This 2002 Article IV Consultation highlights that Belgium’s real GDP growth fell sharply in 2001 to 0.8 percent and remained weak in 2002 at an estimated 0.7 percent. The fundamental factor behind these developments was the slowdown in the economies of Belgium’s trading partners, especially Germany. Thus, Belgium’s export market growth fell from a robust 12.1 percent in 2000 to only 0.6 percent in 2001; in 2002, export markets shrank an estimated 1 percent. In 2002, employment began to decline and unemployment began to rise.

Abstract

This 2002 Article IV Consultation highlights that Belgium’s real GDP growth fell sharply in 2001 to 0.8 percent and remained weak in 2002 at an estimated 0.7 percent. The fundamental factor behind these developments was the slowdown in the economies of Belgium’s trading partners, especially Germany. Thus, Belgium’s export market growth fell from a robust 12.1 percent in 2000 to only 0.6 percent in 2001; in 2002, export markets shrank an estimated 1 percent. In 2002, employment began to decline and unemployment began to rise.

On February 21, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belgium.1

Background

Real GDP growth fell sharply in 2001 to 0.8 percent and remained weak in 2002 at an estimated 0.7 percent. The fundamental factor behind these developments was the slowdown in the economies of Belgium’s trading partners, especially Germany. Thus, Belgium’s export market growth fell from a robust 12.1 percent in 2000 to only 0.6 percent in 2001; in 2002 export markets shrank an estimated 1 percent. This substantial externa! shock rippled through the domestic economy as the Belgian stock market fell in tandem with those elsewhere, household consumption was very sluggish, and business investment fell steeply. In 2002, employment began to decline and unemployment to rise, although the response of the labor market to the economic slowdown has been muted, reflecting substantial labor hoarding.

Inflation has eased, in part due to slow growth. Headline inflation fell more in Belgium than in the euro area in 2002, reflecting temporary factors: Flanders and Brussels eliminated the radio-television tax, electricity prices fell as part of market liberalization, and the introduction of the physical euro appeared to have a smaller one-time price effect in Belgium than elsewhere. Wage growth appears now to have been broadly in line with that in Belgium’s three main trading partners (Germany, the Netherlands, and France), according to revised data released late last year. A two-year indicative wage-growth norm of 5.4 percent for 2003-04 was agreed early this year. This figure is at the mid-point of the range viewed by the Central Economic Council as consistent with preserving international cost competitiveness.

The staff projects real GDP growth of 1.2 percent in 2003, with a gradual pickup in activity through the year. However, at this point there are no concrete indicators of recovery and some downside risks, notably the uncertain economic environment and the persistent weakness of the German economy.

In the face of the slowdown, the authorities have limited the deterioration in the fiscal balance to ensure there is no deficit, which might undermine confidence. Budget balance appears likely for 2002. One consequence of this policy has been a rise in the cyclically adjusted balance by about 0.8 percent of GDP in both 2001 and 2002. That is, the automatic stabilizers have to a large extent been offset, although the aggregate demand effect has been mitigated by the small Belgian fiscal multiplier. For 2003, the budget targets balance again. This may prove difficult to achieve in the absence of further measures, in part because the budget assumed real GDP growth of 2.1 percent, which was then consensus but now looks optimistic. If the staff projection is realized, balance would imply a significant structural tightening.

Further labor-market reform was implemented in 2002. To reduce labor costs and raise take-home pay, social security taxes were cut again and an earned income tax credit was introduced. Various measures were put in place to draw older people into the workforce, including cuts in social security taxes for firms hiring older workers, and a requirement that those between 50 and 58 who become unemployed register and seek work in return for unemployment benefits. Still, the Belgian labor market remains far from the objectives set out in Lisbon.

Executive Board Assessment

Directors commended the authorities on the considerable fiscal consolidation of the past decade. They also welcomed the decline in the debt-to-GDP ratio during this period, especially given that this was achieved within the context of a major effort towards fiscal devolution. In this connection, Directors considered that Belgium’s experience is a good example of how fiscal decentralization can go hand in hand with fiscal consolidation, and could offer lessons for other countries. However, notwithstanding these achievements, Directors underscored that further progress in fiscal consolidation and in reducing Belgium’s still-high debt burden would be needed, especially to contain spending, in order to create budgetary room for tax cuts, and to meet the costs of population aging. They also emphasized the importance of pressing forward with structural measures to reform the social security system and to improve labor market performance and, thus, to strengthen underlying medium-term growth prospects.

Directors observed that the Belgian economy had been sluggish through 2002 and into 2003, with persistent weakness in both export markets and domestic demand. They anticipated a gradual recovery in the course of the year, as supportive monetary conditions and a satisfactory level of external competitiveness should allow Belgium to benefit from the expected recovery in worldwide activity. At the same time, Directors also noted that there were significant downside risks to the short-term outlook, associated notably with current international tensions.

Most Directors stressed that, in spite of these uncertain conditions, fiscal policy should continue to adhere to the budget balance target, and referred in this regard to the still high public debt, the challenges presented by the aging population, and the continuing need to ensure fiscal credibility. They considered that past consolidation efforts had helped to establish confidence, as evidenced by the virtuous circle of lower debt, lower interest rates, and lower spending. Some other Directors, however, felt that the fiscal stabilizers should be allowed to operate around the authorities target of budget balance for 2003. They argued that, given persistent economic weakness, the emergence of a small cyclical deficit would be acceptable in the present circumstances.

Looking forward, Directors noted that fiscal adjustment would be well served, and credibility bolstered, by a firm commitment by the authorities to a medium-term fiscal framework, including spending ceilings, consistent with fiscal consolidation and tax reduction objectives. Directors welcomed the authorities’ intention to gradually build up a significant surplus position and to implement further tax cuts. They emphasized that these objectives would be attainable only if government spending were strictly controlled, and therefore urged the authorities to reduce primary spending growth to rates well below those seen in recent years. Such control would require close scrutiny of all spending programs, at all levels of government. Directors viewed narrowing the scope of the very large social benefit system as a promising avenue in this regard. They also welcomed plans to reduce the civil service during the anticipated wave of retirements in the coming decade.

For the long term, Directors agreed that population aging posed a serious risk to fiscal sustainability, unless appropriate policy measures were taken. They considered a substantial long-term fiscal surplus position to be a prudent response, as this would rapidly cut the national debt and thereby free resources to pay for aging-related rises in pension and health-care spending. Such a policy would reduce the risk that tax increases would be required to cover these costs. At the same time, several Directors felt that further reforms of the pension system should also receive consideration, while acknowledging that past measures had already substantially reduced the generosity of the system, and welcoming the introduction of a “second pillar” scheme.

Directors called for intensified efforts to raise employment rates, especially among older people. They viewed this as key to increasing medium-term growth prospects and reducing social spending. Directors welcomed measures already taken to strengthen incentives to work, notably tax cuts for low-income earners and measures to reduce access to early retirement programs. They recommended that the best course would be to sharpen work incentives by narrowing the extensive social safety net and, in the case of older workers, by ensuring that the various public and privately-negotiated pre-retirement schemes be as neutral as possible with respect to the choice of retirement age. Directors also noted the sharp geographical disparities in labor-market performance. In this regard, they felt that generalized labor-market reforms would help disadvantaged areas, but also welcomed the increased emphasis on regional development policies that favored growth and innovation. Directors also attached importance to reforming the centralized wage bargaining process, with a view to increasing wage flexibility, which, in turn, would help promote a better allocation of resources and narrow regional disparities. More attention could also be paid to training in order to reduce unemployment resulting from poor job matching.

Directors urged the authorities to increase the pace of product market reform. They argued that more rapid liberalization of network industries would benefit the Belgian economy. Directors welcomed the decision by Flanders to advance the schedule for the liberalization of gas and electricity markets, and encouraged other jurisdictions to do likewise. Directors also stressed the importance of competitive entry into the newly liberalized markets, and the corresponding need to ensure that appropriate regulation is in place. They welcomed initiatives to computerize the links between firms and government, which should reduce costs for both.

Directors welcomed the implementation of reforms in the area of financial market supervision. They considered that the new management structure of the banking supervisor, closer links between the financial supervisors and the central bank, and the central bank’s role in macro prudential supervision would all strengthen Belgian markets. They encouraged the authorities to complete the planned merger of the banking and insurance supervisors and to ensure that sufficient resources are made available to take full advantage of the new structure.

Directors praised the authorities for putting in place modern legislation to prevent money laundering and the financing of terrorism, which conforms to EU directives and the Financial Action Task Force recommendations.

Directors commended the authorities’ support for further multilateral trade liberalization. While welcoming their emphasis on improving market access to the poorest countries, Directors encouraged Belgium to extend such access to all developing countries. Directors praised the authorities’ commitment to raise Belgium’s official development assistance to the UN target of 0.7 percent of GNP by 2010.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2002 Article IV Consultation with Belgium is also available.

Belgium: Selected Economic Indicators

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Sources: Data provided by the Belgian authorities, and IMF staff projections.

Excluding gold; Eurosystem’s definition, for 2002, November.

For 2002, average through end-November.

Based on relative normalized unit labor costs in manufacturing.

1

Under 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 Executive Directors, and this summary is transmitted to the country’s authorities.

Belgium: Staff Report for the 2002 Article IV Consultation
Author: International Monetary Fund