Country Report Belgium
The new centre-right government plans to target the budget deficit and Belgian firms’ competitiveness. Thanks to various measures implemented by the former and current government, the increase in unit labour costs came to halt in 2014.
Strengths (+) and weaknesses (-)
(+) Solid financial position of the households and banking sector
Household balances remain healthy and the banking sector’s restructuring in recent years has not influenced the supply of credit to the economy. Low interest rates might stimulate private sector investments.
(+) Strong institutions
Even during periods of political uncertainty, strong institutions have led to policy continuity. Furthermore, Belgium has an excellent primary and higher education system, with good math and science education.
(-) High government debt and aging population
Without additional reforms, government’s spending on pensions and healthcare will rise substantially due to the aging society, which will further increase the already high government debt.
(-) Low competitiveness growth
If left unchecked, the remaining structural labour market rigidities and unfavourable development of rising labour costs but lower productivity growth than peer countries, could threaten macroeconomic stability and economic growth.
1. New centre-right government has plans to target the budget deficit…
Belgian federal elections were held in May 2014. Afterwards, the first centre-right government in 25 years was formed. This took only five months, much faster than the previous government formation, which took a record one and a half year. The coalition consists of three Flemish parties and only one Wallonic party, with the French speaking liberal Charles Michel as prime minister. It is the first time the francophone language community is in such a minority. The French-speaking MR is therefore vulnerable to attacks from all the other francophone parties, especially as the French-speaking part of Belgium tends to be more left-wing than the Dutch-speaking part. Meanwhile, the Flemish nationalists (N-VA), which are also part of the government, have put their separatist agenda on hold for this term, which will likely enhance the stability of the coalition. Likewise, a full split of Belgium is unlikely in the near future.
Although public debt remains high (106% of GDP in 2014), Belgium does not seem to face a risk of fiscal stress in the short term, as the average maturity of the debt portfolio is relatively long at 7.8 years in October 2014 and interest rates are low (European Commission, 2015). Furthermore, the Michel-government plans to balance the public budget by 2018 due to spending cuts worth EUR 11bn over the next. This is, however, two years later than originally planned. Moreover, the government intends to increase the statutory retirement age from 65 to 66 in 2025 and 67 in 2030. This would positively impact long-term debt sustainability, as fast increasing pension expenses are the main cause of Belgium’s relatively poor estimated debt sustainability. The announcement of the reforms and spending cuts caused a lot of turmoil and resulted in massive national strikes in December 2014. This reflects the great resistance of the Belgian population against painful structural reforms. But, despite this resistance, the government seems still committed to its plans to enhance Belgians public finances.
2. …and is likely to target Belgian firms’ competitiveness
Thanks to various minor measures implemented by the former and new government, growth of nominal unit labour costs stagnated in 2014. Rising unit labour costs in the past resulted in a gradual loss of cost competitiveness starting from 2005. This was due to above average (compared with other European countries) labour cost increases, resulting from automatic wage indexation, and below average productivity growth. The corrective measures have been narrowing the labour cost gap with other European countries, but closing it entirely will require additional measures. Since the Belgian economy relies heavily on exports (86% of GDP in 2014), it is essential to further enhance Belgian firm’s competitiveness in order to guarantee economic growth and the sustainability of public debt. Other options to boost competitiveness, like tax incentives, are limited due to the high government debt ratio and pressure of the EC to comply with deficit rules. Going forward, the new government has promised to shift taxes away from labour towards capital over the next few years. It already extended the real wage freeze implemented by the former government in 2013until 2016 and decided not to implement the next round of wage indexation, which was originally planned for 2015. The effect of the latter is, however, expected to be limited, since inflation is expected to remain very low during 2015.
3. Exports and domestic demand drove GDP growth
The recovery of the Belgian economy from the 2012 recession gained some strength in 2014 as growth was 1% y-o-y (figure 1). We expect growth to strengthen further to around 1¼% in 2015 and 1½% in 2016. Household consumption and exports will pick up slightly in 2015, but the former is likely to ease to some extent in 2016. The Belgian economy still faces some challenges, as unemployment (8.5%, February 2015) remains high and due to the efforts of the government to restore firm’s competiveness, households’ purchasing power will not significantly grow in the next two years. An escalation of geographical tensions or a Grexit might harm economic growth in the rest of the eurozone, which is Belgium’s main trading partner. Since the Belgian economy is one of the most open economies of the eurozone, these are serious risks to its economy.
Belgium has a small, open, and private-enterprise-based economy, around 11 million inhabitants and a nominal GDP per head of 47,946 USD. The economy has benefited from its central geographic location combined with a good transport network and excellent education systems. Its diversified industrial base is mainly concentrated in Flanders in the north. As Belgium has few natural resources, it imports a large number of raw materials and exports significant quantities of manufactured goods (partly for re-exports), exposing its economy to volatility in world markets. Most of Belgium’s trade, around three-quarters, is with other EU countries. Belgian banks were damaged by the 2008 financial crisis but have recovered substantially since 2013. The financial position of the private sector is one of the healthiest in Europe, due to very high household savings and only moderate net debt levels of firms. In contrast, at 106% of GDP, the public debt is very high, but the public sector has a reliable track record of repaying its bonds. As a result of measures promoting partial employment and the design of the pension and unemployment benefit systems, early departure from the Belgian labour force is encouraged. This has led to a structurally low participation rate. Low employment rates compounded by challenges originated by the aging population will endanger the economy’s growth potential over the medium-to-long term. But the new centre-right government elected in 2014 has plans to address the urgent need for reforming the labour market and the fiscal side. Tensions between the Dutch-speaking and French-speaking parts of the country have led in recent years to constitutional amendments granting Belgium’s regions and language communities more formal recognition and autonomy. This, and wide social and economic differences between the language communities impede agreement on necessary reforms.