## 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](https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs121908) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/52/mcs121908/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/52/mcs121908/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/52/mcs121908/bundle-manifest.json) ## 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](http://www.imf.org/external/country/BEL/index.htm) - [Mission Concluding Statements](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm) - [http://www.imf.org/external/country/BEL/index.html](https://www.imf.org/external/country/BEL/index.html) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs121908_