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Belgium: Concluding Statement of the 2015 Article IV Mission
December 15, 2014
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
The new government’s economic program includes many welcome measures to address the critical macroeconomic challenges facing the Belgian economy. These challenges come from two related structural imbalances which undermine growth prospects and create significant macroeconomic risks over the medium term. One is a stubbornly low employment rate—only two thirds of the working age population holds a job. The second one is the fiscal imbalance created by rigidities in public spending. The two imbalances reinforce each other. Generous access to social transfers contributes to low employment levels notably by facilitating early exit from the labor force. And the low and shrinking level of private employment, in turn, makes it difficult to pay for the extensive social transfers and government services—roughly only one in four persons in Belgium (all ages included) has a job in the private sector.
The cost of population ageing—which will rise much faster than in most countries in Europe—puts the two imbalances (employment and fiscal) on an unsustainable course in the absence of strong corrective actions. The added annual fiscal costs due to ageing (mostly pensions and medical coverage) are put at nearly 6 percent of GDP by 2040. A shift in the dependency ratio will make it difficult to pay for such costs without increasing employment rates. Whereas there are 3.2 people of working age for every person 65 and over today, that ratio will fall to 2.2 by 2060. The government will not be able to absorb any of these additional costs if it cannot bring down its debt (105 percent of GPD today) well before then. Against this challenging arithmetic, deep changes are needed in behavior and in the capacity of the economy to create jobs. The previous government began the process of reform. But the effort needs to be reinforced with a view to strengthening the position of Belgium as a dynamic economy.
The government program includes measures in the following three areas:
There are different views on how to distribute the burden of adjustment within and across generations. The planned reforms of social security and budgetary measures are a step in the right direction. They reinforce each other and should help preserve the financial integrity of the Belgian social security system so that it can continue to cover social and economic risks for future generations.
We have the following specific remarks on the policy objectives of the different governments:
The programs of the different governments need to include reforms on a broader scale in order to increase the chances of success. Weak growth prospects in Europe will slow down the pace at which the benefits of labor cost reductions and enhanced incentives to work are realized—we have marked down our growth projection for Belgium for 2015 to 1 percent. Much of the policy responsibility for addressing the generalized weakness in aggregate demand lies at the euro area level. But there is also scope to broaden the reform effort in ways that would enhance productivity, potential growth, and incentives to invest and create jobs.
In our view, existing programs should therefore be complemented by coordinated actions in the following areas.
We believe that the banking sector is well placed to expand credit in response to a recovery of investment demand as reforms take hold. The findings of the ECB’s comprehensive assessment confirm that bank balance sheets are more resilient and that systemic risks in the Belgian banking sector have abated considerably. The main challenge for banks remains to maintain adequate profitability in a mature, low interest and low growth environment, while adapting to the evolving regulatory framework. At the same time, Belgian banks are among the most structurally liquid in Europe reflecting to a large extent the tax advantages given to bank deposits. In an increasingly integrated European banking market, part of the tax benefits will leak out of national borders in the form of lower financing costs for foreign banks that tap Belgian savings. We recommend that the tax exemption be revisited in the context of a broader reform of taxation. The low interest rate environment is also putting pressure on life insurance companies, which in addition face a decline in demand for their products owing to recent changes in taxation. This calls for continued close monitoring of their financial situation.
The IMF mission team wishes to thank the authorities for the generous hospitality shown to us and for the open and constructive discussions.
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