Belgium: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, December 21, 2022
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- Published: December 21, 2022
Economic outlook and risks
- Recovery and shocks
- Strong recovery from the pandemic weakened by spillovers from Russia’s war in Ukraine; impact less severe than in some other euro area countries.
- Higher energy prices, tighter financial conditions, weaker confidence, and elevated uncertainty weighing on activity.
- Economy expected to experience a mild recession over the winter before some rebound.
- Growth projections
- Growth projected to slow to 0.2 percent in 2023, from 3.0 percent in 2022 and 6.1 percent in 2021.
- Over the medium-term, growth expected to return to a potential rate of 1.2 percent.
- Inflation and external balance
- Headline inflation expected to reach 10.7 percent in 2022, moderating to 5.4 percent in 2023.
- Core inflation expected to increase from 3.9 percent in 2022 to 6.1 percent in 2023, gradually converging back to 2 percent by 2026.
- External current account: surplus of 0.4 percent of GDP in 2021 to a sizable deficit in 2022; expected to move to a small surplus over the medium term as energy pressures ease.
- Risks and uncertainty
- Upside risks to inflation and wage-price dynamics from escalation of the war in Ukraine, tighter financial conditions, or adverse spillovers from trading partners.
- Downside scenario: lower energy prices would reduce fiscal pressures and, with structural reform progress before elections in 2024, boost confidence.
Strengthening fiscal sustainability
- Fiscal response to energy shock
- Federal and regional support measures, together with automatic indexation, eased impacts but added costs—around ¼ percent of GDP per quarter.
- Some measures (VAT reduction from 21 to 6 percent on gas and electricity; lowered excise duties for petrol and diesel) were not targeted and did not incorporate price signals to reduce consumption.
- Targeting and design of energy support
- Authorities planning a shift from a return to 21 percent VAT to specific excises that incorporate progressivity, adjust with energy prices, and promote a switch from fossil fuels to clean electricity.
- IMF staff recommend indexation of excise rates and a path for higher rates, especially for natural gas, and stronger targeting of vulnerable households (including energy exposure) and reducing employment disincentives from social tariffs.
- Fiscal limits and timing
- IMF staff consider extraordinary energy support in 2023 should stay within the budgeted allocation (0.9 percent of GDP) and be phased out in 2024, or earlier if possible.
- Temporary windfall taxes and solidarity contributions from energy companies will help defray some costs; potential adverse impacts on renewables investment should be monitored.
- Deficit and debt outlook
- 2023-24 budgetary plan envisages a wider fiscal deficit in 2023 than in 2022, largely due to energy support.
- Overall deficits projected to remain elevated over the medium term at 5½ percent of GDP, well above pre-pandemic and debt-stabilizing levels.
- High nominal GDP growth will lower the debt ratio in 2022, but debt will increase continually with high primary deficits unless policy changes.
- Recommended consolidation path
- IMF staff consider the overall fiscal deficit should not increase in 2023 and ideally should be reduced.
- Calls for an adjustment of around 0.8 percent of GDP next year (or more) and a similar magnitude (or more) annually thereafter until reaching the debt-stabilizing deficit level and subsequently structural balance.
- Composition of adjustment
- Emphasis on rationalization of current spending; preserve efficient and productive investment spending.
- Target efficiency gains in energy-support measures, outlays on goods and services, and subsidies.
- Contain wage-bill, social-benefit, and aging costs (pensions, health) and improve benefit targeting and incentives.
- Specific measures: reduce parameter for real health spending increases from 2.5 to 2.0 percent in 2024; system savings targets identified for 2023 and 2024.
- Authorities aim to increase investment outlays to 4 percent of GDP by 2030; scope to improve public investment management framework (PIMA).
- Social and pension measures
- July 2022 pension measures included a pension bonus for work after early retirement or statutory retirement age, minimal working conditions for access to minimum pensions, and a supplement to reduce the gender gap for periods of part-time work due to family care; these also increased costs.
- Need to ensure budget-neutral reforms and secure timely receipt of Next Generation EU Recovery and Resilience Program funding.
- Further actions needed to address budgetary costs of aging and to reduce spending pressures from expansions in minimum pensions and health spending.
- Target areas: unemployment benefit replacement rates (high and unlimited duration), access and duration of sickness and disability benefits.
- Tax reform
- Tax reform blueprint issued earlier in 2022 aims to simplify the tax system, reduce tax burden on labor, broaden tax bases by eliminating or reducing tax expenditures, address work disincentives, and strengthen revenue administration and tax compliance (including 2021 anti-fraud plan).
- Reforms should make capital taxation more consistent across income sources.
- Second tax reform stream focusing on carbon pricing and emissions reduction.
- Early action planned via first-step measures in 2023; robust compensating measures should secure budget neutrality.
- Fiscal federalism and governance
- Decentralization of fiscal competencies significant; deficits at community and regional levels comprise a third of the general government deficit.
- Scope to enhance federal-regional-community arrangements for planning, alignment, savings incentives, and outcomes.
- Possible measures: develop multi-year fiscal plans and expenditure rules at all levels, integrate comprehensive spending reviews, implement existing cooperation arrangements, and integrate fiscal sustainability objectives in burden sharing and structural reforms.
Safeguarding financial stability
- Banking sector resilience and vulnerabilities
- Banking sector emerged resilient from the pandemic: capital and liquidity buffers maintained; profitability strong; improving asset quality across most credit exposures.
- Risks rising: slower growth, elevated uncertainty, wage and energy pressures, tighter financial conditions may weigh on borrowers and require increased provisioning.
- Real estate risk: mortgage exposures relatively high; household debt-service-to-income ratios somewhat elevated; mitigants include high share of long-term, fixed-rate mortgages, a sectoral systemic risk buffer (SSyRB) for housing loans, and borrower-based mortgage lending guidelines from 2020.
- Mortgage moratoria activated in October with strict eligibility criteria taken up in limited numbers; should not delay durable bank-borrower engagement.
- Energy efficiency disclosures in real estate transactions beginning to affect valuations and transactions.
- Macroprudential stance
- Need to balance maintaining resilience, deploying buffers to absorb losses, and ensuring adequate credit provision.
- Decision to maintain the counter-cyclical capital buffer (CCyB) at 0 percent appropriate to allow use of capital cushions to engage with borrowers.
- Further macroprudential calibration may be needed, including potentially releasing the SSyRB for housing loans if the outlook worsens.
- National Bank efforts to gather information and strengthen cyber-preparedness are welcome; complemented by tailored stress-testing and appropriate policy interventions.
- Market and NBFI risks
- Higher and steeper yield curves improving interest margins and asset-liability positions for NBFIs (including life insurers).
- Risk that rapid or disorderly interest-rate adjustment, market volatility, or sharp asset-price corrections could expose vulnerabilities.
- Authorities’ close monitoring of NBFI-related risks is welcome to detect and contain spillovers early.
Building a stronger and more sustainable economy
- Labor market and employment reforms
- Labor market showed record-high job growth; further reforms needed to facilitate reallocation and meet goal of 80 percent employment by 2030 (current 72 percent).
- New federal labor package effective this fall focuses on flexibility and training but more reforms required on wage-setting, hiring and dismissal, employment protection, social benefits, and employer flexibility.
- 2023 federal government increased allocation for minimum wages relative to unemployment benefits to promote activation.
- Target groups: younger workers/entrants, older workers, women, workers with an immigration background (especially women), those receiving disability/sickness benefits.
- Recommended measures: reduce and cap duration of unemployment benefits, ease reduction of social benefits when recipients take jobs, provide tailored on-the-job support for sickness/disability beneficiaries, coaching and training, speed accreditation of foreign qualifications.
- Business environment reforms underway: restructuring and insolvency frameworks, digitalizing the judiciary, rolling out 5G networks; strengthening cyber risk monitoring and preparedness.
- Wage indexation
- Automatic wage indexation has protected purchasing power but places burden on employers, threatening competitiveness.
- Wage Law balances automatic indexation with a corrective mechanism but can imply prolonged no or limited real wage increases post-shocks and may cement labor market rigidities.
- Suggested considerations once elevated price pressures pass: adjust the basis for indexation (health index) to exclude items with high price volatility (e.g., commodity-sensitive items), compensate vulnerable groups with well-targeted fiscal support, and incorporate productivity trends and a wider set of peer economies when interpreting competitiveness under the Wage Law.
- Climate and energy transition
- Limited progress aligning national climate policies with Fit-for-55 targets (47 percent domestic reduction by 2030 for sectors not covered by the EU ETS); EU identified gaps in the 2019 plan.
- Gaps include high transport and building-related emissions, federal-regional differences on targets and policies, need for more ambitious renewables and energy efficiency actions, attention to subsidies, and limited quantified investment needs.
- Some improvements under the RRP, but more policy-setting and implementation needed.
- Policy recommendations: progressively incorporate a higher carbon component into fuel excise regime as international energy prices fall; reduce subsidies (fuel cards, commercial diesel, heating oil); introduce feebates for the power sector and other users; rationalize electricity network fees and levies; provide targeted social protection with cash rather than energy-based support; introduce real-time electricity metering and distance and congestion charging; strengthen federal-regional coordination/burden-sharing and enhance climate-related public investment.
- Energy security and infrastructure
- Authorities extended operations of two nuclear power stations for ten years (decision in March 2022) and secured alternative gas supplies via pipelines and LNG, helping fill storage and increase electricity generation amid maintenance in neighboring nuclear plants.
- Significant investments in offshore windfarms, hydrogen, and other renewable initiatives underway with EU RRP support; continuation of these efforts recommended.
IMF Staff Concluding Statement, December 21, 2022.