OECD Economic Surveys: Belgium 2024

Executive summary

Economic growth has been solid

The Belgian economy has been relatively resilient to recent shocks, with GDP growth converging to its potential (Figure 1). Activity is projected to remain solid, but prospects are uncertain.

Export-oriented industrial sectors have contracted, but domestic demand has underpinned activity. Private consumption was sustained by the automatic indexation of wages to inflation that prevented the erosion of households’ purchasing power. Employment has continued to grow, and the unemployment rate has stabilised at around 5.5%, below its pre-pandemic average level.

Inflation declined rapidly in 2023 amid drops in energy prices, but inflationary pressures remain. By prompting cost and price responses by businesses, wage indexation became an important driver of core inflation and has temporarily weighed on price competitiveness.

Figure 1. The economy has been resilient

Source: OECD Economic Outlook database.

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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.

Table 1. GDP growth will remain resilient

Annual growth rates, %, unless specified	2023	2024	2025
Gross domestic product (GDP)	1.4	1.2	1.4
Unemployment rate (%)	5.5	5.8	5.7
Consumer price index	2.3	4.3	2.0
Current account balance (% of GDP)	-1.0	-0.1	-0.7
Government gross debt (% of GDP, Maastricht definition)	105.2	107.4	110.0

Source: OECD Economic Outlook database

Putting public finances on a sustainable path

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.

Fostering employment of all

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).

Figure 2. Employment gaps are large

Employment rates, 2023

Note: Data on people with disability refer to 2020 or latest year available.

Source: Eurostat.

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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.

Boosting energy efficiency and electrification

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.

Figure 3. Emission reductions need to accelerate

Source: OECD (2023), Environment: Air and Climate (database).

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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.

Supporting SMEs for stronger productivity

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.

 

MAIN FINDINGS	KEY RECOMMENDATIONS
Preserving macroeconomic stability and restoring fiscal sustainability
Economic growth is set to remain resilient, but the debt-to-GDP ratio is high and rising. Fiscal consolidation has started, but absent any further adjustment, the fiscal position will be unsustainable. Regions and communities account for an increasing share of public debt, with regional disparities as for fiscal sustainability.	Frontload the on-going fiscal consolidation by introducing a credible medium-term consolidation strategy with a multiannual budgetary framework and binding expenditure rules for the federal and regional governments.
A Cooperation Agreement ensuring budgetary coordination of federal and regional governments has never been implemented and is being amended.	Implement a revised Cooperation Agreement to strengthen budgetary coordination between federal and regional governments.
Public expenditure is among the highest in the OECD and will increase due to population ageing, including on health and long-term care. The use of spending reviews has increased but remains limited. The reviews are not fully incorporated into the budgeting process and recommendations are typically qualitative.	Focus the consolidation plan on cutting ineffective spending. Make spending reviews a key part of the budgeting process, include mandatory quantified objectives for efficiency gains, accompanied by a comply or explain approach and concrete follow-up actions. Conduct spending reviews in the health and long-term care sectors.
The gap between the statutory and the effective retirement ages is comparatively large. Under certain conditions, early retirement is possible without a full actuarial reduction in the pension calculation.	Increase the penalties for retirement before the statutory retirement age. Consider additional measures to increase the effective age of retirement, including further raising the earliest age of retirement.
Room for efficiency gains in taxation is large. Tax expenditures weigh on revenue, often with little or no evidence of concrete socio-economic benefits. The tax mix is unduly skewed toward labour income taxes.	Resume efforts for a comprehensive tax reform that broadens the tax base by eliminating ineffective tax expenditures, strengthening capital income taxation, and addressing work disincentives.
Fostering employment of all
Financial disincentives to work are substantial, especially for low-income workers and second earners, who are more often women. For low-paid workers, accepting higher-paying jobs or working longer hours can result in little or no net financial gain due to the withdrawal of means-tested benefits and tax advantages as their wages increase.	Strengthen in-work benefits for low-paid workers. Abolish the partial tax splitting system for couples and the tax break for paid maintenance allowances for ex-spouses and children. Withdraw benefits targeted at low-income earners more gradually.
The number of disability benefit recipients has surged. Disability assessment relies mostly on medical criteria that may not reflect capacity to work.	Assess sickness and disability more frequently based on remaining functional capacity using interdisciplinary assessment teams.
Very few disability benefit recipients return to work despite rehabilitation programmes in place.	Make it mandatory to develop a Return-to-Work plan earlier in the sickness and disability benefits procedure, strengthen incentives to participate, while increasing resources for rehabilitation.
Boosting energy efficiency and electrification
Current greenhouse gas emission reduction plans fall short of EU targets. There is no national target for 2050. Agreement on burden sharing across federal and regional governments is intended but progress has been limited.	Set out binding climate targets consistent with EU emission goals for 2030 and 2050 and clearer plans on how these targets will be met.
CO2 prices vary by emission sources and for different fuels. Fossil fuel subsidies reduce emission reduction incentives. The new EU Emission Trading System will expand the coverage of emission pricing.	Gradually increase effective emission prices where they are low, including by implementing the new EU Emission Trading System and phasing out fossil fuel subsidies.
Ensuring secure electricity supply and emission reduction alongside the current commitment for nuclear phase out requires a substantial increase in renewable generation capacity and flexibility.	Better tune the regulatory framework and financial support for expanding capacities from renewable sources, for example by offering contracts-for-difference to renewable generators.
EU plans foresee a zero-emission building stock by 2050. Reaching this target will require more and deeper building renovations and the decarbonisation of heating systems.	Focus support on deep renovation and the decarbonisation of heating, for example by making most public support conditional on committing to minimum energy efficiency gains, prioritising low-income households.
Supporting growth, productivity, and innovation in small- and medium-sized enterprises
Regulatory burdens and administrative costs weigh disproportionately on small firms, hampering business creation and growth.	Adopt a whole-of-government strategy to reduce administrative costs for businesses. Continue to develop a single point of contact to guide small firms through administrative processes, making the most of digital innovations.
There is a wide range of support measures to SMEs. Beyond complexity, size-contingent measures pose risks to business growth and tax compliance.	Perform a sound assessment of SME support and phase out or adjust programmes that are redundant or ineffective.
Though declining, the gender gap in entrepreneurship remains significant. Women face multiple challenges to start a growth-oriented business, including unsupportive social norms, greater difficulty to access finance, lower levels of entrepreneurial skills and less effective entrepreneurial networks.	Address gender gaps in fields of study relevant for innovative entrepreneurship, including STEM. Continue to develop training and mentoring programmes targeted to female entrepreneurs.
Skills shortages hamper firms’ growth. Developing a coherent upskilling strategy, accessing public support for training courses, and arranging cover when employees take time out for training are challenging for small firms.	Help SMEs develop a training strategy, assist the temporary replacement of employees in training, and ensure the best use of existing public programmes.