Mission Impossible? Positive IMF calls for more Belgian action

Each year the International Monetary Fund (IMF) evaluates the economic situation in its member states during its so-called Article IV mission. This month, the IMF delegation looked into the Belgian economy. The temporary IMF report looks fundamentally good. The IMF acknowledges many positive evolutions in the Belgian economy as well as in recent policies. However, the road to higher potential growth is long and full of potholes. In particular, the IMF calls for a structural and long-term approach to investments, fiscal reforms and sustainable public finances. The complex Belgian institutional context is likely to lead to limited success on the suggested agenda.

As a small open economy, the Belgian economy is clearly taking advantage of the global recovery. The IMF expects Belgian real GDP growth to accelerate from 1.75% this year till nearly 2% in 2018, which is slightly above current KBC projections. This evolution has several positive effects. In particular, employment growth is excellent, while the fiscal position is improving. Both are major improvements compared to previous years and a clear break with the past. Strong employment growth is not only helpful to reduce the unemployment rate, but also positive for dealing with the costs of the ageing society as people tend to work longer. The improved fiscal position is necessary to keep public finances sustainable.

The IMF explicitly mentions the recent reform agenda as the reason for the substantial overall improvement in the Belgian economy, apart from the international business cycle. The IMF praises the recent pension reforms, the temporary suspension of wage indexation, the labour tax wedge cuts under the tax shift, and the corporate income tax system reform.
The IMF also formulates various tax policy recommendations. In general taxes on labour should be reduced, while tax policies should favour green and innovative investments. Future tax reforms should be revenue-neutral and preferably growth-enhancing.

Despite its overall optimism, the IMF emphasizes that further reforms are needed to deal with a number of longstanding structural challenges. It puts forward four economic challenges and formulates recommendations for each of them. First, as Belgian public debt still exceeds 100% of GDP, further fiscal consolidation is essential. However, the IMF favours a gradual approach toward a balanced budget. It chooses not to emphasize the fundamental risks of the excessive public debt level, which may weaken the resilience of the Belgian economy in times of economic downturn or crisis. Nevertheless, the IMF states, in its second recommendation, that Belgium urgently needs more public investments. Even though public spending is high, the Belgian public sector is hardly investing. Obviously, the options for public investments depend on the health of public finances. The current public debt burden jeopardizes structural investments. Increasing spending efficiency will do part of the job, although deeper reforms at all levels of government are required. Limiting current spending would enable Belgium to financially address the backlog in public investment, without raising taxes or borrowing.

Thirdly, the IMF continues to see major challenges in the Belgian labour market, which remains very fragile and fragmented despite excellent employment growth. Vulnerable groups like immigrants born outside the EU and low-skilled people are insufficiently integrated in the labour market. Moreover, there is a persistent skill mismatch as well as equally persistent regional disparities in unemployment rates. One should, however, acknowledge that many initiatives have been launched to tackle the skill mismatch. It is clear that this will remain a major challenge to all governments involving many policy domains. Other hopeful news is the recent decline in the unemployment rate in Wallonia as well as in Brussels. In absolute terms, however, the regional disparities remain huge and call for further action.

Fourthly, the IMF pays particular attention to the low Belgian productivity growth. It has to be admitted that productivity growth is low throughout the western world, but a combination of factors ranging from barriers to competition to (again) a clear lack of public investments makes the Belgian situation worse than most. As the Belgian economy is currently growing close to its potential growth, higher productivity growth is essential to boost the economy further in a sustainable way.

What is the main take-away from this IMF evaluation? Fundamentally, it comes down to a blatant call for austerity in current spending, offset by increased investment. This recipe is well-known, unsurprising and no different from the instructions Southern European countries received after the crisis. Belgium’s advantage is its relatively good starting position. However, this recipe implies a drastic overhaul of how the Belgian institutional framework operates, as spending reductions require tough choices and as many policy domains are affected. Hence, implementing these clear IMF recommendations is likely to be extremely challenging. The IMF indirectly acknowledges this challenge by calling for gradual action, despite an economic environment which favours fast action. Moreover, the IMF has not yet taken into account potential international risks in its current analysis (Brexit, Trump, geopolitical conflicts…). Fundamentally, a gradual pace of reform requires a persistent long-term approach to spending and investment policies. As it will be hard to reach a national consensus on many aspects with a broad political support (just think of the Belgian energy policy), it is more likely that the IMF will repeat this same message in the following years.