IMF Executive Board Concludes 2015 Article IV Consultation with Belgium

This 2015 Article IV Consultation highlights that Belgian economy has shown considerable resilience but the outlook is weighed down by weak demand in Europe. Healthy private balance sheets, integration with Germany, and employment support schemes have helped sustain employment and economic activity. However, output is still well below potential and with, subdued growth prospects, job creation remains insufficient. Fiscal adjustment is expected to resume after a pause in 2014. The pace of adjustment targeted by the authorities for 2015–16 is appropriate given the level of debt and related risks.

Abstract

This 2015 Article IV Consultation highlights that Belgian economy has shown considerable resilience but the outlook is weighed down by weak demand in Europe. Healthy private balance sheets, integration with Germany, and employment support schemes have helped sustain employment and economic activity. However, output is still well below potential and with, subdued growth prospects, job creation remains insufficient. Fiscal adjustment is expected to resume after a pause in 2014. The pace of adjustment targeted by the authorities for 2015–16 is appropriate given the level of debt and related risks.

On March, 2, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Belgium.

The economy has shown considerable resilience but the outlook is weighed down by weak demand in Europe. Healthy private balance sheets, integration with Germany, and employment support schemes have helped sustain employment and economic activity. However, output is still well below potential and with, subdued growth prospects, job creation remains insufficient.

The critical domestic policy challenges are preserving competitiveness and addressing the looming fiscal cost of ageing. The wage policies of the previous government reversed in part a loss in cost competitiveness relative to main trading partners, but the economy has also been losing ground in terms of innovation and productivity growth. Age-related government spending is projected to increase sizably by 2040 (an added annual cost of 6 percent of GDP). This reflects the combination of demographics and a low effective age of retirement.

The new federal government has announced ambitious reforms to address these challenges. Its focus is on improving competitiveness through temporary de-indexation of wages and a modest shift of taxation away from labor, and activating working age population by tightening eligibility to pension, pre-pension and unemployment benefits. The program should be complemented by reforms to increase productivity growth and employment creation, by opening sheltered sectors to competition, lowering the cost of regulation, increasing labor market flexibility and improving education and professional training.

Fiscal adjustment is expected to resume after a pause in 2014. The pace of adjustment targeted by the authorities for 2015–16 is appropriate given the level of debt and related risks. It is underpinned by pro-growth expenditure measures, which should enhance its sustainability. Coordination between the levels of government still needs strengthening across a range of issues.

Banks need to adapt further to a challenging operational environment of low growth and low interest rates, and a more demanding regulatory framework. The banking sector fared relatively well by the ECB’s comprehensive assessment, but additional efforts will be needed toward Basel III capital standards.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the authorities’ economic program and its emphasis on fiscal adjustment, competitiveness, and labor market activation. Directors agreed that achievement of the program’s objectives would also require sustaining the momentum of labor and product market reforms to foster productivity growth and the economy’s long-term prospects.

Directors supported the government’s plans to speed up fiscal consolidation to safeguard debt sustainability. They welcomed the shift to an expenditure-based adjustment strategy, given Belgium’s already high level of public spending and taxation. In this regard, Directors were encouraged by the planned reduction in labor taxes, and saw scope for further rebalancing the tax burden away from taxes on labor income toward indirect and environmental taxes, and taxes on capital income. More broadly, they advised enhanced coordination among federal, regional and community governments on fiscal and other shared economic policies.

Directors welcomed the authorities’ actions to raise employment rates by reforming pension, preretirement, and unemployment benefits. Such actions build on past success in raising the employment of older workers, and are critically important given Belgium’s structurally low employment and population aging.

Directors welcomed the authorities’ measures to promote external competitiveness and job growth by better aligning wage and productivity developments. In addition to wage moderation, they recommended further boosting productivity by opening sheltered sectors to competition and reducing the regulatory burden, including in the services economy; facilitating job creation through more flexible contract arrangements; and strengthening the quality of education, training and apprenticeship schemes.

Directors acknowledged the considerable efforts undertaken to repair bank balance sheets. They welcomed the passage of the new banking law and other regulatory reforms put in place to reduce risks associated with universal banking and to strengthen the resolution framework. They nonetheless stressed the need for continued adjustment of banks’ business models, and called for heightened vigilance in the supervision of the financial sector, given the challenging operating environment and a more demanding regulatory framework.

Belgium: Selected Economic Indicators, 2010–20

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Sources: Haver Analytics, Belgian authorities, and IMF staff projections.

Contribution to GDP growth.

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.

2

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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

Belgium: 2015 Article IV Consultation—Staff Report; and Press Release
Author: International Monetary Fund. European Dept.