Belgium: Staff Concluding Statement of the 2018 Article IV Mission

December 18, 2017

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The recovery is gaining momentum. Employment growth is picking up and the fiscal position is improving, as past reforms pay off and growth strengthens throughout Europe. This is an opportunity to enhance the resilience and longer-term growth potential of the Belgian economy. The near-term priority is to push ahead with growth-oriented, revenue-neutral tax reforms while continuing with gradual spending-based budget consolidation to reduce public debt. Over the medium term, reforms are needed to raise productivity growth and integrate vulnerable groups into the workforce, while adapting the financial sector to a changing environment. Staff’s main recommendations:

  • Complement the planned corporate income tax reform with further measures to address remaining distortions in the tax system, and complement the next phases of the tax shift with additional measures to safeguard revenues.

  • Gradually move toward a balanced budget while shifting from current to investment spending.

  • Boost productivity growth by upgrading infrastructure, particularly in transport and energy, and by strengthening competition in services.

  • Unlock Belgium’s large untapped labor market potential by improving education and training of vulnerable groups.

  • Mitigate vulnerabilities in the mortgage market by raising risk-based capital requirements as proposed by the National Bank of Belgium.

  • Carefully navigate the transition toward a European Banking Union.

The economic picture is brightening. Real GDP growth is projected to increase to 1¾ percent in 2017 and close to 2 percent next year. Faster economic growth has contributed to healthy employment growth, higher fiscal revenues, and lower spending on unemployment benefits. The fiscal deficit is projected to halve from 2½ percent of GDP last year to about 1¼ percent of GDP in 2017. These positive developments are supported by the strengthening recovery throughout Europe, as well as by the important reforms that Belgium has implemented in recent years, including pension reforms, the temporary suspension of wage indexation, and labor tax wedge cuts under the tax shift.

The favorable economic environment is an opportunity to lay the foundation for stronger, more inclusive growth in the future. With public debt still very high, it is crucial to rebuild fiscal buffers by gradually moving toward a balanced budget. Fiscal consolidation should combine growth-friendly, revenue-neutral tax reforms with a shift from current to capital spending. Further labor and product market reforms are needed to increase productivity growth, raise potential output, and integrate vulnerable groups into the labor market. While these reforms will not happen overnight, it is important to maintain the reform momentum and not yield to complacency.

We welcome the government’s efforts to reform the corporate income tax system to enhance Belgium’s growth potential. The proposed reform, which aims to be revenue neutral, appropriately lowers the statutory rate while broadening the tax base, including through anti-tax avoidance measures and by reducing the cost of the notional interest rate deduction. The planned next phases of the tax shift, which will further reduce the labor tax wedge, will require additional offsetting measures to safeguard revenues. To this end, and to promote efficiency, these reforms should be complemented by measures that broaden the tax base and address distortions in the tax system. Environmental taxation could be strengthened and certain deductions and exemptions, including on VAT and company cars, could be eliminated. Moreover, to create a more level playing field across business and investment activities, it would be useful to review other aspects of the tax system, including: the taxation of interest, dividends, and capital gains; the targeting of profit tax deductions; the preferential tax treatment of rental income and real estate; and tax preferences on savings accounts.

Achieving a balanced budget will require significant efforts to make government spending more efficient. The sharp decline in the fiscal deficit this year reflects in part the payoff from previous reforms, but also large windfall savings from lower interest rates and a smaller-than-expected contribution to the EU budget. Continued spending restraint will be important, including in the pre-election period. To underpin a sustainable budget position that supports growth and social objectives, it will be critical to pursue deeper reforms of the public sector at all levels of government. This should entail reducing the high level of subsidies, improving administrative efficiency and coordination across levels of government, streamlining the civil service, containing the growth in health care costs, and better targeting social benefits to the most vulnerable. Sufficient efforts to limit the growth in current spending would create more room in the budget to address the significant backlog in public investment.

To fully realize Belgium’s employment potential, it will be critical to address the severe fragmentation of the labor market. Jobs growth has accelerated in 2016 and 2017, driven by the cyclical recovery and the positive impact of past reforms. Older workers account for much of the employment increase, whereas progress has been more limited in integrating vulnerable groups—especially immigrants born outside the EU, the young, and the low-skilled. Moreover, large regional disparities in unemployment rates persist, and there is a significant skills mismatch. It is therefore crucial to address educational gaps, improve the supply of and demand for training and lifelong learning, and reduce barriers to geographical mobility. The wage setting process, guided by the revised 1996 law, should reflect not only comparator country wages, but also productivity developments as well as local and sectoral labor market conditions. The new National Productivity Council could play a useful role in informing social partners. Moreover, ensuring some degree of flexibility in labor agreements at the enterprise level would help support employment and competitiveness.

Another central challenge is to raise productivity growth, which has lagged behind peer countries. This reflects a range of factors, including deindustrialization and a sustained decline in public investment, which has halved since the 1970s as a ratio to GDP. Moreover, barriers to competition and the limited dynamism of firm entry and exit appear to have hampered productivity growth in a number of services, with adverse spillovers to other sectors. Boosting productivity would help improve external competitiveness and mitigate the impact of population aging on potential growth. Efforts should focus on increasing investment in transport and energy infrastructure, and enhancing institutional capacity to foster competition, especially in professional and corporate services and network industries such as telecommunications. Innovation could be stimulated through appropriate tax incentives and investment in human capital through education and professional training reforms.

The resilience of Belgium’s financial sector has improved considerably since the crisis, but cyclical vulnerabilities are rising. The National Bank of Belgium’s (NBB) recent proposal to increase risk-based capital requirements on banks’ mortgage portfolios would help address pockets of vulnerability in the home loan sector, and should be approved swiftly. Going forward, it will be important to stand ready to tighten macroprudential conditions further if balance sheet risks were to grow significantly. In this regard, it would be helpful to revise the institutional framework to enhance the NBB’s ability to deploy cyclical macroprudential measures in the financial sector in a timely manner.

Completion of the Banking Union is a central objective for Europe. Carefully navigating the transition period is an important institutional challenge. Progress is being made, especially with respect to the resolution framework. At the same time, systemically important euro area subsidiaries operating in Belgium should continue to be closely supervised under the Single Supervisory Mechanism, and they should maintain sufficient capital and loss absorbing capacity until the completion of the Banking Union. More broadly, Belgian financial institutions need to continue adapting their business models to a changing economic, technological, and regulatory environment over the coming years. This should include further efforts to diversify revenue sources, reduce costs, and step up protections against cyber risks.

We thank the authorities for their constructive policy dialogue and kind hospitality.






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