Belgium: Staff Concluding Statement of the 2021 Article IV Mission

June 29, 2021

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.

Washington, DC:

While the pandemic has had major social and economic impacts in Belgium, these have been mitigated by a strong, sustained public health and economic policy response. With the authorities’ impressive vaccination campaign continuing and containment measures easing, consumer and business confidence are recovering and have reached historic highs, although uncertainty and risks remain. The authorities appropriately prioritized containing the pandemic and supporting the economy and households, extending broad support measures to 2021. These are rightly expected to be phased out from October, with targeted support continuing. Policies should increasingly focus on addressing long-standing fiscal and structural challenges, many aggravated by the pandemic. The government’s adjustment plan is rightly linked to the recovery, but should be strengthened to durably rebuild fiscal buffers, centered on expenditure-led, medium-term consolidation. This would help guard against future pressures (aging population, rising interest rates) and new shocks. Tax reforms, including actions against tax/social security fraud, should simplify the tax system, strengthen compliance, ease the burden on labor income, improve labor-market incentives, promote fairness, and help achieve climate goals. L abor and social-benefit policies should shift from preserving jobs to facilitating reallocation/participation, including to meet the authorities’ ambitious employment targets. These efforts should be complemented by enhanced debt restructuring/insolvency frameworks, reduced regulatory barriers to entry and competition, and actions to promote business dynamism. Plans to fight poverty and reform pensions now under preparation appear to rely heavily on increased labor participation; attention will also be needed to ensuring fiscal sustainability. Financial sector risks, while manageable, should be closely monitored. The Next Generation EU / Recovery and Resilience Program (NGEU/RRP) should boost reforms and the green-digital transformation.

Economic outlook and risks

The Belgian economy was strongly affected by COVID-19 in 2020, contracting by 6.3 percent, in line with the EU average. Contact-intensive activities were particularly affected. Increasingly-targeted restrictions and adaptation by households and firms eased impacts over time. The authorities’ timely and strong response also helped mitigate impacts, preventing a spike of job losses and bankruptcies. The financial sector has weathered the crisis well so far, benefitting from monetary easing, public support to borrowers, and regulatory and supervisory actions. The external current account moved to a small deficit in 2020, despite sustained pharmaceutical exports, lower energy prices, and lower travel/transport service imports.

The authorities’ impressive vaccination campaign has facilitated reopening, confidence has rebounded sharply, and growth forecasts are being revised upwards. Growth should reach 5 percent and 3½ percent in 2021 and 2022, led by private consumption and investment and an improving global environment. Investment and reforms under the NGEU/RRP should support growth. Uncertainty remains, however, still dominated by COVID dynamics, especially new strains; near-term risks are balanced. Upside risks include stronger recovery with vaccination and reopening, although this could exacerbate supply bottlenecks and price hikes. Scarring effects are diminishing, although rising unemployment and bankruptcies remain a possibility, especially for hard-hit sectors, after public support is phased out. Weaker global recovery, tighter financing conditions aggravated by higher debt levels, or geopolitical strains could affect the outlook. While there has been renewed policy momentum at the federal level since the new government took office, delays or difficulties in reaching consensus may slow or affect reforms and adjustment going forward.

Maintaining adequate fiscal support, while preparing adjustment plans

Fiscal support should be maintained while the health crisis continues and until the recovery firms. However, broad support should be phased out, with measures increasingly targeted and closely coordinated across levels of government. Solvency support should leverage private-sector resources and expertise and target firms that have been affected by the pandemic, are without market access, but viable.

As the recovery gains speed, policies should focus on rebuilding buffers, the importance of which has been demonstrated by COVID and other recent shocks (GFC, European debt crisis). Low interest rates and extended maturities offer comfort now, but market conditions may change quickly, especially if inflation accelerates. The federal government’s adjustment plan foresees a fixed annual effort of 0.2 percent of GDP from 2021 and a variable effort of up to 0.4 percent from 2022, depending on the level and growth of GDP. Though rightly linked to the recovery, many measures are not yet well-specified, and the planned adjustment does not stabilize debt , which will remain 20 ppts. of GDP above pre-COVID levels in 2026, leaving public finances vulnerable to shocks. A more ambitious adjustment that keeps debt on a downward path would be desirable, allocated across the federal and regional governments with clear, binding targets. Sustained efforts would restore buffers for future shocks.

Given the high tax burden, consolidation should be expenditure-led and focus on concrete plans to contain health costs, improve benefit targeting and labor-market incentives, bolster pension sustainability, reduce public administration duplication and subsidies, and raise efficiencies in other areas, supported by spending reviews. 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) have not yet been accompanied by concrete reforms to health services, early retirement, pensions, or unemployment. The higher cap on health-spending growth (+2.5 percent from 2022 in real terms) may lead to spending drift, although efforts are underway to identify efficiencies and savings. Poverty-reduction and pension reforms will be presented in July and September, respectively. Both will rely heavily on the increase of employment, particularly for those aged 18-25 and 50-67. Accordingly, efforts to promote business dynamism and hiring will be key. To ensure fiscal sustainability, adjustments in existing benefits and parametric pension changes should also be considered. Plans should also be formulated to contain spending drift from automatic indexation and from the mechanism for real benefit increases (the “welfare envelope”) and to reform unemployment benefits. Additional savings (or higher revenues) will be needed to create space for higher public investment and green-digital transformation in line with the authorities’ ambitious goal of increasing capital spending to 4 percent of GDP by 2030.

Preparations have started on tax reforms to strengthen compliance and reduce labor taxes:

· The authorities see scope for ambitious yields from anti-fraud actions and enhanced compliance: up to 0.2 percent of GDP by 2024. A multi-agency plan has been developed, with coordination among the fiscal, economy/employment, and legal/law enforcement authorities. The plan will be made more concrete in the coming months, including close monitoring of yields. Timely, efficient, and effective implementation will require clear responsibilities and accountability, secured full-time resources, strong program management, and risk identification and mitigation. Particular attention should be paid to large-scale, automated data matching and tax administration access to relevant third-party information, including of financial institutions. Compliance risks of high-wealth individuals (HWI) are a particular concern that should also be addressed.

· Comprehensive tax-policy reforms should aim at lowering effective tax rates on labor income, offset by base broadening, including curtailing and ideally eliminating preferential treatment of in-kind labor benefits. Reduction of tax expenditures on consumption taxes will also help rebalance the tax mix and decrease reliance on labor taxes. Improved tax system design should address the tight personal income tax bracket structure and provide incentives for labor-market participation, especially for low-to-medium income and second earners. Particular attention should be paid to simplification to reduce compliance and administration costs. The tax reform should also aim at restoring the neutrality of taxation with respect to different forms of investment, income, or savings ; real estate taxes should be modernized/updated. Greater climate ambition at the EU level calls for phase-out of fossil-fuel subsidies and stronger carbon taxation. Impacts on vulnerable consumers and external competitiveness will need to be addressed (via transfers or other offsetting mechanisms). A notable first step in greening the vehicle fleet in Belgium has been the decision to apply tax advantages for company cars only to zero-emissions vehicles from 2026; reducing or eliminating this costly and regressive benefit should be part of the tax reform. Also, when fully implemented, international tax changes, especially introduction of a global minimum corporate income tax, could boost revenues.

Reinforcing financial stability

Banks appear to have adequate buffers, including under stress. However, emerging strains among debtors who have been particularly affected by the pandemic and who have benefitted from support should be closely monitored. Timely loan-loss recognition will be crucial so that banks can keep fulfilling their intermediation function; early engagement with challenged-yet-viable borrowers will support the recovery. In addition, banks could play an important role in partnering with the government to help channel and leverage solvency support to viable enterprises in the context of narrowing fiscal space and substantial accumulated savings.

Other financial sector risks should be monitored, with timely action taken as needed. COVID has affected commercial (CRE) and residential (RRE) real estate—in opposite ways. For CRE, the shock heightened risks from lower occupancy, rental expectations, and structural changes (working, living, shopping, travel), against a backdrop of elevated valuations. RRE prices continued to increase as mortgage rates fell to historic lows, and households channeled additional savings into residential properties, raising valuation concerns. The financial sector is highly exposed to mortgages, and vulnerabilities could emerge as income support is scaled back, or—especially for CRE—if interest rates quickly rise. Buffers for adverse real estate developments have been kept in place and should be strengthened if valuations rise sharply further. In addition, banking sector home-host issues and adequacy of risk-absorbing capital in Belgian subsidiaries are a key concern, given the large foreign presence. Other challenges include: (i) accelerating digitalization, which affects operating costs, intensifies competition, and heightens risks (e.g., cyber-crime); (ii) exposure to climate risks; and (iii) persistently-low interest rates that weigh on profitability, challenge business models, and encourage search-for-yield behavior.

Addressing structural challenges

The pandemic has deepened labor-market fragmentation. Women and younger, lower-skilled, lower-income, and foreign-born workers have been particularly affected. While broad pandemic-related support (STW, SE) has been helpful to preserve jobs, this will phase out in October; extended measures should be well targeted and kept under close review. Policies should pivot to facilitating retraining and reallocation, especially in light of emerging labor shortages in some sectors, as well as ongoing structural challenges from skills mismatches and automation/digitalization. With labor market recovery, the temporary freeze on the phased reduction of unemployment benefits (degressivity) should be lifted.

Further reforms are needed to meet the authorities’ ambitious goal of raising the employment rate from 70 to 80 percent by 2030. This implies a strong push among young, old, low-skilled, non-EU-born, and female workers. The authorities’ plans to review disincentives for cross-sectoral mobility (e.g., seniority pay), improve working conditions to reduce flow into sickness/disability, keep older workers active for longer, and combat discrimination are welcome. However, many of these initiatives are still in the early stages, reflecting the short tenure of the new government and the priority given to COVID response. More fundamental reform of social benefits, wage-setting, and employment-protection should be considered to boost productivity and competitiveness and advance post-COVID transformation.

In addition, effective restructuring and insolvency provisions would help limit scarring and facilitate reallocation and exit, critical for post-COVID recovery. Pre-COVID reforms made resolving insolvencies easier. Further, temporary measures introduced earlier this year aimed to improve access to judicial reorganization, especially for SMEs, and to facilitate restructuring at an early stage, with limited court involvement. The introduction of a “pre-pack” procedure is likely to save time and costs and may improve restructuring prospects for smaller firms and alleviate pressures on the court system. However, risks of system congestion and excessive liquidation remain if bankruptcies mount once support is scaled back. To mitigate risks and enhance prevention and early intervention, plans to strengthen early warning mechanisms, introduce special out-of-court procedures for SMEs, boost resources, and allow creditors to initiate procedures in the context of the transposition of the EU Directive on Restructuring and Insolvency next year are welcome and should be accelerated where possible. The government could incentivize restructuring through tax relief or haircuts on its claims.

Product-market reforms are also needed. Working-time regulations were eased in response to COVID, but (pre-existing) rigidities and costs meant that higher e-commerce and logistics demand was often met by foreign firms. Other reforms need to be firmed up and strengthened, including reducing red-tape for start-ups, addressing other entry barriers, and initiatives to support innovation (e.g., improved risk-capital availability, R&D tax incentive efficiency).

The NGEU/RRP provides an opportunity to boost investment, productivity, and growth. It contains federal and regional components and investment and reforms in decarbonization, mobility, digitalization, inclusion, and productivity. It aims to lift public investment and crowd-in private capital. At the same time, labor- and product-market reforms identified in the RRP need to be fleshed out.

Later this summer, new climate targets and policy initiatives are expected to be agreed at the European level. Substantial, accelerated, and coordinated federal-regional efforts will be needed to discourage emissions by households and firms and meet ambitious new goals. Fossil-fuel subsidies (including preferential prices/tax rates) should be phased out, and a credible long-term framework for carbon pricing should be put in place to guide consumption and investment decisions, along with regulations and transition support for particularly-affected households and sectors. Federal and regional efforts should be detailed in a clear, monitorable climate action plan, closely linked to commitments and with improved coordination to enhance coherence and efficiency.

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The mission thanks the Belgium authorities and other stakeholders for their hospitality, constructive policy dialogue, and productive collaboration.

IMF Communications Department


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