Belgium—Staff Concluding Statement of the 2020 Article IV Consultation
IMF News, February 20, 2020
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- Published: February 20, 2020
Context and challenges
- Economic activity held up despite prolonged political uncertainty: Belgium has been without a full-fledged government since December 2018.
- Real GDP growth: 1.4 percent in 2019, above the euro-area average.
- Labor market: over 70,000 jobs created in 2019; unemployment rate reached a historical low of 5.4 percent.
- Public finances deteriorated sharply:
- Revenue collection declined due to the ongoing tax shift and waning temporary factors.
- Social-benefit spending increased, largely offset by a lower interest bill.
- Public debt at around 100 percent of GDP, among the highest in the euro-zone.
- Outlook and risks:
- Growth projected to moderate to around 1.2 percent this year and next and stabilize at its potential rate of around 1.3 percent in the medium term.
- Downside external risks include escalating trade tensions, further euro-area growth slowdown, and rapid spread of the coronavirus.
- Prolonged political uncertainty could weigh on confidence and activity.
- Medium- and long-term structural challenges: high public and rising private debt, an aging population, slowing productivity growth, and climate change.
- Near-term priority: limit risks through selective measures with cross-party support while ensuring the fiscal deficit does not deteriorate further; a new government should implement comprehensive reforms to enhance fiscal and financial resilience and boost growth.
Rebuilding fiscal buffers and safeguarding sustainability
- Fiscal outlook under current policies:
- The deficit is expected to reach around 2¼ percent of GDP this year as revenues decline and social spending rises.
- Aging pressures will boost pension and health spending, leading to further deterioration of the deficit in the medium term and putting debt on a rising trajectory in the coming decade.
- Adverse shocks would cause the deficit and debt to rise sooner and faster; limited room for discretionary fiscal policy in response to shocks.
- Recommended fiscal strategy:
- Caretaker authorities should strengthen spending controls and resist pressures that would further worsen the deficit; maintain budget discipline at the sub-national level.
- As soon as a new government is formed, implement a credible and balanced consolidation strategy to reach structural fiscal balance by 2024 through a fiscal effort of around ½ percent of GDP per year.
- Growth-friendly spending reforms to underpin adjustment:
- Healthcare: strengthen overall cost controls, promote preventive healthcare, and focus reimbursements on generic medicines.
- Pensions: revisit the pace of increase of the effective retirement age (while linking it to gains in life expectancy) and the mechanism governing real-benefit growth.
- Other social benefits: improve targeting while protecting the most vulnerable; reform unemployment insurance to strengthen return-to-work incentives; tighten controls on disability benefits; better target family benefits to support women’s labor-force participation.
- Subsidies: improve efficiency of subsidies and exemptions, including for R&D where overlapping schemes lead to decreasing returns; revisit the company-car scheme.
- Wage bill and administrative costs: reduce fragmentation and duplication in public administration.
- Tax policy:
- Further base-broadening reforms could create space to lower the labor tax wedge in the medium run to support employment and growth; examine simplification and neutrality of capital taxation.
Raising potential output
- Labor-force participation:
- Belgium’s labor-force participation rate remains among the lowest in Europe, especially for the young, low-skilled, non-EU born, and women.
- Priority reforms: active labor-market policies and targeted training programs for vulnerable groups; revisit parental-leave policies and reduce tax disincentives to bolster female participation; improve public transport across regions and reduce real-estate regulatory and tax barriers to support mobility; better align wages with productivity at the firm level (including via opt-outs and revisiting seniority pay) and increase flexibility of collective dismissals.
- Productivity:
- Labor-productivity growth has slowed considerably over the last two decades.
- Recommended measures: reduce red tape for startups; lower regulatory barriers to competition in professional services, retail trade and distribution; continue support for access to venture capital for innovative firms; consider public investment in infrastructure, fiscal space permitting, for positive spillovers.
- Climate policy:
- Current policies insufficient to attain medium- and long-term greenhouse gas reduction targets.
- Options for a new government, in collaboration with regional governments and EU institutions:
- Feebates or regulations to incentivize reductions in emissions.
- Carbon taxes, with revenues used to compensate vulnerable households and boost green investment.
- Extending the emissions-trading system (ETS) to cover more sectors.
Safeguarding financial-sector stability
- Financial-sector resilience and challenges:
- Bank balance sheets strengthened; capital and liquidity ratios remain adequate.
- Insurance companies have bolstered solvency ratios.
- Low-for-long interest rates pressure profitability, leading banks to ease credit standards; robust credit growth has pushed up household and corporate leverage, raising concerns about pricing of risk and future loan performance.
- Macroprudential policy and supervisory actions:
- Authorities activated the Countercyclical Capital Buffer and issued supervisory expectations limiting the share of new high-risk mortgage loans.
- Recommended ongoing actions: continue monitoring risks, assess effectiveness of measures, be ready to extend expiring measures and use additional borrower-based tools if risks intensify.
- Revisit the framework for macro-prudential decision-making to ensure timely deployment of policies.
- Encourage banks to rationalize costs, strengthen governance, and adapt business models for digitalization.
- Closing note: The mission thanks the authorities for their constructive policy dialogue and kind hospitality.
IMF Staff Concluding Statement, February 20, 2020.