Belgium: Reforms to put public finances on a sustainable path      

By Jonathan Smith, Caroline Klein, OECD Economics Department

Belgium coped well with the pandemic and energy crisis, but fiscal support to mitigate their impact has brought higher fiscal deficits and further increases in public debt. The ratio of public debt to GDP is among the highest in the EU; it stood at 105% in 2023. Absent of fiscal consolidation, the sustainability of public finances is at risk. Demographic change is exacerbating the challenge of ensuring fiscal sustainability. Costs related to ageing, particularly spending on pensions and long-term care, are projected to increase by 3.7 percentage points of GDP by 2060, much larger than the average EU country (European Commission, 2024). Furthermore, the digital and green transitions require substantial public investment, accentuating the fiscal challenge.

The 2024 Economic Survey of Belgium discusses the key elements needed to put public debt onto a sustainable path. Long-run fiscal projections currently suggest that without such measures the debt-to-GDP ratio could exceed 200% by 2050 (Figure 1).

Figure 1: Bringing public debt on a sustainable path requires substantial fiscal efforts

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 the Economic Survey.
Source: OECD (2024).

First, addressing the fiscal challenge requires a credible consolidation strategy involving all of Belgium’s regions and communities. The new EU fiscal rules should help strengthen Belgium’s budgetary discipline. Nevertheless, more needs to be done to improve coordination across governments. Regions and communities account for an increasing share of Belgium’s gross debt, but the current system of Cooperative Agreements across governments is not working. Despite finalisation in 2013, the Cooperative Agreements have never been implemented; this suggests a need for reform. Binding multiannual spending rules should be introduced for all governments to support fiscal discipline and improve clarity for policymakers, businesses and households on the consolidation path.

Second, raising public spending efficiency should be the cornerstone of fiscal consolidation. Public expenditure in Belgium is among the highest in the OECD and has increased sharply since 2019 from 51.9% to 54.6% of GDP in 2023. Spending reviews can help identify efficiency gains and can support consolidation when carried out with clear savings objectives and followed by concrete actions. Belgium has progressed on this front, but there is scope for more. It should build on experiences from pilot spending reviews and move to comprehensive reviews to cover a larger share of government spending. Spending reviews should be systemically integrated into the budgetary planning cycles as already done in some regions.

Reforms are needed to ensure the sustainability of the pension system, which makes up a substantial share of the costs related to population aging. Belgium is projected to have one of the highest public pension expenditures in the European Union by 2045. While two sets of pension reforms have been carried out since 2020, they have focused on improving pension adequacy for pensioners rather than limiting increases in long-term costs for the public at large. Part of the problem is the gap between the effective and the legal retirement age, which is the highest in the OECD (OECD, 2023). In light of this, Belgium should place greater emphasis on incentivising and enabling older workers to stay in employment. This should be achieved both via financial incentives such as penalties for early retirement, but also through complementary non-pecuniary reforms to extend working lives, such as developing the prevention of work-related health risks and upskilling programmes.

Lastly, Belgium must improve the efficiency and fairness of its tax system. The extensive use of special tax provisions narrows the tax base and weighs on revenue, often with little or no evidence of concrete socio-economic benefits. Furthermore, the tax mix is unduly skewed toward labour income taxes. Belgium has one of the highest tax burdens on labour income in the OECD – which, inter alia, disincentivises work. Targeted cuts in effective labour income taxation are needed to strengthen incentives to remain in employment, expand working hours, or return to work if unemployed. Attention to the incentives for low-wage workers is particularly important. The taxation of capital income is relatively flat and low but mainly because of the absence of a capital gains tax, which Belgium should consider introducing. Finally, indicators point to a relatively high level of tax revenue losses from non-compliance vis-a-vis other EU countries. Efforts for a comprehensive tax reform that would advance on a number of these issues have been put on hold. Major tax reform should be resumed to support economic growth, employment, and fiscal sustainability.

References

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. https://doi.org/10.2765/022983  

Guillemette, Y. and D. Turner (2018), “The Long View: Scenarios for the World Economy to 2060”, OECD Economic Policy Papers, No. 22, OECD Publishing, Paris, https://doi.org/10.1787/b4f4e03e-en.

OECD (2024) OECD Economic Surveys: Belgium 2024, OECD Publishing, Paris, https://doi.org/10.1787/c671124e-en.

OECD (2024), OECD Economic Outlook, Volume 2024 Issue 1: An unfolding recovery, OECD Publishing, Paris, https://doi.org/10.1787/69a0c310-en.

OECD (2023), Pensions at a Glance 2023: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/678055dd-en.