Belgium: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, February 5, 2025
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- Published: February 5, 2025
Mission scope and context
- An IMF team led by Jean-François Dauphin visited Brussels to conduct the 2025 Article IV consultation with Belgium. The mission’s discussions took place January 22-February 3 and occurred before the formation of the new government.
- The statement summarizes the mission’s findings and recommendations and does not reflect the new government’s policy intentions.
- The IMF team thanks Belgian authorities and counterparts for constructive dialogue, congratulates the new government on its nomination, and looks forward to future engagement.
Key takeaways on economic performance
- The Belgian economy has been resilient to a series of shocks, but growth has slowed, and disinflation has faced headwinds.
- Labor market has been strong but shows signs of cooling.
- Labor-cost competitiveness has declined with wage growth outpacing sluggish productivity growth.
- Absent policy change, pressures from an aging population will weigh on Belgium’s social model and further increase the fiscal deficit and public debt, heightening vulnerability to changes in market sentiment.
Economic outlook and risks
- Growth and inflation projections:
- Output is expected to grow by 1.1 percent in 2025 and slightly increase by 2027 supported by monetary policy easing and a higher contribution from net exports.
- Inflation is projected to gradually decline as wage growth moderates and the projected drop in international energy prices passes through to retail prices.
- External and fiscal medium-term outlook:
- The external current account is expected to return to small surpluses over the medium term as energy prices ease and external demand increases.
- Under unchanged policies, pressures from the aging population would further increase the fiscal deficit to about 7 percent and public debt about 125 percent of GDP in 2030.
- Risk assessment:
- The baseline outlook is subject to sizeable risks, tilted down for growth and up for inflation.
- Downside growth risks include faltering recovery in external demand amid escalating geoeconomic tensions and trade fragmentation.
- Upside inflation risks include adverse energy price developments or persistently-high core inflation affecting expectations.
- Fiscal sustainability concerns could trigger a sharp increase in borrowing costs—especially if global risk aversion increases—necessitating abrupt fiscal consolidation with negative consequences for growth and potentially financial stability.
Rebuilding fiscal buffers — findings and recommendations
- Rationale:
- Significant fiscal consolidation is needed to address large structural deficits and rising public debt exacerbated by the pandemic and energy crisis.
- Short-term consolidation will help further reduce inflation despite still-high wage growth and looser monetary policy.
- Sustained reduction in fiscal deficits is needed to reduce vulnerability to changes in market sentiment, rebuild space for future shocks, address long-term spending pressures, and preserve Belgium’s social model.
- European governance framework:
- Consolidation under the new EU economic governance framework (EGF) would significantly improve fiscal sustainability.
- The medium-term fiscal structural plan (MTFSP) under the EGF would benefit from a seven-year rather than a four-year adjustment path, accompanied by credible and front-loaded growth-enhancing reforms.
- Under such an adjustment, an annual reduction in the structural primary balance of about 0.5 percentage points of GDP until 2031 will be necessary to reach an overall deficit below 3 percent of GDP by 2031 and maintain it until 2041, per the EGF.
- Fiscal policy priorities:
- Center consolidation on rationalizing current spending while preserving (or ideally increasing) public investment.
- Rationalize social benefits and the public wage bill to achieve budgetary savings.
- Preserve or increase public investment to mitigate growth impacts of consolidation, support the green transition, and bolster productive capacity.
- Public investment efficiency:
- Improve infrastructure investment strategies, strengthen project appraisal, selection, and governance, and improve coordination within and among federal and federated entities.
- In healthcare: increase focus on preventive care and reform hospital organization and roles to absorb spending increases from aging.
- In education: pursue reforms to achieve the same outcomes at lower costs or improve outcomes without increasing spending.
- Pension reforms:
- Raise the effective retirement age in line with healthy-life expectancy and facilitate longer employment through life-long learning and upskilling.
- Review eligibility criteria for specific pension regimes (e.g., disability pensions) and limit increases in pension benefits by reviewing automatic indexation.
- Review special provisions (e.g., arduous jobs) to balance fairness and costs.
- Tax reforms:
- Shift part of the tax burden from labor to capital, without revenue loss, and reduce tax exemptions.
- Belgium has the highest labor-tax wedge in the OECD.
- Reduce labor taxation to help increase the employment rate.
- Tax all capital income (e.g., interests, dividends, and capital gains) in the same way, ideally by incorporating these revenues into overall taxable income subject to personal income tax.
- Reduce preferential regimes and treatments that cause foregone revenue.
- Coordinate tax reforms among federal and federated entities for revenue and distributional impacts.
- Fiscal framework and accountability:
- The new EGF provides an opportunity to strengthen Belgium’s fiscal framework through a revitalized fiscal council and greater accountability among federated entities.
- Implementation of the 2013 federal-regional coordination agreement has proved challenging; the EGF offers a renewed opportunity to introduce binding rules for burden sharing the fiscal adjustment, with clear accountability for the federal and all federated entities.
- Strengthen the fiscal council (e.g., enhanced staffing and direct reporting to parliaments) to ensure compliance with European commitments.
Preserving macrofinancial stability
- Systemic risk assessment:
- Overall systemic risks in the financial sector remain moderate but are evolving due to changing macroeconomic and market conditions.
- The economy is slowing and real estate markets are cooling, while interest rates are now decreasing.
- Household indebtedness has stabilized; corporate indebtedness has declined as substantial investments were largely cash financed.
- Corporate bankruptcies have been increasing but remain aligned with pre-pandemic trends.
- Residential real estate risks have moderated; commercial real estate market activity has dropped sharply and vacancies have risen, reflecting low demand for office space.
- Overall, exposures to real estate remain broadly stable.
- Policy recommendations:
- Maintain current capital buffer requirements and prudential limits on residential mortgages.
- Continue macroprudential measures: capital buffers have been significantly raised since last year.
- NBB’s encouragement to lengthen new mortgage maturities to ease household debt servicing was appropriate.
- Accelerate progress in implementing the 2023 Financial Stability Assessment Program (FSAP) recommendations now that a new government is in place and required legislative changes can be advanced.
Strengthening labor markets
- Key constraints:
- Labor market fragmentation and rigidity impede growth potential.
- Coexistence of local/sectoral pockets of high vacancies and pockets of high unemployment indicates inefficiencies in labor allocation.
- Employment gaps remain high for low-skilled workers, older workers, women, and individuals with an immigration background or disabilities.
- Policy priorities:
- Increase income gap between work and nonwork through tax, social benefit, and labor market reforms.
- Reduce the cost of hiring and dismissal.
- Reduce the duration of unemployment benefits and link social benefits to income levels to incentivize labor force re-entry.
- Focus on facilitating re-integration of workers from long-term sick leave.
- Wage-setting reforms:
- Consider abolishing automatic indexation and the 1996 wage law that define a floor and ceiling for wage growth, which do not allow optimal labor allocation and increased employment.
- At a minimum, consider reforms including:
- Adjusting the basis for indexation to exclude volatile prices.
- Broadening the group of comparator countries in the wage law.
- Using productivity-adjusted wage growth as the basis for comparison.
- Allowing firms to partially index wages considering specific local and sectoral labor market conditions.
- Education and life-long training:
- Reforms are necessary to upskill the labor force, enhance employment rates, and promote growth.
- Educational outcomes in Belgium are comparable to peers but achieved at a higher cost.
- Address teacher shortages, reduce grade repetition rates, and achieve greater equality of educational outcomes irrespective of backgrounds.
- Align education with company needs, better leverage teachers’ time, and strengthen support for students facing difficulties.
Boosting productivity and firm dynamics
- Diagnosis:
- Belgium’s long-term productivity slowdown is worse than peers despite significant investment in innovation.
- Lagging productivity is linked to insufficient firm dynamics—low entry, growth, and exit rates; Belgium experiences some of the lowest firm entry and exit rates in the EU.
- Policy recommendations:
- Implement product market reforms to reduce regulatory and administrative barriers and improve the insolvency regime.
- Deepen the European single market and advance the capital market union to improve access to larger markets, enhance competition and firm dynamics, and provide buffers against geo-fragmentation risks.
- Develop venture capital within an EU-wide push toward capital market union to widen firms’ financing options.
Sustaining the green transition
- Challenges and priorities:
- Much effort remains needed to achieve climate objectives.
- The expansion of the EU emissions trading system should be complemented by timely implementation of carbon taxation and phasing out fossil fuel subsidies, while ensuring support for vulnerable populations.
- Consolidate federal and regional climate efforts into a coherent national strategy with improved coordination and accountability among federal and regional governments.
- Ensure adequate investments in the green transition to meet climate goals and contribute to the European Green Deal.
International Monetary Fund — Staff Concluding Statement of the 2025 Article IV Mission for Belgium
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