On March 13, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Belgium.
After a slowdown in 2016, the recovery is expected strengthen modestly this year, with real GDP projected at 1.6 percent. The medium-term outlook remains constrained by structurally weak growth in advanced economies. Downside risks are significant, including those related to global and regional uncertainties that could affect trade and financial markets.
In its first year in office, the government enacted a range of important measures, including pension reforms, a suspension of wage indexation (“saut d’index”), and a “tax shift” reducing the labor tax wedge. The year 2016 proved more difficult, as fiscal consolidation stalled and the budget deficit exceeded its target by a significant margin. However, structural reform efforts continued, including through ongoing negotiations on reforming the wage setting process (the “1996 law on competitiveness”) and the corporate income tax system.
Notwithstanding recent progress, major challenges continue to weigh on Belgium’s economic prospects—including high public debt and severe labor market fragmentation. The fiscal gains made in previous decades have been undone by the crisis, and the public debt-to-GDP ratio has returned to triple digits. The pace of consolidation since 2010 has been much slower than in other euro area countries, as public spending continued to grow faster than GDP until recently. Fiscal sustainability therefore remains tenuous and sensitive to potential shocks. And while private employment has been recovering, there is entrenched high unemployment and inactivity among certain groups, including the young, the low-skilled, and immigrants from outside the European Union.
Executive Board Assessment [2]
Executive Directors welcomed the reforms of the past two years, which should help strengthen competitiveness, support job creation, and address the cost of ageing. Directors noted that growth prospects are modest and risks are on the downside, in part due to a weak external environment. To address these issues and the high level of public debt, Directors recommended further efforts to strengthen public finances and raise the country’s growth potential.
Directors agreed that fiscal consolidation should be underpinned by an ambitious and credible medium-term strategy that targets a balanced budget at all levels of government. The bulk of this fiscal consolidation should come from the spending side, based on efficiency-oriented reforms. Directors welcomed ongoing deliberations on further tax reform, while stressing that the overarching goal should be to make the tax system more supportive of jobs and growth while safeguarding revenues. In this context, Directors saw merit in lowering the relatively high corporate income tax rate as part of a broader reform of the business and investment income taxation. In light of the fiscal slippages in 2016, they emphasized the need for realistic revenue and expenditure targets, backed by high-quality measures.
Directors encouraged the authorities to adopt a comprehensive strategy for addressing labor market fragmentation and raising the employment rate among vulnerable groups to boost Belgium’s growth potential. Such a strategy should preserve the gains from wage moderation by linking wage growth to broader labor market and economic conditions, reduce the labor tax wedge, improve education and on-the-job training, and reduce barriers to geographical mobility.
Directors stressed that additional reforms are needed to raise potential growth and employment. They underscored the need for a comprehensive and prioritized infrastructure strategy to reduce the backlog in public investment and alleviate transport bottlenecks. Directors also stressed the importance of fostering greater competition in services to help reduce prices paid by consumers and firms and boost productivity.
Directors observed that banks and insurers should continue to adapt to an environment of low growth and interest rates. To maintain their soundness and resilience, banks need to pursue further cost reduction and diversification of revenue sources. Directors encouraged regulators to closely monitor pockets of vulnerability in the mortgage market, and to stand ready to deploy further macro-prudential measures as appropriate.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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Belgium: Selected Economic Indicators (2014–17) |
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Sources: Haver, Belgostat, and IMF staff projections. |
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