Rapid tightening of financing conditions has helped turn the credit and real estate cycles. Higher interest rates have weighed on housing transactions and prices, bringing the latter more in line with fundamentals. The financial sector has remained resilient, with capital and liquidity ratios significantly above regulatory requirements. However, non-performing loans have increased, though moderately from a record low level, among commercial banks and relatively low credit risk provisions pose risks.

Real GDP is projected to grow at 1.2% in 2024 and 1.4% in 2025 (Table 1). While financial conditions are easing, slowing employment and wage growth are dampening domestic demand. In 2025, global trade recovery and further monetary policy easing will sustain activity. Inflation will decline in 2025 to reach 2% as second round effects from wage growth diminish, and slowing domestic demand reduces underlying pressures.

Belgium’s economic outlook relies significantly on its trade prospects. A weakening, instead of a strengthening, of foreign demand would put a drag on exports, which are around 80% of GDP, one of the highest levels in the OECD. Another risk is that a larger-than-expected deceleration in employment emerges, ramping up unemployment and dampening domestic demand. Conversely, the resolution of geopolitical tensions would improve confidence and expand export opportunities.

The pandemic and energy crises have accentuated Belgium’s fiscal challenges. Additional consolidation measures are needed to build buffers for future fiscal shocks, accommodate the fiscal impact of population ageing and create room for public investment in the digital and the green transitions. Raising public spending efficiency and expanding the tax base, including by fostering labour market participation, should be the cornerstones of the consolidation strategy.

The public debt burden is among the highest in the EU and is set to increase steeply in the absence of reform. According to projections, putting the ratio of public debt to GDP on a declining path will require a prolonged period of consolidation to counter rising spending on pension, health and long-term care. In the near term, the resilience of the economy along with monetary policy easing paves the way for frontloading this necessary consolidation. Belgium’s tax burden is among the highest in the OECD, thus consolidation should primarily come from spending cuts. Spending reviews should be more widely used and better integrated into the budget process. Identifying and achieving efficiency gains in the health and the long-term care sectors is a priority. Further pension reform should also be agreed as public spending in these areas is relatively high and will increase as the population ages. The relatively low effective retirement age weighs on the sustainability of the pension system, calling for strengthening policies to promote longer working lives.

Comprehensive tax reform should resume. A reform including simplification of taxation, base broadening and shifting taxation from labour to less distortive taxes has been suspended. Reform must resume and focus on supporting labour market activation, strengthening capital income taxation, removing inefficient tax expenditures, notably fossil fuel subsidies, and reinforcing the pricing of environmentally harmful activities.

Improving the budgetary framework would facilitate fiscal consolidation efforts. Regions and communities account for an increasing share of public debt, but cooperative agreements across governments on annual budget targets have never been reached. Introducing binding expenditure rules with multi-year annual caps for federal and regional governments and implementing a revised cooperation agreement would help raise transparency and accountability.

Preserving high living standards as the population ages and reducing socio-economic inequalities requires improving labour outcomes for all. Regional disparities and employment gaps for women, older people, foreign-born, and people with disabilities are particularly large (Figure 2).

Financial disincentives to work are substantial for low-income workers. Despite recent measures, high labour income taxation combined with a comprehensive social protection system creates inactivity and low-wage traps. Strengthening in-work benefits for low-paid workers and withdrawing them more gradually as income rises, could encourage labour market participation.

Women, especially mothers with low income and a foreign background, are less likely to be employed than men and work fewer hours. Together with the limited, yet growing availability of childcare services, the personal income tax system discourages participation of low-income second earners and contributes to gender inequality, calling for abolishing the partial tax splitting for couples and the tax break for paid maintenance allowances for ex-spouses and children.

The number of sickness and disability benefit recipients has increased dramatically over the past decade. Recent measures rightly aim to encourage the retention of people with reduced work capacity in employment and to strengthen rehabilitation. The prevention of health risks and return to employment have remained low. Disability assessments rely mostly on medical criteria, without considering the individual’s remaining functional capacity. Return-to-work programmes have improved but should start earlier in the process and incentives to participate need strengthening.

Emission reductions have to accelerate significantly for Belgium to meet EU targets. Strengthening decarbonisation incentives and coordination across federal and regional governments for climate policies are key to a cost-efficient transition.

Emissions have been on a declining trend, but current climate plans fall short of EU targets for 2030 and 2050 (Figure 3). Climate policy is highly decentralised, with energy, building, and transport largely the responsibility of regions. Binding targets and more clarity on how these will be met are required to spur the changes required for the energy and climate transition.

Belgium needs to further reduce greenhouse gas emissions in the energy sector by lowering fossil fuel reliance, while continuing to ensure energy security. Belgium is committed to emission reduction, but also to gradually phasing out its nuclear energy generation by 2035. Despite an acceleration in 2023, renewable energy generation lags behind the large increases required to achieve emission-reduction goals. Developing flexible support mechanisms and easing planning and approval processes would help renewable energy deployment. Moderate and patchy carbon taxation and large subsidies encourage fossil-fuel consumption, calling for increasing effective emission prices where they are low, including by implementing the European Emission Trading System 2. Reaching the target of a zero-emission building stock requires accelerating the pace of renovations, making them more energy efficient, and decarbonising heating systems. The residential sector accounts for around a quarter of energy-related greenhouse gas emissions. The majority of building renovations fail to yield significant energy efficiency gains. Financial support should provide strong incentives for efficient renovations and be targeted at low-income households who face difficulties in financing and planning these investments.

Business dynamism has been resilient despite economic turmoil. However, comparatively few high growth businesses emerge from Belgium’s SME sector. This tendency to remain small poses challenges for growth and productivity.

Administrative burdens impose large costs for SMEs. Setting up a business, complying with regulation, and paying taxes, represent a relatively large overhead for small firms. In addition to the sheer workload, small businesses often lack sufficient expertise to tackle all areas of administration. Reducing these burdens calls for a broad-based strategy to further cut administrative costs with tight coordination across public institutions and the involvement of small business representatives.

Belgium has a wide range of SME support programmes. However, their objectives can be unclear with little evidence of their positive effects. Streamlining SME support measures following comprehensive reviews of their costs and benefits would help achieve efficiency gains. Women’s entrepreneurial potential is underutilised. Gender gaps in entrepreneurship have decreased over the past two decades, but women still led less than a quarter of SMEs in 2022 and, as in many other economies, they are under-represented in growth-oriented businesses. Targeted training and mentoring programmes to develop entrepreneurial skills and networks among female entrepreneurs should be expanded.

Recruitment difficulties are among the main barriers to small firms’ growth. Improving access to lifelong learning can help address skills shortages, but small firms lack resources to develop and implement training strategies. More tailored support is needed, including help for businesses to continue operations when staff are on training.