Belgium - 2008 Article IV Consultations: Concluding Statement of the Mission

IMF News, December 19, 2008

Source details

Canonical URL

Belgium - 2008 Article IV Consultations: Concluding Statement of the Mission

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Published: December 19, 2008

Overview and context

• Publication dates: December 19, 2008; text dated December 15, 2008.
• Core message: Belgium faces an extraordinary set of economic challenges from the global financial crisis, a deep European and US recession, and an earlier spike in energy and commodity prices. Authorities should address the crisis decisively while pursuing medium- and long-term reforms to restore competitiveness and fiscal sustainability.
• Key structural challenges highlighted: long-run fiscal pressures from an aging population; unsustainable imbalances from existing fiscal federalism arrangements; structural rigidities dampening growth and job creation.

1. The Economic Outlook: A sharp economic downturn, with a slow recovery

Findings and projections:

• Growth will turn negative in Q4 2008 and contraction expected to continue into H1 2009, with a weak recovery beginning only late in 2009.
• Belgian growth is expected to fall to around -¾ percent in 2009.
• Economic activity likely to remain below potential in 2010.
• Risks to the forecast are large and tilted to the downside.
• Unemployment will rise, eventually peaking well above 8 percent during the downturn.
• Inflation dynamics:
  • The early-2008 spike in inflation has begun to reverse, but aftereffects will continue in 2009.
  • Indexation mechanisms will generate higher wage growth than in partner countries over the coming year.
  • Services prices show some second-round inflationary effects.
  • Inflation should fall to around 2 percent in 2009, but may still remain above the euro area average.
• Structural concern: price-setting behavior in food and energy markets.

2. Responding to the Crisis—the Financial Sector

Assessment of past actions:

• Authorities acted quickly, comprehensively, and decisively in Fortis and Dexia interventions in late September; also intervened in Ethias and strengthened capital in KBC.
• Legal complications remain in the Fortis operation.

Ongoing risks:

• Elevated systemic risks from additional problems in advanced-economy institutions, contagion to Eastern Europe and other emerging markets, and recession-induced stress on banks.

Recommended framework and actions:

• Establish a broader legal framework with pre-established rules for interventions and capacity to mobilize significant further financial resources.
• Prepare specific contingency plans jointly by Government, BFIC, and NBB for major banks, smaller banks, and the insurance industry.
• Immediately strengthen information sharing and coordination between BFIC and NBB:
  • Create joint databases for offsite inspections.
  • Set up joint onsite inspection teams combining BFIC supervisors and NBB macrofinancial risk experts.
• Consider eventual unification of macrofinancial risk analysis with banking and insurance supervision under a single structure while keeping financial markets supervision separate.
• Press for expansion of pan-European banking supervision mechanisms; in the interim, prioritize strengthening supervisory colleges and bilateral memoranda of understanding with foreign supervisors.

3. Responding to the Crisis—the Fiscal sector

Short-term fiscal assessment:

• 2008 fiscal deficit likely near 1 percent of GDP due to late budget approval/implementation and initial downturn effects.
• 2009 deficit projected between 2-2½ percent of GDP, with a corresponding deterioration of the structural balance of around ¾ percent of GDP.
• The Plan de Relance is judged to be broadly the right magnitude; a larger package now would be hazardous given elevated public debt and long-term consolidation challenges. A larger package should be considered only if the situation deteriorates significantly further and in coordination with the EU.

Critique of stimulus composition and recommendations:

• Desirable stimulus features: timely, temporary, and targeted toward growth-generating sectors; tied to structural fiscal measures for longer-term sustainability.
• Shortcomings of Plan de Relance:
  • Timeliness: heavy reliance on boosting investment limited by how much can be accelerated for immediate impact in H1 2009.
  • Temporariness: roughly 2/3 of the cost of the Plan de Relance's measures could be permanent.
  • Includes expensive reductions in social contributions and permanent increases in unemployment and other social benefits.
  • Targeting: some measures (VAT reductions in construction, boosts to unemployment benefits) are targeted; other measures have diffuse benefits and may raise savings rather than spending.
• Policy recommendations:
  • Include sunset clauses or long-term compensatory savings in all Plan de Relance elements.
  • Focus measures on increasing incomes of those most likely to spend (e.g., the low-income and unemployed) and on accelerating investments already underway.
  • Link reductions in social contributions to countervailing long-term savings if pursued.

4. Beyond the crisis—Achieving fiscal sustainability

Current fiscal pressures:

• The financial crisis has increased the gross debt-to-GDP ratio by some 6 percentage points.
• Deficits in 2008 and 2009 will further increase public indebtedness.

Medium-term anchor and institutional reforms:

• Recommendation: the government, in collaboration with regions and communities, should firmly commit now to a structural adjustment of at least 0.7 percent of GDP per year once the crisis has passed, to return as soon as possible to fiscal balance and eventually to a surplus.
• Steps to lay groundwork now (could be coupled with temporary stimulus to reassure markets):
  • Multiyear budgeting:
  • Consider a medium-term budgetary framework to guide the annual budget process.
  • Translate spending plans into binding ceilings forming the basis for the annual budget cycle.
  • Strengthen the role of the High Finance Council (HFC):
  • Expand mandate to act as independent evaluator of government fiscal plans and outcomes, produce regular reports, include expenditure policy issues, and help set parameters for the multiyear budget process.
  • Undertake comprehensive expenditure and revenue reviews:
  • Identify reductions in tax expenditures and opportunities to streamline and improve spending efficiency.
  • Objective: reduce the size of government, currently nearly 50 percent of GDP.
  • Tackle imbalances in fiscal federalism:
  • Shift more of the burden of fiscal consolidation and aging-related preparation from federal/social security to community/regional entities.
  • Reconsider horizontal imbalances to better match spending authority and revenue-raising responsibility and improve transparency and incentives of intergovernmental solidarity mechanisms.

5. Beyond the crisis—Competitiveness and Structural reforms

Assessment of competitiveness:

• Evidence of a competitiveness gap: declining Belgian shares in European markets, an appreciating real effective exchange rate, and a deteriorating external current account balance that has slipped into deficit for the first time in many years.

Labor market recommendations:

• Centralized wage-setting and indexation have helped macro coordination but generated real wage rigidity and weakened competitiveness.
• Central Economic Council view: no room for real wage increases over 2009-10; the existing real wage gap should be reduced, but current indexation mechanisms prevent it.
• Policy options:
  • Adapt wage indexation parameters to permit full coverage for the poorest, most vulnerable workers, while allowing less-than-complete indexation for the economy as a whole.
  • Increase use of all-in agreements to introduce greater real wage flexibility.
  • Improve activation policies and remove inactivity traps; increase training opportunities at least to previously agreed targets; focus on improving labor productivity.

Product and services market reforms:

• Retail: ease restrictions on new retail establishments; deregulate opening hours and sales periods to promote competition and lower consumer prices.
• Pharmaceuticals: remove price regulations on over-the-counter drugs while liberalizing their market.
• Energy: carefully examine pricing policies; the recent enhancement of regulator (CREG) investigation powers is welcomed; recommend additional actions by the new price observatory to increase end-user transparency.
• EU Services Directive: fully seize liberalizing opportunities.
• Estimated benefits: reforms of this type could lower the consumer price level by as much as 1-2 percentage points over time, boosting purchasing power by hundreds of euros per household while narrowing the external competitiveness gap.

Competition authority recommendations:

• Reinforce the Competition Council to act as a vocal public advocate for competition and a watchdog against rent-seeking behavior.
• Empower and staff the Competition Council to analyze policy areas where change could boost competition and to issue periodic sectoral reports with specific recommendations.
• Reinforce cooperation between the Competition Council and sectoral regulators such as CREG.

Source: IMF Mission Concluding Statement, Belgium - 2008 Article IV Consultations.

References

• Belgium and the IMF
• Mission Concluding Statements
• PRESS CENTER
• Article IV
• http://www.imf.org/external/country/BEL/index.html
• https://www.imf.org/en/home