Belgium’s fiscal clean-up still has a long way to go

Starting a term with a deficit above 5% of GDP is a tough inheritance for any new government. Moreover, on a no-policy-change basis, ageing would have added around 0.2 percentage points to the deficit each year, while a higher interest-rate environment is expected to add another 0.1 points annually. In other words, much of this legislature’s fiscal agenda will be about stabilising – and ultimately repairing – public finances. Prime Minister Bart De Wever has been clear about the challenge, warning of a difficult decade ahead.

In recent months, the federal government has rolled out structural reforms covering pensions, the labour market and capital taxation. Most measures are now finalised, allowing a clearer estimate of their budgetary impact in both the short and the long run. A series of publications from the National Bank of Belgium, the Federal Planning Bureau and the Public Finance Monitoring Committee has also sharpened the picture of where public finances are headed.

The latest reports contain at least one encouraging message. The National Bank of Belgium’s annual report estimates that the measures adopted will deliver net savings of around 1.1ppt of GDP by 2028. Excluding additional defence spending, savings could reach 1.6ppt. On top of that, tax revenues are expected to rise by about 0.3ppt of GDP.

On the spending side, most savings come from social benefits – particularly pensions and unemployment. On the revenue side, indirect taxes (VAT and excise duties) and wealth taxation contribute positively, although much of that gain is offset by planned cuts to taxes on earned income.

The Federal Planning Bureau also provides a detailed estimate of how pension reform affects the cost of ageing (the rise in age-related public spending). Over the long term (2024–2070), it estimates the cost of ageing would fall by 1.3 percentage points of GDP – around one-third lower than pre-reform assessments. The improvement reflects both lower spending (via changes to pension calculation) and higher GDP, as reforms lift labour supply and the number of people in work.

Taken together, these assessments suggest Belgium has, unlike some peers, implemented reforms that meaningfully improve the longer-term fiscal trajectory, even if only partially.

But all of the analyses point to the same conclusion: the package, as it stands, is not enough to put public finances on a sustainable footing in the medium term. Under unchanged policy assumptions, the deficit worsens again from 2027 and could reach 6.2% of GDP by 2030. The Public Finance Monitoring Committee – bringing together senior officials from the Finance Ministry and Social Security, as well as representatives from the Inspectorate of Finance and the Planning Bureau – also foresees a renewed deterioration from 2029, with the deficit close to 6% of GDP by 2030.

The National Bank of Belgium estimates that a deficit of around 3% of GDP would be needed to stabilise the debt ratio. Belgium remains far from that threshold in the years ahead, not only because the primary balance is projected to settle around -2% of GDP by 2030, but also because interest costs will rise. That reflects both higher debt levels and a structurally higher interest-rate environment than in the past.

It is also worth noting that many projections assume annual growth of around 1.1%. The renewed conflict in the Middle East makes that assumption less credible in the near term. Growth is likely to come in below 1% this year (ING projection: 0.7%), which would further weaken the budget balance. Meanwhile, the rise in long-term rates since the escalation of the conflict is likely to increase debt-servicing costs, at least temporarily.

One caveat is that institutional projections (National Bank of Belgium, Planning Bureau) only include measures that have been formally decided and sufficiently documented. Our baseline assumes additional steps later in the legislature, which would make the fiscal trajectory less bleak than the unchanged policy scenarios suggest.

However, the room for manoeuvring looks limited. Social tensions remain elevated (with repeated strikes and national days of action), and political frictions within the majority add another constraint. We therefore expect any additional measures to focus on offsetting weaker growth and keeping the deficit below 5% of GDP – likely enough to meet European Commission requirements (we mustn’t forget that Belgium is still in an excessive deficit procedure). Even so, this would not stabilise the debt path, which remains a key consideration for sovereign ratings.

Moody’s will update Belgium’s sovereign rating today, with S&P scheduled to follow a week later. It is not clear that the good news will outweigh the bad, and the risk of a downgrade remains meaningful. Still, Moody’s recent decision not to downgrade France despite budget challenges at least as severe as Belgium’s argues for a status quo for now.