Belgium: Staff Report for the 2016 Article IV Consultation

The new government has taken important steps to support job creation and address the cost of aging-notably through wage moderation, pension reform, and a tax shift. But growth prospects remain mediocre, public debt very high, and the labor market severely fragmented. Downside risks loom large, including from the slowdown in emerging markets, financial volatility, and geopolitical stress.


The new government has taken important steps to support job creation and address the cost of aging-notably through wage moderation, pension reform, and a tax shift. But growth prospects remain mediocre, public debt very high, and the labor market severely fragmented. Downside risks loom large, including from the slowdown in emerging markets, financial volatility, and geopolitical stress.

Context: Moderate Recovery, Reforms Advance

1. In its first year in office, the government has taken important steps to promote competitiveness, job creation, and fiscal sustainability. The three main reforms enacted were pension reforms raising the retirement age, a suspension of wage indexation (“saut d’index”), and a “tax shift” reducing the labor tax wedge. Widespread strikes took place in the initial months of the right-leaning coalition, but recent efforts to better involve social partners in certain policy deliberations have helped improve relations. At the same time, 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. These policies are generally consistent with several of last year’s Article IV recommendations (Appendix I).

2. Output growth has been resilient, supported by solid wage growth and comparatively slow fiscal consolidation. Consumer spending contributed more than half to 2007–14 real GDP growth, benefiting from healthy private sector balance sheets, robust mortgage lending, and solid wage growth including from the automatic indexation mechanism (until its suspension a year ago). In contrast to many other euro area countries, post-crisis fiscal consolidation was very modest, notwithstanding a sizeable level of debt and deficits, making government spending another important driver of growth. Investment contributed the remainder, while net exports were broadly neutral (Figure 1). In 2015, growth was again highly reliant on private consumption as public spending slowed while trend investment and net export growth (abstracting from large one-off transactions) were relatively subdued.1

3. Government policies have also contributed to inflation and employment growth above euro area averages. Wage indexation and continued government spending propped up domestic demand in the aftermath of the crisis, and the output gap did not widen as much as in other EU countries. As a result, core inflation has remained above peers, averaging around 1½ percent since 2011. Headline inflation rebounded in 2015, as the effect of the collapse of energy prices in the second half of 2014 wore off. At the same time, employment growth has benefitted from public support through direct hiring as well as a sharp rise in labor subsidies. As a result, the unemployment rate, at 8½ percent, is only one percentage point above the pre-crisis level, and almost entirely structural.

Figure 1.
Figure 1.

Real Sector Developments

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

1 Used for wage indexation.

4. Belgium’s external competitiveness has declined significantly since the early 2000s. After years of large current account surpluses, Belgium gradually lost export market shares, until a sharp fall in net exports brought the current account into broad balance during the crisis (Figure 2). This trend was partly due to high and rapidly growing labor costs that had outpaced productivity growth since the mid-2000s. More recently, with policy actions imposing wage moderation (including the saut d’index), a weaker euro, and growing labor productivity, the current account may again move into a small surplus, thanks to strong growth of service exports and income from the large net international investment position. Notwithstanding these recent improvements, staff’s preliminary assessment under the External Balance Assessment (EBA) suggests that Belgium’s external position is still moderately weaker than medium-term fundamentals and desirable policies would imply (see Appendix I). On the basis of the EBA exchange rate assessment, staff considers the real effective exchange rate to be overvalued by between 0 to 10 percent.

Figure 2.
Figure 2.

External Competitiveness

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

5. A long track record of fiscal consolidation has been undone during the crisis, bringing the public debt ratio back well into the triple digits. After more than a decade of running large structural primary surpluses, Belgium reduced its public debt-to-GDP ratio from 131 percent in 1995 to 87 percent in 2007 (Figure 3). Since then, real primary expenditure growth, driven by social benefits and the wage bill, outpaced real GDP growth, offsetting much of the revenue-based adjustment effort. The resulting structural deficits—plus the one-off costs for crisis support to banks—have brought public debt back to 106 percent of GDP at end-2015. While Belgium exited the Excessive Deficit Procedure in June 2014, the 2014 deficit turned out still marginally above 3 percent of GDP. The European Commission judged this episode to be due to exceptional and temporary factors; an assessment that was supported by significant reforms advanced by the new government and ambitious fiscal structural adjustment objectives.

Figure 3.
Figure 3.

Fiscal Developments

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

6. The recent pension reform is a major step toward addressing the long-term cost of aging. Successive reforms of early retirement schemes starting in 2012 have been complemented by a broader pension reform adopted in August 2015 (See Appendix III). The main elements involve: first, a gradual increase in the legal retirement age from 65 to 66 in 2025 and 67 in 2030; second, raising the minimum age and career length required for early retirement starting in 2017; and third, boosting the minimum age for survivor’s pension. The reforms are expected to halve the annual growth in pension costs in the long run from the current 4–5 percent per year. They should also accelerate progress in increasing the employment rate as well as the effective retirement age, which in 2012 was the second lowest in the OECD (59.2 years).

7. The reduction in social security contributions as part of the tax shift should boost employment growth. The tax shift aims to improve competitiveness and strengthen purchasing power through tax relief and lower social security contributions for employers and reduced personal income taxes for employees. Given that the main measures are targeted toward lower incomes, they could stimulate significantly employment rates of vulnerable groups (see Box 1). Counterbalancing measures under the tax shift include increases in the VAT on electricity, excises on diesel, alcohol, tobacco, and sugary drinks, increases on withholding taxes, and new taxes on certain financial vehicles and on short-term capital gains. The yield of some of the new tax measures is uncertain, and the tax shift is not revenue neutral, even if supply-side benefits (Box 1) are taken into account.

Employment Impact of Tax Wedge Reductions

To address some of the effects related to the high and—until recently—rapidly increasing labor costs, the coalition government, building on the previous government’s measures, is reducing the employers’ social security contribution (SSC) gradually from 33 percent to 25 percent in 2019. This reduction is in effect smaller on average than it might seem, given the numerous existing exceptions which leave the current effective contribution rate closer to 27 percent.


Wage Distribution in Belgium and SSC Reduction, 2013

(In percent of full-time employed, by wage; right scale in percent)

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Sources: SPF Economy and IMF Staff calculations.

The measure is targeted at lower salaries, whose contribution rates will be reduced over-proportionally (chart). The contribution for an employee at the minimum wage will be reduced by 6½ percentage points, while labor costs for the median worker will fall by only about 1¾ percent. The targeting of low wages favors the young and the unskilled, who tend to have lower wages, but also the lowest employment rates. The tax shift has thus the potential to support activation for some of the most vulnerable groups.


Average Gross Wage by Age Group, 2013

(Monthly gross wage in euros; right scale in percent)

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Sources: SPF Economy and IMF Staff calculations.

Aggregate effects could be significant. Regression results based on data that distinguishes wage- and non-wage labor costs suggest that the employment rates of workers close to the median of the distribution will increase by about 0.7 percentage points, and that for minimum wage earners by 1.6 percentage points. This could be substantial, particularly for the low-skilled whose employment rate is 37 percent. The reduction of labor costs alone could increase aggregate employment by an additional 35,000–40,000 jobs, of which more than a third would be among the lower-skilled. Belgian estimates by the Planning Bureau and the National Bank of Belgium (NBB) using more fully specified models are in a similar range. They suggest the creation of an additional 45,000–65,000 jobs by 2021. In the NBB’s model, the reduction of the employers’ SSC contributions alone will create 49,000 jobs by 2021.

8. The banking sector has refocused on the domestic market, in particular mortgage lending. Bank assets have fallen from above 400 percent of GDP in 2008 to about 275 percent in 2014, largely by shedding activities abroad. Credit to the private sector has risen strongly since early 2013, driven primarily by household mortgage growth (Figure 4), although the most recent growth is affected by anticipating reductions in tax deductibility (“bonus logement”) at the regional level. Gross household indebtedness has risen to about 62 percent of GDP, though net financial assets have remained comparatively high. Bank credit to non-financial corporations has been growing much more moderately, partly because large companies can finance themselves on the markets. The aggregate size of corporate balance sheets, with liabilities at almost 290 percent of GDP in 2014, reflects Belgium’s position as a corporate treasury center where multinationals raise funds in Belgium and distribute them to related entities abroad. Excluding these positions, corporate debt (bank loans and debt securities issued) was around 45 percent of GDP in mid-2015.

Figure 4.
Figure 4.

Credit Conditions

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Outlook: Mediocre Growth, Downside Risks

9. The recovery is expected to continue at a modest pace in the near term, while inflation will spike temporarily due to tax measures. Real GDP growth is projected to remain just under 1½ percent in 2016 (as in the previous two years), driven again primarily by private consumption (supported by continued low energy prices), while investment growth pauses due to base effects from one-off transactions in previous years. External demand will help somewhat, driven by the moderate euro area recovery and the depreciated exchange rate. Headline inflation is set to rise to 1¾ percent in 2016 due to tax increases under the tax shift. Under the projected baseline medium-term recovery, the output gap will close gradually, bringing inflation back closer to euro area average and unemployment down to its structural level of around 7½ percent by 2020.

10. Medium-term growth prospects remain mediocre. Though the economy has been resilient, potential output and total factor productivity have fallen, and a return to trend output is not expected. Potential output growth will also remain below pre-crisis levels (Box 2). While this is consistent with trends in other euro area countries, prospects for Belgium are worsened by slowing demographics, structural inefficiencies in specific labor market segments, and low competition in some regulated services. While capital’s contribution to potential growth is expected to return close to pre-crisis levels, both those from employment and Total Factor Productivity (TFP) will likely remain substantially reduced.


Belgium: Loss in Potential Output Since the Crisis

(In index, 1999 = 100)

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Sources: IMF World Economic Outlook and Staff calculations.

11. In the current volatile global environment, downside risks loom large. External risks are particularly elevated, while domestic risks are large but more of a medium-term nature. Key risks can be summarized as follows (see Appendix IV):

  • China and emerging markets slowdown. Direct exposures are relatively low, but the economy’s openness and strong integration into global value chains through Germany means high exposure to indirect shocks from abroad. Preliminary calculations suggest that for every 1 percent reduction in the Chinese average 2016–20 growth due to a domestic negative investment demand shock, the Belgian economy could grow by about 0.2 percent slower.

  • Financial markets volatility. New shocks from unanticipated changes in growth and financial fundamentals in large and emerging economies could enhance financial volatility (from already elevated levels in recent months), impair confidence in euro area economies, and eventually stifle the incipient recovery.

  • Regional risks. If the euro area recovery were to falter, Belgium will be particularly affected given its openness and strong intra-EU trade linkages, including to Germany, France, and the Netherlands. The EU’s refugee surge has so far had a modest impact on Belgium, but could eventually pose a significant challenge, especially given Belgium’s poor track record of labor market integration of non-EU migrants (see below).

  • Fiscal policy. A key domestic policy risk relates to the longer-term fiscal outlook, which could veer off course if benefits of recent reforms (such as the tax shift) turn out to be smaller than anticipated and/or fiscal federalism hampers the ability to deliver the overall intended adjustment. This, together with potentially lackluster growth, could worsen debt dynamics and eventually undermine confidence in fiscal sustainability.

  • House prices. After a long period of rapid growth, house prices have stabilized since 2013. A sharp reversal could have a significant impact on consumption, even if banks’ exposures could be managed (see below). However, staff analysis does not suggest a major overvaluation, as past price trends were broadly in line with borrowing cost, demographic and income developments.2

Potential Output in Belgium

Potential output plays an important role in assessing fiscal efforts and projecting future growth, inflation, unemployment, and debt dynamics. Following significant revisions in recent years, IMF staff has sought to improve the consistency and robustness of its estimates by using a multivariate filter approach that incorporates empirical relationships between actual and potential GDP, unemployment, and inflation. This filter has been applied to assess potential output in the global economy (2015 April WEO) and to some of the euro area’s biggest economies.1


Inflation and Economic Slack

(In percent)

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Belgium’s potential growth has slowed significantly since the late 1990s, likely mostly due to a gradual decline in TFP growth, mirrored in other advanced economies and partially related to structural factors. These include lower growth returns from ICT and the reallocation of factors to sectors with comparatively lower productivity levels and slower productivity growth; e.g personal- and non-market services2. In Belgium, more dynamic employment growth initially offset this decline and maintained potential growth above 2 percent until the mid 2000s. However, the collapse of TFP growth during the crisis cut potential growth by half; despite labor and capital contributions that still compared rather favorably with peers. On average, the contribution of TFP has been zero since the crisis.

Looking ahead, Belgium’s potential growth appears substantially weaker than before the crisis. Under current policies, including recent and planned reforms, potential growth should increase over the medium term, but average only about 1.3 percent over 2015–20. A continuing rebound in investment is projected to bring the contribution of capital back close to pre-crisis levels. The average contribution of labor on the other hand will be held back by slowing demographics, more than offsetting reforms in favor of employment activation. With capacity utilization rebounding, TFP growth will return to positive territory, but may be reduced (in favor of the employment contribution) if policies are effective in activating low-skilled employees. The Non-Accelerating Inflation Rate of Unemployment (NAIRU), estimated at approximately 8 percent, is expected to decline only very slowly over the forecast horizon.


Belgium: Potential Output Growth

(In log differences)

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

1 N. Budina, H. Lin, E. Pérez Ruiz, J. Vandenbussche and A. Weber, 2015, “Potential output in France, Germany, and Spain: A reassessment,” Chapter III, Selected Issues paper for Spain 2015 Article IV consultation.2 IMF Staff Discussion Note No. 15/3; Era Dabla-Norris, Si Guo, Vikram Haksar, Minsuk Kim, Kalpana Kochhar, Kevin Wiseman, Aleksandra Zdzienicka; “The New Normal: A Sector-level Perspective on Productivity Trends in Advanced Economies.”

Policy Challenges

12. 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. While private sector employment is beginning to recover, there is entrenched high unemployment and inactivity among certain groups, including the young, the low-skilled, and non-EU immigrants. This has not only considerable human and social costs, but also detracts from Belgium’s longer-term economic potential.

13. Belgium needs to rebuild buffers against future shocks by laying the foundations for a lasting reduction in public debt. Downside risks have already increased, as evidenced by the increased volatility in financial markets in recent months, underscoring the urgency of rebuilding buffers while growth remains solid, as projected under staff’s baseline. This requires bringing down the deficit, but doing so without undermining the recovery or social cohesion. The policy discussions thus focused on how to square this circle, in particular by making tax and expenditure policies more efficient, advancing growth-oriented reforms, and maintaining financial stability.

A. Getting to Budget Balance

14. Belgium’s high level of public debt is a risk to fiscal sustainability. Under baseline projections, with moderate growth and low inflation, debt will remain above 100 percent of GDP throughout the projection period. Gross financing needs are currently almost 20 percent of GDP. Staff’s debt sustainability analysis (Appendix V) suggests that even modest changes in the economic environment would push the public debt ratio above 110 percent. The debt ratio is most sensitive to shocks to GDP growth, and a combined macro-fiscal shock could place the debt ratio on a rising trajectory throughout the forecast horizon.


Gross Nominal Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Text Table. Fiscal Adjustment Under Current Policies and the Authorities’ Objective

(In percent of GDP and in percent of potential GDP)

article image
Sources: staff estimates, 2016 draft budget.

Fiscal deficit and debt estimates differ because outturn figures are not yet available. Debt figures include the impact of early KBC debt repayment.

Multiplier assumptions were 0.7 for expenditure and 0.5 for revenue.

15. A balanced budget would be a credible medium-term anchor for addressing the debt problem. The authorities’ objective is to achieve structural balance at all levels of government by 2018, which means about ⅔ percent of GDP adjustment on average per year for the next three years.3 This pace can be justified given the importance of underpinning longer-term fiscal sustainability after a period where structural adjustment has been very limited—just ¼ percentage point of GDP per year since 2010. Over the medium term, reaching budget balance would help reinforce the decline in the public debt ratio. However, the design of the consolidation strategy should take into account that the accelerated pace of adjustment will create significant drag on aggregate demand (even under modest multiplier assumptions, see text table above), thereby slowing the initial reduction in the debt ratio compared to the authorities’ stated objective. The quality of adjustment measures is thus of critical importance.

16. The authorities’ target is very ambitious and requires additional measures, the bulk of which should come from the expenditure side. To reach structural balance by 2018 (using staff’s estimate of potential GDP), additional structural effort of 1¾–2 percent of GDP would be needed over the coming three years.4 There are differing views in Belgium on how to close the fiscal gap—some are skeptical about new taxes, while others are concerned about the impact of possible spending cuts. Staff argued that, given the high tax level and past strong expenditure growth, the consolidation should be mostly expenditure-based, especially as staff’s analysis (Selected Issues) indicates significant scope for making public spending more efficient, thus mitigating the impact on growth.

Text Table. Possible Additional Fiscal Measures

(In percent of GDP)

article image

Long term effect estimated as a convergence to EU average.

Through faster attrition.

Subsidies are about 2 percent higher than in EU average and the three neighbors’ average (France, Germany, Netherlands).

Beyond the government plan to cut social security spending (See Hallaert and Nowak, 2015). Additional measures could include (1) tightening the eligibility rules of sickness and disabilities schemes and unemployment to avoid their use as early retirement scheme and (2) increasing the use of means testing.

Assuming that the redistributive power of social benefits is increased to the EU average, Belgium could achieve the same reduction in income inequality at a fiscal cost lower by 3% points of GDP. This number is reduced by the planned reforms of social security (See Hallaert and Nowak, 2015).

Includes the reform of capital income taxation. Belgium’s High Council of Finance (2014) estimates that a comprehensive reform of the capital income taxation alone could increase the revenue by 1 to 2 percent of GDP per year.

17. Making public spending more efficient requires deep reforms at all levels of government. At around 55 percent of GDP, the level of government spending is among the highest in the EU. While it is projected to decline gradually, there is significant scope for securing additional adjustment through reforms to ensure that spending translates well into better economic and social outcomes (Figure 5 and Selected Issues). Possible measures include:

  • Wage bill. At 12.7 percent of GDP in 2014, the wage bill is high by international standards and has been increasing rapidly. To complement wage moderation, there is scope for faster than planned attrition-based and well-targeted reductions in public employment across all levels of government.

  • Social spending. The efficiency of social spending could be improved significantly, notably through enhanced means-testing of benefits with a view to better targeting the most vulnerable. To illustrate the potential for efficiency gains, if the redistributive power of social benefits was at EU average, Belgium could achieve the same reduction in income inequality at a lower fiscal cost by 3¼ percentage points of GDP.

  • Health spending. A significant factor in the cost of aging, health spending could be made much more efficient, including by further reducing medication and hospitalization costs, and better enforcing budget ceilings.

  • Unemployment benefits. Linking benefits to job search and accelerating the phase-out of benefits with employer top-up that act as an early retirement scheme could improve the unemployment benefit system. More generally, as reforms are implemented, care should be taken to limit the scope for substitution across benefits, for example as observed when the tightening in early retirement was accompanied by increased use of disability benefits.

  • Education spending has increased sharply without apparent improvements in test scores. Reviewing the system and refocusing it on the areas with the biggest education gaps would also help address labor market issues described below.

  • Public investment. With overall investment relatively modest, the focus should be on redirecting resources to more productive projects, notably in transport infrastructure.

Figure 5.
Figure 5.

Public expenditure

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Sources: Eurostat, Euromod, OECD, and IMF staff estimates.1 Dash lines represent the EU median.

18. Strengthening budget monitoring and close coordination between levels of government are even more important after the sixth reform of the state. The reform devolves many fiscal responsibilities to communities and regions, and involves a revised system of financing and transfers which will require additional adjustment at the sub-national level. For example, because transfers from the federal government are in part linked to specific taxes such as the personal income tax (PIT), lower PIT rates under the tax shift will imply lower revenues for communities. Closer coordination will be needed to ensure that fiscal commitments at the general government level can be met. In this context, it is crucial to improve budgetary control through strengthening and integrating intra-year monitoring of budget execution across all levels of government.

19. There is still scope to improve the efficiency and fairness of the tax system.5 Beyond the measures already passed under the tax shift, staff argued for a more efficient taxation of wealth, including by introducing a broader capital gains tax, shifting real estate taxes from transactions to recurring charges, and limiting the favorable tax treatment of rental income. Further strengthening environmental charges and eliminating the generous fiscal incentives for company cars would have both environmental and fiscal benefits. There is also scope for improving VAT efficiency. Finally, regions could use their new fiscal responsibilities to further target the income tax cuts toward the lower wage ranges.

Figure 6.
Figure 6.

Tax System1

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Sources: OECD and IMF staff estimates.1 OECD and EU15 are simple averages for OECD and EU15 countries, respectively.

20. Authorities’ views. The authorities reiterated their commitment to reaching structural budget balance by 2018. They acknowledged that further measures would be needed, but expressed confidence that the adopted policies will go a long way toward this goal, especially as reductions in labor costs under the tax shift will lead to increased employment and revenues. They also pointed to expected savings from a redesign of the functioning of the federal government, including improving the management of real estate holdings and centralizing and streamlining procurement practices. They stressed their determination to continue the reform efforts. For example, they intend to further reform the pension system in 2016 by focusing on the second pillar, notably by disallowing benefitting from the supplementary pension before the legal age of retirement. Additional measures to reduce the growth in spending on health should further help limit the cost of aging over the medium-term. The authorities also intend to promote reactivation policies for people benefiting from disability allowance and strengthen the benefit allocation control mechanism. With respect to the sixth reform of the state, communities and regions have taken steps to improve monitoring and control, and all plan to close their (relatively small) budget deficits by 2018.

B. Tapping Belgium’s Full Labor Market Potential

21. The severe fragmentation of the labor market has major social and economic costs. Belgium’s unemployment rate is slightly below the euro area average, partly thanks to public employment and labor subsidies. However, the labor market is deeply segmented (Figure 7, Selected Issues). Differences are particularly stark in four dimensions—regionally, with unemployment just 5 percent in Flanders, almost 12 percent in Wallonia, and a staggering 18½ percent in the Brussels capital region; age-wise, with employment rates low among the young and the elderly; skill-related, with mismatches resulting in structurally high job vacancies and low employment rates of the low skilled; and by immigration background, with only about half of non-EU born residents aged 25–54 employed, compared to over 80 percent for Belgian-born residents. The underlying problems are complex and interlinked—involving longer-term structural changes affecting the regions, barriers to labor mobility, language barriers, significant gaps in education and training for certain groups, ill-aligned incentives for work, and a wage setting process that does not fully reflect economic conditions.

22. Addressing this problem is all the more urgent given the ongoing refugee crisis. Between 2015 and 2017, asylum seekers alone may add up to one percent to Belgium’s population (Box 3). In the long run, the inflow of refugees could benefit potential output growth and help reduce the cost of aging, especially when migrants are young and educated. To reap these benefits, however, Belgium needs to dramatically improve the integration of non-EU migrants. The government’s decision to reduce the waiting period for refugees to get a work permit from six to four months is an important step in the right direction. However, staff noted that active labor market policies in the form of training and language support, and specific adjustments to labor and product market regulations may be needed to accelerate their integration. Because the benefits of such policies would not be limited to refugees, substantial synergies exist between facilitating their integration and addressing the underlying causes of the wider labor market segmentation.

Figure 7.
Figure 7.

Labor Market Segmentation

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Integration of Migrants

Belgium has a poor track record of integrating non-EU migrants into the labor market. Immigration from other European countries and from outside the EU has been the main driver behind Belgium’s relatively healthy population growth. Poor integration of immigrants from outside the EU is however a source of concern not only for public finances, but also for social cohesion. In no other European country is inactivity among non-EU migrants as prevalent as in Belgium. Further, the likelihood of a non-EU migrant in Belgium being employed is the lowest on the continent.


Asylum Applicants

(In total persons; right scale in thousands of persons)

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Source: EuroStat.

Belgium is heavily affected by the ongoing refugee crisis. As in many other European countries, refugee inflows to Belgium have increased dramatically since the beginning of 2015. The number of first-time asylum applications during the first 10 months of 2015 was two and a half times higher than during the same period a year earlier. As a share of total population, this inflow is 50 percent above the EU average, but still far below levels experienced by Sweden or Austria. As the geopolitical instability in the countries of origin continues, the authorities expect the number of applications to decline only very gradually. Between 2015 and 2017, the number of asylum seekers may reach 100,000 (including 6,000 under the agreed EU agreement), which would correspond to about 0.9 percent of Belgium’s total population.


Belgium in Perspective: Asylum Requests, 2015M1-M10

(In percent; right scale in percentage change)

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Source: EuroStat

Inflows of refugees bring opportunities … Predominantly male, and substantially younger than the Belgian average, the current wave of refugees can bring a demographic boost and thus benefits in terms of potential output and fiscal sustainability in the longer run. While details on skill levels are not available, there are indications that the education level for many refugees may be higher than during earlier refugee crises. Many natives of Syria and Iraq also have relevant language skills.

… but also risks. Apart from the political and social risks that poor integration can bring, creating labor market opportunities should be a priority to minimize the short-term burden on public expenditure. The longer it takes for refugees to find a job, the bigger the social expenditure and foregone tax revenues. A combination of poor labor market opportunities and a generous welfare system could create inactivity traps and reduce incentives to assimilate, learn the local languages and upgrade existing skills. This would be particularly problematic in Belgium, where also low-skilled natives have comparably higher unemployment and inactivity rates.

23. Tapping Belgium’s full labor market potential requires a comprehensive and inclusive jobs strategy. Wage moderation and the saut d’index have led to improvements on the cost side, and the government has reinforced activation policies to address long-term unemployment, increased the effective retirement age, and strengthened incentives to return to work after long-term illness. These are important steps, which are expected to provide positive impulses for the coming years. Areas for further policy improvements include:

  • To lock in the benefits from recent wage moderation, the wage formation process could be reformed to account not only for price developments but also broader labor market and economic conditions.

  • Education and training could be improved to better meet languages and technical skill requirements. This could be supported by aligning curricula closer to local labor market needs and by intensifying the cooperation between schools and employers, including under apprenticeship programs (which are a successful tradition in the German-speaking community). Promoting and improving the targeting of continuous education could support the labor force’s flexibility and quality, for example to allow for greater movement between economic sectors.

  • Work incentives for the unemployed could be strengthened, e.g. by making benefits still more degressive and enforcing strengthened job search requirements. In the meantime, the job search could benefit from more effective support by unemployment agencies, and individualized training offers. Additional targeted reductions in the labor tax wedge could further promote job creation for the low-skilled.

  • Geographic segmentation could be addressed by reducing barriers to mobility and improving collaboration between local governments. Addressing the severe traffic congestion in some large urban centers (see below), improving public transport, and reducing disincentives to buy/sell a house (see 2015 Selected Issues) would make the labor force more mobile. Collaboration between regional entities could be further encouraged to improve the flow of information, harmonize administrative procedures, and share opportunities more effectively.

24. Authorities’ views. The authorities acknowledged the labor market challenges, including the need to integrate non-EU migrants better into the labor force. They noted that the recent efforts at wage moderation, including through the saut d’index, and the cuts in the labor tax wedge under the tax shift should help improve conditions for vulnerable groups. They did not favor a special minimum wage, as previous experiments with lower minimum wages for the young did not boost youth employment. While a reform of the collective wage negotiation process is being discussed by social partners—including the role of seniority in the wage setting—it is unlikely that this would involve moving away from automatic indexation as this system has been an important anchor of the social contract in Belgium. Other areas for reform include the regulation of night work for e-commerce businesses and the establishment of career accounts for training. They highlighted the continued efforts to improve vocational training schemes.

C. Supporting Economic Growth and Financial Stability

25. To unlock Belgium’s full economic potential, employment policies alone will not suffice. The administrative burden remains substantial, especially for smaller companies, and heavy regulation of some product markets is limiting competition and constraining export growth. Moreover, severe traffic congestion in large urban centers is impeding economic activity. Addressing these bottlenecks will require targeted policy action:

  • Alleviating traffic congestion in urban areas. Drivers in Belgium lose more time in traffic than in any other European country.6 Besides disrupting commuter traffic, congestion also hampers business and investment in urban centers, and carries significant health costs. To reduce these pressures, staff recommended abolishing the tax deductibility of company cars (which account for more than 40 percent of new car registrations in Belgium), expanding road pricing schemes, and investing in well-targeted public transport projects.

  • Easing the regulatory burden to support growth and employment. Staff analysis has shown that liberalization could be most effective in retail, transport, and professional services, notably accounting and legal professions. Some of the barriers appear to be in the form of self-regulatory organizations, which can impose standards that complicate entry. Staff reiterated that deregulation of these sectors would benefit competition and exports, both directly as well as indirectly through linkages with other sectors, as greater productivity in services would improve service inputs for manufacturing exports. Moreover, despite efforts to lighten administrative procedures for businesses, compliance remains onerous for SMEs and the regionalization of market access under the sixth reform of the state could set further hurdles. Additional simplification as well as harmonization across regions should help support growth and employment.

26. Maintaining a sound financial sector is critical for supporting the recovery and ensuring resilience against shocks. Since the crisis, which resulted in the restructuring of Dexia and Fortis banks, the banking sector has become smaller and focused primarily on the Belgian market. It is now more resilient and more profitable. The system’s regulatory Tier I capital ratio reached 15.6 percent in 2015:H1, and NPLs remain low (Figure 8). In contrast to other euro area countries, Belgian banks’ customer deposits exceed their loans at the system level. However, with interest rates expected to remain low and continuing mortgage refinancing which will lock in lower returns, banks’ business models must continue to adapt and regulators need to remain vigilant and reactive to existing and emerging risks:

  • Recent strong household credit growth could be a cause for concern. Risks to bank’s balance sheets are mitigated by the prevalence of owner-occupancy and of fixed-rate mortgages, as well as a default law that protects against selective default, and more generally by a relatively strong net asset position of households. In addition, recent prudential measures raising risk weights on mortgages appear to have borne fruit. However, a significant share of loans still have relatively high loan-to-value and/or debt-service-to-income ratios, suggestive of pockets of vulnerabilities, particularly in the young and low to middle income borrowers, that warrant continued vigilance. Staff thus recommended considering more targeted actions to limit overexposures of vulnerable groups (for example, additional risk weights or caps on loan-to-value ratios or limits on debt-service-to-income ratios). Staff also cautioned against banks’ over-reliance on the mortgage business.

  • Low growth and low inflation will limit profitability in the medium-term, while new forms of finance will create competition. Although many banks have started to cut costs, further adjustment of the business model may be needed in some cases. In this context, the similarity in strategies being pursued may result in reduced system resilience in the face of shocks that would likely impact the major banks in the same way. For insurance and long-term savings, the reduction of some minimum guaranteed interest rates (e.g. on complementary pensions) is a step towards reducing the sector’s exposure to protracted low inflation.

Figure 8.
Figure 8.

Banking System Health

Citation: IMF Staff Country Reports 2016, 077; 10.5089/9781513547480.002.A001

Source: Haver Analytics.

27. Authorities’ views. The authorities pointed to progress made in reducing the regulatory burden and in making the financial system more resilient, but agreed that certain areas still required further attention, in particular:

  • The authorities saw some scope for facilitating market entry and reducing the administrative costs that fall disproportionally on small firms. They pointed out, however, that the overall regulatory burden in Belgium was comparable to the EU average, and that productivity growth has been satisfactory in firms linked to the export sector. The authorities agreed with the need to address traffic congestion including through well-targeted public investment in transport infrastructure.

  • Regarding concerns about mortgage credit growth, the authorities have extended the add-on to the risk weights for mortgages while also raising capital requirements for eight banks which were designated domestic systemically important institutions. Before taking further measures, they planned to let the impact of changes in tax regimes for mortgage deductibility, now a regional competency, play out. They also pointed to the more complex institutional environment, with the European Commission and the European Systemic Risk Board needing to weigh in.

Staff Appraisal

28. One year into office, the government has made important progress in delivering on its economic reform agenda. At the center of the program are steps to improve external competitiveness and address the country’s fiscal challenges, with a view to supporting private sector growth and employment. The saut d’index, building on earlier wage moderation efforts, has further narrowed the wage gap with neighboring countries. The tax shift, with its reductions in the labor tax wedge, should support job creation over the medium run. The 2015 pension reform should raise employment rates and significantly reduce the projected long-term increase in the cost of aging.

29. The central challenge is to bring down public debt while also nurturing the recovery and supporting social cohesion. Growth prospects remain mediocre, weighed down by high public debt and severe labor market fragmentation, and downside risks loom large. The favorable external conditions that have supported the recovery—including low interest rates, a depreciated euro, and low oil prices—may not last. And the slowdown in emerging markets, financial market volatility, and geopolitical stress could dampen or throw the recovery off course. To build buffers against future shocks, it is imperative to achieve a lasting reduction in public debt. But the challenge is to do so without undermining the recovery or jeopardizing social cohesion. To this end, fiscal adjustment should be based on more efficient spending and taxation, while structural reforms should be focused on the severe fragmentation of the labor market and other obstacles to growth.

30. The government’s goal of reaching fiscal balance by 2018 is ambitious, and will require quality measures. Budget balance is a critical milestone toward lasting debt reduction. Staff estimates that substantial additional fiscal measures are needed over three years to reach structural balance. To minimize the drag on aggregate demand, it is imperative that fiscal consolidation be underpinned by high quality structural measures to improve efficiency, even if these may take some time to yield results. The bulk of adjustment will have to come from the expenditure side, where staff sees significant scope for greater efficiency, with a smaller contribution coming from tax measures, given the already high level of taxation in Belgium.

31. Public spending should be made much more efficient, while the tax system can also be further improved. Efforts toward operational improvements at the federal level are welcome, and there is ample scope for further spending efficiency, for instance through well-targeted reductions in public employment, enhanced means-testing in social spending to better target the most vulnerable, and improved budgetary control across all levels of government. These efforts would allow room for more productive public investment. On revenues, there is scope to partly finance the tax shift through a more efficient taxation of wealth and real estate and a further greening of the tax system, including by eliminating generous tax incentives for company cars.

32. To tap Belgium’s full economic potential, there is an urgent need to address the severe labor market fragmentation via a comprehensive and inclusive jobs strategy. The current refugee surge highlights the urgency of adopting measures that would help address deep segmentation along age, skill level, geographic, and migration background. This should involve further reducing the labor tax wedge for the low-skilled, improving education and training in languages and technical skills, strengthening activation policies, and addressing barriers to geographic mobility. The wage formation process could be adapted to better account for employment conditions—which could help lock in gains from recent wage moderation.

33. Efforts to ease traffic congestion and red tape would be important complements to the employment policies. The severe traffic congestion in some large urban centers could be alleviated through road pricing schemes, the elimination of tax incentives for company cars, and well-targeted public transport projects. Structural reforms, such as reducing the administrative burden on smaller companies and lowering barriers to competition in some service sectors, would help support employment growth.

34. The soundness of the financial sector should be maintained to support the recovery and ensure resilience against shocks. The banking sector has restructured since the crisis, and returned to profitability. But banks’ business models must continue to adapt. The protracted low-interest environment weighs on medium-term prospects of both banks and insurance companies, requiring vigilance and proactive supervision. With credit growth driven primarily by mortgage lending, additional targeted prudential measures to limit overexposures of vulnerable borrowers should be considered.

35. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

Belgium: Selected Economic Indicators, 2012–21

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

Contribution to GDP growth.

Data for 2015 is October value.

Table 2.

Belgium: Balance of Payments, 2012–21

(In percent of GDP)

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Sources: Haver Analytics, Belgian authorities, and IMF staff projections.
Table 3.

Belgium: General Government Statement of Operations, 2010–21

(In percent of GDP)

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

Excludes the 2012 Dexia recapitalization.

Table 4.

Belgium: General Government Consolidated Balance Sheet, 2006–14

(In percent of GDP)

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Sources: Haver Analytics and IMF’s staff calculations.
Table 5.

Belgium: Structure of the Financial System, 2009–15

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Sources: National Bank of Belgium, Belgian Asset Managers Association, and Financial Services and Markets Authority.

On consolidated basis.

On company basis.

For insurance companies, data refer to the end-Sept. 2015 situation. For the number of credit institutions, data refer to situation of 4 Nov.

Table 6.

Belgium: Financial Soundness Indicators of the Banking Sector, 2009–151

(In percent unless otherwise indicated)

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Sources: National Bank of Belgium.

Consolidated data. Data are based on the IAS/IFRS reporting scheme.

Only loans to households as of 2014

Excluding saving certificates as of 2014

Deposits booked at amortized cost only.

Only household deposits as of 2014

Unconsolidated data.