Belgium: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, June 29, 2021
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- Published: June 29, 2021
Mission summary and priorities
- Pandemic impacts mitigated by a strong, sustained public health and economic policy response and an impressive vaccination campaign; confidence recovering to historic highs, though uncertainty and risks remain.
- Authorities appropriately prioritized containing the pandemic and supporting the economy and households, extending broad support measures to 2021 and planning to phase them out from October with targeted support continuing.
- Policy priority shift recommended: from crisis support to addressing long-standing fiscal and structural challenges aggravated by the pandemic, with emphasis on expenditure-led, medium-term consolidation to rebuild buffers.
- Key cross-cutting needs: tax reform and anti-fraud actions, labor and social-benefit reforms to facilitate reallocation and participation, enhanced insolvency/restructuring frameworks, reduced regulatory barriers, and promotion of business dynamism.
- Next Generation EU / Recovery and Resilience Program (NGEU/RRP) should be used to boost reforms and the green-digital transformation.
Economic outlook and risks
- 2020 contraction: 6.3 percent (Belgian economy strongly affected, in line with EU average); contact-intensive activities most affected.
- Growth forecasts: 5 percent in 2021 and 3½ percent in 2022, led by private consumption and investment and an improving global environment.
- Near-term risks balanced and dominated by COVID dynamics, especially new strains; upside risks from faster reopening could exacerbate supply bottlenecks and price hikes.
- Potential downside scenarios: rising unemployment and bankruptcies after public support phased out; weaker global recovery; tighter financing conditions; geopolitical strains; delays in domestic reforms due to political consensus challenges.
Fiscal support, adjustment plans, and recommended stance
- Maintain fiscal support while health crisis continues and until recovery firms; phase out broad support and increasingly target measures across government levels.
- Solvency support: should leverage private-sector resources and expertise and target firms affected by the pandemic that are without market access but viable.
- Federal adjustment plan specifics: fixed annual effort of 0.2 percent of GDP from 2021 and a variable effort of up to 0.4 percent from 2022, contingent on GDP level and growth.
- Assessment of plan: many measures not well-specified; planned adjustment does not stabilize debt, which will remain 20 ppts. of GDP above pre-COVID levels in 2026, leaving public finances vulnerable.
- Recommendation: a more ambitious adjustment to put debt on a downward path, allocated across federal and regional governments with clear, binding targets to restore buffers.
- Consolidation approach: expenditure-led, given the high tax burden; focus on containing health costs, improving benefit targeting and labor-market incentives, bolstering pension sustainability, reducing public administration duplication and subsidies, and raising efficiencies supported by spending reviews.
- Temporary vs structural spending: COVID-related expansion of health and social spending should be kept temporary; higher structural outlays on health, minimum pensions, and social assistance (totaling ½ percent of GDP) lack accompanying concrete reforms.
- Risks of spending drift: higher cap on health-spending growth (+2.5 percent from 2022 in real terms) may lead to spending drift; need to contain drift from automatic indexation and the “welfare envelope”.
- Timing of reforms: poverty-reduction and pension reforms will be presented in July and September, respectively; both rely heavily on employment increases.
Tax reform and anti-fraud measures
- Anti-fraud/compliance potential: authorities see scope for yields of up to 0.2 percent of GDP by 2024 from anti-fraud actions and enhanced compliance; a multi-agency plan has been developed with coordination across fiscal, economy/employment, and legal/law enforcement authorities.
- Implementation requirements: clear responsibilities and accountability, secured full-time resources, strong program management, risk identification and mitigation, large-scale automated data matching, tax administration access to third-party information (including financial institutions). Compliance risks of high-wealth individuals (HWI) are a particular concern.
- Comprehensive tax-policy reform objectives:
- Lower effective tax rates on labor income, offset by base broadening.
- Curtail and ideally eliminate preferential treatment of in-kind labor benefits.
- Reduce tax expenditures on consumption taxes to rebalance the tax mix and decrease reliance on labor taxes.
- Address tight personal income tax bracket structure; provide incentives for labor-market participation, especially for low-to-medium income and second earners.
- Simplify to reduce compliance and administration costs.
- Restore neutrality across forms of investment, income, or savings; modernize/update real estate taxes.
- Phase-out of fossil-fuel subsidies and stronger carbon taxation to meet greater EU climate ambition; address impacts on vulnerable consumers and external competitiveness via transfers or offsetting mechanisms.
- Specific policy point: decision to apply tax advantages for company cars only to zero-emissions vehicles from 2026 noted as a first step; reducing or eliminating this costly and regressive benefit should be part of tax reform.
- International context: full implementation of international tax changes (e.g., global minimum corporate income tax) could boost revenues.
Financial sector resilience and risks
- Banking sector: appears to have adequate buffers, including under stress; timely loan-loss recognition crucial to support intermediation and recovery.
- Role for banks: partner with government to channel and leverage solvency support to viable enterprises amid narrowing fiscal space and substantial accumulated savings.
- Real estate exposures:
- Commercial real estate (CRE): COVID heightened risks from lower occupancy, rental expectations, and structural changes amid elevated valuations.
- Residential real estate (RRE): prices continued to increase as mortgage rates fell to historic lows and households channeled additional savings into residential properties, raising valuation concerns.
- Sector vulnerabilities could emerge as income support is scaled back or if interest rates rise sharply—buffers should be strengthened if valuations rise further.
- Other financial risks to monitor: home-host issues and adequacy of risk-absorbing capital in Belgian subsidiaries given large foreign presence; accelerating digitalization (operating costs, competition, cyber-crime); exposure to climate risks; persistently-low interest rates weighing on profitability and encouraging search-for-yield behavior.
Labor market, structural reforms, and insolvency frameworks
- Labor-market scarring and fragmentation: women, younger, lower-skilled, lower-income, and foreign-born workers disproportionately affected.
- Transition of policy focus: from preserving jobs to facilitating retraining, reallocation, and participation; targeted extension of support where needed; lift temporary freeze on phased reduction of unemployment benefits (degressivity) as recovery progresses.
- Employment target: government aims to raise employment rate from 70 to 80 percent by 2030; this requires strong improvements among young, old, low-skilled, non-EU-born, and female workers.
- Planned labor measures: review disincentives for cross-sectoral mobility (e.g., seniority pay), improve working conditions to reduce flow into sickness/disability, keep older workers active longer, combat discrimination—many initiatives still early-stage.
- Recommendation: consider more fundamental reform of social benefits, wage-setting, and employment-protection to boost productivity and competitiveness.
- Insolvency and restructuring:
- Pre-COVID reforms eased insolvency resolution; recent temporary measures improve access to judicial reorganization for SMEs and encourage early-stage restructuring with limited court involvement.
- Introduction of a “pre-pack” procedure anticipated to save time and costs and improve restructuring prospects for smaller firms.
- Risks remain of system congestion and excessive liquidation if bankruptcies mount after support withdrawal.
- Recommended acceleration of plans to strengthen early warning mechanisms, introduce special out-of-court procedures for SMEs, boost resources, and allow creditors to initiate procedures in the EU Directive on Restructuring and Insolvency transposition next year.
- Government could incentivize restructuring through tax relief or haircuts on its claims.
Product-market reform, NGEU/RRP, and climate agenda
- Product-market reforms needed: reduce red-tape for start-ups, address entry barriers, support innovation (improve risk-capital availability, R&D tax incentive efficiency), and remove pre-existing rigidities that favored foreign providers in e-commerce and logistics.
- NGEU/RRP opportunity: contains federal and regional components and investment/reforms in decarbonization, mobility, digitalization, inclusion, and productivity; aims to lift public investment and crowd-in private capital. Labor- and product-market reforms identified need further specification.
- Climate policy imperatives:
- Expectation of new European climate targets later this summer requiring substantial, accelerated, coordinated federal-regional efforts.
- Recommended actions: phase-out fossil-fuel subsidies (including preferential prices/tax rates); establish a credible long-term framework for carbon pricing; accompany transition with regulations and support for particularly-affected households and sectors.
- Need for a clear, monitorable climate action plan with federal-regional coordination to enhance coherence and efficiency.
Belgium: Staff Concluding Statement of the 2021 Article IV Mission