Belgium: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, October 24, 2023
Source details
- Canonical URL
- Belgium: Staff Concluding Statement of the 2023 Article IV Mission
Other formats
Bibliographic details
- Published: October 24, 2023
Key takeaways and context
- Supported by strong and timely policy response, the Belgium economy showed resilience in withstanding a series of shocks in the past three years.
- Current challenges: slowing growth, elevated core inflation, increased public debt and structural fiscal deficits following the pandemic and energy crisis, aging population, climate transition pressures, low productivity, and low labor participation.
- Policy priority: address the confluence of cyclical and structural challenges through fiscal consolidation, spending efficiency, tax/pension/healthcare reforms, labor and product market reforms, accelerated climate transition coordination, and strengthened macro-financial safeguards.
Economic outlook and risks
- Growth projections:
- Projected at around 1 percent in 2023 and 1 percent in 2024, down from 3.2 percent in 2022.
- Medium-term growth expected to return to potential of 1¼ percent.
- Inflation projections:
- Headline inflation projected to drop to 2.5 percent in 2023, then rise again in 2024, likely above 4 percent.
- Core inflation projected at 7½ percent in 2023 and 3¾ percent in 2024.
- Labor market: expected to remain tight.
- External sector: current account expected to return to a small surplus over the medium term.
- Key risks:
- Escalating geopolitical tensions and trade/financial flow disruptions.
- Monetary policy of major central banks tightening more or for longer than expected.
- Insufficient monetary policy response risking a wage-price spiral, especially with automatic wage indexation in Belgium.
- Protracted government formation after June elections could delay fiscal adjustment and reforms, raise risk premia, and worsen debt dynamics.
Fiscal consolidation: findings and required adjustments
- Purpose: preserve Belgium’s redistributive social model, support disinflation, reduce debt, rebuild buffers, and sustain public finances under aging pressures.
- Baseline no-adjustment scenario:
- Overall deficit expected to reach about 5½ percent of GDP by 2028.
- Public debt would exceed 115 percent of GDP.
- Higher debt and interest rates will increase annual borrowing costs by close to 1 percent of GDP.
- Suggested consolidation path:
- Minimum structural primary adjustment of 0.6 ppts of GDP in 2024 and 0.8 ppts annually during 2025-30 — a cumulative adjustment of 5.7 ppts of GDP — to more than offset estimated increases in aging outlays, help achieve a structural balance by 2030, and put public debt on a downward path towards 60 percent of GDP.
- Focus of adjustment:
- Prioritize rationalizing spending and increasing efficiency across all levels of government.
- Preserve high-return public investment to boost potential growth.
- Given high tax levels, limited scope to raise additional revenue; tax reforms should proceed but aim to be at least budget neutral and, ideally, deficit reducing.
Fiscal policy recommendations (sectoral)
- Pensions:
- Recent increases in minimum pensions and 2020/2022 pension bonuses increase projected deficits in 2022-70.
- July 2023 agreement to offset these costs is welcome, but further reforms are needed to foster a rise in the effective retirement age to address medium-term aging pressures.
- Healthcare:
- Health outcomes comparatively good but costly.
- Efficiency gains (including preventive care emphasis, hospital organization reform, and promoting generic drugs) could help absorb projected increases in health and long-term care spending due to aging.
- Tax policy and administration:
- Continue implementation of the 2022 tax reform blueprint to improve labor participation and fairness.
- Gradually reduce or eliminate rate differentials in the VAT with measures to cushion low-income households.
- Make capital taxation more consistent across income sources, particularly real estate and capital gains.
- Strengthen tax administration to improve tax collection.
- Fiscal coordination:
- Improve coordination among federal entities; fiscal adjustment at region and community levels should be part of a broader consolidation plan with strict spending limits applied at all levels of government.
Financial sector resilience: current status and recommended actions
- Current strengths and risks:
- Bank profitability and capital adequacy increasing; liquidity buffers ample.
- Stress tests show high resilience, but mounting risks include a turning real estate cycle, fast-changing interest rate environment, and potential corporate debt vulnerabilities.
- Real estate correction has been orderly; mitigating factors include widespread fixed-rate mortgages, strong household financial positions, and low commercial property vacancies; but riskier lending segments could become vulnerable.
- Macroprudential action:
- National Bank of Belgium (NBB) activated the counter-cyclical capital buffer and recalibrated the sectoral systemic risk buffer (SSyRB) for residential mortgages.
- Capital buffer adjustment anticipated to add €1.6 billion in capital to absorb unexpected losses and cushion housing market corrections.
- Not advisable to lower the SSyRB further until housing market outlook is clearer.
- NBB should monitor for potential unexpected procyclical effects of tightening.
- Strengthening oversight and frameworks:
- Supervision: improve corporate governance framework of banks, monitor internal capital targets, enhance NBB–Financial Services and Markets Authority information sharing, incorporate consumer protection, and further enhance regulatory framework for insurance sector and AML/CFT sanction and supervisory framework (including payment institutions).
- Macroprudential policy: remove requirement for formal government approval of macroprudential measures (at least for instruments foreseen in the Capital Requirements Directive and Regulation); ideally grant NBB full power to set macroprudential policy while maintaining a consultative role for the Ministry of Finance; strengthen NBB’s systemic risk assessment framework.
- Crisis management and resolution: finalize national resolution handbook (including tools outside preferred resolution strategies), ensure operational readiness of resolution plans and internal coordination, strengthen emergency liquidity assistance collateral framework, and pursue draft law to separate the deposit insurance fund from the national budget and increase its target level.
Policies to foster higher and greener growth
- Labor market and productivity:
- Tight labor markets require improvements in productivity, labor participation, and interregional mobility to raise growth.
- Continue labor market, tax, and social benefit reforms to widen net income gap between non-work and work and promote participation.
- Reduce skills mismatches, increase job market flexibility (e.g., build on flexi-jobs measures), and promote inclusion of foreign-born, lower-skilled, older workers, and individuals with disabilities.
- Product-market reforms:
- Total factor productivity growth has declined over past two decades; productivity levels fall below neighboring economies.
- Regulation of retail sector and most professional occupations are particularly restrictive versus peers; streamlining regulation and licensing and reducing competition barriers would help.
- Climate transition:
- Recent extension of two nuclear reactors’ life by 10 years and investment in additional renewable energy and LNG capacity support emissions reduction and energy security.
- Revised National Energy and Climate Plan (present version) projects emissions from non-ETS activities to decline by less than 43 percent, short of the 47 percent target.
- Recommend greater federal-regional coordination and complementary national measures ahead of planned EU ETS expansion by 2027, including higher carbon taxation, reduction of fossil fuel subsidies, sectoral feebates, price floors/ceilings to ensure payback from low-carbon investments, and using part of carbon tax revenues to protect vulnerable households.
Closing acknowledgements
- The IMF team thanks the Belgium authorities and other stakeholders for candid discussions and collaboration, and specifically acknowledges the National Bank of Belgium for hospitality and excellent support.
Belgium: Staff Concluding Statement of the 2023 Article IV Mission (October 24, 2023).
Content in this bundle
- Press Release-English