Jonathan SMITH
OECD
Caroline KLEIN
OECD
OECD Economic Surveys: Belgium 2024
OECD Economic Surveys: Belgium
Abstract
Economic growth in Belgium has remained resilient to recent shocks and is expected to remain robust, though risks are elevated. While headline inflation has fallen fast, underlying price pressures persist, with core inflation falling more slowly. The credit and real estate cycles have turned amid the rapid tightening of financing conditions, but the banking system remains strong with robust capital and liquidity ratios. Medium-term fiscal sustainability challenges have been accentuated by the COVID-19 pandemic and energy crises. Belgium’s public debt burden is among the highest in the EU and is set to increase sharply in the absence of reform. Additional consolidation measures are needed, and a consolidation plan is required across federal and regional governments, with incentives to meet targets. The resilience of the economy, along with monetary policy easing, means fiscal consolidation can, and should, be accelerated. Raising public spending efficiency through spending reviews, and expanding the tax base, including by fostering labour market participation and increasing the effective retirement age, should be the cornerstones of this strategy. Efforts for a comprehensive tax reform should continue, eliminating ineffective tax expenditures and shifting taxation from labour towards less distortive taxes.
Output growth has decelerated but remains robust
Belgium’s economy proved resilient to disruptions following the energy crisis and Russia’s war of aggression against Ukraine (Figure 2.1). Economic activity has remained strong, and by the end of 2023, real GDP was 5.3% above its pre-pandemic level in the fourth quarter of 2019, which compares favourably to 3% for the euro area. Belgium is one of only a few European countries that have not recorded a negative quarterly growth rate since the beginning of 2022.
Source: OECD Economic Outlook database.
Economic growth has remained robust (Figure 2.2), despite being weighed down by high economic uncertainty, a slowdown in Belgian’s main trading partners, and inflation caused by spikes in energy and food prices. As a small open economy, Belgium is highly exposed to trade developments (Box 2.1). Exports have stalled lately, falling 3.3% in 2023, partly due to a loss of price competitiveness. Industrial production has been falling since December 2022, although rose in April and May (Figure 2.2, Panel B), and high borrowing costs and weak confidence have held back housing investment, falling 5.7% in 2023. The fiscal position has also deteriorated, with the debt-to-GDP ratio high (105%, Maastricht definition) and the fiscal deficit increasing in 2023. A contractionary fiscal stance is urgently needed in the near term to create fiscal space and put debt on a downward trajectory (see below). In contrast, household consumption is holding up relatively well (Figure 2.2, Panel A). This has mostly been due to the automatic indexation of wages and social benefits that has on average protected households’ purchasing power. Business investment has also remained surprisingly resilient given tight financing conditions (Figure 2.2, Panel A). Corporate gross margins reached historic highs in 2022, and although they have declined in 2023, remain above historic levels, providing companies with ample self-financing possibilities (NBB, 2023a). Given the context of high and rising energy and labour costs, alongside labour shortages, companies have been investing in digitisation and automation. Businesses have also been investing in greening the production process to reduce exposure to energy price volatility and to comply with environmental regulations (NBB, 2023a).
Note: Export performance includes goods and services and is calculated for each country by comparing the growth of its export volumes with that of its export market. This shows whether the country's exports grow faster or slower than its market, i.e. if over time it is experiencing market share gains or losses. Regional aggregate for the OECD is calculated inclusive of intra-regional trade.
Source: OECD Economic Outlook database 115, OECD Key short-term economic indicators.
Belgium’s economy is exposed to trade risks. Goods and services exports account for around 80% of Belgian GDP, among the highest in the OECD, with the euro area as its main trading partner (Figure 2.3, Panels A and B). Belgium is deeply integrated into global value chains and therefore affected by growing restrictive trade policies in non-EU trading partners. Measured as the combination of backward and forward integration of its exports, its integration is among the highest in the OECD at 57%. The main export industries include chemical products (including pharmaceuticals), machinery and transport, and manufactured goods (Figure 2.3, Panels C and D).
Source: OECD International Trade Statistics database, International Trade in Services database.
The labour market has been very tight but is starting to ease (Figure 2.4). Employment growth has been fast (Figure 2.4, Panel C), with employment rates surpassing pre-pandemic levels in the second quarter of 2021. Labour shortages are widespread, and the job vacancy rate is high (Figure 2.4, Panel B). Skill shortages and labour hoarding are particularly evident in certain types of employment, such as specialised technical profiles in manufacturing (NBB, 2023a) and sectors with a high share of temporary contracts (NBB, 2024a). Employment growth is however now decelerating (Figure 2.4, Panel C). The unemployment rate is near historic lows (RVA/ONEM, 2024), but masks significant regional disparities (Figure 2.4, Panel A). The governments in Belgium have the ambition to reach an employment rate of 80%. Raising activity in certain segments of the population, and related low transitions from inactivity or unemployment to employment, would help to ease labour market tightness and address gender inequality (see Chapter 3). Belgium has room to further increase employment rates by international comparison, although there is large variation across its regions (Figure 2.4, Panel D).
Source: Belstat, Belgian National Bank, Eurostat, OECD Economic Outlook 115 database.
Output is expected to grow at 1.2% in 2024, before reaching 1.4% in 2025 (Table 2.1). Continued weak global demand and tight financing conditions are weighing on growth in 2024. Economic activity should begin to pick up in 2025 though, as inflation and labour cost growth continue to moderate, and easing financing conditions and external demand support recovery. Consumption growth will slow as the effect of automatic wage indexation starts to fade and job growth decelerates. Lower energy prices should sustain demand from Belgium’s main trading partners, and faster wage growth in neighbouring countries will allow Belgium to improve price competitiveness. Construction activity has decelerated on the back of weakening housing markets and high building material costs, but lower borrowing costs and more relaxed lending standards in 2025 should bring some recovery. Employment growth is expected to continue its moderation in 2024, with a consequent increase in the unemployment rate, before picking up in 2025.
1. Contribution to changes in real GDP.
2. As a percentage of potential GDP.
3. As a percentage of household disposable income.
4. As a percentage of GDP.
Source: update of OECD Economic Outlook 115
Headline inflation fell but core inflation remains persistent
Headline inflation increased significantly in the post-pandemic recovery but has since fallen fast (Figure 2.5, Panel A). Supply bottlenecks and soaring energy prices triggered by the war in Ukraine have eased, reducing inflationary pressures. Headline inflation (HICP) peaked at 13.1% in October 2022, the highest inflation seen since 1975, but it declined in 2023 following energy prices, and faster than in neighbouring countries and the euro area as a whole (Figure 2.5, Panel A). Headline inflation in Belgium is relatively more affected by energy price fluctuations. A large share of households have variable-price electricity and gas contracts, that have been indexed monthly since the energy crisis, meaning a more rapid pass-through from wholesale to retail markets. In 2024, inflation began to increase again as the contribution from energy turned positive amid rising energy prices (Figure 2.5, Panel A).
The federal and regional governments enacted numerous support measures to cushion the effect of high energy prices, and while this limited the impact, retail prices still rose significantly. While some support measures were targeted (e.g., measures to protect vulnerable citizens with low incomes in Flanders and Brussels, and the extension of the social energy tariff by the federal government), untargeted support measures weakened price incentives for energy savings (e.g., the reduction in VAT on electricity and gas). Untargeted measures accounted for around 80% of the total energy relief measures budgeted by the federal government (OECD, 2023h). In the event of a similar energy price shock in the future, broad-based untargeted support should be avoided. Instead, policy should focus on interventions that maintain incentives for energy reduction.
Note: The estimates account for higher direct energy costs (electricity, gas and fuels) and higher indirect energy costs embodied in energy intensive intermediate inputs. The estimates assume energy inputs are non-substitutable in the short term and that higher energy costs are fully passed on to consumer prices over a period of 6 months. Alternative assumptions on the duration of pass-through do not fundamentally change the results. The figure refers to quarterly averages.
Source: OECD calculations based on Eurostat.
Core inflation has fallen more slowly than headline inflation (Figure 2.5, Panel B). Belgium’s sticky core inflation partly reflects widespread indexation of wages and some regulated prices in services, such as rents, telecom, and insurance (Jonckheere & Zimmer, 2024). This has made internal drivers of inflation more prominent than in neighbouring countries (Figure 2.5, Panels C and D). To limit housing price growth, rents were frozen at the end of 2022 for properties with low energy performance (EPC) scores. Landlords have been allowed to index rents once again: since October 2023 in Flanders and Brussels, and since November 2023 in Wallonia.
Headline inflation is expected to rise to 4.3% in 2024, before falling to 2% in 2025 (Table 2.1). The ending of government energy support measures has contributed to rising energy inflation in 2024, and continued energy inflation (albeit expected to be temporary), alongside persistent core inflation, will continue to push up headline inflation through 2024. As slowing domestic demand continues to reduce inflationary pressures however, and second round effects dissipate, headline and core inflation should slow through 2025.
The wage-setting framework in Belgium has been an important non-energy driver of core inflation (Jonckheere & Zimmer, 2024; Figure 2.6). Most workers in Belgium are covered by collective agreements that provide for automatic adjustments of their base wages to an index of consumer prices, called the health index (see Box 2.2). This put significant pressure on firms generating second round effects on prices. Most employees saw wages increase by 11% in January 2023. Nevertheless, this did not lead to excessively strong wage-price dynamics in Belgium. Companies had built up sufficiently large profit margins in previous periods (De Keyser et al., 2023) and absorbed part of the wage increases (Bijnens et al., 2023).
Note: Private sector wage indexation refers to the impact the indexation of wages has on the year-on-year growth rate of private sector wages. This is calculated as the weighted average evolution of the different wage indexation mechanisms of different sectors in the private sector.
Source: Eurostat and National Bank of Belgium.
The wage formation process in Belgium aims to avoid real wage decreases via automatic wage indexation to inflation, but also to avoid stronger nominal wage increases than in neighbouring countries. Indexation is set according to the smoothed “health index”, which is a national index of consumer prices excluding alcohol, tobacco, and motor fuels.
Wage indexation in the private sector is not a legal obligation, but consists mainly of sectoral schemes, introduced through autonomous (legally extended) collective agreements concluded between the social partners. Most workers in Belgium are covered by these collective agreements established by joint committees. Automatic indexation is done through sector-specific formulas and timing. These automatic indexation collective agreements can cover various wage components depending on the applicable joint committee, but they are usually limited to indexation of basic pay.
Different indexation mechanisms apply in the public and private sector. Public sector wages and social benefits are indexed when the health index exceeds a trigger index, which in the public sector is always 2% higher than the previous one. In practice, this means that indexation occurs when prices rise by 2% in comparison to the last trigger index. Social benefits are then increased by 2% one month later and wages by 2% two months later.
In contrast, there is no uniform indexation mechanism for the private sector. The social partners freely determine on a sector-by-sector basis, and not all employees are entitled to automatic wage indexation, although only 2% of employees do not have automatic indexation on a sector level. Around half of private sector employees also see their wages adjusted when a given trigger index is crossed like in the public sector, although not necessary by 2%. Almost all others benefit at specific points in time (e.g., annually or quarterly), with around 40% seeing an adjustment once per year. The framework for the wage formation process was created by the “Law on the Promotion of Employment and Maintaining Competitiveness”. By 2010 a 4% gap had emerged between salary developments in Belgium and the comparator countries of Germany, France, and the Netherlands (Belgium’s key export markets). This led the federal government to try to close the wage gap via a legal prerogative that allowed it to set a relatively low benchmark for wage rises for 2011-12 and 2013-14, and then a suspension of the index in 2015-16 (the so called “index-jump”). This led to a closing of the labour cost gap and greater cost competitiveness (IMF, 2019).
To prevent wage gaps from re-emerging a reform in 2017 adapted the upper limit on real wage increases that social partners can negotiate based on the projected wage growth in Belgium and its neighbouring countries over the next two years. This limit is a binding factor in salary negotiations. The reform also introduced a correction term for past overshoots of wages in Belgium versus neighbouring countries, a safety margin to account for forecasting errors, and a wage cost reduction that is partially taken into account when calculating the wage cost handicap. The wage norm for the bi-annual wage bargaining round of 2023-2024 was set at ‘0%’.
Source: OECD (2022a); NBB (2022c)
This significant wage growth was well in advance of increases among trading partners, and since it was not accompanied by an increase in labour productivity, put additional pressures on firms (NBB, 2023a), and put Belgium at a temporary competitive disadvantage with respect to wage levels (Figure 2.7). The Conseil Central de l’Economie has estimated that the wage gap between Belgium and its reference neighbouring countries (the Netherlands, France and Germany) will be around 1.8% by the end of 2024. This is based on a starting point of 0.9 % in 2022. Since the wage formation process includes a ceiling based on the wage growth of neighbouring countries, this reduces competitiveness losses over time, but the recent period of high inflation has tested the limits of the approach. As mentioned in the 2020 and 2022 Economic Survey, a review of the system could be considered, particularly the global effectiveness of the 2017 reform in safeguarding competitiveness and its effects on internal demand, economic growth, employment and inflation (OECD, 2022a).
The review of the system could amongst others look into the index used in wage indexation (‘the smoothed health index’). This index is not well insulated from fluctuations in the most volatile components of HICP, such as energy or food prices, which can lead to overestimates relative to real household expenditure becoming engrained in real wage increases (NBB, 2022b). It is welcome therefore that the Index Commission is currently assessing the components of the consumer price index. Excluding items with high volatility could lead to more predictable salary developments and distribute losses more evenly across households and other sectors of the economy, but whereby removing components must take into account the representativeness of the index.
The wage ceiling could be revised to enable wages to evolve more in line with economic fundamentals, such as productivity growth (Table 2.3). Productivity deviations across Belgium and its key trading partners must be considered to maintain external competitiveness, although it should be noted that labour costs and prices in general are not the only determinant of competitiveness and export performance. The wage ceiling adds to labour market rigidities as it reduces opportunities for social partners to negotiate and for employers to offer real salary increases differentiated across sectors and firms. Since deviations in productivity growth at the firm or sectoral level are not adjusted for, this worsens already relatively low job-to-job transition rates in Belgium and increases the need for non-transparent in-kind benefits by employers to achieve a differentiated compensation structure (Geis, 2023). Loosening rigidities would allow for a more optimal allocation of economic resources as it would increase the bargaining space for labour unions and the ability for employers to adjust real base pay for existing employees with productivity developments at the firm or sectoral level.
Note: Each series shows the ratio of unit labour costs in Belgium relative to the country stated. All series are indexed to 1996. The years 2019, 2020 and 2021 are considered as one as temporary unemployment during the COVID crisis has skewed the statistics. This bias has subsequently been compensated.
Source: Conseil central de l’économie.
Uncertainty around the economic outlook remains high
Uncertainty around the outlook remains high, with key risks related to trade prospects and future price developments. Belgium is vulnerable to external demand shocks and rising energy prices and energy supply disruptions, as it relies on imported energy from a limited number of suppliers for over 70% of its needs. This makes Belgium’s economy particularly sensitive to global energy price developments (European Commission, 2023a). Reliance on energy imports may accentuate further as Belgium plans to gradually phase out nuclear power and the deployment of renewable energy sources has been comparatively slow so far (see Chapter 4). Energy intensity is relatively high (Figure 2.8), mainly due to major industrial consumption, although electricity consumption has been declining recently. Belgium must transform its energy system to reduce vulnerability to future energy crises while accelerating the green transition (see Chapter 4). There is also uncertainty around the persistence of inflation, the impact of tight global monetary policy on global growth and the global risk to debt markets. Additional monetary tightening worldwide could further dampen external demand and amplify risks surrounding high indebtedness and repricing of real estate, with repercussions on the financial sector. Conversely, a faster than expected decline in price pressures, and a quicker global rebound would result in higher trade, renewed confidence, and more growth. Several tail risks, including climate-related events such as flooding, or excessive government support in other countries (as part of industrial policy) impacting Belgian competitiveness, could additionally dent growth prospects (see Table 2.2).
Source: International Energy Agency: World Energy Indicators database.
Tighter financing conditions have helped turn the credit and real estate cycles
Rapid tightening of monetary policy since mid-2022 has turned the credit and real estate cycles after years of dynamic growth. The ECB raised policy rates fast, and the average interest rate on new mortgage and corporate loans has increased significantly, contributing to a fall in the credit-to-GDP ratio, and a deceleration of credit growth (Figure 2.9, Panels A and B). Long-term rates also increased significantly, but less sharply than short-term rates (Figure 2.9, Panels C and D).
Note: Credit in panel A includes credit at market value from all sectors to the non-financial sector.
Source: Bank for International Settlements; National Bank of Belgium.
The cooling in the Belgian real estate market has been significant. Prices surged 16% between the end of 2019 and 2021, partly due to a persistent supply-demand gap in the housing stock particularly in major cities, such as Brussels. Since then, house price growth and housing transactions have declined, although the fall in house price growth has been milder than the EU as a whole (Figure 2.10). Higher mortgage rates have especially dampened demand for buy-to-let transactions, which had been boosted by the search for yield in preceding years (NBB, 2023b). The commercial real estate market is also showing significant signs of re-pricing, with activity dropping significantly in 2023 after record investment volumes in 2022. Belgian banks are among the most exposed in Europe to commercial real estate collateralised corporate lending, totalling around 15% of GDP (NBB, 2023b). A Sectoral Systemic Risk Buffer (SSyRB) was introduced in May 2022 in Belgium to cover risks related to residential mortgage loans, but no such buffer exists for commercial real estate. Belgium could consider introducing such a buffer for commercial real estate to further augment its macroprudential policy arsenal.
Source: Eurostat; OECD Analytical house prices indicators; OECD National and Regional House Price Indices.
The fall in real house prices should help mitigate housing affordability issues and reduce risks of an overheating housing market. There has been an upward trend in the price-to-income ratio since 1996. Housing affordability has deteriorated significantly since 2019 as income growth failed to keep pace with the rapid surge in prices. Around a third of Belgians rely on the rental market, more than on average in the OECD (24%) and rental prices have also surged, hitting all-time highs in 2023. The Brussels-Capital Region faces a severe housing crisis, with apartment prices nearly tripling between 1996 and 2020 and significantly increasing demand for social housing (OECD, 2024a). One household in two qualifies for social housing and demand for social housing increased by 27% between 2019 and 2024. Higher interest rates generally reduce the borrowing capacity of households, potentially constraining access to home ownership, but this has been counterbalanced by banks offering an increase in the maturity of new mortgage loans, which is welcome (NBB, 2023b). The Belgian central bank estimates that the gap between actual property prices and fair value has declined by around 10% since 2021, representing a return to prices closer in line with fundamentals (NBB, 2023b).
A more challenging economic environment calls for enhanced financial supervision
Belgian’s financial sector has remained resilient against the backdrop of higher interest rates and slower growth. Banks are in a good position, with capital and liquidity significantly above regulatory requirements, although banking sector leverage and liquid asset holdings are towards the higher and the lower ends of OECD countries respectively (Figure 2.11). Belgian banks proved very resilient to the events in the US and Swiss banking sectors in early 2023, exposures to these institutions were low, and liquidity was sufficient to meet increasing demands. Recent EU-wide stress tests have showed that Belgian banks performed above the European average, with good resilience to current inflationary pressures and macroeconomic and political uncertainties (EBA, 2023). The countercyclical capital buffer was also reactivated on 1 October 2023 to a rate of 1% by 1 October 2024, which will enhance banking sector resilience. This is important given banks are the main source of finance in Belgium. Lastly, the insurance sector is well capitalised with the solvency capital requirement coverage ratio standing twice the regulatory requirement (209% at the end of 2022).
Source: Financial Soundness Indicators, IMF.
Household debt however has increased significantly over the last decade primarily driven by mortgage lending in a buoyant housing market (Figure 2.12). Residential mortgages make up a fifth of total assets on banks’ balance sheets (around 55% of GDP), and riskier mortgage loans could become vulnerable should the macro-financial environment deteriorate or if the cooling of the housing market turns into a sharper correction (Table 2.3). Banks’ provisions for household debt are also at their lowest levels since at least 2018 and falling (Figure 2.13). Risks are reduced by the fact most mortgages in Belgium are fixed rate and fully amortising, which insulates many households from rising debt service costs (NBB, 2024a). Belgian households additionally have large amounts of financial assets, with household debt primarily held by those in third and fourth quintiles of the income distribution (34% and 48% of mortgage debt respectively). However, of those households with a mortgage in the first- and second-income quintiles, 50% and 25% respectively spend more than 30% of their pre-tax income on mortgage payments (NBB, 2023), and these households generally hold little buffer to cope with temporary income shocks. The central bank introduced so called “prudential expectations” in 2020, which have significantly improved the credit quality of mortgage loans since and led to a major decrease in the risk observed in the stock of loans. These expectations set tolerance levels (with some margins) for banks on the issuance of mortgage loans with high loan-to-value and/or high debt-service-to-income ratios, and there has been good compliance from the financial sector. A SSyRB was also introduced on 1 May 2022 for Belgian credit institutions that apply the internal ratings-based approach to their residential real estate exposures. Although this was lowered from 9% to 6% in April 2024, this is still the highest in the EU, and taking into account the combined adjustment of the CCyB and the SSyRB implies an increase in macroprudential buffers from EUR 2.6 billion as of 1 April 2024 to EUR 3.8 billion as of 1 October 2024 (NBB, 2024b). The central bank’s baseline scenario is of a soft landing, but Belgium should remain vigilant and consider additional macroprudential measures if and when necessary, including adjusting tolerance levels.
Source: National Bank of Belgium.
Belgian non-financial corporates (NFC) also have a relatively high debt ratio, although it has declined recently (Figure 2.12). A high share of this debt pertains to intra-group lending, typically held by large enterprises. Belgian corporates have generally had sufficient buffers to absorb recent shocks, however cost pressures are weighing on businesses and tighter financing conditions are raising credit risk concerns, particularly for corporates with weaker profitability. The median interest-coverage ratio has been declining over the past 20 years (NBB, 2023b), but weakening economic activity and tight financing conditions could weigh on the debt servicing capacity of some firms and increase the risk of corporate failures for the most leveraged. The credit quality of loans to NFCs is generally worse than the aggregate loan portfolio (IMF, 2023b), and while support measures (including loan deferrals, moratoria, furlough arrangements, and various tax exemptions) successfully prevented a wave of insolvencies during the pandemic and energy crisis, these measures may have increased the risks of debt overhang (OECD, 2021a). Although this so far seems to have been contained – support measures helped improve NFCs' solvency and liquidity positions – Belgium must take measures to reduce vulnerabilities as they emerge in this context. This includes continuing to assess non-performing loans which increased through 2023 (albeit from an all-time low in 2022), especially in sectors disproportionately affected by the energy crisis, and ensuring credit risk provisions remain adequate. Credit risk provisions for NFCs have not been increasing and are back to levels seen before the pandemic (Figure 2.13, Panel B). It is therefore welcome that the central bank reactivated the countercyclical capital buffer in October 2023.
Note: Stage 1 of impairment is the expected credit loss of a financial asset, recognised on day one of purchase or origination. Stage 2 is triggered if credit risk is deemed to have increased significantly. Stage 3 occurs where a financial asset becomes credit impaired.
Source: National Bank of Belgium.
The institutional framework used to set macroprudential policy should be reviewed. Belgium’s central bank is the designated macroprudential authority with a mandate for financial stability, but it does not have full power to set policy. Macroprudential instruments are subject to approval by the Minister of Finance or the Council of Ministers before coming into force via a Royal Decree. The Belgian federal government relies on the central bank for expertise, but it can refuse to enact the recommendation. There have been two instances of measures recommended by the central bank not being enacted by the federal government. Refusals to enact a recommendation are therefore not systematic. Nevertheless, robust institutional arrangements are key to effective macroprudential policy, and disagreements can delay or prevent the adoption of appropriate policies, potentially due to political considerations (Ingves, 2022; Valencia & Ueda, 2012). In an assessment of 14 jurisdictions, the Committee on the Global Financial System (CGFS) – a central bank forum for assessing risks to financial stability at the Bank for International Settlements (BIS) – suggested that macroprudential polices were better targeted when the macroprudential authority had a clear mandate, operational independence and the legal basis to direct policy across the full range of macroprudential tools (BIS, 2023). While some countries, such as France and Denmark, allow their Ministry of Finance to preside over the macroprudential authority, many countries (e.g. Ireland, Czech Republic and the United Kingdom) have given their central bank independence in setting macroprudential policy. This does not necessarily imply policy divergence. For example, the United Kingdom allows the Ministry of Finance to play a passive role via its presence as a non-voting member on the Financial Policy Committee (FPC) that sets macroprudential policy and via the exchange of remit-and-response letters to provide transparency and high-level coordination between policy objectives. Belgium should consider whether the central bank can be given full power to set macroprudential policy without the need for government approval, as also recommended by the European Systemic Risk Board (ESRB, 2011).
Financial sector resilience to climate-related risks requires closer attention. The energy and climate transition poses a challenge to Belgian financial stability, particularly due to the transition risk associated with energy inefficient buildings. The Belgian banking sector has a large share of energy inefficient buildings in its portfolio via mortgage exposures and the value of these could be severely affected by future green policies (NBB, 2023b). More than 40% of new mortgages in 2022 were for energy-inefficient homes with an EPC-rating of D, E or F. Given the considerable size of real estate exposures in the Belgian banking sector, banks must integrate climate-related risks into their management practices. Lack of regulatory standards often hinders the ability to integrate climate risks into the supervisory framework, and thus it is welcome that the Belgian central bank has recently asked financial institutions to collect data concerning the energy efficiency of collateral on new mortgage loans. In line with European legislation in terms of ESG reporting and risk management (Corporate Sustainability Reporting Directive, Sustainable Finance Disclosure Regulation, and Revised Banking Package), as well as the initiatives of neighbouring countries (such as Germany, the Netherlands and Luxembourg) which have also developed national sustainable finance strategies, Belgium should go further and build on the conclusions of the study on policy options for a Belgian sustainable finance strategy project funded through the EU Technical Support Instrument (TSI). This strategy could, amongst others, improve the quantity and quality, as well as the monitoring of climate-related reporting. Standardised regulatory guidance can lead to a significant increase in the disclosure of climate-related risks (Acosta-Smith et al., 2023).
The pandemic and the energy crisis accentuated the fiscal sustainability challenge
The pandemic and the energy crisis have left Belgium with higher structural deficits and a further increase in an already high debt-to-GDP ratio. The debt-to-GDP ratio reached 105% in 2023 (Maastricht definition), among the highest in the EU (Figure 2.14). Moreover, since 2022, the rise in government bond yields and the accompanying decompression of risk premia are putting additional pressure on public finances.
In the near term, urgent consolidation measures are needed. Federal and regional governments have continued to run deficits well above 2019 levels despite the diminishing need for fiscal support amid recovering growth. The level of debt poses macro-financial risks and is limiting the scope for public investment, including necessary investments in the digital and green transitions. New fiscal measures are needed to stabilise public finances and investor confidence, accommodate the fiscal impact of population ageing, and build buffers for future fiscal shocks.
Source: OECD Analytical database.
Risks to long-run fiscal sustainability are sizeable
Long-run fiscal projections point to significant risks of an unsustainable increase in public debt. In absence of reform towards consolidation, the primary balance is projected to deteriorate from its estimated level for 2025 (-2.5% of GDP) as ageing costs increase. Estimates suggest this would bring public debt above 200% of GDP by 2049 (“No reform scenario” in Figure 2.15). Gradually improving the primary balance to +0.6% of GDP – its pre-pandemic average level – by 2030 would stabilise the debt-to-GDP ratio at around 100% (“Consolidation scenario” in Figure 2.15). This implies a consolidation effort of 3.7 percentage points of GDP between 2025 and 2030 (0.7 percentage point of GDP per year). Offsetting the rising public spending on pensions, health, and long-term care accounts for 0.6 percentage points of the total. Structural reforms included in this Survey and an ambitious package of saving measures amounting to 3% of GDP could achieve this target (Box 2.4). After 2030, maintaining the primary surplus will be complicated by further rises in ageing costs. The share of the population over 80 years old is projected to double by 2070 and ageing costs are estimated to add an average of 3% of GDP to government spending between 2030 and 2060. Maintaining primary surplus at 0.6% after 2030 would require an average annual consolidation effort of around 0.1% of GDP.
Gross government debt as a share of GDP
Note: The "Current tax and spending policy" scenario is based on the OECD Economic Outlook 115 projections until 2025, the OECD long-term model thereafter. The scenario assumes a continuation of the policy stance with the primary fiscal balance remaining constant at its 2025 level (-2.5%) before accounting for net ageing-related costs. Net ageing costs are defined as changes in expenditure on old-age pensions, health, and long-term care minus changes in expenditure on education, which will add on average an additional 3.7 percentage points of GDP to annual government spending from 2025 to 2060 assuming no-policy change. The "Consolidation" scenario assumes that the primary budget surplus reaches 0.6% of GDP by 2030 and is maintained until 2060, which requires tax and spending measures after 2025, including to offset rising net ageing costs. The "Consolidation scenario plus reforms generating higher output growth" scenario additionally assumes higher GDP growth from the implementation of the ambitious package of structural reforms reported in Box 2.4.
Source: Adapted from OECD (2024), OECD Economic Outlook: Statistics and Projections (database), May; Guillemette, Y. and D. Turner (2018), "The Long View: Scenarios for the World Economy to 2060", OECD Economic Policy Paper No. 22., OECD Publishing, Paris; and European Commission (2024), "The 2024 Ageing Report - Economic and budgetary projections for the EU Member States (2022-2070)" Directorate-General for Economic and Financial Affairs.
Furthermore, fiscal consolidation will have to go beyond achieving pre-pandemic levels to put deficits and the public debt burden on the downward path envisaged in the new EU fiscal rules (see Box 2.3). This should be expenditure led, with a focus on cutting ineffective spending, given Belgium’s already high tax burden (see below). Belgium’s deficit and debt levels are well above the thresholds for a reference trajectory, 3% and 60% of GDP respectively. Nevertheless, this substantial fiscal challenge can be overcome and indeed consolidation has already started. Estimates from the federal Ministry of Finance suggest that Belgium has been undertaking an EUR 11 billion effort (1.8% of GDP) since 2021. The majority of this (0.8% of GDP, around 5 billion EUR) is planned for 2024, the first non-crisis year since 2021. Furthermore, Belgium undertook substantial fiscal adjustments in the past, with the primary balance surplus reaching 6% of GDP in the early 2000s. Belgium is among the few countries that maintained large primary surpluses for sustained periods (Eichengreen and Panizza, 2016). In addition, undertaking structural reforms that boost growth could help improve debt dynamics. The package of reforms recommended in this Survey would reduce the debt-to-GDP ratio by around 25 percentage points by 2050 or would allow for lower primary budget surpluses (“Consolidation scenario plus reforms generating higher output growth” in Figure 2.15 and Box 1.2).
The new economic governance framework was adopted by the European Council on 29 April 2024 with the aim to reduce debt ratios and public deficits in a gradual, realistic, sustainable, and growth-friendly way. All EU countries are obliged to submit national medium-term structural budgetary plans for a 4- or 5-year period (depending on the length of the national legislature), committing to a multi-year public net expenditure path, as well as explaining how investments and reforms will be undertaken. The first national plans are to be prepared by 20 September 2024, unless an extension is granted.
The rules protect structural reforms and public investment in strategic areas by allowing for the budgetary adjustment period to be extended to a maximum of seven years if certain reforms and investments, such as for the digital and green transition, are carried out. Participation in the Recovery and Resilience Facility is considered a sufficient condition for an extension.
For Member States, like Belgium, whose public debt exceeds 60% of GDP or whose public deficit exceeds 3% of GDP, the European Commission will present a reference path for annual growth in net primary expenditure that ensures (by the end of the fiscal adjustment period) the public debt ratio follows a plausible downward path and the deficit is reduced and kept below 3% of GDP over the medium term. Member states can engage in technical dialogue with the Commission (up to one month) before this path is transmitted to discuss the relevant economic and budgetary outlook, and any relevant recent statistical data available.
In particular, the technical trajectory ensures that:
1. the expected public debt ratio decreases each year by an average of at least 1 percentage point of GDP if the public debt ratio exceeds 90%, or 0.5 percentage points of GDP if the public debt ranges from 60% to 90%;
2. the budgetary adjustment continues until the deficit level reaches 1.5% of GDP in structural terms. The annual improvement in the structural primary balance to reach the required level is 0.4% of GDP, reduced to 0.25% of GDP if the adjustment period is extended.
On the basis of the reference path, Belgium will need to integrate the fiscal adjustment path into its national medium-term structural budgetary plans, including information on planned reforms (replacing the current stability and reform programmes). In addition, the agreement provides for a control account to record any deviations from the net expenditure trajectories at the time of implementation. If differences in the control account exceed 0.3 percentage points of GDP per year (or 0.6 percentage points of GDP cumulatively), a report will be drawn up by the Commission. In the case of no or insufficient action on the part of the Member state, a system of fines will be adopted, capped at 0.05% of the previous year’s GDP. These fines must be paid every six months until the Council finds compliance with the letters of formal notice in accordance with Article 126(9) Treaty of the Functioning of the European Union.
Adding to the fiscal challenges are wide uncertainties on the impact of the climate transition on public finances. Transforming the economy to reduce emissions requires considerable public spending and could bring additional tax revenues. For example, investment costs to achieve the energy transition in the energy industry and public transport in Belgium have been estimated at about 1.9% of GDP per year until 2030, parts of which will be borne directly by the public sector (OECD, 2021). Also, government subsidies are needed to encourage green mobility and converting the building stock to low emissions (see Chapter 4). Additional public investments will be necessary in training as the green transition transforms skills demands (FPS Environment, 2023) and for climate change adaptation. Combining several policy instruments to achieve net zero, as discussed in Chapter 4, can reduce these costs (D’Arcangelo et al., 2022). The green transition can generate tax revenues – for example from fuel excise and carbon taxes. These revenues will however shrink in the longer term as the transition progresses. Identifying fiscal risks, such as the need for more public investment to reach emissions targets than planned, as done in the United Kingdom and Germany would help strengthen debt sustainability analysis (OECD, 2020).
This box summarises potential medium-term impacts of selected structural reforms included in this Survey on the government balance (Table 2.4). The estimated fiscal effects include only the direct impact and exclude potential behavioural responses that could occur due to a policy change. While recommended reforms in this Survey have budget and GDP implications, not all can be quantified due to model limitations.
Source: OECD calculations, estimates of green investment and revenues from pricing instruments come from Guillemette, Y. and J. Château (2023), "Long-term scenarios: incorporating the energy transition", OECD Economic Policy Papers, No. 33, OECD Publishing, Paris, https://doi.org/10.1787/153ab87c-en; estimates of savings from higher senior employment come from European Commission (2024) 2024 Ageing Report
Belgium will need to commit to a multi-year downward trajectory for its public debt and deficit starting from 2025. Belgium remains the only Euro Area country without fully developed national multiannual fiscal planning. While the Stability Programme contains budget targets beyond the one-year horizon, the level of detail is limited compared with fully developed multiannual fiscal planning. There is no obligation to justify publicly any discrepancies from the budget trajectory and experience has shown that the targets stated in the stability programmes are often not met (NBB, 2021). A credible transparent medium-term fiscal framework supported by sound institutions is an important criterion for a successful consolidation (Balasundharam, et. al, 2023). The High Council of Finance (HCF), an advisory fiscal council set up to promote the coordination and implementation of fiscal policy in the Belgian federal state structure, is mandated to ensure a sustainable public finance trajectory. However, lack of political agreement on targets prevents the HCF from carrying out this mandate (see below). A carefully designed and committed multi-year plan would provide a clear, transparent, and accountable roadmap, which increases the chance of buy-in both from the population and the markets (IMF, 2023c). Multi-annual planning is carried out by the Flemish government, which produces multi-annual budget estimates based on different policy options, but this should be introduced at all governments.
Belgium’s federal structure calls for coordinated consolidation efforts
An increasing contribution of Belgium’s gross debt is from the regions and communities, although the debt and deficit remain concentrated with the federal government, and there is significant regional disparity (Figure 2.16). The shocks from the pandemic and the energy crisis have widened deficits in the regions and communities. Although recent efforts to extend the maturity of public debt at both the federal and regional levels are welcome, particularly as most was achieved before interest rates rose (NBB, 2022a). In Wallonia, floods in 2021 and subsequent reconstruction needs presented further challenges. From an average of around 12% of Belgian GDP from 2010-2015, public debt of the communities and regions rose to around 17% of GDP in 2022, or 16.6% of total public debt. There is however sizeable regional variance, with some entities having relatively high levels of debt compared to their disposable revenue (Figure 2.16, Panel C). All entities currently have a good quality sovereign rating (at least an A rating from all rating agencies).
Belgium’s federal structure and fiscal decentralisation increases the importance of coordination across all governments. Devolution of powers and competences has progressed in Belgium over recent decades with six state reforms leading to a complex set of arrangements. Multiple decision makers shape the state of public finances, and there is no hierarchy of members in Belgium’s institutional setting. Governments of the federal, regional and community are equal from a legal perspective, hence there is no subordination to the federal government in matters of budgetary policy.
Note: “Others” include the German community, Common Commissions, Interregional units and local governments. Disposable revenues represent the financial resources available to the various entities for policy implementation. However, the revenues of the Community commissions (COCOM, COCOF & VGC) in Brussels are not taken into account.
Source: National Bank of Belgium.
In Belgium, subnational governments are largely funded by transfers, implying a substantial vertical fiscal imbalance (Figure 2.17). To enhance fiscal management, revenue must follow devolved mandates (OECD, 2022b), and the latest State Reform (the Sixth, finalised in 2012) paved the way for more revenue autonomy, such as introducing regional personal income tax. However, it also devolved more powers and competencies to the regional and community governments, such that broadly, expenditure decentralisation outpaced revenue decentralisation. As a result, vertical fiscal imbalance, as measured by the share of own spending not financed through own revenues, is estimated to be larger than in other fiscally decentralised countries, such as Canada or Switzerland (OECD, 2022b).
Source: OECD Global Revenue Statistics database.
A system of Cooperative Agreements across governments is supposed to ensure fiscal sustainability but is not working as intended. An Agreement was last finalised in 2013 but has never been implemented. Following the Sixth State reform in 2012, there was an agreed principle that each entity should move towards budget balance in the medium term. This was to be operationalised in Cooperation agreements for budget coordination, with recommendations of the HCF forming the basis of the agreements. The Agreement in 2013 provides the formal framework for budgetary coordination in Belgium. The allocation of annual budget targets must be approved by the Consultative Committee, which comprises the prime minister and the minister presidents of the Communities and Regions. This Committee, however, has never agreed on the allocation of the budget target and given its approval. This lack of agreement on targets prevents the HCF, which is also chronically understaffed, from effectively monitoring compliance with these targets. This undermines the credibility of the overall fiscal consolidation trajectory.
Belgium’s inability to reach agreement in past years illustrates the limitations and risks to a non-structured approach. The 2024 combined budget of the regions and communities will deviate from the Stability Programme with a planned deficit 0.4 percentage points of GDP larger than the target of -1.1% of GDP. A way ahead needs to be found. One route is to resolve the impasses in the 2013 Coordination Agreement to ensure accountability and that binding targets are met. Another is to seek an alternative to the Agreement system. Belgium is currently revising the Cooperation agreement as the implementation of the new EU economic governance framework will entail a need to adapt the Cooperation Agreement. It would be welcome if this revision could reinforce the role of the HCF. The necessary provisions should be brought into force by 31 December 2025.
Once political agreement is reached, artificial intelligence can help operationalise collaboration across all governments. In France, an early warning system intended to identify local authorities potentially facing financial difficulties is being enhanced using AI tools. Indonesia is also using machine learning techniques to standardise municipal budgetary and financial data reporting to the national government in real-time (AI as a Financial Advisor (AIFA) system). This offers an easy-to-use interface to monitor and compare subnational government performance (OECD, 2023d). While AI could be used to assess risks and inform policy making, its use should be conditioned to ensure privacy, security, data reliability, fairness, and accountability.
Increasing public spending efficiency
Public expenditure is among the highest in the OECD and has increased sharply since 2019 mostly due to pandemic-related spending and the energy crisis (Figure 2.18). Addressing this high level of spending should form the basis of Belgium’ fiscal consolidation strategy. Belgium spends more than the euro area average across multiple spending categories, and particularly on general public services, and economic affairs (Figure 2.18). Social benefits have risen over the last 20 years by 1.5 percentage points of GDP more than the average in neigbouring countries (Godefroid, Stinglhamber and Van Parys, 2021). This strong increase in social benefits has been a key factor explaining primary expenditure growth. In addition to deficit reduction, the 2020 and 2022 Economic Surveys underscore the importance of improving the composition and efficiency of public spending to also create space for public investment needs, especially given age-related pressures and the climate transition.
Source: OECD National Accounts database.
Introducing strict expenditure rules for all governments could improve transparency and support spending-based consolidation, as recommended in the 2022 Economic Survey. Expenditure rules have proved successful elsewhere, such as Switzerland, in contributing to a decrease in debt ratios. Yet, echoing the paucity of coordinated and medium-term budgeting, Belgium has limited expenditure rules (a notable exception is a rule around the real growth of healthcare spending). Belgium is beginning to explore the use of more expenditure rules, which is welcome. Flanders for the first time incorporated an illustrative non-binding spending norm in its 2022-2027 multi-annual budget and will apply an expenditure rule in its annual budget from 2025 onwards. A project to design an expenditure rule was also recently initiated at the HCF, in cooperation with the European Commission and the OECD. Belgium could also take inspiration from the Netherlands and Denmark, who take medium-term projections to define expenditure rules, based on the room for fiscal manoeuvre and defined quantitative budgetary objectives.
There is scope to make greater use of spending reviews. Spending reviews have started to be used (both at the federal and regional levels), which is welcome, but are limited in scope and conducted inconsistently across governments. The federal government piloted three spending reviews in 2021 (on telework, the exemption of withholding tax, and the effectiveness of care), and will begin to consider different topics each year. Regions are also initiating more spending reviews. Flanders conducted a broad reassessment of all expenditures in 2021 and is in the process of conducting nine specific spending reviews. Wallonia introduced zero-based budgeting in 2020 (a budgeting technique in which expenses must be justified for a new budget starting from zero, versus adjustment from the previous budget), and has started spending reviews. The Brussels-Capital Region has also completed several spending reviews and will integrate this into the budgetary cycle.
Belgium should build on these experiences of pilot spending reviews and move to comprehensive reviews that cover a larger share of government spending, thus with greater budgetary implications. The Federal Public Service Strategy and Support (BOSA), the central actor for public finance within the federal administration, should facilitate technical, methodological coordination and coherence, significantly involving the federal and regional line ministries. Many OECD countries have used comprehensive review procedures as a basis to manage severe budgetary problems (OECD, 2023b). In the United Kingdom, a comprehensive spending review is used in the preparation for a new medium-term expenditure framework, while in the Netherlands, comprehensive spending reviews mostly take place in the years preceding parliamentary elections. Given the current budget situation, reviews should be designed to meet dual objectives, including fiscal consolidation – identifying savings measures that reduce the rate of growth or the level of public expenditure – and increasing the efficiency and effectiveness of policies.
Spending reviews should be integrated systematically into budgetary planning cycles at all government levels, as currently envisaged in the Recovery and Resilience Plan. Integration into the budgetary preparation process increases impact, ensuring that certain policy options are at least considered. Belgium could take inspiration from the Netherlands for which spending reviews have become an integral part of the regular budgetary framework (the Interdepartementale Beleidsonderzoeken). The reviews are used in budgetary preparation and are linked to the multiannual budget, providing multiple policy options. The Netherlands also mandates providing quantitative options with at least one policy option that saves up to 20% of the expenditure base in the following four years. In Belgium, spending review conclusions are mostly qualitative, although both Flanders and Brussels have begun to incorporate quantitative savings scenarios into their spending reviews, which is welcome. Through the revision of its Public Finance Code, Flanders and Brussels has also legally embedded spending reviews into their budgetary process.
Tackling rising ageing costs
Pension spending makes up a large share of ageing costs
Pension expenditure makes up a large share of Belgium’s ageing costs and is expected to increase significantly faster than some other high-debt reference countries (Figure 2.19; European Commission, 2024). Serious reforms are needed to enhance financial sustainability. By 2045, Belgium is projected to have the tenth highest public pension expenditure in the European Union (European Commission, 2024). A pension reform was agreed in July 2023, following previous reforms enacted in December 2020 (Box 2.5). The main focus of reforms has been to improve adequacy and equity of the pension system (e.g. increasing the minimum pension and focusing on career length rather than age), while increasing incentives to delay retirement decisions (e.g. introducing a pension bonus for later retirement). The isolated impact of these pension reforms is estimated to increase costs by +0.14 percentage points, although incorporating the projected upward adjustment in the long-term employment rate (since 2020) would imply pension expenditures of 0.2 percentage points of GDP lower in 2070 (Belgian Study Committee on Ageing, 2023).
Further focus on incentivising and enabling older workers to stay in the workforce is needed. The gap between the statutory retirement age and average labour market exit age remains among the highest in the OECD, and the average labour market exit age is among the lowest in the OECD as well (OECD, 2023). Current incentives to retire at the statutory age are low by international standards. Early retirement is possible with no actuarial reduction in the pension calculation (from age 60 with 44 career years, at 61 with 43 career years, or at 63 with 42 career years), although the pension will be incomplete for those with less than 45 career years (OECD, 2023g). The introduction of a pension bonus to encourage longer working lives is welcome, but as is common in most other OECD countries, a combination of bonuses and penalties based on the statutory retirement age, should be considered. In Finland for example, amongst other conditions, a 0.4% reduction (addition) is applied to each month of the pension taken out before (after) the lowest pensionable age. Complementary reforms are also needed to extend working lives. Upskilling is essential to maintain the employability of older workers, but their participation in lifelong learning is low (see Chapter 3). Accommodating older workers’ needs for flexibility and improved working conditions have also been shown to delay retirement decisions, such as supporting needs around flexible working hours and teleworking (Hudomiet et al., 2019). Belgium could take inspiration from Denmark and Finland who have automatically linked the retirement age to life expectancy to lower pension spending, but as a result, placed greater emphasis on the promotion of healthier jobs and workplaces, such as early-intervention models for those with reduced work ability, and tackling age discrimination to facilitate longer working lives (OECD, 2024d). Belgium should also consider further increasing the earliest age of retirement to directly increase the effective age of retirement.
Complementary reforms outside of pension policies are additionally required to extend working lives. Strong spending increases are being driven, among others, by rising numbers of people receiving disability benefits. Belgian disability beneficiaries increased by around 5 percentage points over the last decade, versus 1 percentage point for the EU. This was partly due to the tightening of early retirement schemes that led an increase in labour market exit via disability (OECD, 2022a). As the statutory retirement age increases to 67 by 2030, reforms to minimise pathways for labour market exit, particularly to avoid larger inflows to disability schemes, will be crucial (see Chapter 3). Lastly, increasing female labour market participation, for which measures are so far absent, could help lessen sustainability concerns and reduce the gender pension gap, which is just above the OECD average (OECD, 2024b; see Chapter 3).
Age-related expenses, including healthcare and pensions, as a percentage of GDP
Note: The AWG scenario is taken from the European Commission (DG ECFIN) and the Economic Policy Committee (Ageing Working Group) baseline scenario for calculating the overall budgetary impact of ageing. EU averages are weighted according to GDP.
Source: European Commission Ageing Report 2024.
Two sets of reforms have been made since 2020 as part of a multi-pronged strategy to address the need for pension reform. The main emphasis was to increase pension adequacy without increasing long-term ageing costs. The preference for enhancing financial sustainability is through achieving an 80% employment target, although serious reforms are required for this to become a reality (see Chapter 3).
The first set of reforms were agreed in December 2020:
1. The minimum pension granted to retirees with low pension rights was increased to reach 1 500 EUR net per month in 2024.The maximum pension ceiling was additionally raised.
2. The pension calculation for the self-employed and employees has been harmonised. The correction coefficient for pensioners on the self-employed scheme was abolished for occupational career years from 2021. The correction coefficient reflected the ratio of contributions to pension under the self-employed scheme versus that of employees. For income years from 2019, the coefficient was 69%, and earnings were multiplied by this coefficient to calculate the pension of the self-employed. The contribution rate for the self-employed was not increased.
Given high inflation and automatic indexation, the minimum pension for a single person reached 1 637 EUR gross per month in January 2023, which is more than what planned in the 2020 reform (EUR 1 500). Consequently, the fourth and final increase in January 2024 was revised. As of May 2024, the gross minimum pension was EUR 1 773.
The second set of reforms were politically agreed in July 2023 (passed in Parliament in April 2024), which included:
1. The introduction of a pension bonus to encourage longer working lives. For each year worked after the earliest possible retirement date, a bonus is awarded to the pension. This can be accrued over a period of a maximum of 3 years. The bonus is progressive: EUR 3 775 for the first year; EUR 7 550 for the second; and EUR 11 325 for the third year. It can be taken as a one-time payment or as a supplement to the monthly pension.
2. Limiting adjustment to civil servants’ pensions (the perequation system) to a maximum annual increase of 0.3% more than the inflation rate. Previously, the perequation system implied that retired civil servants would benefit from an increase in the salary scales of current civil servants.
3. Introduction of a supplementary career-length condition (20 years worked or credited for illness or care periods) to have access to the minimum pension in addition to the current requirement of 30 years worked or credited.
The measures announced in December 2020 are estimated to increase the cost of pensions (over the period 2019-2070, as a percentage of GDP) by 0.57 percentage points, while the July 2023 measures are expected to lead to a reduction of 0.43 percentage points. This implies an overall increase in pension expenditures of 0.14 percentage points. Taking into account the improved employment outlook however, following the previous government’s reforms, long-term pension expenditures are expected to decrease by 0.2 percentage points of GDP compared to projections in 2020.
Source: Belgian Study Committee on Ageing (2023)
Healthcare and long-term care expenditure are high and will rise significantly due to ageing
The healthcare and long-term care systems need to evolve to overcome the challenges of ageing. Health spending (as a % of GDP) is above the EU average, although below that of neighbouring countries France and Germany (Figure 2.20). Ageing could increase public spending on healthcare and long-term care by around 0.6 and 1.7 percentage points of GDP respectively by 2070 (European Commission, 2024). The concentration of multiple long-term conditions (multimorbidity) among the older population partly accounts for this high spending. Those with multimorbidity currently account for 65% of total healthcare expenses (Van der Heyden et al., 2023).
While there is a need for resilient health systems, scope for efficiency gains have been identified in various aspects of healthcare. The use of low-cost teleconsultations is comparatively small in Belgium compared to the rest of Europe (OECD, 2023c). The number of hospital beds is high, with a longstanding over-capacity in most types of beds, but an under-capacity in geriatrics (IMF, 2023d). Converting some of the excess hospital beds into geriatric beds could reduce the fiscal cost of increasing capacity of geriatric care. The rate of avoidable hospital admissions is also high for some conditions, suggesting that efficiency gains are possible by reinforcing primary healthcare (OECD, 2023c). Various studies indicate other inefficiencies, such as an insufficiently widespread use of breast cancer screening (Devos et al., 2019), or a comparatively high use of expensive medical imagery (INAMI-RIZIV, 2022). A widespread review on the use of health resources could identify cost reductions.
Belgium has scope to strengthen prevention to avoid costly hospitalisation, avoidable mortality, and chronic diseases. Spending on prevention is comparatively low (Figure 2.20, Panel C; OECD, 2023). Increasing it would help postpone the occurrence of diseases, reduce hospitalisation rates, and healthcare treatment costs. This would make the working-age population healthier and more productive and enable older people to maintain healthier lives for longer. The share of the older population in Belgium that are limited in their ability to perform at least one activity of daily living or instrumental activity of daily living is among the highest in Europe (OECD, 2023c). Older patients are also associated with a higher risk of admission through the emergency department and longer hospital stays (De Foor et al., 2020).
Source: OECD Health expenditure and financing database; OECD System of Health Accounts.
Public spending on long-term care is also among the highest in Europe, but lower than the Netherlands and the Nordic countries (Figure 2.21). This is projected to increase significantly by around 1.7 percentage points of GDP by 2070 (European Commission, 2024). Belgium’s high cost comes despite a high prevalence of informal long-term care, and a long-standing policy to develop at-home care services (HealthyBelgium, 2022). Belgium should undertake a review to identify cost reductions, including whether support is targeted to those in need. Belgium could additionally take inspiration from countries that have attempted to strengthen preventative health policies to reduce long-term care needs, such as Norway and Japan. Developments in new technology could also provide labour-saving technology to reduce costs and improve productivity. Denmark has prepared a 10-year plan to achieve an additional 10 000 equivalent full-time employees in the public sector (including long-term care) via automation and digitalisation (OECD, 2024d).
The complex distribution of tasks and responsibilities across different governments increases healthcare inefficiencies. Responsibilities are often complexly intertwined. This complexity generates overlaps and increases administrative and coordination costs. In addition, the incentives of different governments are often not aligned because community and regional decisions affect federal costs. For instance, communities may lack incentives to invest in preventative care, because they do not benefit from lower acute care costs which are borne by the federal government. Better aligning the incentives of different governments, such as communities sharing federal care costs, or consolidating responsibilities to a single government level, could reduce incentives to cost shift and improve overall efficiency.
Source: OECD Health Statistics, European Commission Ageing Report.
Improving efficiency and fairness of the tax system
The tax burden is high, but the tax base is narrow
Belgium’s substantial public spending is echoed in taxation. Government revenues as a share of GDP were 42% of GDP in 2022, the sixth highest in the OECD (Figure 2.22, Panel A). There is extensive use of special tax provisions and there are compliance issues. Tax expenditures were estimated at around 6% of GDP in 2019 and have increased since the early 2000s (Figure 2.22, Panel B). An increasing proportion of them are directed to employment and research and development measures (Figure 2.22, Panel C). The extensive use of reduced rates and tax base narrowing measures implies standard tax rates are higher than otherwise would be the case. These tax concessions also diminish the efficiency of the tax system, increase complexity and reduce transparency. Moreover, tax expenditures can be regressive and undermine environmental policy objectives.
Note: The OECD Inventory of Support Measures for Fossil Fuels is based on a bottom-up approach that collects detailed information from official government sources on individual support measures for fossil fuels. It covers direct budgetary transfers and tax expenditures arising from tax provisions that provide a benefit or preference for fossil-fuel production or consumption relative to alternatives. The Inventory aims for comprehensiveness, but it is not exhaustive. The Inventory contains more information for countries that have demonstrated greater transparency in their budget documentation, and therefore higher levels of support can also reflect greater transparency.
Source: OECD (2022), OECD Global revenue Statistics, Ministry of Finance data, OECD Fossil Fuel Support - Detailed Indicators data.
As recommended in past Economic Surveys of Belgium (OECD, 2020; OECD, 2022a), tax expenditures should be streamlined. The expenditures should be assessed at all governments and those that do not meet their original objective, or undermine the effectiveness of other policies, should be reformed (Table 2.5). Eliminating ineffective tax expenditures would also help reduce the administration burden on small firms and improve tax compliance (see Chapter 5). Cost-benefit analysis of tax measures would be facilitated by more clearly defined policy objectives, better data, and more analytical resources (Janssens and Luyten, 2021). Among the more glaring candidates for reform are: multiple reduced VAT rates, personal income tax deductions disproportionally benefiting higher income households, the R&D tax credit, tax exemptions for second and third pillar pensions, and the favourable treatment of company cars (see Chapters 4 and 5). As discussed in Chapter 4, eliminating fossil fuel support should be a priority. These (usually implicit) subsidies reduce the efficiency of climate change mitigation policies by weakening the carbon-price signal and are large in Belgium, estimated at around 3.1% of GDP in 2021 (FPS Finances, 2024; OECD, 2023e; Figure 2.22, Panel D).
Reducing labour income taxation and improving tax neutrality
A major tax reform has stalled. The reform aims to modernise and simplify the tax system, removing disincentives to work, and broaden the tax base. However, it has been put on hold due to disagreements in the federal government coalition. This is unfortunate as the tax system is heavily skewed toward the taxation of labour; penalising growth, employment, and fiscal sustainability (OECD, 2022a, Figure 2.23, Panel A). Belgium is among the OECD countries with the highest tax wedges (OECD, 2023f, Figure 2.23, Panel B) and targeted cuts in effective labour income taxation are needed to sustain labour market activation. Financial disincentives to work remain high for low-wage workers despite recent reforms, and for women (Chapter 3). Progressivity of personal income tax is high, but the top tax rate applies at a relatively low level of income. Widening the personal income tax brackets would reduce the marginal effective tax rate for individuals with medium incomes and could increase incentives to expand working hours. Hours worked stand well below the EU and the OECD averages, reflecting above average incidence of part-time employment. At the regional level, transaction taxes on immovable properties could be reduced as they are relatively large and likely impede mobility. In Flanders, the transaction tax on immovable properties was reduced to 3% on 1 January 2022 (previously 6%) when buying a property that qualifies as the individual’s sole owner-occupied property. The tax was also reduced in Brussels (on 1 April 2023) for the same category of owners, through the amount and ceiling of the tax allowance simultaneously being raised, accompanied by an additional allowance when the energy performance of the building is improved. Fiscal room to finance these measures could be created by phasing out ineffective tax expenditures and strengthening capital income taxation (Table 2.5).
Source: OECD Global revenues Statistics and OECD Taxing Wages.
The taxation of capital income is relatively flat and low mainly because of the absence of a capital gains tax. The gap between labour and capital income taxation is large by OECD standards (see Box 2.6). It has gradually increased over time as a result of the drop in the statutory CIT rate, which has been offset, to some extent by rising taxes on dividends. Introducing a tax on realised capital gains, and broadening the capital income tax base would improve horizontal and vertical equity and would strengthen neutrality in the tax system (OECD, 2022a). A capital gains tax should only apply to realised capital gains that accrue after the introduction of the tax, in order to avoid unintended behavioural responses, negative investment impacts and a breach in the social contract. As in the majority of OECD countries, the sale of main residences could be exempted to avoid potential lock-in effects and unintended consequences with respect to residential and labour mobility (OECD, 2022e). A cap on this exemption could be considered to strengthen progressivity, but this may increase lock-in effects particularly for older generations. Taxing capital income at the individual level at mildly progressive tax rates within a dual progressive income tax (DPIT) like done in Denmark or Finland, could also be considered, provided it does not add tax system complexity and impose excessive implementation costs on the tax administration. As an alternative, introducing a tax on wealth could further increase progressivity in the tax system, and would also allow consideration for some taxation of unrealised capital gains to mitigate the incentive of capital holding (e.g., on financial assets whereby prices are readily available – ‘Mark-to-Market Capital Gains’). However, this could have a negative impact on overall investment, entrepreneurship and could induce higher-incomes and wealth owners to vote with their feet (Hansson, 2008; Akgun et al., 2017). Evidence on the macroeconomic impact of such a tax is thin, and critically depends on the design of the tax and available options for tax arbitrage (Bastin & Van Camp, 2024). If they are levied at mildly progressive tax rates, taxes on capital income would reach the same objectives than a net wealth tax without running the risk of creating tax-induced distortions and preventing the tax burden on capital income becoming excessively high (OECD, 2018).
The gap between capital and labour income taxation is large in Belgium, especially for high income levels (Figure 2.24). This affects the efficiency of the tax system by creating tax arbitrage opportunities and encouraging incorporation with professional-services employees and the self-employed organising themselves as legal entities to be taxed at lower effective tax rates (Hourani and Perret, 2024). Shareholders working in their own companies also tend to retain corporate income within the firm rather than distribute dividends (see Smith, Pope and Miller (2019) on the UK). While it provides an additional buffer to businesses during crises, the retention of corporate incomes reduces tax revenue and risks locking in capital into existing firms without necessarily sustaining investment in business capital (Hourani and Perret, 2024). Additionally, the differential treatment of labour and capital income affects equity, as capital income is concentrated at the top of the distribution. High earners benefit disproportionately from preferential capital income tax treatment, reducing vertical equity (Hourani et al., 2023).
Capital income is less taxed than labour income because it is taxed at a flat rate that is lower than the income tax rates payable on wage income. Dividend income is also exempt from taxation up to a certain threshold and capital gains held by private individuals are not subject to taxation. Social security contributions and regional and municipal taxes are paid on wage income but not on dividend income or other types of capital income.
Note: Panel A: Gap between personal and corporate-level effective tax rates for wage and dividend income, total profits or labour cost equal to five times the average wage.
Source: Hourani et al.
Environmental taxes accounted for around 4% of total tax revenues in 2021, below the OECD average and lagging behind peers, such as the Netherlands (almost 8%). Taxes on pollution and resources (excluding fuel and transport) collected at the regional level have declined since the early 2000s’ (SPFF, 2023). As discussed in Chapter 4 and recommended in past Surveys, carbon pricing needs to be reinforced as it is too low in some sectors to incentivise emissions cuts and green investment. Feebates – revenue neutral tax-subsidy schemes – could be considered to reinforce carbon pricing and incentives for shifting to cleaner processes and assets in a large range of sectors (Vernon, 2023). In the transport sector, expanding road pricing to light duty vehicles would also contribute to pricing congestion costs and air pollution generated by road transport and help compensate for revenue losses from fuel taxation as cars get greener (see Chapter 4).
Raising compliance for a stronger and fairer tax system
Scope to strengthen tax compliance and collection should be exploited. Improving tax compliance and collection could bring significant benefits including increased tax revenues, lower inequality, and a more level playing field between firms. Indicators of tax compliance point to a relatively high level of informality and large related tax revenue losses in Belgium vis-a-vis other EU countries (IMF, 2021). The VAT compliance gap that measures the difference between revenues collected and the tax liability is among the highest in the EU (Figure 2.25). Estimates of the European Commission and the IMF suggest Belgium loses from 16% to 20% of potential VAT revenue, around 1% to 2% of GDP, due to compliance issues (IMF, 2023a; European Commission, 2023b).
Note: The VAT gap refers to the difference between expected VAT revenue and the actual amount collected. The VAT compliance gap measures the difference between revenues collected and the tax liability.
Source: European Commission, 2023.
Combating tax fraud has been a key focus for the federal government as demonstrated in the programme of the Belgium Presidency of the Council of Europe in the first half of 2024. Priority has been given to measures aiming to curb tax evasion, aggressive tax planning and harmful tax competition (Belgian Government, 2024). At the national level, since 2021, the government has initiated three consecutive action plans coordinated by the Ministerial Committee for the fight against tax and social fraud and a program to reduce the VAT gap to the level of neighbouring countries. Initiatives have been taken to strengthen tax enforcement, including prolonging the investigation and assessment periods for tax fraud to give tax authorities more time to gather information and participate in international joint tax audits. Multidisciplinary investigation teams have been established and cooperation with the federal police have been strengthened. Measures to address skills shortages and improve knowledge sharing in the tax administration are being elaborated.
Enhancing the tax administration’s access to data should be considered. Increasing the tax administration’s access to data, including through more use of data from third parties, such as financial institutions, insurance companies, public agencies is key to enhance risk detection and facilitate investigations (OECD, 2024c). Despite recent initiatives, relatively limited access to bank data compromises efforts to combat tax fraud. Since 2022, bank information of taxpayers that is shared with other jurisdictions as part of the automatic exchange of financial account information can be used by the tax administration. Nevertheless, access to bank information remains constrained as regulation requires an initial request to the taxpayer before procedures to obtain information from financial institutions can start. Unlike in some other OECD countries, such as France with FICOBA (Fichier des comptes bancaires), there is no systematic periodic data provision of bank information to tax authorities (IMF, 2021). Allowing access to the central register of bank accounts, asset portfolios, and financial contracts and the possibility to immediately query financial institutions in the event of suspicion of fraud would significantly facilitate risk assessment, controls, and investigations. One step further would be to extend the Automatic Exchange of Information to the domestic tax administration. This would allow the tax administration to prefill the tax return with income from capital and facilitate the implementation of a comprehensive capital income tax reform as discussed above. These measures should be accompanied by robust privacy safeguards.
Better collaboration across institutions could also help to increase efficiency of risk detection and controls. For instance, better collaboration between the tax administration and inspectorate from the social security system would facilitate controls of withholding tax system (Belgian Court of auditors, 2023). One step further would be to integrate the collection of personal income tax and social security contribution like done for instance in Sweden and Australia. This would allow to achieve efficiency gains and free-up resources in the tax administrations as processes involved are very similar (IMF, 2021). This can also decrease compliance costs for taxpayers by providing a single point of contact for labour taxes.
There is room to improve VAT collection and enforcement, including by using available digital technologies. For instance, e-invoicing has been adopted by many OECD countries providing a more transparent and traceable system for transactions helping to reduce fraudulent activities, such as fake invoices and underreporting of income, and facilitates audits (OECD, 2022a). Real-time monitoring of invoices and receipts – “transaction-based reporting” – is being progressively introduced in Belgium. A 2023 tax modernisation law includes measures to improve the processing of periodic VAT returns and payments by introducing digital systems and automation (PwC, 2023). Electronic invoicing will be mandatory for business-to-business transactions by January 2026. Reporting requirements could be strengthened with the introduction of mandatory electronic invoicing for all transactions.
Artificial intelligence should be exploited to help detect fraud. Some countries, including Denmark, Sweden, Australia, and Canada are rapidly expanding the use of artificial intelligence (AI) for risk assessment. Their experience can serve as inputs into risk-based auditing models applied by the tax administration. This approach, for instance helps uncover unusual patterns of business sales data. In Belgium, all data mining processing operations must be fully foreseeable. Achieving complete foreseeability of every processing operation can be challenging due to the complexity of AI algorithms and may hinder the scope for using AI. The 2022 national convergence plan for the development of AI envisages the adoption of a governance framework for the use of AI in federal public services, including the establishment of an advisory committee on the ethical use of AI in the operation of public services (BOSA, 2022). The project “Maitrise development de l’IA” has been set up to define the role and the principles of the use of AI in the Belgian federal tax administration (FPS Finances, 2024). Following OECD AI Principles, a robust data governance model should be established to ensure a trustworthy and coherent use of AI in the public sector without imposing overly restrictive requirements. Strengthening coordination and cooperation between the federal and regional governments in this policy area would help to achieve large efficiency gains.
Strengthening the assessment of tax gaps and noncompliance would help tax enforcement. To-date analysis has generally been ad hoc, for instance the on-going project on VAT gaps conducted by the IMF (IMF, 2023a). One step further would be to collect and regularly publish information on tax gaps, based in a well-established methodology, as done for instance by the U.S. Internal Revenue Service. Establishing a tax research network involving the tax administration, as is planned in Germany or an independent fiscal institute should be considered to collect information on tax compliance and analyse the impact of reforms. The VAT compliance gap appears largely concentrated in some sectors in Belgium (the professional and managerial services sector, IMF, 2023a). Federal Public Service Finance plans to refine existing analytical tools to monitor the VAT gap at the sectoral level, which is welcome.
Simplifying the tax system would reduce compliance costs for taxpayers and enforcement costs for the tax administration. It would enhance transparency and trust in the system, and limit opportunities for tax evasion and fraud. Tax procedures are complex and differ significantly across taxes. Enforced collection rules that pertain to the mechanisms and regulations employed by tax authorities to collect taxes that are overdue or have not been voluntarily paid by taxpayers have been harmonised and collected in a single code. Investigation and assessment periods of income and VAT taxes have been aligned. Further consolidating administrative provisions for the different tax laws would enhance the consistency of tax enforcement (IMF, 2021). Effort in that direction should continue by considering room for simplification and harmonisation as part of a broad tax reform.
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