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Belgium and the IMF
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The IMF Executive Board on February 23, 1998 concluded the 1997 Article IV consultation1 with Belgium.
Growth in 1997 was more rapid than anticipated, as strong external demand was complemented by an acceleration of domestic spending. Private consumption picked up pace, while corporate investment continued to expand. The recovery of household and business confidence has owed much to firm macroeconomic policies, particularly the decisive reduction of the fiscal deficit. Employment growth, however, remains weak. Recent economic performance thus reflects success in reducing macroeconomic imbalances, but also persisting structural problems.
Economic activity accelerated markedly in 1997, with GDP rising by 2.7 percent. While the recovery was export-led, domestic demand growth was stronger than projected. Corporate investment continued to expand, reflecting capacity pressures, lower interest rates, higher profits and strong foreign demand. Private consumption proved more robust than projected earlier, growing by 2.1 percent: its acceleration over the past four years, despite little growth in real disposable income, reflects a decline in precautionary saving as household confidence has recovered. Wages are tracking below the norm for 1997-98 (a ceiling of some 3 percent at an annual rate), and inflation has been well below 2 percent. The unemployment rate edged down slightly to some 12½ percent (9½ percent on an OECD standardized basis), with some three-quarters of the total estimated to be structural—concentrated among youths and the long-term jobless, and with striking local variations in unemployment. Some shortages of high-skill labor are reported; but job creation remains weak, and mobility low. The current account surplus rose to some 5 percent of GDP over the past decade, with gains in the terms of trade and in investment income. The direct investment account, meanwhile, was in surplus, partly as a result of inflows for fiscally-privileged corporate headquarter activities, and foreign participations in the service sector; offsetting movements included outward portfolio investment and public debt repayment.
Monetary policy has continued to be firmly geared to the deutsche mark link. Long-term interest rates are now essentially at par with rates in Germany, and the short-term differential is small. With a real effective exchange rate depreciation of some 7 percent over the past two years, and a decline in interest rates, monetary conditions have eased notably. Market interest rates rose in October (when official rates mirrored developments in Germany), but have recently eased again.
Since 1992, fiscal policy has been directed firmly to deficit reduction, despite an adverse cyclical setting, and the structural deficit has been cut by over 6 points of GDP. The debt ratio has fallen by 13 points from a 1993 peak. However, this reflected mainly lower interest costs and, until recently, higher taxes. The 1997 deficit goal was 2.9 percent of GDP. Modest spending cuts were largely durable, but little decline in the primary spending ratio was targeted; and civil service pension reform powers expired unused. Implementation was tight; and with strong revenues and lower-than-projected interest rates, it proved possible to cut the deficit to 2.1 percent of GDP— well below target. The 1998 budget aimed for an overall deficit of 2.3 percent of GDP, but this was recently cut to 1.8 percent of GDP. Revenue measures include an easing of social contrib-utions, with minor tax offsets. Primary spending is to rise by close to 2 percent in real terms.
Labor market policies have tended to focus on the demand side, with pay norms in force for much of the past 15 years, and targeted cuts in social contributions—although the tax burden on labor income remains heavy. On the supply side, problems remain: unemployment benefits taper down over time, but without a final cut-off, and are not subject to strong job-search/training tests. Effective marginal tax rates on households are very high in some cases when the unemployed find work. Restraints remain on agency hiring and fixed-term work. Wage norms have safe-guarded competitiveness but compressed differentials. Labor contracts are legally binding on all firms in a sector; and public support for early retirement has in the past been widespread. In the product markets, with EU policies, change is underway; but reforms have yet to reach full fruition; slow job creation reflects in part remaining restrictions in services such as distribution.
The short-term outlook is for growth to continue at above potential, but with some slowing as a result of weaker expansion in foreign markets. Although exports to Asia are very modest, the main risk to the outlook lies in the impact of developments there on the global environment, including Belgium’s competitiveness in third markets. On the positive side, market interest rates have declined in recent months. GDP is projected by the staff to grow by 2.6 percent in 1998. Although skill shortages may widen in the labor market, little pressure on prices is expected.
Executive Board Assessment
Executive Directors commended the strong macroeconomic and—especially—fiscal policies pursued by the authorities in recent years, which had yielded a number of impressive achievements and brought Belgium to the threshold of EMU. These policies had helped to lower risk premiums, trigger a recovery of investment, and strengthen household confidence. As a result, growth was becoming more balanced, with strong export growth complemented by rising domestic demand. At the same time, however, Directors remained concerned about the continuing serious structural problems in the economy, in particular the high level of unemployment and the high, albeit declining, ratio of public debt to GDP. Directors therefore urged the authorities to take advantage of the current economic recovery to address decisively underlying structural issues, in particular those relating to the functioning of the labor and product markets, and the outlook for the public finances—including the heavy tax burden on labor income. In this regard, Directors underlined the crucial interlinkages recognized by the authorities, between labor market reforms and fiscal adjustment, and noted therefore that the medium-term sustainability of the fiscal position would be much improved by such reforms.
Directors noted that monetary policy, based on the deutsche mark link, had achieved high credibility. This had contributed to the decline in inflation and interest rates in recent years, and had helped to lay the basis for the present economic recovery. Directors saw the prospective monetary union as offering opportunities to strengthen economic performance. However, they stressed that this would depend on action to improve the flexibility of the economy, by creating sufficient room for fiscal stabilizers to operate, and by imparting greater responsiveness to labor and product markets.
Directors praised the firm implementation of fiscal policy in 1997, which had cut the deficit to a level well below target, against the background of favorable economic trends. They noted, however, that this performance reflected mainly interest rate reductions and revenue increases rather than reductions in primary spending. For 1998, Directors welcomed the announcement that the deficit objective had been revised from 2.3 percent of GDP to 1.8 percent of GDP.
Directors considered that fiscal consolidation remained a very high priority for 1998 and beyond, and should be designed to ensure a convincing safety margin under the Stability and Growth Pact, as well as a decisive cut in the debt burden before the emergence of demographic pressures. Directors considered that, over the medium term, fiscal policy should also aim to secure a durable cut in the tax burden. To achieve these twin goals, it would be crucial to secure a slowdown in primary spending to well below the trend growth of GDP. This would require further structural reforms in health care and pensions, as well as greater prioritization of spending; moreover, several Directors stressed that it wasparticularly important for the regions and communities to restrain spending firmly. For 1999, Directors called for a strong fiscal effort, with a view to achieving structural balance over the medium term. In addition, there was need to reach agreement on medium-term spending ceilings for each level of government, to create scope for a significant cut in the tax burden on labor income, which should reduce total labor costs. In this regard, Directors supported the authorities’ intention to reduce social security contributions by employers, in a fiscally neutral manner, and urged that this be achieved as far as possible by offsetting expenditure cuts.
There was a clear consensus that improving the prospects for employment creation was a crucial priority for the period ahead, and one which could make a major long-run contribution to strengthening economic performance and the sustainability of the public finances. Directors noted that the unemployment problem was a complex issue, displaying large disparities among regions and skill levels and reflecting a number of difficult problems in the labor market related in particular to the benefit and tax structure, and limited wage differentiation among sectors and firms. They therefore called for measures to liberalize labor market conditions. A key priority in this regard was to improve the opportunities and incentives for the young to enter employment and training. To that end, unemployment benefits should be made more dependent on genuine efforts to seek work or training, which would require better coordination among the welfare, employment, and training services. Recent steps to address tax traps and pare back early retirement were welcomed, but further progress in these directions was viewed as crucial. Several Directors expressed their doubts regarding suggestions to shorten working hours, and stated in particular that, in any event, any such reduction should not result in an increase in labor costs.
Directors noted that the performance of the economy, including in job creation, would also benefit from a strengthening of competition in product markets. European Union policies and market pressures would be major forces for change, leading to further rationalization in such sectors as telecommunications, power, transport, and banking. In this connection, Directors stressed the need to deregulate market services, such as distribution, so that efficiency gains in mature industries were coupled with vigorous job creation elsewhere.
With a strengthening of structural policies, Directors considered that the Belgian economy stood to gain strongly from wider economic integration in Europe, including an enlargement of the European Union—objectives supported by the authorities.
With regard to development assistance, Directors expressed concern about the recent impact of budgetary restraint, while hoping that greater selectivity might mitigate the economic impact of this; they encouraged the authorities to accord higher priority to protecting aid flows, with a view to reversing the downward trend.
|Belgium: Selected Economic Indicators|
|Real economy (change in percent)|
|CPI (year average)||2.4||1.5||2.1||1.6||1.5|
|Unemployment rate (in percent)||12.9||12.9||12.7||12.5||12.3|
|Gross national saving (percent of GDP)||21.9||22.8||22.5||23.0||23.2|
|Gross national investment (percent of GDP)||17.6||17.9||17.5||17.7||17.8|
|Public finance (percent of GDP)|
|Federal government balance (deficit -)||-4.8||-4.0||-3.0||-2.3||-1.9|
|General government balance (deficit -)||-4.9||-3.9||-3.2||-2.1||-1.8|
|Money and interest rates|
|M2 (end of year, percent change)2||2.8||4.9||6.4||3.6||...|
|Money market rate (in percent)||5.7||4.8||3.2||3.5||...|
|Government bond yield (in percent)||7.8||7.5||6.5||5.8||...|
|Balance of payments of BLEU (in percent of GDP)|
|Trade balance (percent of GDP)||2.9||3.5||3.2||3.4||3.8|
|Current account (percent of GDP)||5.4||5.3||5.2||5.6||6.0|
|Official reserves (US$ billion)3||13.9||16.2||17.0||16.2||...|
|Exchange rate regime||Member of ERM
BF 37.47 per US$1
|Present rate (February 23, 1998)|
|Nominal effective exchange rate (1990 =100)||105.1||109.3||107||102.7||...|
|Real effective exchange rate (1990 = 100)||105.6||110.7||108||103.5||...|
Sources: Data provided by the authorities; and IMF staff
2For 1997, August.
3Excluding gold; for 1997, December.
1Under 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. At the conclusion of the discussion,
the Managing Director, as Chairman of the Board, summarizes the views of directors, and this
summary is transmitted to the country's authorities. In this PIN, the main features of the Board's
discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT