## _cr1677

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### Employment Impact of Tax Wedge Reductions
- Tax-shift measures and design
  - Employers’ social security contribution (SSC) is being reduced gradually from 33 percent to 25 percent in 2019.
  - Numerous existing exceptions leave the current effective contribution rate closer to 27 percent.
  - The measure is targeted at lower salaries; contribution rates for low wages will be reduced over-proportionally.
  - Counterbalancing measures under the tax shift include increases in the VAT on electricity, excises on diesel, alcohol, tobacco, and sugary drinks, increases on withholding taxes, and new taxes on certain financial vehicles and on short-term capital gains.
  - The yield of some of the new tax measures is uncertain, and the tax shift is not revenue neutral, even if supply-side benefits are taken into account.

- Estimated employment effects (aggregate and group-specific)
  - Contribution reductions by wage group:
    - The contribution for an employee at the minimum wage will be reduced by 6½ percentage points.
    - Labor costs for the median worker will fall by only about 1¾ percent.
  - Targeting implications:
    - The targeting of low wages favors the young and the unskilled, who tend to have lower wages, but also the lowest employment rates.
    - The tax shift has the potential to support activation for some of the most vulnerable groups.
  - Regression-based employment rate estimates:
    - Employment rates of workers close to the median of the distribution will increase by about 0.7 percentage points.
    - Employment rates for minimum wage earners will increase by 1.6 percentage points.
    - The low-skilled employment rate is 37 percent.
  - Aggregate job creation estimates:
    - The reduction of labor costs alone could increase aggregate employment by an additional 35,000–40,000 jobs, of which more than a third would be among the lower-skilled.
    - Belgian estimates by the Planning Bureau and the National Bank of Belgium (NBB) suggest the creation of an additional 45,000–65,000 jobs by 2021.
    - In the NBB’s model, the reduction of the employers’ SSC contributions alone will create 49,000 jobs by 2021.

- Implementation considerations and fiscal context
  - The tax shift is partly financed by a set of tax increases and new levies; some yields are uncertain.
  - The tax shift is not revenue neutral even when accounting for potential supply-side benefits.
  - The tax-shift design concentrates relief on lower wages, implying stronger labor-market effects for young and unskilled workers and potential gains in activation for vulnerable groups.

### Medium-term growth prospects and productivity
- Outlook and diagnostics
  - Medium-term growth prospects described as "mediocre."
  - Potential output and Total Factor Productivity (TFP) have fallen, and "a return to trend output is not expected."
  - Potential output growth will remain below pre-crisis levels.
  - Under current policies, "potential growth should increase over the medium term, but average only about 1.3 percent over 2015–20."
  - Capital’s contribution to potential growth is expected to return close to pre-crisis levels; contributions from employment and TFP will likely remain substantially reduced.
  - The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is "estimated at approximately 8 percent" and is "expected to decline only very slowly over the forecast horizon."
  - Post-crisis TFP contribution: "On average, the contribution of TFP has been zero since the crisis."
  - IMF staff applied a multivariate filter incorporating relationships between actual and potential GDP, unemployment, and inflation.

- Key downside risks
  - China and emerging markets slowdown:
    - "Preliminary calculations suggest that for every 1 percent reduction in the Chinese average 2016–20 growth due to a domestic negative investment demand shock, the Belgian economy could grow by about 0.2 percent slower."
  - Financial markets volatility and regional risks linked to openness and intra-EU trade linkages (Germany, France, Netherlands).
  - Refugee integration risks given Belgium’s "poor track record of labor market integration of non-EU migrants."
  - Fiscal policy risk if benefits of recent reforms are smaller than anticipated and/or fiscal federalism hampers intended adjustment.
  - House prices: "House prices have stabilized since 2013." Staff analysis "does not suggest a major overvaluation."

- Policy challenges and fiscal stance
  - Major challenges: high public debt and "severe labor market fragmentation."
  - Public debt-to-GDP ratio has returned to triple digits; fiscal gains reversed since the crisis.
  - With the deficit "hovering around three percent of GDP," fiscal sustainability is "tenuous and sensitive to potential macroeconomic shocks."
  - Need to "rebuild buffers against future shocks" while not undermining recovery or social cohesion; focus on making tax and expenditure policies more efficient, advancing growth-oriented reforms, and maintaining financial stability.

### Getting to budget balance — targets and fiscal consolidation
- Targets and implications
  - Under baseline projections, "debt will remain above 100 percent of GDP throughout the projection period."
  - Gross financing needs are "currently almost 20 percent of GDP."
  - Staff’s debt sustainability analysis indicates modest changes could push public debt above 110 percent.
  - Authorities’ objective: achieve structural balance at all levels of government by 2018, implying "about ⅔ percent of GDP adjustment on average per year for the next three years."
  - Historical pace of structural adjustment since 2010: "just ¼ percentage point of GDP per year since 2010."
  - To reach structural balance by 2018 (using staff’s estimate of potential GDP), "additional structural effort of 1¾−2 percent of GDP would be needed over the coming three years."
  - Multiplier assumptions noted: 0.7 for expenditure and 0.5 for revenue.

- Consolidation direction and possible measures (In percent of GDP)
  - Reduce wage bill: 0.3 (By 2018) and 1.8 (Long Term)
  - Reduce subsidies: 0.5 (By 2018) and 2.1 (Long Term)
  - Increase social benefits efficiency: 0.3 (By 2018) and 2.0 (Long Term)
  - Reform of taxation: 0.4 (By 2018) and 1.3-2.6 (Long Term)
  - Total: 1.5 (By 2018) and 7.2 - 8.5 (Long Term)
  - Notes:
    - Long term effect estimated as a convergence to EU average.
    - Subsidies are "about 2 percent higher than in EU average and the three neighbors' average (France, Germany, Netherlands)."
    - Comprehensive reform of capital income taxation could increase revenue by "1 to 2 percent of GDP per year" (High Council of Finance estimate).

- Priority areas to make public spending more efficient
  - Overall government spending "at around 55 percent of GDP."
  - Wage bill: "12.7 percent of GDP in 2014" — scope for attrition-based and well-targeted reductions.
  - Social spending: enhance means-testing; EU-average redistributive power could lower fiscal cost by 3¼ percentage points of GDP.
  - Health spending: reduce medication and hospitalization costs, enforce budget ceilings.
  - Unemployment benefits: link benefits to job search, accelerate phase-out of benefits with employer top-up that act as early retirement; limit substitution across benefits.
  - Education spending: review and refocus on areas with biggest education gaps.
  - Public investment: redirect to more productive projects, notably transport infrastructure.

- Governance and subnational coordination
  - Sixth state reform devolves many fiscal responsibilities to communities and regions; transfers linked to specific taxes mean lower PIT rates reduce revenues for communities.
  - Need for closer coordination and "strengthening and integrating intra-year monitoring of budget execution across all levels of government."

- Tax system reform opportunities
  - Improve taxation of wealth, including introducing a broader capital gains tax.
  - Shift real estate taxes from transactions to recurring charges and limit favorable treatment of rental income.
  - Strengthen environmental charges and eliminate generous fiscal incentives for company cars.
  - Improve VAT efficiency.
  - Regions could target income tax cuts toward lower wage ranges under new fiscal responsibilities.

### Authorities’ views and commitments
- Fiscal consolidation and reforms
  - Authorities reiterated commitment to reaching structural budget balance by 2018 and acknowledged further measures were needed.
  - Expected savings from redesigning federal functioning: improving management of real estate holdings; centralizing and streamlining procurement.
  - Determination to continue reforms including:
    - further reform of the pension system in 2016 focusing on the second pillar (disallowing access to supplementary pension before legal retirement age);
    - measures to reduce growth in health spending;
    - reactivation policies for disability allowance beneficiaries and strengthening benefit allocation control.
  - Communities and regions plan to close their (relatively small) budget deficits by 2018.

- Labor market segmentation and recommendations
  - Four dimensions of segmentation:
    - Regional: unemployment 5 percent in Flanders, almost 12 percent in Wallonia, and 18½ percent in the Brussels capital region.
    - Age: employment rates low among the young and the elderly.
    - Skill-related: structurally high job vacancies and low employment rates of the low skilled.
    - Immigration background: about half of non-EU born residents aged 25–54 employed, compared to over 80 percent for Belgian-born residents.
  - Refugee implications:
    - Between 2015 and 2017, asylum seekers alone may add up to one percent to Belgium’s population.
    - The number of asylum seekers may reach 100,000 (including 6,000 under the agreed EU agreement), corresponding to about 0.9 percent of Belgium’s total population.
    - Government reduced waiting period for refugees to get a work permit from six to four months.
    - Active labor market policies and language support recommended to accelerate integration.
  - Selected policy recommendations:
    - Reform wage formation to better reflect labor market conditions.
    - Improve education and training, align curricula to local labor market needs, intensify school-employer cooperation and apprenticeships, promote continuous education.
    - Strengthen work incentives: make benefits more degressive, enforce job search requirements, improve individualized training offers, consider targeted reductions in labor tax wedge for the low-skilled.
    - Reduce geographic segmentation: address traffic congestion, improve public transport, reduce disincentives to move house, encourage regional cooperation.

- Authorities’ positions on reforms
  - Acknowledged challenges including non-EU migrant integration.
  - Not in favor of a special minimum wage; past experiments did not boost youth employment.
  - Collective wage negotiation reform under discussion, but moving away from automatic indexation is unlikely.
  - Other reforms: regulation of night work for e-commerce, career accounts for training, improvement of vocational training.

### One year into office — reform progress and strategy
- Progress and central challenge
  - Saut d’index and earlier wage moderation narrowed the wage gap with neighbors.
  - Tax shift targeted at lower incomes should support job creation over the medium run.
  - 2015 pension reform expected to raise employment rates and reduce projected long-term cost of aging.
  - Central challenge: bring down public debt while nurturing recovery and supporting social cohesion.

- Fiscal strategy and measures
  - Government goal: reach fiscal balance by 2018 — ambitious and requiring quality measures.
  - Staff: substantial additional fiscal measures needed over three years; bulk of adjustment should be expenditure-based.
  - Suggested expenditure measures: well-targeted reductions in public employment; enhanced means-testing in social spending; improved budgetary control; reallocate savings toward productive investment.
  - Suggested revenue measures: more efficient taxation of wealth and real estate; greening the tax system; eliminate tax incentives for company cars.

- Labor market and structural reforms
  - Urgent comprehensive jobs strategy to address segmentation by age, skill, geography, and migration background.
  - Complementary reforms: ease traffic congestion (road pricing, eliminate company car incentives, public transport), reduce red tape, liberalize retail/transport/professional services, simplify across regions.

- Financial sector soundness
  - Banking sector restructured and profitable, but business models must adapt to prolonged low-interest environment.
  - Credit growth primarily in mortgages; consider targeted prudential measures for vulnerable borrowers.

- Institutional note
  - Next Article IV consultation proposed on the standard 12-month cycle.

- Selected exact statistics (2012–21 series)
  - Real GDP growth: 0.2, 0.0, 1.3, 1.4, 1.4, 1.5, 1.5, 1.5, 1.5, 1.5.
  - Unemployment rate: 7.6, 8.4, 8.5, 8.4, 8.2, 8.0, 7.8, 7.5, 7.4, 7.4.
  - General government debt (percent of GDP): 104.1, 105.1, 106.7, 106.2, 105.9, 105.0, 103.9, 102.9, 101.9, 100.8.
  - General government balance (percent of GDP): -4.1, -2.9, -3.1, -2.8, -2.6, -2.2, -1.9, -2.2, -2.2, -2.2.
  - Revenue (percent of GDP): 51.6, 52.7, 52.0, 51.2, 50.8, 50.8, 50.5, 50.1, 49.9, 49.9.
  - Expenditure (percent of GDP): 55.8, 55.6, 55.1, 54.0, 53.4, 52.9, 52.4, 52.3, 52.1, 52.1.
  - Current account (percent of GDP): -0.1, -0.2, -0.2, 0.9, 1.4, 1.6, 1.6, 1.6, 1.7, 1.7.
  - Nominal GDP (in billions of euros): 387.4, 392.7, 400.6, 410.6, 422.1, 434.5, 447.9, 461.9, 476.7, 492.7.
  - Population (in millions): 11.1, 11.2, 11.2, 11.3, 11.4, 11.5, 11.6, 11.7, 11.8, 11.8.

### Current account, REER, capital flows, and reserves
- Current account assessment
  - Staff assessment estimates a CA gap in the range of -2.5 to -0.5 percent of GDP.
  - Projected CA evolution consistent with fiscal consolidation, recovery in household saving rate, and gradual increases in private and public investment.

- Real exchange rate (REER)
  - Unit labor costs point to a gradual loss of competitiveness since 2005; most loss from lower productivity growth.
  - CPI-based REER depreciated by less than 1 percent between 2013 and 2014.
  - Substantial nominal effective depreciation in early 2015 lowered the 2015 REER by approximately 5 percent compared to 2014 average.
  - EBA model estimates for 2015 point to a REER overvaluation of 4 (index model) to 6 percent (level model).
  - Staff assessment: 2015 REER gap in the range of 0 to 10 percent.

- Capital and financial accounts
  - Short-term debt accounts for about 47 percent of the external liabilities and financing need.
  - Belgium remains exposed to financial market risks but the structure of financial flows does not point to specific vulnerabilities; strong NIIP reduces vulnerabilities associated with high public debt.

- FX intervention and reserves
  - Euro is a global reserve currency; euro-area reserves typically low relative to standard metrics, currency free floating.

### Debt sustainability, fiscal outlook, and stress tests
- Fiscal outlook and projections
  - Primary balance projected to improve until 2017 and thereafter remain close to balance.
  - Projected structural deficit of 2.3 percent in 2021.
  - Headline balance decline from 3.1 percent of GDP in 2014 to 2.1 percent in 2018, before rising again in the medium-term mainly due to unfinanced revenue losses from tax shift.
  - Government gross debt estimated at 106.2 percent of GDP in 2015 and projected to stay above 100 percent through the medium term.
  - Gross financing needs estimated at 17.9 percent of GDP in 2016 and expected to remain around 13–15 percent of GDP in the medium term.
  - Belgium subject to the higher scrutiny framework.

- DSA baseline (selected figures)
  - Nominal gross public debt (percent of GDP): 97.3 (2014); 106.7 (2015); 106.2 (2016); 105.9 (2017); 105.0 (2018); 103.8 (2019); 102.9 (2020); 101.8 (2021).
  - Public gross financing needs (percent of GDP): 21.8 (2014); 19.4 (2015); 19.5 (2016); 17.9 (2017); 17.9 (2018); 16.0 (2019); 15.3 (2020); 13.6 (2021).
  - Real GDP growth (in percent): 1.2 (2014); 1.3 (2015); 1.4 (2016); 1.4 (2017); 1.5 (2018); 1.5 (2019); 1.5 (2020); 1.5 (2021).
  - Inflation (GDP deflator, in percent): 1.8 (2014); 0.7 (2015); 1.1 (2016); 1.3 (2017); 1.4 (2018); 1.5 (2019); 1.6 (2020); 1.7 (2021).

- Stress tests and scenarios (highlights)
  - Growth shock: 1.6 percentage points lower growth from 2017–18 increases debt-to-GDP to 111 percent in 2018.
  - High interest rate scenario: increase in spreads by 470 basis points from 2018 reverses downward debt dynamics; impact on financing needs 2.9 percent of GDP in 2021.
  - Primary balance shock: cumulative 2 percentage points of GDP deterioration in 2017–18 worsens debt ratio by 2½ percentage points relative to baseline in 2021.
  - Combined macro-fiscal scenario: debt reaches 113 percent of GDP in 2018 and continues rising through 2021; financing needs remain above 15 percent of GDP through 2021.

### Pension reforms, labor market activation, and measures in Appendix III
- Pension reforms and parameters
  - Legal age for full pension is 65; increased to 66 in 2025 and 67 in 2030. Implemented.
  - 16.5 percent if leaving at 60 and if leaving at 61 without legal pension 18 percent instead of 16.5 percent.
  - Pension complement for frontier or seasonal workers provisions and minimum pension career conditions outlined; several items implemented or planned.
  - Structural reform of the pension scheme planned by the new government.

- Labor market and unemployment benefit reforms (selected implemented and pending items)
  - Search requirements tightened (suitable job distance increased to 60 km; shortened rights to search for same job for young); several measures Implemented or Pending.
  - Unemployment benefit levels revised: initial benefits 65 percent for three months, then 60 percent for nine months; later reductions and stepwise degressivity implemented.
  - Youth and transition measures: availability and evaluation rules adjusted; sectoral agreements and supplementary efforts for youngsters implemented.
  - Temporary unemployment and time credit: employer penalties for excess use; allowance reductions; duration adjustments implemented.
  - Social security contributions and wage subsidies: 2016–2020 tax shift package with staged SSC reductions (down to 30% in 2016 and 25% in 2018), strengthening low-wage measures, and sectoral subsidies — Implemented or In preparation.

### Financial sector, supervision, and macrofinancial monitoring
- Banking and insurance supervision
  - System regulatory Tier I capital ratio reached 15.6 percent in 2015:H1.
  - NPLs remain low; customer deposits exceed loans at system level.
  - Insurance supervision strengthened; further solvency framework work needed.
  - FSMA adopting a risk-based conduct supervision; resourcing required.

- Macroprudential concerns and recommendations
  - Recent strong household credit growth noted; mitigating factors include owner-occupancy and fixed-rate mortgages.
  - Pockets of vulnerability: high loan-to-value and/or debt-service-to-income ratios among young and low- to middle-income borrowers.
  - Staff recommended considering targeted macroprudential actions (additional risk weights, caps on loan-to-value ratios, or limits on debt-service-to-income ratios).
  - Caution against banks' over-reliance on mortgage business; business-model adjustments advised.

- Macrofinancial risk monitoring and fiscal transparency
  - Introduction of a macrofinancial risk dashboard to monitor systemic and emerging risk.
  - Need to upgrade supervisory tools for group-wide risk monitoring and to further upgrade crisis management framework.
  - Fiscal transparency: Belgium meets and in some areas exceeds the fiscal transparency code; areas to improve include clarity on objectives/targets of expenditure, medium-term budget estimates, presentation of new policy measures and costs, in-year data on local governments, and governance of state-owned equity holdings.
  - Institutional recommendations: reinforce High Council of Finance role and convert intergovernmental budget agreements into published, specified agreements.
  - Statistical coverage: Belgium is a SDDS subscriber; national accounts and FSIs timely with some shortcomings in export/import deflators.

*Source: IMF staff report (content unit _cr1677).*

### 1. Employment Impact of Tax Wedge Reductions __________________________________________________8

### Employment Impact of Tax Wedge Reductions

### Tax-shift measures and design
- Employers’ social security contribution (SSC) is being reduced gradually from 33 percent to 25 percent in 2019.
- Numerous existing exceptions leave the current effective contribution rate closer to 27 percent.
- The measure is targeted at lower salaries; contribution rates for low wages will be reduced over-proportionally.
- Counterbalancing measures under the tax shift include increases in the VAT on electricity, excises on diesel, alcohol, tobacco, and sugary drinks, increases on withholding taxes, and new taxes on certain financial vehicles and on short-term capital gains.
- The yield of some of the new tax measures is uncertain, and the tax shift is not revenue neutral, even if supply-side benefits are taken into account.

### Estimated employment effects (aggregate and group-specific)
- Contribution reductions by wage group:
  - The contribution for an employee at the minimum wage will be reduced by 6½ percentage points.
  - Labor costs for the median worker will fall by only about 1¾ percent.
- Targeting implications:
  - The targeting of low wages favors the young and the unskilled, who tend to have lower wages, but also the lowest employment rates.
  - The tax shift has the potential to support activation for some of the most vulnerable groups.
- Regression-based employment rate estimates:
  - Employment rates of workers close to the median of the distribution will increase by about 0.7 percentage points.
  - Employment rates for minimum wage earners will increase by 1.6 percentage points.
  - The low-skilled employment rate is 37 percent.
- Aggregate job creation estimates:
  - The reduction of labor costs alone could increase aggregate employment by an additional 35,000–40,000 jobs, of which more than a third would be among the lower-skilled.
  - Belgian estimates by the Planning Bureau and the National Bank of Belgium (NBB) suggest the creation of an additional 45,000–65,000 jobs by 2021.
  - In the NBB’s model, the reduction of the employers’ SSC contributions alone will create 49,000 jobs by 2021.

### Implementation considerations and fiscal context
- The tax shift is partly financed by a set of tax increases and new levies; some yields are uncertain.
- The tax shift is not revenue neutral even when accounting for potential supply-side benefits.
- The tax-shift design concentrates relief on lower wages, implying stronger labor-market effects for young and unskilled workers and potential gains in activation for vulnerable groups.

*Source: IMF staff summary of "Employment Impact of Tax Wedge Reductions" (Box 1) from the Belgium staff report.*

### 10.      Medium-term growth prospects remain

### 10.      Medium-term growth prospects remain

### Medium-term growth outlook and productivity
- Medium-term growth prospects described as "mediocre."
- Potential output and Total Factor Productivity (TFP) have fallen, and "a return to trend output is not expected."
- Potential output growth will remain below pre-crisis levels.
- Under current policies, "potential growth should increase over the medium term, but average only about 1.3 percent over 2015–20."
- Capital’s contribution to potential growth is expected to return close to pre-crisis levels; contributions from employment and TFP will likely remain substantially reduced.
- The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is "estimated at approximately 8 percent" and is "expected to decline only very slowly over the forecast horizon."
- Post-crisis TFP contribution: "On average, the contribution of TFP has been zero since the crisis."

### Key downside risks
- China and emerging markets slowdown:
  - "Preliminary calculations suggest that for every 1 percent reduction in the Chinese average 2016–20 growth due to a domestic negative investment demand shock, the Belgian economy could grow by about 0.2 percent slower."
- Financial markets volatility:
  - "New shocks from unanticipated changes in growth and financial fundamentals in large and emerging economies could enhance financial volatility."
- Regional risks:
  - High exposure to an EU/euro area recovery faltering due to openness and intra-EU trade linkages (Germany, France, Netherlands).
  - The EU refugee surge has so far had a modest impact, but integration risks remain given Belgium’s "poor track record of labor market integration of non-EU migrants."
- Fiscal policy risk:
  - Longer-term fiscal outlook could veer off course if benefits of recent reforms (such as the tax shift) are smaller than anticipated and/or fiscal federalism hampers intended adjustment.
- House prices:
  - "House prices have stabilized since 2013." A sharp reversal could significantly impact consumption; staff analysis "does not suggest a major overvaluation."

### Potential output (Box 2) — key diagnostics
- IMF staff applied a multivariate filter incorporating relationships between actual and potential GDP, unemployment, and inflation.
- Belgium’s potential growth has slowed significantly since the late 1990s, "likely mostly due to a gradual decline in TFP growth."
- Before the mid-2000s, dynamic employment growth helped maintain potential growth above 2 percent; the crisis collapsed TFP growth and "cut potential growth by half."
- Average contribution of TFP has been zero since the crisis.
- Looking ahead: capacity utilization rebound will return TFP growth to positive territory, but TFP may be reduced if policies succeed in activating low-skilled employees (i.e., employment contribution may rise while TFP contribution remains muted).

### Policy challenges and fiscal stance
- Major challenges: high public debt and "severe labor market fragmentation."
- Public debt-to-GDP ratio has returned to triple digits; fiscal gains reversed since the crisis.
- With the deficit "hovering around three percent of GDP," fiscal sustainability is "tenuous and sensitive to potential macroeconomic shocks."
- Employment: private sector employment beginning to recover, but high unemployment/inactivity among young, low-skilled, and non-EU immigrants persists.
- Need to "rebuild buffers against future shocks" while not undermining recovery or social cohesion; focus on making tax and expenditure policies more efficient, advancing growth-oriented reforms, and maintaining financial stability.

### Getting to budget balance — targets and implications
- Under baseline projections, "debt will remain above 100 percent of GDP throughout the projection period."
- Gross financing needs are "currently almost 20 percent of GDP."
- Staff’s debt sustainability analysis indicates modest changes could push public debt above 110 percent.
- Authorities’ objective: achieve structural balance at all levels of government by 2018, implying "about ⅔ percent of GDP adjustment on average per year for the next three years."
- Historical pace of structural adjustment since 2010: "just ¼ percentage point of GDP per year since 2010."
- To reach structural balance by 2018 (using staff’s estimate of potential GDP), "additional structural effort of 1¾−2 percent of GDP would be needed over the coming three years."
- Accelerated adjustment will create significant drag on aggregate demand even under modest multiplier assumptions (multiplier assumptions noted as 0.7 for expenditure and 0.5 for revenue).

### Fiscal consolidation direction and possible measures
- Consolidation should be mostly expenditure-based given high tax levels and past strong expenditure growth; scope exists to make public spending more efficient.
- Text table summary of possible additional fiscal measures (In percent of GDP):
  - Reduce wage bill: 0.3 (By 2018) and 1.8 (Long Term)
  - Reduce subsidies: 0.5 (By 2018) and 2.1 (Long Term)
  - Increase social benefits efficiency: 0.3 (By 2018) and 2.0 (Long Term)
  - Reform of taxation: 0.4 (By 2018) and 1.3-2.6 (Long Term)
  - Total: 1.5 (By 2018) and 7.2 - 8.5 (Long Term)
- Notes from table:
  - Long term effect estimated as a convergence to EU average.
  - Subsidies are "about 2 percent higher than in EU average and the three neighbors' average (France, Germany, Netherlands)."
  - Comprehensive reform of capital income taxation could increase revenue by "1 to 2 percent of GDP per year" (High Council of Finance estimate).

### Making public spending more efficient — priority areas
- Overall government spending "at around 55 percent of GDP" — among the highest in the EU.
- Specific measures suggested:
  - Wage bill: at "12.7 percent of GDP in 2014," scope for faster attrition-based and well-targeted reductions in public employment across all levels of government.
  - Social spending: enhance means-testing; if redistributive power of social benefits were at EU average, Belgium "could achieve the same reduction in income inequality at a lower fiscal cost by 3¼ percentage points of GDP."
  - Health spending: reduce medication and hospitalization costs, better enforce budget ceilings.
  - Unemployment benefits: link benefits to job search, accelerate phase-out of benefits with employer top-up that act as an early retirement scheme; limit substitution across benefits.
  - Education spending: review system and refocus on areas with biggest education gaps (noting education spending increased "without apparent improvements in test scores").
  - Public investment: redirect resources to more productive projects, notably in transport infrastructure.

### Governance and subnational coordination
- Sixth state reform devolves many fiscal responsibilities to communities and regions, altering financing and transfers.
- Transfers linked to specific taxes (e.g., personal income tax) mean that lower PIT rates under the tax shift will reduce revenues for communities.
- Need for closer coordination across levels of government and improved budgetary control via "strengthening and integrating intra-year monitoring of budget execution across all levels of government."

### Tax system reform opportunities
- Scope to improve efficiency and fairness beyond measures in the tax shift:
  - More efficient taxation of wealth, including introducing a broader capital gains tax.
  - Shift real estate taxes from transactions to recurring charges and limit favorable treatment of rental income.
  - Strengthen environmental charges and eliminate generous fiscal incentives for company cars.
  - Improve VAT efficiency.
  - Regions could target income tax cuts toward lower wage ranges under new fiscal responsibilities.

*Source: IMF staff report, "10. Medium-term growth prospects remain" (extracted content unit _cr1677).*

### 20.      Authorities’ views. The authorities reiterated their commitment to reaching structural budget

### _cr1677 - 20.      Authorities’ views. The authorities reiterated their commitment to reaching structural budget

### Authorities’ views on fiscal consolidation and reforms
- The authorities reiterated their commitment to reaching structural budget balance by 2018.
- They acknowledged that further measures would be needed but expressed confidence that the adopted policies will go a long way toward this goal, especially as reductions in labor costs under the tax shift will lead to increased employment and revenues.
- Expected savings from a redesign of the functioning of the federal government were highlighted, including:
  - improving the management of real estate holdings;
  - centralizing and streamlining procurement practices.
- The authorities stressed determination to continue reform efforts, including:
  - further reform of the pension system in 2016 focusing on the second pillar, notably by disallowing benefitting from the supplementary pension before the legal age of retirement;
  - additional measures to reduce the growth in spending on health to help limit the cost of aging over the medium-term;
  - promotion of reactivation policies for people benefiting from disability allowance and strengthening the benefit allocation control mechanism.
- With respect to the sixth reform of the state, communities and regions have taken steps to improve monitoring and control and all plan to close their (relatively small) budget deficits by 2018.

### B. Tapping Belgium’s Full Labor Market Potential — Key findings
- The labor market is deeply segmented along four dimensions:
  - Regional: unemployment just 5 percent in Flanders, almost 12 percent in Wallonia, and a staggering 18½ percent in the Brussels capital region.
  - Age: employment rates low among the young and the elderly.
  - Skill-related: mismatches resulting in structurally high job vacancies and low employment rates of the low skilled.
  - Immigration background: only about half of non-EU born residents aged 25–54 employed, compared to over 80 percent for Belgian-born residents.
- Underlying causes cited: longer-term structural changes affecting the regions, barriers to labor mobility, language barriers, significant gaps in education and training for certain groups, ill-aligned incentives for work, and a wage setting process that does not fully reflect economic conditions.
- Refugee crisis implications:
  - Between 2015 and 2017, asylum seekers alone may add up to one percent to Belgium’s population.
  - The government reduced the waiting period for refugees to get a work permit from six to four months.
  - Active labor market policies (training, language support) and adjustments to labor and product market regulations may be needed to accelerate integration.
  - Substantial synergies exist between facilitating refugee integration and addressing wider labor market segmentation.

### Box 3 — Integration of Migrants: findings and risks
- Belgium has a poor track record of integrating non-EU migrants into the labor market; inactivity among non-EU migrants is the highest in Europe and likelihood of employment the lowest.
- Asylum applications rose dramatically in 2015: the number of first-time asylum applications during the first 10 months of 2015 was two and a half times higher than during the same period a year earlier.
- As a share of total population, this inflow is 50 percent above the EU average.
- Between 2015 and 2017, the number of asylum seekers may reach 100,000 (including 6,000 under the agreed EU agreement), which would correspond to about 0.9 percent of Belgium’s total population.
- Potential benefits: predominantly male and substantially younger refugees can boost potential output and fiscal sustainability in the longer run; indications that education levels for many refugees may be higher than during earlier refugee crises.
- Risks: delayed labor market entry increases social expenditure and foregone tax revenues; generous welfare combined with poor labor opportunities could create inactivity traps and hinder assimilation, language acquisition, and skills upgrading — particularly problematic given high unemployment/inactivity among low-skilled natives.

### C. Policy recommendations to tap labor market potential (selected)
- Reform wage formation to account not only for price developments but also broader labor market and economic conditions to lock in benefits from recent wage moderation.
- Improve education and training to meet language and technical skill requirements:
  - align curricula closer to local labor market needs;
  - intensify cooperation between schools and employers, including under apprenticeship programs;
  - promote and better target continuous education to enhance labor force flexibility and quality.
- Strengthen work incentives for the unemployed:
  - make benefits more degressive and enforce strengthened job search requirements;
  - improve support by unemployment agencies and provide individualized training offers;
  - consider additional targeted reductions in the labor tax wedge to promote job creation for the low-skilled.
- Reduce geographic segmentation by lowering barriers to mobility and improving collaboration between local governments:
  - address severe traffic congestion (see below), improve public transport, and reduce disincentives to buy/sell a house;
  - encourage regional cooperation to harmonize administrative procedures and improve information flows.

### Authorities’ views on labor market reforms
- Authorities acknowledged labor market challenges including the need to better integrate non-EU migrants.
- They noted recent efforts at wage moderation (including the saut d’index) and cuts in the labor tax wedge should help vulnerable groups.
- They did not favor a special minimum wage; previous experiments with lower minimum wages for the young did not boost youth employment.
- Collective wage negotiation reform is being discussed by social partners, including the role of seniority, but moving away from automatic indexation is unlikely given its role as an anchor of the social contract.
- Other reform areas mentioned: regulation of night work for e-commerce businesses, establishment of career accounts for training, and continued improvement of vocational training schemes.

### C. Supporting Economic Growth and Financial Stability — Constraints and policy measures
- Non-labor bottlenecks constraining growth:
  - substantial administrative burden, especially for smaller companies;
  - heavy regulation in some product markets limiting competition and export growth;
  - severe traffic congestion in large urban centers impeding economic activity.
- Targeted policy actions recommended:
  - Alleviate traffic congestion:
    - abolish the tax deductibility of company cars (which account for more than 40 percent of new car registrations in Belgium);
    - expand road pricing schemes;
    - invest in well-targeted public transport projects.
  - Ease regulatory burden to support growth and employment:
    - liberalization could be most effective in retail, transport, and professional services (notably accounting and legal professions);
    - address barriers from self-regulatory organizations and reduce compliance burdens for SMEs;
    - additional simplification and harmonization across regions to mitigate potential hurdles from regionalization under the sixth reform of the state.

### Financial sector health, risks, and recommendations
- Post-crisis banking sector developments:
  - System regulatory Tier I capital ratio reached 15.6 percent in 2015:H1.
  - NPLs remain low.
  - Belgian banks’ customer deposits exceed their loans at the system level.
- Concerns and suggested vigilance:
  - Recent strong household credit growth could be a concern despite mitigating factors (owner-occupancy, prevalence of fixed-rate mortgages, default law protections, relatively strong net asset position of households).
  - A significant share of loans still have relatively high loan-to-value and/or debt-service-to-income ratios, indicating pockets of vulnerability in young and low- to middle-income borrowers.
  - Staff recommended considering targeted macroprudential actions to limit overexposures of vulnerable groups (for example, additional risk weights or caps on loan-to-value ratios or limits on debt-service-to-income ratios).
  - Staff cautioned against banks’ over-reliance on the mortgage business.
  - Low growth and low inflation will limit profitability in the medium-term; further business model adjustments may be needed.
  - For insurance and long-term savings, reduction of some minimum guaranteed interest rates (e.g. on complementary pensions) is a step toward reducing exposure to protracted low inflation.

### Authorities’ views on growth and financial stability
- Authorities reported progress in reducing the regulatory burden and making the financial system more resilient but agreed further attention is required in some areas:
  - Some scope exists for facilitating market entry and reducing administrative costs that fall disproportionately on small firms; overall regulatory burden comparable to the EU average.
  - Agreed on the need to address traffic congestion, including through well-targeted public investment in transport infrastructure.
  - On mortgage credit growth, authorities extended the add-on to risk weights for mortgages and raised capital requirements for eight banks designated as domestic systemically important institutions.
  - Before taking further measures, authorities planned to let the impact of changes in tax regimes for mortgage deductibility (now a regional competency) play out and noted the need to weigh in the European Commission and the European Systemic Risk Board.

*Source: _cr1677 - 20.      Authorities’ views. The authorities reiterated their commitment to reaching structural budget (PDF chapter/section).*

### 28.      One year into office, the government has made important progress in delivering on its

### _cr1677 - 28.      One year into office, the government has made important progress in delivering on its

### Progress on the government’s reform agenda
- Saut d’index and earlier wage moderation have further narrowed the wage gap with neighboring countries.
- The tax shift reduced the labor tax wedge, targeted at lower incomes, and should support job creation over the medium run.
- The 2015 pension reform is expected to raise employment rates and significantly reduce the projected long-term increase in the cost of aging.

### Central challenge: public debt, recovery, and social cohesion
- The central challenge is to bring down public debt while nurturing the recovery and supporting social cohesion.
- Growth prospects are described as mediocre, weighed down by high public debt and severe labor market fragmentation.
- Downside risks identified: the potential end of favorable external conditions (low interest rates, a depreciated euro, low oil prices), slowdown in emerging markets, financial market volatility, and geopolitical stress.
- Policy principle: achieve lasting public debt reduction without undermining the recovery or jeopardizing social cohesion through quality fiscal consolidation and targeted structural reforms.

### Fiscal strategy and the 2018 fiscal-balance goal
- Government goal: reach fiscal balance by 2018 — characterized as ambitious and requiring quality measures.
- Staff estimates that substantial additional fiscal measures are needed over three years to reach structural balance.
- Fiscal consolidation should be underpinned by high quality structural measures to improve efficiency, even if they take time to yield results.
- Composition: bulk of adjustment should come from the expenditure side, with a smaller contribution from tax measures given the already high level of taxation in Belgium.

### Public spending efficiency and revenue options
- Suggested expenditure-side measures:
  - Well-targeted reductions in public employment.
  - Enhanced means-testing in social spending to better target the most vulnerable.
  - Improved budgetary control across all levels of government.
  - Reallocate savings toward more productive public investment.
- Suggested revenue-side measures:
  - Partly finance the tax shift through more efficient taxation of wealth and real estate.
  - Further greening of the tax system, including eliminating generous tax incentives for company cars.

### Labor market fragmentation and jobs strategy
- Urgent need for a comprehensive and inclusive jobs strategy to address severe labor market segmentation by age, skill level, geographic, and migration background.
- Recommended measures:
  - Further reduce the labor tax wedge for the low-skilled.
  - Improve education and training in languages and technical skills.
  - Strengthen activation policies.
  - Address barriers to geographic mobility.
  - Adapt the wage formation process to better account for employment conditions to lock in gains from recent wage moderation.

### Complementary structural reforms
- Ease traffic congestion and red tape to support employment and productivity:
  - Consider road pricing schemes.
  - Eliminate tax incentives for company cars.
  - Implement well-targeted public transport projects.
- Reduce administrative burden on smaller companies and lower barriers to competition in some service sectors.

### Financial sector soundness and risks
- Banking sector has restructured since the crisis and returned to profitability, but banks’ business models must continue to adapt.
- Prolonged low-interest environment weighs on medium-term prospects of both banks and insurance companies — requires vigilance and proactive supervision by authorities.
- With credit growth driven primarily by mortgage lending, consider additional targeted prudential measures to limit overexposures of vulnerable borrowers.

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

### Key statistics and projections (selected exact figures from Tables)
- Real GDP growth: 0.2, 0.0, 1.3, 1.4, 1.4, 1.5, 1.5, 1.5, 1.5, 1.5 (2012–21).
- Unemployment rate: 7.6, 8.4, 8.5, 8.4, 8.2, 8.0, 7.8, 7.5, 7.4, 7.4 (2012–21).
- General government debt (percent of GDP): 104.1, 105.1, 106.7, 106.2, 105.9, 105.0, 103.9, 102.9, 101.9, 100.8 (2012–21).
- General government balance (percent of GDP): -4.1, -2.9, -3.1, -2.8, -2.6, -2.2, -1.9, -2.2, -2.2, -2.2 (2012–21).
- Revenue (percent of GDP): 51.6, 52.7, 52.0, 51.2, 50.8, 50.8, 50.5, 50.1, 49.9, 49.9 (2012–21).
- Expenditure (percent of GDP): 55.8, 55.6, 55.1, 54.0, 53.4, 52.9, 52.4, 52.3, 52.1, 52.1 (2012–21).
- Current account (percent of GDP): -0.1, -0.2, -0.2, 0.9, 1.4, 1.6, 1.6, 1.6, 1.7, 1.7 (2012–21).
- Nominal GDP (in billions of euros): 387.4, 392.7, 400.6, 410.6, 422.1, 434.5, 447.9, 461.9, 476.7, 492.7 (2012–21).
- Population (in millions): 11.1, 11.2, 11.2, 11.3, 11.4, 11.5, 11.6, 11.7, 11.8, 11.8 (2012–21).

### Appendix I — Selected Fund recommendations and authorities’ responses (summary)
- Fiscal policy:
  - Recommendation: further rebalance tax burden away from labor toward indirect/environmental and capital taxes.
  - Authorities’ action: tax shift approved by Parliament reduced the labor tax wedge targeted at lower incomes and increased other taxes including excise taxes and VAT on electricity.
  - Recommendation: enhance coordination among federal, regional, and community governments on fiscal/shared policies.
  - Authorities’ action: coordination ongoing, including through the Comité de Concertation.
- Financial sector policy:
  - Recommendation: heighten vigilance in supervision.
  - Authorities’ action: National Bank and ECB continue active monitoring.
- Structural reforms:
  - Recommendation: sustain labor and product market reforms and boost productivity (facilitate job creation through flexible contract arrangements; strengthen education, training, apprenticeship schemes; open sheltered sectors; reduce regulatory burden).
  - Authorities’ action: various measures ongoing (e.g., more flexible night work for e-commerce; vocational training and apprenticeship programs); some efforts complicated by the sixth reform of the state and devolution of regulatory powers.

*Source: IMF staff report (Belgium), selected sections and tables provided in the content unit.*

### 2015. The staff assessment is similar, estimating a CA gap in

### _cr1677 - 2015. The staff assessment is similar, estimating a CA gap in

### Current account (CA) and projected CA evolution
- Staff assessment estimates a CA gap in the range of -2.5 to -0.5 percent of GDP. 3/
- Projected CA evolution is consistent with:
  - a fiscal consolidation
  - a recovery in the household saving rate
  - a more gradual increase in both private and public investment (these increases offset part of the consolidation and saving recovery)

### Real exchange rate (REER) — background and assessment
- Background:
  - Unit labor costs point to a gradual loss of competitiveness since 2005.
  - Most of the loss has come from lower productivity growth, with a smaller contribution from wage growth exceeding that of trading partners.
  - Real wage moderation since 2013 had only limited effect on the ULC-based REER, which continued to appreciate between 2013 and 2014.
  - The CPI-based REER depreciated by less than 1 percent between 2013 and 2014.
  - A substantial nominal effective depreciation, which accelerated in early 2015, has lowered the 2015 REER by approximately 5 percent compared to its 2014 average.
- Assessment:
  - Estimates of the EBA model for 2015 point to a REER overvaluation of 4 (index model) to 6 percent (level model).
  - The staff assessment, consistent with the CA assessment, is a 2015 REER gap in the range of 0 to 10 percent. 4/

### Capital and financial accounts — flows and policy measures
- Background:
  - Gross financial outflows and inflows were on an upward trend during the pre-crisis period along the expansion of banks’ cross-border operations.
  - Since 2007, along the bank deleveraging, they have shrunk and have been more volatile.
  - Short-term debt accounts for about 47 percent of the external liabilities and financing need. 1/
  - 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 the 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.

### Technical Background Notes (selected)
- All numbers refer to averages over the first three quarters of 2015. 1/
- The Belgian CA numbers have undergone major upward revisions in the fall of 2014 as well as in spring and fall of 2015, complicating the comparison with the previous ESR assessment. 2/
- Belgium’s status as a center of corporate treasury activities and its resulting large gross foreign asset and liability positions complicate the measurement of the current account, and thus are a source of uncertainty about the CA assessment. 3/
- The REER gap assessment is consistent with the staff’s CA gap assessment, considering the relatively high ratios of exports and imports to GDP, which tend to make the CA more responsive to the REER. 4/

---

### Appendix III — Labor Market and Pension Reform Measures (selected measures and status)
- UNEMPLOYMENT BENEFITS (selected items)
  - Search requirements:
    - Suitable job is 25 km away or less → Suitable job is 60 km away or less — Implemented
    - Restrict rights to search for the same kind of job to six months → Restrict right to search for the same kind of job to three months (young unemployed) and five months (other unemployed) — Implemented
    - Monitor search efforts for 18–21 months after unemployment, with an annual follow-up → Monitor search efforts nine months (<26 years old) or 12 months (26 or older) after start of unemployment, with follow-ups every nine months — Implemented
    - Search requirements applicable until 60 and according to concept of “adequate availability” between 60 and 65. Exemptions are still possible according to the length of the career. — Pending the agreement on the definition of “adequate availability”
  - Registration as job seeker:
    - To obtain unemployment benefits, unemployed have to be registered as job seekers within 2 weeks from the day they are laid off → Registration as job seeker has to be done within 4 weeks following the notice of lay-off — Postponed at request of the social partners
  - Unemployment benefit levels:
    - Initial unemployment benefits are 60 percent of last wage, falling after one year to 55 percent for people living alone and 40 percent for people living in a family with another income
    - New scheme: Initial unemployment benefits are 65 percent of last wage for three months, then 60 percent for the following nine months. After 13 months there is a reduction to 55 percent for people living alone and 40 percent for people living in a family with another income. Between 15 and 24 months of unemployment, depending on career length before unemployment, a stepwise reduction to arrive after maximum 48 months at a level just above social assistance — Implemented
  - No degressivity of unemployment benefits for unemployed proving long periods of work — Required career length did raise from 20 years in 2012, to 23 years in 2015, and will become 25 years from November 2016 on. — Implemented
  - Higher unemployment benefits for unemployed above 50 (Seniority complement) — Eliminated for new entrants, except in specific cases related to collective dismissals or heavy jobs — Implemented
  - Unemployment benefit based on the wage of the last work period of at least 4 weeks → Unemployment benefit based on the average wage of the last 12 months — administratively complicated – research for alternatives with the same goal

- YOUTH AND TRANSITION MEASURES (selected)
  - Unemployment benefits for the young entering the labor force:
    - Available after nine months of unemployment → Available after 12 months of unemployment — Implemented
    - Evaluation of search efforts before opening the right on unemployment benefits for young people leaving school: Two evaluations of search efforts 7 and 11 months after registering as jobseeker. Opening of right on unemployment benefits only after two positive evaluations — Implemented for all youngsters that have left school after June 1, 2013
    - Unlimited → Limited to three years (five years for worker on the margin of the labor market) for unemployed living with family with other income, or until the age of 33 in other family situations. Period of three years could be extended by six months if at least worked six months in the last 24 months. — Implemented - first application started in January 2015
  - Easing the transition to the labor market for low-skilled youth:
    - Sectoral level collective agreements addressing employment needs of groups at risk for the equivalent of at least 0,10 % of gross wage cost of the whole sector.
    - 2013: at least one quarter (0.025%) of the money spend has to go to unemployed youngsters < 26 years — Implemented
    - 2015: sectors are invited to raise the effort for youngsters: at least 0.05 % has to go to actions for youngsters — Implemented
    - Supplementary efforts: sectorial plans to offer supplementary job experience for youngsters in ingrown-jobs (total budget of €12 million), only accessible for sectors that have foreseen an effort of at least 0.05 % — 13 plans approved – implementation in 2016–2017

- TEMPORARY UNEMPLOYMENT AND TIME CREDIT
  - Government subsidy for temporary unemployment:
    - Without employer penalty → Employers will pay a penalty if there is excess use of the system — Implemented and strengthened from 2016 on
    - Allowance for temporary unemployment is 70 percent of last salary → Reduced to 65 percent of salary — Implemented
  - Government subsidy for time-credit and career break system:
    - Five year duration before the age of 50 → 2013: One year duration (two to five years if part-time), with supplementary credit of maximum 36 months for specific motivated breaks, such as childcare or studies (maximum 48 months for specific cases such as taking care of a handicapped child less than 21 year old) — Implemented
    - 2015: Elimination of the rights to benefits for one year non-motivated break. For childcare, one supplementary year of break with benefits — Implemented
    - Unlimited duration above the age of 50 (time reduction) → 2013: Unlimited duration above the age of 55 (time reduction) — Implemented
    - 2015: Unlimited duration (time reduction) above the age of 60 and 25 years of seniority (with transitional measures and possible derogations till 2019) — Implemented with some exceptions (age limit 55) for long periods of night- and shiftwork

- PENSION BENEFITS (selected)
  - Pre-pension benefits (renamed to “Unemployment benefits with employer top-up"):
    - Minimum age and career length: 60/30 (men) 60/26 (women)
    - 2012/13: Minimum age and career length 60/40 for new collective agreements (60 years in 2015 for existing agreements with 40 years career in 2015 for men and in 2024 for women) — Implemented
    - Or: 58/37 (men) and 58/33 (women) for long careers — Implemented
    - 2015: Minimum age 62 for new entrants. No more “long career” scheme. Minimum age 58 for new entrants in case of hardship jobs (60 on a date to be fixed by the National Labour Council) — Implemented
    - Pre-pension years count fully towards pension rights at the last wage level → Pre-pension years below the age of 60 do not count towards pension rights at last wage level but on a lower fictive level — Implemented
  - Statutory early retirement benefit:
    - 2012 and before: Minimum age 60, full career length 35 years (5 years for civil servants)
    - 2013: Minimum age increased by six months every year to 62 by 2016, career length increased by one year every year to 40 years by 2015. Exceptions for long career: 61/41 or 60/41 in 2016 — Implemented
    - 2015: Minimum age will increase by six months in 2017 and 2018 to 63 on condition of a full career length that will increase by one year to 41 in 2017 and to 42 in 2019. In statutory regime, early retirement will be always possible three years before statutory retirement age. Exceptions for long career will be stricter: required career length to retire at 60 will increase from 42 years in 2016 to 43 years in 2017 and 44 in 2019 (and for an early retirement at the age of 61 career length rises from 41 in 2016 to 42 in 2017 and 43 in 2019) — Implemented
  - Pension bonus:
    - Pension bonus for workers and self-employed persons: €2.2974 for every day worked extra if 62 or a career of 44 years
    - Unified pension bonus for workers, self-employed persons and statutory government employees: progressively increasing lump sum amount (from €1.5 to €2.0) for every day worked extra. Bonus starts not earlier than 12 months after earliest possible date for early retirement. Bonus continued after 65 years of age. Only real working days create bonus rights. — Implemented
    - Pension bonus phased out. Only people who met conditions for early retirement by December 31, 2014 or were 65 years old and had a career of 40 before December 31, 2014 were still eligible to a pension bonus. — Implemented
  - Survivors’ pension for widow(er)s:
    - Always for survivors of 45 years and older, under certain conditions in case of survivors younger than 45
    - For widow(er)s younger than 45 survivors’ pension replaced by transition allowance (12 months if no children, 24 months if children) that can be combined without limitation with work income, followed by automatic access to unemployment benefit if no gainful occupation and entitled to appropriate and early guidance. — Implemented
    - Eligibility age of 45 increased gradually to 50 by 2025 — Planned by the new government
    - As for 2025, the eligibility age of 50 will increase gradually by one year each year to reach 55 in 2030 — Planned by the new government

- SOCIAL SECURITY CONTRIBUTIONS AND WAGE SUBSIDIES (selected)
  - Reductions and tax shift measures:
    - 2016–2020 tax shift package: Two-stage overhaul of the SSC reductions in the profit sector: lower headline SSC rates (down to 30% in 2016 and 25% in 2018), strengthening the low-wage measure (2016–2020), removing high-wage measure (2018) and removing across-the-board cut per employee (2018) — Implemented but low uptake
    - 2016 tax shift package: Night and shift work wage subsidies (from 15.6% in 2015 to 22.8% in 2016) — Law and Royal Decree in preparation / Implemented (strengthening around-the-clock shift work wage subsidies)
    - 2015 tax shift package: Strengthening general wage subsidy in micro start-ups from 1.12% to 10% or 20% (2015) — Implemented
    - 2016 tax shift package: Strengthening overtime wage subsidies in construction and catering (2016) — Implemented
  - Reductions targeted to encourage hiring and lower labor costs:
    - Employees’ SSC cuts for low-wage earners: compensation for non-indexation wages (2015) — In preparation
    - Tax shift package: employees’ SSC cuts for low-wage earners (2016-2020) — Implemented
    - 2016-2020 tax shift package: Labor cost reducing package for non-profit sector (50% non-profit wage subsidy, 45% SSC cuts for low wages, 5% hospitals) — In preparation

- OTHER MEASURES
  - Principle of career unity in pension calculation: Notion career no longer expressed in years (45), but in full time equivalent days (14,040) — Social partners have given positive advice – Law project is sent to the Parliament

*Source: Appendix II and Appendix III of the IMF staff report contained in the supplied PDF content.*

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

### _cr1677 - 16.5 percent if leaving at 60 and if leaving at

### Pension policy changes and reforms
- Legal age for full pension is 65; increased to 66 in 2025 and 67 in 2030. Implemented.
- 16.5 percent if leaving at 60 and if leaving at 61 without legal pension 18 percent instead of 16.5 percent.
- The legal framework for the second pillar system will be adapted such that the access age will be more in line with the statutory retirement age. Planned by the new government.
- Decrease pension expenditure. Planned by the new government.
- 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.
  - As of 2015, pension complement for frontier or seasonal workers is granted to people who worked as frontier or seasonal workers before 2015 and who are before December 1, 2015:
    - 65 years old, or
    - Fulfill the conditions for early retirement.
  - Social partners have given positive advice – Law project is sent to the Parliament.
- 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.

### Risk Assessment Matrix — key risks, likelihood, impact, and policy responses
- China slowdown.
  - Likelihood: Low/Medium.
  - Impact/transmission: Significant. Suppresses commodity prices, roils global financial markets, and reduces global growth.
  - Policy response: Slow the pace of fiscal consolidation somewhat by letting automatic stabilizers operate.
- Structurally weak growth in the euro area.
  - Likelihood: High.
  - Impact/transmission: Strong impact through trade channel and by implication investment. Protracted growth shortfall could lower potential growth, raise structural unemployment and complicate further fiscal adjustment.
  - Policy response: Coordinated policy response at European level to which Belgium could contribute by slowing the pace of consolidation.
- Tighter or more volatile global financial conditions from unanticipated changes in growth and financial fundamentals in large economies.
  - Likelihood: Medium.
  - Impact/transmission: Low. Limited exposure of domestic banks to global risks. While the sovereign-banking nexus remains important, it is being gradually unwound.
  - Policy response: Euro area monetary policy is first line of defense against liquidity stress, supported by activation of backstops and resolution mechanism.
- Migration shock (dislocation in labor flows, sharp rise in migrant flows).
  - Likelihood: High.
  - Impact/transmission: Medium. The migrant crisis will have a relatively minor immediate fiscal impact, but the medium-term impact will depend on the speed of integration of migrants into the workforce.
  - Policy response: Adopt proactive policies to hasten integration of migrants, including active labor market policies, strengthening language and skill training.
- Rapid and disruptive housing price correction.
  - Likelihood: Low.
  - Impact/transmission: Medium. Overvaluation is expected to be resolved gradually, but if not, private adjustment could occur through low consumption. Banks are relatively well protected given capital buffers and full recourse loans.
  - Policy response: Following the increase in capital requirements on mortgage lending in 2014, additional macro-prudential measures could be introduced while also working on the supply side of the housing market to alleviate price pressures.
- Weak implementation of fiscal and structural reforms.
  - Likelihood: Low.
  - Impact/transmission: Medium. Failure to keep up with gains from reforms in the rest of the euro area would trigger adverse growth-fiscal dynamics.
  - Policy response: Continue with labor market, public spending and social transfers reforms, complemented with product market and regulatory reforms.

### Debt Sustainability Analysis — baseline projections and realism
- Public debt sustainability risks remain high.
- Baseline projection for public debt-to-GDP ratio:
  - Projected to have peaked at 106.7 percent in 2014 and to decline to 101.1 percent by 2021 as the fiscal deficit narrows gradually and economic recovery gains traction.
- Gross financing needs:
  - Estimated at 17.9 percent of GDP in 2016 and expected to decline to 13–15 percent in the medium term.
- Sensitivity:
  - The projected decline in public debt is relatively sensitive to macroeconomic shocks, particularly involving combined shocks.
- Baseline and realism of projections:
  - Under the baseline, economic recovery and modest fiscal consolidation result in a gradual decline in the gross financing need and the public debt ratio over the medium term.
  - Relative to the DSA from 2014, the projection for the debt ratio has increased through the whole projection period, mainly due to slower projected fiscal consolidation and changes in the historical debt ratio (due to statistical changes on the coverage of public debt).
- Macroeconomic assumptions:
  - Growth is estimated at 1.4 percent in 2016 and rising to 1½ percent in 2017 on the back of stronger demand.
  - The output gap narrows over the medium term and is projected to close by 2021.
  - Inflation is projected to stay below 2 percent throughout the period, reflecting the still negative output gap, lower oil prices, and the ongoing wage moderation.
- Fiscal outlook:
  - In staff’s baseline projections, the general government deficit comes down from

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

### 3.1 percent of GDP in 2014 to 2.1 percent in 2018, before rising again in the medium-term due

### _cr1677 - 3.1 percent of GDP in 2014 to 2.1 percent in 2018, before rising again in the medium-term due

### Fiscal outlook and medium-term projection
- Primary balance trajectory:
  - Projected to improve until 2017 and thereafter remain close to balance.
  - Projected structural deficit of 2.3 percent in 2021.
  - Decline in headline balance from 3.1 percent of GDP in 2014 to 2.1 percent in 2018, before rising again in the medium-term mainly due to unfinanced revenue losses from tax shift.
- Staff assessment:
  - Projections reflect staff’s assessment of the authorities’ plans over the medium-term, in which some measures remain to be identified.

### Debt levels and gross financing needs
- Public debt:
  - Government gross debt estimated at 106.2 percent of GDP in 2015.
  - Projected to stay above 100 percent through the medium term.
- Gross financing needs:
  - Estimated at 17.9 percent of GDP in 2016.
  - Expected to remain around 13–15 percent of GDP in the medium term.
- Higher scrutiny framework:
  - Belgium’s high level of government debt and gross financing requirement calls for using the higher scrutiny framework.

### Realism of baseline assumptions and forecast track record
- Forecast errors (median) for 2006–14:
  - Real GDP growth: -0.58 percent.
  - Inflation (GDP deflator): 0.2 percent.
  - Primary balance: forecast bias of -0.31 percent of GDP (staff projections have been optimistic).
- Percentile ranks:
  - Real GDP growth forecast error has a percentile rank of 33%.
  - Primary balance forecast error has a percentile rank of 48%.
  - Inflation (deflator) forecast error has a percentile rank of 33%.

### Heat map and vulnerability indicators
- Debt burden:
  - Risks from the debt level are deemed high given the relevant threshold of 85 percent is breached under baseline and all stress test scenarios.
- External financing and foreign holdings:
  - External financing requirement at 99 percent of GDP, significantly above the upper early warning benchmark.
  - Public debt held by foreigners: 55 percent of total.
- Gross financing needs and thresholds:
  - Gross financing needs were just below the 20 percent of GDP benchmark in 2015 and decline over the medium-term.

### Shocks and stress tests — scenarios and key impacts
- Growth shock:
  - Assumption: real output growth rates lower by one standard deviation starting in 2017–18, i.e. 1.6 percentage points relative to the baseline.
  - Assumed decline in inflation: 0.25 percentage points per 1 percentage point decrease in GDP growth.
  - Impact: debt-to-GDP increases to 111 percent of GDP in 2018 and declines thereafter.
- High interest rate scenario:
  - Assumption: increase in spreads by 470 basis points starting in 2018.
  - Impact: deterioration of public debt and gross financing needs back-loaded; impact on financing needs is 2.9 percent of GDP in 2021; debt dynamics reversed and no longer follow a downward trajectory.
- Real exchange rate shock:
  - Assumption: 10 percent depreciation in the real exchange rate in 2017.
  - Impact: small effects relative to the baseline.
- Primary balance shock:
  - Assumption: cumulative 2 percentage points of GDP deterioration in the primary balance in 2017–18 (one standard deviation shock) due to revenue shock and rise in interest rates.
  - Impact: deterioration in the debt ratio of 2½ percentage points relative to the baseline in 2021 and slightly higher gross financing needs.
- Combined macro-fiscal scenario:
  - Aggregates shocks to real growth, the interest rate, the exchange rate, and the primary balance (avoiding double-counting).
  - Impact: debt reaches 113 percent of GDP in 2018 and continues rising through 2021; financing needs remain high through 2018 and above 15 percent of GDP through 2021.
- Persistent fiscal deficits shock:
  - Assumption: primary balance close to 1 percent of GDP through 2021.
  - Impact: debt ratio hovers at current rates over the medium-term.

### DSA baseline projections (selected figures from Public DSA)
- Nominal gross public debt (percent of GDP): 97.3 (2014); 106.7 (2015); 106.2 (2016); 105.9 (2017); 105.0 (2018); 103.8 (2019); 102.9 (2020); 101.8 (2021); 100.7 (2021 projection line).
- Public gross financing needs (percent of GDP): 21.8 (2014); 19.4 (2015); 19.5 (2016); 17.9 (2017); 17.9 (2018); 16.0 (2019); 15.3 (2020); 13.6 (2021); 12.9 (2021 projection line).
- Real GDP growth (in percent): 1.2 (2014); 1.3 (2015); 1.4 (2016); 1.4 (2017); 1.5 (2018); 1.5 (2019); 1.5 (2020); 1.5 (2021).
- Inflation (GDP deflator, in percent): 1.8 (2014); 0.7 (2015); 1.1 (2016); 1.3 (2017); 1.4 (2018); 1.5 (2019); 1.6 (2020); 1.7 (2021); 1.9 (final projection year).
- Effective interest rate (in percent): 4.1 (2014); 3.0 (2015); 2.7 (2016); 2.5 (2017); 2.4 (2018–2021).
- Change in gross public sector debt (cumulative): 1.0 (2014); 1.6 (2015); -0.5 (2016); -0.3 (2017); -0.9 (2018); -1.2 (2019); -0.9 (2020); -1.0 (2021); -1.1 (cumulative through 2021); -5.5 (cumulative over projection horizon).
- Identified debt-creating flows (cumulative): 0.8 (2014); 1.4 (2015); -0.2 (2016); 0.0 (2017); -0.6 (2018); -0.9 (2019); -0.6 (2020); -0.7 (2021); -0.8 (cumulative); -3.7 (cumulative over projection horizon).
- Primary (noninterest) revenue and grants (percent of GDP): 49.4 (2014); 51.6 (2015); 50.9 (2016); 50.5 (2017); 50.5 (2018); 50.2 (2019); 49.8 (2020); 49.6 (2021); 49.6 (cumulative).
- Primary (noninterest) expenditure (percent of GDP): 48.6 (2014); 52.0 (2015); 51.2 (2016); 50.8 (2017); 50.5 (2018); 50.0 (2019); 50.0 (2020); 49.7 (2021); 49.7 (cumulative).
- Automatic debt dynamics (contribution): 0.9 (2014); 1.1 (2015); 0.3 (2016); -0.3 (2017); -0.6 (2018); -0.7 (2019); -0.8 (2020); -0.8 (2021); -0.9 (cumulative); -4.1 (cumulative).
- Interest rate/growth differential: 1.0 (2014); 1.1 (2015); 0.3 (2016); -0.3 (2017); -0.6 (2018); -0.7 (2019); -0.8 (2020); -0.8 (2021); -0.9 (cumulative); -4.1 (cumulative).

### Composition of public debt and alternative scenarios (highlights)
- Baseline, Historical, and Constant Primary Balance scenarios provided with differing assumptions on Real GDP growth, Inflation, Primary Balance, and Effective interest rate.
- Charts show gross nominal public debt and public gross financing needs by maturity (short-term vs. medium and long-term) and by currency (local vs. foreign).

### Staff and authorities' views
- Authorities agreed with analysis conclusions.
- Authorities noted that foreign holdership of public debt can be a source of risk as well as a sign of investor confidence.
- Authorities observed that the methodology did not take into account projections for the cost of aging.

*Source: IMF staff.*

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

### _cr1677 - introduction of macrofinancial risk dashboard to monitor systemic and emerging risk. Funding and

### Macrofinancial risk monitoring and crisis management
- 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.

### Banking, insurance, and securities supervision
- 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.
- Adoption of the new institutional architecture has allowed the FSMA to focus solely on market and business conduct.
- 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.

### Pensions oversight
- 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: main findings and areas for improvement
- Summary finding: In many areas Belgium meets, and in some cases exceeds, the requirements of the fiscal transparency code.
- Strengths:
  - Basic government finance processes supported by a sound institutional and legal framework.
  - Clear roles and responsibilities in the budget process with a well-defined separation of powers between the executive and legislature.
  - Fiscal information provided through regular publications and extensive use of the internet.
  - Budget formulation supported by medium-term macroeconomic forecasts and clearly formulated medium-term fiscal policy goals.
  - Audit processes are extensive and improve budget management decisions, practices and standards, with government financial decisions evaluated ex ante and ex post by various institutions.
- Areas to improve:
  - Limited insight about the objectives and targets of government expenditure.
  - Medium-term budget estimates need to make budgetary decision-making more oriented to the medium-term.
  - 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.
- Fiscal policy coordination:
  - Institutional arrangements 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:
  - Internal audit processes could be better coordinated and simplified by reducing the number of internal control and audit layers.
  - The Court of Audit’s Single Audit initiative to minimize overlap, coordinate work programs, and to share common data and analysis is timely.

### AML/CFT
- 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 was adopted during the FATF February 2015 plenary meeting and found that the core elements of a sound AML/CFT regime were present, although some elements remained to be brought in line with the 2012 FATF standard.

### Statistical issues and data coverage
- 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.
- Both annual and quarterly accounts data are of good quality, with shortcomings mainly related 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 overall quality and availability of financial indicators are good.
- Authorities provide quarterly updates of financial sector indicators (FSIs) in a timely manner.

### Key statistics and reporting frequencies (As of January 2016)
- Exchange Rates: Date of latest observation 1/29/16; Date received 1/29/16; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 12/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- International Investment Position: Date of latest observation 2015:Q3; Date received 1/16; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Reserve/Base Money: Date of latest observation 12/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Broad Money: Date of latest observation 12/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central Bank Balance Sheet: Date of latest observation 12/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation 12/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Interest Rates: Date of latest observation 1/29/16; Date received 1/29/16; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- Consumer Price Index: Date of latest observation 12/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Revenue, Expenditure, Balance and Composition of Financing — General Government: Date of latest observation 2015:Q3; Date received 1/16; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Revenue, Expenditure, Balance and Composition of Financing — Central Government: Date of latest observation 12/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Stock of Central Government Debt: Date of latest observation 12/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- External Current Account Balance: Date of latest observation 9/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Exports and Imports of Goods and Services: Date of latest observation 9/15; Date received 1/16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- GDP/GNP: Date of latest observation 2015:Q3; Date received 1/16; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Gross External Debt: Date of latest observation 2015:Q3; Date received 1/16; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Notes on item definitions and reporting frequency: (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, and 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) This information is provided on a budget-accounting basis (not on a national accounts basis). (6) Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I), and not available (NA).

*International Monetary Fund*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1677.pdf_