INTERNATIONAL Monetary Fund (IMF) staff has appreciated efforts of Belgium's new Government to cope with macroeconomic challenges and expects it to step up tax reforms.

In their preliminary findings at the conclusion of Article IV consultation with Belgian officials, IMF staff has noted that the tax policy measures of the government program contain a net reduction in labor taxes and a useful simplification of various social security abatement schemes, which should help limit unwanted distortions.

As put by IMF release issued on 15th December, “At the same time we see scope for going further in tax reform. Income from capital is not taxed uniformly, and a more harmonized treatment would put the taxation of such income on a more equal footing with labor income. Property taxes could be rebalanced from transaction taxes to recurrent taxes on immovable property. This would stabilize tax collection and enhance labor mobility. We also see scope for reducing deviations from the standard VAT rate, e.g., for electricity, and to increase environmental taxes. Revenue gains from such reforms would be available to reduce labor taxes further.”

The macroeconomic challenges faced by the country emanate from two related structural imbalances which undermine its growth prospects and create significant macroeconomic risks over the medium term. One is a stubbornly low employment rate-only two thirds of the working age population holds a job. The second one is the fiscal imbalance created by rigidities in public spending.

IMF Staff has opined that these two imbalances reinforce each other. Generous access to social transfers contributes to low employment levels notably by facilitating early exit from the labor force. And the low and shrinking level of private employment, in turn, makes it difficult to pay for the extensive social transfers and government services-roughly only one in four persons in Belgium (all ages included) has a job in the private sector.

The Staff considers the pace of structural adjustment targeted by the authorities in 2015-16 (0.7 percent of GDP a year) to be appropriate. They have thus welcomed the commitment to achieve it by containing current spending while eschewing increases in the overall tax burden.

The release says that to be sustainable, savings on the spending side should be guided by clearer priorities. Public investment has been curtailed by budgetary constraints at a time when significant growth-enhancing investments are needed in the areas of transportation, energy infrastructure, education, and social housing. These investments would sustain demand, enhance productivity, and crowd in additional private investment.

It adds: “They are all the more justified in the current low interest rate environment. Therefore, we see a good case for Belgium to use any flexibility that might be provided under euro area fiscal rules to promote growth-enhancing investment spending.”