2016), 0.9 (2017), 1.1 (2018), 1.2 (2019), 1.3 (2020), 1.4 (2020).
- Effective interest rate (in percent): 4.1 (2013), 3.1 (2014), 3.0 (2015), 2.8 (2016), 2.6 (2017), 2.5 (2018), 2.5 (2019), 2.5 (2020).
- Cumulative change in gross public sector debt (2013–2020): 0.3 (2013), 0.6 (2014), 1.1 (2015), 0.8 (2016), -0.4 (2017), -1.3 (2018), -1.8 (2019), -2.1 (2020), -2.5 (2020 cumulative), -7.4 (cumulative to 2020).

### Stress-test scenario assumptions (selected)
- Growth shock: real output growth lower by 1.6 percentage points relative to baseline starting 2015–16.
- High interest rate scenario: spreads increase by 200 basis points throughout projection period.
- Real exchange rate shock: 15 percent devaluation in 2015.
- Primary balance shock: cumulative deterioration of 2.1 percentage points of GDP in 2015–16.
- Combined shock: aggregates shocks to real growth, interest rate, exchange rate, and primary balance.
- Contingent liability shock: 50 percent of state guarantees to financial sector called upon in 2016.
- Economic stagnation scenario: nominal GDP growth 1.5 percent, real growth 1 percent, inflation 0.5 percent throughout 2016–20.
- Deflation scenario: real growth 0.5 percent, inflation 0 percent throughout projection period.

*Sources: Belgian Federal Public Service Employment, Labor and Social Dialogue; National Bank of Belgium; National Employment Office; Federal Planning Bureau; Ministry of Pensions; Belgian Stability Program 2012–15; IMF staff projections and DSA tables.*

### introduction of macrofinancial risk dashboard to monitor systemic and emerging risk. Funding and

### introduction of macrofinancial risk dashboard to monitor systemic and emerging risk. Funding and

### Financial sector supervision, crisis management, and market conduct
- Introduction of a macrofinancial risk dashboard to monitor systemic and emerging risk.
- Funding and risk management standards are being improved.
- Supervisory tools for monitoring group-wide risks need to be upgraded.
- The crisis management framework, while updated for handling systemic firms, is in need of a further upgrade owing in part to EU-wide developments.
- Insurance supervision has been significantly strengthened although further work is needed, particularly, in strengthening the solvency framework.
- Both bank and insurance supervisory frameworks integrate vertical analyses of individual insurers with horizontal review of the sector.
- The adoption of the new institutional architecture has allowed the FSMA to focus solely on market and business conduct and the adoption of EU directives in the interim has addressed many of the recommendations for the securities sector.
- The FSMA’s plan to adopt a risk-based approach to conduct supervision must be adequately resourced.
- Pension regulation and supervision has been strengthened; while pension funds remain the remit of the FSMA, there is currently a debate as to whether this should be the responsibility of the NBB.

### Fiscal transparency, budget processes, and institutional coordination
- The report found that in many areas Belgium meets, and in some cases exceeds, the requirements of the fiscal transparency code.
- Basic government finance processes are supported by a sound institutional and legal framework.
- Roles and responsibilities in the budget process are clear, with a well-defined separation of powers between the executive and legislature.
- Fiscal information is provided through regular publications and extensive use of the internet.
- Budget formulation is appropriately supported by medium-term macroeconomic forecasts and clearly formulated medium-term fiscal policy goals.
- Audit processes are extensive and help improve budget management decisions, practices and standards, with government financial decisions evaluated ex ante and ex post by various institutions.
- Areas identified for improvement:
  - limited insight about the objectives and targets of government expenditure;
  - the medium-term budget estimates need to make budgetary decision-making more oriented to the medium-term;
  - the presentation of new policy measures and their medium-term costs could be clarified;
  - budget implementation by departments and agencies could be streamlined.
- Public information could be increased on:
  - fiscal risk and tax expenditures in budget documents;
  - in-year budgetary data on local government and agencies;
  - the content of the final government accounts;
  - the governance of state-owned equity holdings.
- Institutional arrangements for fiscal policy coordination could be strengthened by:
  - reinforcing and expanding the role of the High Council of Finance, including by providing additional institutional safeguards as to its continuity and independence, and having the Council cover all important issues bearing on fiscal policy;
  - converting the budget agreements between the federal government, regions, and communities into published agreements which specify the targeted balance for each partner and identify the measures needed to achieve this target.
- Internal audit processes could be better coordinated and simplified by reducing the number of internal control and audit layers; the Court of Audit’s recent Single Audit initiative seeks to minimize overlap, coordinate work programs, and share common data and analysis.

### AML/CFT framework
- Belgium’s AML/CFT framework was last assessed in July 2014 by the Financial Action Task Force (FATF) against the 2012 FATF standard using the 2013 assessment methodology.
- The evaluation report is scheduled to be discussed during the FATF February 2015 plenary meeting.
- A previous assessment in 2005 found Belgium’s AML/CFT framework to be largely compliant with the former standard, although shortcomings were identified.
- Authorities appear to have addressed some deficiencies by:
  - reinforcing the framework for the freezing of terrorist assets (in 2006);
  - adopting a new AML/CFT law (in 2010).
- The latest assessment report, once adopted, will provide an up-to-date picture of Belgium’s AML/CFT regime and identify measures for further improvement.

### Statistics and data provision
- 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.
- On-line access to comprehensive databases is facilitated by the NBB’s data search engine, Belgostat.
- Belgium is a SDDS subscriber.
- 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 2010 (ESA 2010) in 2014; revisions of national accounts were released in September, 2014 to comply with EUROSTAT requirements.
- The central bank is responsible for compiling national accounts statistics; quarterly accounts are published within a lag of three months.
- Shortcomings mainly relate to export and import deflators, which are based on unit values rather than prices collected directly from exporters and importers.
- Belgium compiles and publishes a complete set of general government accounts on an accrual basis (ESA 2010).
- The NBB publishes annual and quarterly data on general government revenue, expenditure, and net lending/borrowing; transactions in financial assets and liabilities and a financial balance sheet data; and details on the consolidated gross debt.
- The authorities provide quarterly updates of financial sector indicators (FSIs) in a timely manner.

### IMF Article IV consultation (Press Release No. 15/111, March 12, 2015) — key findings and Board assessment
- On March, 2, 2015, the Executive Board of the IMF concluded the Article IV consultation with Belgium.
- The economy has shown considerable resilience but the outlook is weighed down by weak demand in Europe.
- Healthy private balance sheets, integration with Germany, and employment support schemes have helped sustain employment and economic activity.
- Output is still well below potential and with subdued growth prospects, job creation remains insufficient.
- Critical domestic policy challenges:
  - preserving competitiveness;
  - addressing the looming fiscal cost of ageing (age-related government spending is projected to increase sizably by 2040, an added annual cost of 6 percent of GDP, reflecting demographics and a low effective age of retirement).
- The new federal government announced reforms focusing on:
  - improving competitiveness through temporary de-indexation of wages and a modest shift of taxation away from labor;
  - activating working age population by tightening eligibility to pension, pre-pension and unemployment benefits.
- These measures should be complemented by reforms to increase productivity growth and employment creation, including:
  - opening sheltered sectors to competition;
  - lowering the cost of regulation;
  - increasing labor market flexibility;
  - improving education and professional training.
- Fiscal adjustment is expected to resume after a pause in 2014; the pace targeted for 2015–16 is appropriate given the level of debt and related risks and is underpinned by pro-growth expenditure measures.
- Coordination between the levels of government still needs strengthening across a range of issues.
- Banks need to adapt further to a challenging operational environment of low growth and low interest rates, and a more demanding regulatory framework.
- The banking sector fared relatively well by the ECB’s comprehensive assessment, but additional efforts will be needed toward Basel III capital standards.

- Executive Board Assessment:
  - Directors agreed with the thrust of the staff appraisal and welcomed the authorities’ economic program emphasizing fiscal adjustment, competitiveness, and labor market activation.
  - Directors emphasized sustaining momentum of labor and product market reforms to foster productivity growth and long-term prospects.
  - Directors supported speeding up fiscal consolidation to safeguard debt sustainability and welcomed the shift to an expenditure-based adjustment strategy.
  - Directors were encouraged by the planned reduction in labor taxes and saw scope for further rebalancing the tax burden away from taxes on labor income toward indirect and environmental taxes, and taxes on capital income.
  - Directors advised enhanced coordination among federal, regional and community governments on fiscal and other shared economic policies.
  - Directors welcomed measures to raise employment rates by reforming pension, pre-retirement, and unemployment benefits.
  - Directors welcomed measures to promote external competitiveness and job growth by better aligning wage and productivity developments and recommended:
    - opening sheltered sectors to competition;
    - reducing the regulatory burden, including in the services economy;
    - facilitating job creation through more flexible contract arrangements;
    - strengthening the quality of education, training and apprenticeship schemes.
  - Directors acknowledged efforts to repair bank balance sheets, welcomed the new banking law and other regulatory reforms to reduce risks associated with universal banking and to strengthen the resolution framework, but stressed the need for continued adjustment of banks’ business models and heightened vigilance in supervision.

### Selected economic indicators and projections (2010–20)
- Real economy (percentage change from the previous period; unless otherwise indicated):
  - Real GDP: 2010: 2.5; 2011: 1.6; 2012: 0.1; 2013: 0.3; 2014: 0.9; 2015: 1.0; 2016: 1.3; 2017: 1.4; 2018: 1.5; 2019: 1.5; 2020: 1.5
  - Domestic demand: 2.0; 1.9; 0.3; -0.6; 0.4; 0.9; 1.2; 1.3; 1.5; 1.6; 1.6
  - Private consumption: 2.8; 0.6; 0.8; 0.3; 0.9; 1.0; 1.1; 1.2; 1.3; 1.4; 1.4
  - Public consumption: 1.2; 0.8; 1.4; 1.1; 0.1; -0.5; 0.3; 0.4; 0.8; 0.8; 1.0
  - Gross fixed investment: -0.1; 4.0; 0.0; -2.2; 4.0; 1.9; 2.1; 2.5; 2.6; 2.6; 2.6
  - Business investment: -1.9; 5.2; -0.3; -1.2; 5.2; 2.4; 2.5; 2.9; 3.0; 3.1; 3.2
  - Public investment: 3.6; 2.5; 3.4; -5.4; 0.5; 1.0; 1.3; 2.5; 2.6; 2.6; 1.5
  - Dwellings: 3.3; 1.4; -0.5; -3.5; 1.9; 0.7; 1.1; 1.1; 1.2; 1.2; 1.2
  - Stockbuilding: 0.3; 0.5; -0.4; -0.5; -1.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
  - Foreign balance: 0.3; -0.4; 0.0; 0.8; 0.5; 0.2; 0.2; 0.0; 0.0; 0.0; 0.0
  - Exports, goods and services: 10.0; 6.6; 1.9; 2.9; 3.3; 3.2; 3.8; 4.1; 4.3; 4.5; 4.5
  - Imports, goods and services: 9.6; 7.2; 1.9; 1.8; 2.7; 3.0; 3.7; 4.1; 4.4; 4.6; 4.7
- Potential output and output gap:
  - Potential output growth: 1.2; 1.0; 1.1; 1.1; 1.0; 1.0; 1.1; 1.1; 1.2; 1.2; 1.4
  - Potential output growth per working age person: 0.4; 0.4; 0.7; 0.9; 0.8; 0.8; 0.9; 1.0; 1.1; 1.2; 1.5
  - Output gap (in percent): -0.2; 0.4; -0.5; -1.3; -1.3; -1.3; -1.0; -0.8; -0.4; -0.1; 0.0
- Employment:
  - Unemployment rate: 8.3; 7.2; 7.6; 8.4; 8.5; 8.4; 8.3; 8.2; 8.2; 8.1; 8.1
  - Employment (percent change): 0.7; 1.4; 0.3; -0.3; 0.4; 0.4; 0.5; 0.7; 0.8; 0.9; 0.9
- Prices:
  - Consumer prices: 2.3; 3.4; 2.6; 1.2; 0.5; 0.1; 0.9; 1.2; 1.3; 1.4; 1.5
  - GDP deflator: 2.0; 2.2; 2.1; 1.5; 1.1; 0.8; 0.9; 1.1; 1.2; 1.3; 1.4
- Public finance (percent of GDP):
  - Revenue: 48.4; 49.3; 50.7; 51.5; 51.3; 51.0; 50.9; 50.9; 50.9; 50.9; 50.9
  - Expenditure: 52.3; 53.2; 54.8; 54.4; 54.5; 53.9; 53.1; 52.4; 52.0; 51.6; 51.4
  - General government balance: -4.0; -3.9; -4.1; -2.9; -3.2; -2.9; -2.2; -1.5; -1.1; -0.7; -0.4
  - Structural balance: -3.9; -3.9; -3.4; -2.9; -2.9; -2.3; -1.7; -1.1; -0.8; -0.7; -0.4
  - Structural primary balance: -0.5; -0.5; 0.0; 0.3; 0.2; 0.6; 1.0; 1.5; 1.7; 1.8; 2.0
  - Primary balance: -0.6; -0.5; -0.7; 0.3; -0.1; 0.0; 0.5; 1.1; 1.5; 1.7; 1.9
  - General government debt: 99.6; 102.1; 104.0; 104.5; 105.6; 106.4; 105.9; 104.5; 102.7; 100.6; 98.0
- Balance of payments (percent of GDP):
  - Trade balance: 1.2; -0.8; -0.9; -0.2; 0.8; 1.2; 1.1; 1.1; 1.1; 1.0; 1.0
  - Current account: 1.5; -1.3; -0.9; 0.1; 1.4; 1.7; 1.7; 1.7; 1.7; 1.7; 1.7
  - Terms of trade (percent change): -2.1; -1.4; -1.7; 0.2; 0.0; 0.2; 1.8; -0.6; -0.2; -0.1; 0.0
  - Exports, goods and services (volume, percent change): ...; 4.4; -0.9; 2.1; 3.3; 3.2; 3.8; 4.1; 4.3; 4.5; 4.5
  - Imports, goods and services (volume, percent change): ...; 5.3; -1.4; 0.3; 2.7; 3.0; 3.7; 4.1; 4.4; 4.6; 4.7
- Memorandum items:
  - Structural fiscal adjustment: 0.4; 0.0; 0.5; 0.6; 0.0; 0.6; 0.6; 0.6; 0.3; 0.2; 0.2
  - Structural fiscal primary adjustment: 0.2; 0.0; 0.5; 0.3; 0.0; 0.4; 0.4; 0.4; 0.2; 0.1; 0.1
  - Nominal GDP (in billions of euros): 366; 380; 388; 395; 403; 410; 420; 430; 442; 455; 468
  - Population (in millions): 10.8; 11.0; 11.1; 11.2; 11.2; 11.2; 11.3; 11.4; 11.5; 11.5; 11.6

*Source: IMF staff report and Press Release No. 15/111 (Article IV consultation with Belgium).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1570.pdf_