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© 2023 International Monetary Fund
SIP/2023/016
IMF Selected Issues Paper
European Department
Fiscal Federalism in Belgium: Challenges in Restoring Fiscal Sustainability Prepared by Yu Ching Wong
Authorized for distribution by Mark Horton
March 2023
IMF Selected Issues Papers are prepared by IMF staff as background documentation for periodic consultations with member countries. It is based on the information available at the time it was completed on February 10, 2023. This paper is also published separately as IMF Country Report No 23/099.
ABSTRACT: Fiscal decentralization in Belgium progressed substantially in 2015-19. However, as decentralization of expenditure responsibilities continued to outpace decentralization of revenue authority, vertical fiscal gaps and greater reliance on transfers from shared resources may have reduced spending discipline. Consecutive shocks (pandemic, energy prices) have worsened the fiscal positions of all levels of government, requiring urgent and concerted effort to improve fiscal and debt sustainability. Fostering better fiscal policy coordination across all levels of government would improve the efficiency of Belgium's decentralized fiscal framework. We recommend that fiscal adjustment at the subnational levels should be a part of the general government fiscal consolidation plan, with strict spending limits applying; integrating systematic spending reviews in the budgetary process; and adopting a more strategic, multi-annual fiscal framework to support adjustment. Implementing the 2013 Cooperation Arrangement—intended to provide fiscal rules to govern and coordinate public finances at all levels—is important. Also, the cost of overborrowing at the regional level should be fully internalized; recalibration of transfers could be considered; and some flexibility should be retained in the pace and scope of further decentralization. Finally, there is scope to improve the integration of fiscal sustainability objectives in federal and subnational structural reforms.
RECOMMENDED CITATION: Wong, Yu Ching. Fiscal Federalism in Belgium: Challenges in Restoring Fiscal Sustainability. IMF Selected Issues Paper (SIP/2023/016). Washington, D.C.: International Monetary Fund.
| JEL Classification Numbers: E24, E25, E31, E61, E64, F16, J31, J32, J33, J52 |
| Keywords: Fiscal policy, fiscal consolidation, taxation and revenue, budget, deficit, and debt, state and local governments, federal and subnational public finances, fiscal decentralization, federalism |
| Author's E-Mail Address: YWong@imf.org |
| JEL Classification Numbers: E24, E25, E31, E61, E64, F16, J31, J32, J33, J52 |
| Keywords: Fiscal policy, fiscal consolidation, taxation and revenue, budget, deficit, and debt, state and local governments, federal and subnational public finances, fiscal decentralization, federalism |
| Author's E-Mail Address: YWong@imf.org |
Front Page
SELECTED ISSUES PAPERS
Fiscal Federalism in Belgium: Challenges in Restoring Fiscal Sustainability
Belgium
Title Page
BELGIUM
SELECTED ISSUES
February 10, 2023
Approved By
European Department
Prepared By Andre Geis, Yu Ching Wong (both EUR) and Nate Vernon (FAD).
Contents
FISCAL FEDERALISM IN BELGIUM: CHALLENGES IN RESTORING FISCAL SUSTAINABILITY
A. Introduction
B. How Has Fiscal Decentralization Evolved in Belgium?
C. Key Challenges in Federal and Subnational Public Finances in Belgium
D. Policy Options to Improve Debt Sustainability Under Fiscal Decentralization
E. Conclusions
BOX
1. Evolution of Fiscal Federalism in Belgium
FIGURES
1. Progress in Fiscal Decentralization (1995-2020)
2. Economic and Social Characteristics by Regions
TABLES
1. Financing Sources of Expenditure in Flanders, Wallonia, Brussels, and the French Community
2. Summary of Fiscal Positions: Net Lending (+)/Borrowing (-)
References