On March 2, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Belgium.
The recovery is expected to continue at a modest pace in the near term, driven primarily by private consumption, supported by continued low energy prices. However, downside risks loom large, including from the slowdown in emerging markets, financial volatility, and geopolitical stress.
In its first year in office, the new government has taken important steps to promote competitiveness, job creation, and fiscal sustainability. Key reforms enacted include pension reforms, a suspension of wage indexation (“saut d’index”), and a “tax shift” reducing the labor tax wedge. The sixth reform of the state has brought a further devolution of responsibilities, greater tax autonomy for the regions, and a gradual rollout of a revised funding and transfer system.
Notwithstanding recent reform 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 reversed since 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. With the deficit hovering around three percent of GDP, fiscal sustainability is tenuous and sensitive to potential macroeconomic shocks. And while private employment is beginning to recover, 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 Assessment2
Executive Directors commended the authorities for the recent reforms, including wage moderation, the tax shift away from labor, and the recent pension reform, which should support job creation and significantly reduce the projected increase in the economic cost of aging. Looking ahead, Directors considered that high public debt and structural rigidities pose challenges to the outlook and that risks are tilted to the downside. They noted that in order to build buffers against future shocks, the focus should be to bring down public debt while nurturing the recovery and social cohesion. On the structural side, efforts are needed to address labor market fragmentation and further strengthen the financial sector.
Directors concurred that the government’s ambitious goal of reaching structural fiscal balance by 2018 would require substantial additional measures. To minimize the drag on growth, fiscal consolidation should be primarily expenditure-based and underpinned by high quality structural measures. In particular, Directors saw scope for making public spending more efficient, including through well-targeted reductions in public employment, enhanced means-testing in social spending to better protect the most vulnerable, and improved budgetary control across all levels of government. On the revenue side, Directors recommended more efficient taxation of wealth and real estate and phasing out of generous tax exemptions.
Directors agreed that addressing the severe labor market fragmentation through a comprehensive and inclusive jobs strategy is essential to boosting growth prospects. They encouraged further efforts to reduce the labor tax wedge for the low-skilled, improve education and training, and strengthen incentives toward active labor market participation. These employment policies should be complemented by steps to remove barriers to geographic mobility, promote competition, and reduce the administrative burden on companies.
Directors shared the view that Belgium’s financial sector is generally healthy, and maintaining its soundness will be important to ensure resilience against shocks. Banks’ business models should continue to adapt in the context of a protracted low-interest environment. Given the strong growth in mortgage lending, Directors recommended vigilance and proactive supervision, including consideration of targeted prudential measures to limit overexposures of vulnerable borrowers.
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