Staff Concluding Statement of the 2022 Article IV Mission

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.