Mon. Jul 22nd, 2024

December 21, 2022

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

After strong recovery from the pandemic, Belgium was hit by a second successive shock—higher energy prices and other spillovers from Russia’s invasion of Ukraine. A strong and timely response to higher energy prices via household and firm support measures, demand reduction, and supply-side actions, together with automatic indexation of wages and benefits and limited reliance on gas from Russia, eased impacts. The labor market has shown strong resilience with record-high job growth, and the financial sector has sound capital, liquidity, and profits. Still, Belgium faces a slowdown of activity and high inflation, as elsewhere in the euro area, along with competitiveness challenges, elevated fiscal deficits and public debt, and continuing risks and uncertainty. The authorities should pursue multi-year expenditure-led fiscal consolidation from 2023 to ease pressures and vulnerabilities, support efforts to reduce inflation, rebuild buffers, and put debt on a declining path. They should improve targeting of energy support and advance reforms in social benefits, pensions, and health. Efforts to initiate tax reforms are welcome, along with other reforms to help meet ambitious employment goals. Climate actions should be advanced. In all these areas, alignment of federal and regional policies will be helpful. While the financial sector has performed well, risks are rising, and continued vigilance is warranted.

Economic outlook and risks

1. A strong recovery from the pandemic has been weakened by spillovers from Russia’s war in Ukraine, albeit less so than in some other euro area countries . Higher energy prices, tighter financial conditions, weaker confidence, and elevated uncertainty are weighing on activity. The economy is expected to experience a mild recession over the winter before some rebound takes hold with gains in purchasing power from wage indexation for many households from January 2023 and a pick-up of external demand. Growth is projected to slow to 0.2 percent in 2023, from 3.0 percent in 2022 and 6.1 percent in 2021. Over the medium-term, growth is expected to return to a potential rate of 1.2 percent.

2. Inflation has risen sharply, reflecting strong post-pandemic demand, supply-chain bottlenecks, higher energy and food prices, and rising wage costs . Headline inflation is expected to reach 10.7 percent in 2022, moderating to 5.4 percent in 2023. With broadening price pressures, core inflation is expected to increase from 3.9 percent in 2022 to 6.1 percent in 2023 before gradually converging back to 2 percent by 2026. The external current account balance is expected to swing from a surplus of 0.4 percent of GDP in 2021 to a sizable deficit in 2022, reflecting higher energy imports, lower external demand (including for Covid vaccines), and some loss of competitiveness with emergence of a sizable wage gap relative to key trading partners. The government’s action to set a zero real wage increase (not including premia and wage drift) for 2023-24, within the wage-norm legal framework and when social partners could not come to agreement, will help in this regard. The current account is expected to move to a small surplus over the medium term as energy pressures ease and external demand recovers.

3. The outlook is subject to substantial uncertainty and risks . These include escalation of the war in Ukraine and further spillovers, a sharper-than-expected tightening of financial conditions, and more adverse spillovers from major trading partners. Further shocks could renew inflationary pressures and wage-price dynamics. By contrast, lower energy prices would reduce fiscal pressures, and together with progress on structural reforms before elections in 2024, boost confidence.

Strengthening Fiscal Sustainability

4. Following the spike of energy prices, the federal and regional authorities provided timely and substantial support to households and firms . This was in addition to built-in wage and benefit indexation. The response helped cushion impacts via a range of measures, some targeted, and subject to quarterly reassessment and renewal. Measures have added significant costs—around ¼ percent of GDP per quarter—and include an extension of the expanded social tariff for energy and a basic energy package providing gas and electricity vouchers to lower- and middle-income households in the winter months. Some actions, such as reduction of the VAT rate on gas and electricity from 21 to 6 percent, and lowering of excise duties for petrol and diesel, were not targeted and did not incorporate price signals to reduce consumption.

5. The authorities are rightly considering ways to further improve targeting of energy support . Support should remain temporary, limited, and predictable in scope. A shift is planned from a return to the standard 21 percent VAT rate on gas and electricity for households to specific excises that will incorporate some progressivity, be adjusted for changes in energy prices, and promote a switch from fossil fuels to clean electricity. The IMF staff commend the authorities on this shift and consider that the new excises should also incorporate indexation of excise rates and a path for higher rates, especially for natural gas, to promote emissions reduction. Further efforts are needed to strengthen targeting to vulnerable households (e.g., not only income levels, but energy exposure) and to ensure that social tariff benefits do not provide strong employment disincentives (e.g., due to full phase out with changes of employment status or income relative to thresholds).

6. Notwithstanding the quarter-by-quarter review of energy measures, there are risks of protracted support . If energy prices remain elevated, continued support would require a political decision, including on adjustment of the support measures and budget mitigation. The IMF staff consider that extraordinary energy support in 2023 should stay within the budgeted allocation (0.9 percent of GDP), as announced in the budgetary plan, and in any event, should be phased out in 2024, or earlier if possible. Social tariffs with enhanced targeting are expected to be in place. Temporary windfall taxes and solidarity contributions from energy companies will help defray some of the costs. While these have been designed to apply to a prudent measure of extraordinary revenues (for some technologies, below EU guidelines), potential adverse impacts on investments in renewables should be closely monitored.

7. The 2023-24 budgetary plan envisages a wider fiscal deficit in 2023 than in 2022, due largely to energy support . With increasing spending pressures from aging (and higher defense spending and debt service costs), overall deficits are projected to remain elevated over the medium term at 5½ percent of GDP, well above pre-pandemic and debt-stabilizing levels. Although high nominal GDP growth will lower the debt ratio in 2022, this will reverse, and debt will increase continually with high primary deficits. High deficits and rising debt may increase vulnerability to adverse changes in market sentiment (directly, but also in other countries, with Belgium as a bystander) and limit fiscal space and the ability to respond to new shocks. High deficits lean against monetary policy actions to reduce inflation, and much-needed increases in capital investment to support growth and the green transition are constrained.

8. There is a need to pursue consolidation and reduce risks and vulnerabilities, clearly establish fiscal sustainability, and rebuild buffers . The IMF staff considers that the overall fiscal deficit should not increase in 2023 and ideally should be reduced. This calls for an adjustment of around 0.8 percent of GDP next year (or more) and of a similar magnitude (or more) annually thereafter, until the debt-stabilizing deficit level, and subsequently, structural balance are reached. While this adjustment is large, including in view of the slowing economy, taking action already in 2023 and committing to a credible, multi-year adjustment path will have important impacts on inflation, vulnerabilities, fiscal space, and confidence.

9. Adjustment next year and beyond should focus on rationalization of current spending. Public spending is elevated, with room for efficiency gains. Efficient and productive investment spending at the federal and regional levels should be preserved to mitigate growth impacts and raise medium-term growth prospects. Tax rates are high, and increases would likely negatively affect compliance and growth. Spending rationalization should draw on federal and regional spending reviews, with a focus on enhancing efficiencies, including on energy-support measures, outlays on goods and services, and subsidies. Sustained efforts are needed to contain wage-bill, social-benefit, and aging costs (pensions, health) and to improve benefit targeting and incentives. The parameter for real health spending increases will be reduced from 2.5 to 2.0 percent in 2024, and targets for system savings have been identified for 2023 and 2024. Investment spending has increased in recent years, but remains low, constraining productivity gains and growth (e.g., mobility bottlenecks). The authorities rightly aim to increase investment outlays to 4 percent of GDP by 2030. There is scope to improve the public investment management framework at the federal and regional levels, with support from an IMF diagnostic assessment (PIMA).

10. Pension measures agreed in July 2022 addressed important areas, but also increased costs . Actions included a pension bonus for work after early retirement or the statutory retirement age, setting minimal working conditions for access to minimum pensions, and a supplement to reduce the gender gap for periods of part-time work due to family care. Efforts are needed now to ensure budget-neutral reforms and secure timely receipt of Next Generation EU Recovery and Resilience Program funding. Further actions will be needed to address increasing budgetary costs of aging and shore up medium- and long-term sustainability. Other expansions of social spending (e.g., minimum pensions, health spending) have added to fiscal pressures; real benefit increases have exceeded productivity and wage growth. Actions are needed to reduce these spending pressures. For example, unemployment benefit replacement rates are high relative to peers, with unlimited duration. Access to and duration of sickness and disability benefits are other focus areas. The tight job market offers an opportunity to tackle social benefit reforms to reduce inactivity traps, with tax and benefit (dis)incentives for labor participation rightly being reviewed for adjustment, while efforts to improve job-matching, training, coaching, mobility, and flexibility are underway.

11. An important tax reform blueprint was issued earlier in 2022, aiming to simplify the complex tax system and enhance fairness . Measures would reduce the tax burden on labor, broaden tax bases by eliminating or reducing tax expenditures, address disincentives to work (via tax rates, brackets, and alignment with social benefits), and further strengthen revenue administration and tax compliance (also via a 2021 anti-fraud plan that aims to improve tools and coordination or integration of agencies). The IMF staff considers that reforms should also make capital taxation more consistent across income sources. A second tax reform stream is focusing on carbon pricing and emissions reduction. These are key reforms that should move forward. Early action is planned via first-step measures in 2023. It will be important that robust compensating measures are secured, so that the measures are budget neutral.

12. Federalism arrangements involve substantial decentralization of fiscal competencies to regions and communities and should be strengthened . Within this framework, there is scope to enhance federal-regional-community arrangements to improve planning, alignment, savings incentives, and outcomes. This is particularly important, given the necessary fiscal consolidation—deficits at the community and regional levels comprise a third of the general government deficit—and the need to enhance climate efforts, including allocation of emissions reduction targets. Other possible measures include fully developing multi-year fiscal plans and expenditure rules at all levels of government and fully integrating comprehensive spending reviews. Implementing existing cooperation arrangements would help strengthen policy alignment across different levels of government within the dimension of fiscal federalism, and there is scope to improve the integration of fiscal sustainability objectives in burden sharing and in structural reforms, accompanied by cost-benefit assessment to inform the formulation of measures.

Safeguarding Financial Stability

13. The banking sector emerged resilient from the pandemic, but risks are rising . Capital and liquidity buffers have been maintained at comfortable levels, and profitability has remained strong, also supported by improving asset quality across most credit exposures. Still, slower growth in a context of elevated uncertainty, wage and energy price pressures, and tighter financial conditions may weigh on borrowers, requiring a build-up of credit provisioning. In addition, a sharp correction of real estate prices may cause stress, as mortgage exposures are relatively high and debt-service-to-income ratios of households somewhat elevated. However, risks are mitigated by a high share of long-term, fixed-rate mortgages as well as by appropriately maintaining a sectoral systemic risk buffer (SSyRB) for housing loans and by suitably keeping borrower-based mortgage lending guidelines established in 2020 in place. Going forward, house price developments should be closely monitored for signs of an accelerated decline and a worsening of mortgage portfolios, with deployment of available buffers if needed. Mortgage moratoria, activated in October with relatively strict eligibility criteria to ease the impact of higher energy bills on household finances, have been taken up in limited number, and should not delay or impede bank-borrower engagement to durably address debt service challenges. Incorporating energy efficiency disclosures in real estate transactions is starting to have an important effect on valuations and transactions.

14. In an uncommonly fluid macro-financial environment, macroprudential policy needs to balance a range of factors. These include maintaining financial sector resilience, deploying buffers to absorb losses when needed and ensuring the adequate provision of credit to the economy. In this context, the decision to maintain the counter-cyclical capital buffer (CCyB) at 0 percent has been appropriate to allow banks to use available capital cushions to pro-actively engage with borrowers in difficulty. Going forward, an additional worsening of the macro-financial outlook may call for a further calibration of macroprudential policy towards supporting the capacity of banks to absorb losses and safeguarding the provision of credit, such as by releasing the SSyRB for housing loans. Efforts by the National Bank to gather information and strengthen cyber-preparedness are welcome and are being complemented by tailored stress-testing and appropriate policy intervention to mitigate risks.

15. Higher and steeper yield curves are improving interest margins, again in a context of increasing risks . Gains include improved margins for banks and the asset-liability balance with long-term obligation of non-bank financial institutions (NBFIs) including life insurers. However, an overly rapid or disorderly adjustment of interest rates, accompanied by market volatility or sharp asset-price corrections, may expose vulnerabilities. Efforts by the authorities to closely monitor NBFI-related risks are welcome to detect and contain spillovers at an early stage.

Building a Stronger and More Sustainable Economy

16. Following important action in 2022, further labor market reforms are needed to facilitate reallocation and meet the authorities’ ambitious goals . A new federal labor package became effective this fall, focusing on flexibility and training. The package will modernize aspects of Belgium’s complex employment laws, but more is needed to reach 2030 goals—80 percent employment, up from 72 percent presently—particularly in a tight labor market. For 2023, the federal government increased the allocation for minimum wages relative to unemployment benefits in the distribution of the welfare envelope to promote activation. Efforts will need to target younger workers/entrants, older workers, women, workers with an immigration background (especially women), and those receiving disability/sickness benefits. This should include reforms of wage-setting, hiring and dismissal, employment protection, social benefits, and employer flexibility. This will require concerted action by all stakeholders, especially the social partners. Reducing and capping the duration of unemployment benefits would provide more incentives for job search, along with easing the reduction of social benefits when recipients take jobs, providing tailored on-the-job support to those now receiving sickness/disability benefits, encouraging entry and assimilation through coaching and training, and enhancing/speeding the process of accreditation of foreign education and professional qualifications. Important business environment reforms are underway, including enhancing restructuring and insolvency frameworks, digitalizing the judiciary, and rolling out 5G networks. The federal and regional governments are strengthening cyber risk monitoring and preparedness in the economy.

17. Automatic wage indexation has provided relatively timely protection of household purchasing power, but modifications should be considered . Higher wages via indexation creates scope for more limited government support in the event of an inflationary shock. However, indexation puts the burden of adjustment to higher prices largely on employers, threatening to weaken corporate balance sheets and international competitiveness, thereby sapping investment and growth. While the Wage Law balances a guarantee to automatically index wages to inflation with a corrective mechanism to preserve external competitiveness, it implies prolonged periods of no or limited real wage increases in the wake of inflationary shocks. To facilitate negotiations among social partners, government intervention in collective bargaining is therefore common, often accompanied by costly fiscal incentives to reach agreement. In addition, the restrictions on real wage increases imposed by the Wage Law at times of elevated inflation may cement labor market rigidities by lessening the room for real wage differentiation across sectors or firms according to productivity developments. To preserve the benefits of wage indexation while enhancing the long-term viability of the framework, the authorities and stakeholders should consider modifications once the present period of elevated price pressures has passed. In particular, the basis for indexation, the so-called health index, could be adjusted to exclude additional items subject to high price volatility from terms of trade shocks, such as items sensitive to global commodity price swings, with vulnerable groups being compensated for purchasing power losses from such shocks by well-targeted fiscal support. Moreover, consideration should be given to incorporating productivity trends and a wider set of peer economies when interpreting developments in competitiveness under the provisions of the Wage Law.

18. Reaching ambitious climate goals will require a wider set of initiatives and greater focus on execution and coordination . There has been limited progress in aligning national climate policies with more ambitious Fit-for-55 targets (47 percent domestic reduction by 2030 for sectors not covered by the EU emission trading system (ETS)). Several gaps and shortcomings in the authorities’ current plan (2019) were identified by the EU, including high transport and building-related emissions; federal and regional differences on targets and policies; the need for more ambitious actions on renewables and energy efficiency; greater attention to subsidies; and limited quantified information on investment needs. Some of these issues have been addressed, in part, under the RRP. But much more needs to be done in policy-setting and implementation. The authorities recognize the need to reduce the relative price of green energy. This should be implemented through progressively incorporating a higher carbon component into the fuel excise regime as international energy prices fall, reducing subsidies (fuel cards, commercial diesel, heating oil), introducing feebates for the power sector and other users, rationalizing electricity network fees and levies, and providing targeted social protection with cash rather than energy-based support. Real-time electricity metering and distance and congestion charging should be introduced. Complimentary, non-price reforms should cover strengthening federal-regional coordination/burden-sharing and enhancing climate-related public investment.

19. Belgium is an important energy hub in Western Europe, and the authorities have taken important steps to enhance energy security . This includes a decision in March 2022 to extend the operations of two nuclear power stations for ten years and efforts to secure alternative supplies of gas via pipelines and LNG deliveries, which have helped fill storage facilities in the region and increase electricity generation as nuclear plants in neighboring countries are undergoing maintenance. Significant new investments are being made in offshore windfarms, hydrogen, and other renewable initiatives, including with support from the EU RRP. These important efforts should continue.

The IMF team would like to thank the Belgium authorities and other stakeholders for their hospitality, engaging discussions, and productive collaboration. We are especially grateful to the National Bank of Belgium for its assistance with meeting and logistical arrangements.

Source – IMF 

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