Statement by Domenico Fanizza, Executive Director for Malta and Laura Cerami, Advisor to the Executive Director February 22, 2019

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Belgium


2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Belgium

The authorities thank staff for the candid exchange of views during the Article IV consultation mission. Staff’s outreach to all stakeholders has been greatly appreciated as Belgium has a long political tradition of consensus building and social concertation. Over the last years, Belgium has implemented a wide set of reforms, including pension, labor market and a corporate income tax reform, while bringing public finances on a sounder footing. Given the increased external uncertainties related to Brexit and trade tensions, the authorities consider that continuing the reform momentum and sustaining fiscal prudence are more crucial than ever for an open economy like Belgium.

A continuing recovery

In 2018, Belgium’s economy continued to recover at an annualized growth rate of 1.4 percent and a 1.2 percent expansion of employment. The authorities’ policies have been successful in creating jobs. They have stimulated demand for labor through wage moderation and reductions in employers’ contributions and have supported the labor supply by reducing taxes, extending the working life and activating job-seekers. As a result, the labor supply has expanded, and unemployment has fallen, making Belgium’s recovery remarkably job-rich. Over the past four years, the labor force has expanded by around 120,000 units, of which more than half is due to an increase in the participation rate. Nonetheless, over the same period, the number of unemployed dropped by around 100,000 units, bringing the unemployment rate down to 6 percent, the lowest level since the 1970s. In all, no less than 220,000 jobs were created in Belgium during the last four years, and mainly in the business sector rather than in the public or state-aided sectors.

Notwithstanding these labor market developments, the Belgian economy also shows signs of strains. In line with staff’s advice, the authorities acknowledge three key areas for further work: 1) addressing labor shortages and labor market disparities, 2) boosting productivity growth and improving infrastructure, and 3) completing fiscal consolidation.

Addressing Labor Shortages and Labor Market Disparities

70percent of the Belgian population in the 20–64 age group is now at work. This is 2 percentage points higher than at the start of the global financial crisis. Nonetheless, the under-used labor potential is still significant. Mobilization of that potential could create considerable scope for the economy’s production capacity and could have a positive impact on public finances, by increasing revenue while also reducing recourse to replacement incomes. The Federal Parliament is therefore discussing the so-called “Jobs Deal” and is expected to reach agreement in the coming weeks about a set of labor market measures, including tighter eligibility requirements for early retirement schemes and incentives for job training.

Like staff, the authorities recognize that labor market shortages and productivity gains vary between businesses, sectors and sub-regions. The revised Wage Law has been effective in capping nominal hourly labor cost developments based on a weighted average of the expected increase in nominal labor costs in France, Germany and the Netherlands. However, as recommended by international organizations and the National Bank of Belgium (NBB), productivity differentials should be better taken into account in Belgium’s wage setting process. Finally, the authorities are cognizant of the need for continued efforts to integrate vulnerable groups in the labor market, such as workers with a migrant background or low-skilled workers.

Boosting Productivity Growth and Improving Infrastructure

The authorities agree with staff’s advice to take significant actions in view of increasing potential output and boosting productivity growth. The limited productivity gains during recent years are in part the result of the strong job creation. While this has a transient downward effect on productivity growth, it should ensure that future productivity gains will have a greater impact as more workers will share in these gains. That said, the authorities agree with staff that further efforts to enhance productivity are needed. First, the policy initiatives described by staff to increase access to growth financing (including the Belgian Growth Fund described in Box 4) should stimulate innovation. Second, the authorities are keenly aware of the need to boost the low level of productive public investments. Belgium’s National Investment Pact lists six priorities where public investment is to be strongly increased by 2030 through public-private partnerships: the digital transition, cyber security, education, health care, the energy transition and mobility. Finally, the authorities agree that more focus should be given to liberalizing services and regulating professions.

Completing Fiscal Consolidation

The Belgian authorities’ budget deficit decreased to 0.7 percent of GDP in 2018, while public debt declined by 1.5 percentage points to 102 percent of GDP. Although the deficit has been reduced considerably in recent years and the debt dynamic was reversed several years ago, the consolidation of public finances has not yet been fully achieved. The authorities are committed to further progress towards a structurally balanced budget.

Given the pressing needs for productive public investments, the still significant aging costs at the horizon, as illustrated in Box 3 on Belgium’s Intertemporal Net Worth, will require further efforts in order to free up fiscal space. To strike a careful balance between consolidation and growth, the authorities agree that further increasing the labor force participation rate will be paramount to increasing revenues over the medium term. In addition, they recognize that there is room for streamlining certain current expenditures, as well as continued moderation of health care costs. Finally, the authorities agree that further improvement of coordination among the federal government and the regional governments on the fiscal trajectory is needed.

Financial sector

The Belgian banking sector has significantly increased its resilience in recent years and Belgian banks typically boast strong levels of capitalization, as demonstrated by the 2018 EBA stress test for Belgium’s two biggest banking groups.

That said, the NBB, in its capacity of macroprudential supervisor, will continue to keep a close watch on the Belgian property and credit markets. The increase in Belgian household debt points to increasing systemic risks in the current credit cycle, especially as Belgian banks are still expanding their mortgage loan portfolios. Therefore, the NBB has introduced a new -and strict- macroprudential measure in 2018, whereby Belgian banks using internal models must build up capital buffers relative to the risk, and adequate to absorb potential losses on the mortgage portfolio in the event of a property crisis. The NBB is keeping a close eye on this measure’s impact on mortgage lending and might consider supplementary measures if the risks continue to build up.

Simultaneously, and for the first time since the global financial crisis, the credit cycle is also accelerating for Belgian non-financial corporations. With growth of around 7 percent – well above the euro area average of 4 percent – the provision of business loans by Belgian banks is among the most dynamic in the EU. The NBB monitors the situation closely and might consider activating the countercyclical capital buffer.


Belgium has implemented a wide set of reforms, as described in Box 1. The federal and regional elections in May are nearing. While the outgoing federal government has lost its majority in Parliament in December 2018, the reform momentum however has not faded. A majority of components of the above-mentioned Jobs Deal is expected to be approved by Parliament in the coming weeks. In addition, social partners have agreed on a 1.1 percent real increase ceiling of wages nationally, in line with the Revised Wage Law. This agreement has now been submitted to the government for approval.

The Belgian authorities look forward to a continuation of the productive interaction with Fund staff.