Front Matter Page

© 2007 International Monetary Fund

March 2007

IMF Country Report No. 07/88

Belgium: Selected Issues

This Selected Issues paper for Belgium was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on January 12, 2007. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Belgium or the Executive Board of the IMF.

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Front Matter Page

INTERNATIONAL MONETARY FUND

BELGIUM

Selected Issues

Prepared by Rodolfo Luzio and Jianping Zhou (EUR)

Approved by the European Department

January 12, 2007

Contents

• Executive Summary

• I. Fiscal Sustainability and Coordination in a Federal State

  • A. Introduction

  • B. Challenge of Population Aging

  • C. Policy Strategy to Achieve Sustainability

  • D. Challenges to the Current Fiscal Framework

  • E. Concluding Remarks

  • References

• Tables

• I.1. Projections of the Fiscal Costs of Aging, 2005–50

• I.2. Macroeconomic Assumptions, 2005–50

• I.3. Long-Term Fiscal Scenarios, 2005–50

• I.4. Budgetary Targets Across Levels of Government, 2005–09

• Figures

• I.1. Demographic Changes Among EU Countries

• I.2. Macroeconomic Assumptions for Scenarios, 2005–45

• I.3. Public Debt Scenarios, 2005–45

• I.4. Primary Balance Scenarios, 2005–45

• I.5. Budgetary Performance of Regions and Communities, 1995–2003

Executive Summary

As emphasized in the staff report for the 2006 Article IV consultation with Belgium, fiscal consolidation and an increase in the flexibility of labor markets are key economic policy priorities. Together, they should make headway in addressing the long-term challenge of population aging, while reform in the labor market would also address concerns about external competitiveness going forward and improve the economy’s ability to take advantage of global dynamics. These issues are documented in the following two chapters of this selected issues paper.

The first chapter focuses on the fiscal challenge in coping with population aging, including the sustainability of prevailing fiscal federalism arrangements across levels of governments. The analysis demonstrates that the current strategy of upfront consolidation is likely to fall short of achieving sustainability. Further reductions in aging-related spending and growth-and productivity-enhancing reforms beyond those assumed under the authorities’ strategy appear to be necessary. In addition, the parameters of the current arrangements of revenue sharing and allocation of expenditure responsibilities across levels of government are forcing an unworkable degree of fiscal adjustment onto the federal government. A modification of the arrangements has become essential, but the substance of the changes are a political issue. It will be important that any further devolution of spending be accompanied by heightened accountability and improved coordination of fiscal and other economic policies across levels of government.

The second chapter assesses whether the wage bargaining framework, a key labor market institution, is conducive to preserving external competitiveness and raising employment rates. It finds that during 1996–2006, the increase in labor costs in Belgium was largely in line with the average of three neighboring countries, but that Belgium’s competitive edge has eroded, especially in its manufacturing sector. This is mainly because the framework does not take into account differential productivity growth in setting the margin for wage increases and the practice of indexation places a floor under domestic wage increases. While full decentralization of wage bargaining may not be feasible in the short term, some changes to the framework are necessary to prevent further losses in competitiveness. “All-in” agreements should be encouraged to minimize high wage increases due to inflation surprises, and any tax cuts should be used solely to reduce labor costs. The law that past overruns of the wage norm should be corrected in subsequent wage agreements needs to be enforced. In the longer run, the framework needs to be changed to take into account developments in productivity and allow more wage dispersion at the sectoral and enterprise levels.

Contents

• II. Wage Formation and Competitiveness in Belgium

  • A. Introduction

  • B. Wage Formation in Belgium

  • C. Has the Wage Norm Been Effective in Preserving Competitiveness?

  • D. Is the Wage Formation Framework Conducive to Employment Growth?

  • E. Concluding Remarks

  • References

• Tables

• II.1. Unit Labor Costs in the Private Sector, 1997–2006

• Figures

• II.1 Hourly Labor Costs, 1995–2007

• II.2. Labor Utilization, 1996–2005

• II.3. Unit Labor Costs, 1995–2005

• II.4. Wages and Productivity, 1991–2005

• II.5. Unit Labor Costs in the Manufacturing Sector, 1995–2005

• II.6. Employment Rates, 1991–2005

• II.7. Capital Intensity, 1991–2005

• II.8. National and Regional Employment Rates, 2Q:2006