EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 500 final COMMISSION STAFF WORKING DOCUMENT Country Report Belgium 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011









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Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Reform priorities 3.1.Public finances and taxation 3.2.Financial sector 3.3.Labour market, education and social policies 3.4. Competitiveness and Investment 3.5.Environmental sustainability Annex A: Overview Table Annex B: DSA statistical annex Annex C: Standard Tables Annex D: Investment guidance on Just Transition Fund 2021-2027 for Belgium Annex E: Progress towards the Sustainable Development Goals (SDGs)91 References96 LIST OF Tables Table 1.1:Key economic and financial indicators – Belgium

Table 2.1:Progress with the implementation of the 2019 CSRs Table 3.1.1:Government size by subsector in 2021, (% of GDP) Table 3.2.1:Domestic banking groups and standalone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and non-EU) controlled branches Table 3.4.1:Distribution of competences between government tiers - Funding Table C.1:Financial market indicators Table C.2:Headline social scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth Table E.1:Indicators measuring Belgium’s progress towards the SDGs LIST OF Graphs Graph 1.1: GDP growth and components Graph 1.2: Potential growth estimates and components Graph 1.3: Changes in merchandise export market share Graph 1.4: Employment growth by occupation, cumulative, thousands Graph 1.5: External accounts developments Graph 1.6: Private indebtedness Graph 1.7: Deflated house price index

Graph 1.8: Monetary and financial institutions lending to the non-financial private sector Graph 2.1: Overall multiannual implementation of 2011-2019 CSRs to date Graph 3.1.1: Breakdown of gross public debt Graph 3.1.2: Evolution of primary expenditure Graph 3.1.3: Evolution of public net capital stock Graph 3.1.4: Public debt medium-term projections and scenarios (% of GDP) Graph 3.1.5: Tax wedge on average wage, single earner (2018) Graph 3.2.1: Evolution of households debt Graph 3.2.2: Households indebtedness, selected indicators 33 Graph 3.3.1: Key labour market indicators Graph 3.3.2: Number of jobseekers per vacancy, by region Graph 3.3.3: Share of private sector salaried employment that is ill, by duration of the illness Graph 3.3.4: Employment rates, by population groups and regions (2018) Graph 3.3.5: Low wage traps for different social benefits (for a single earner household working at the minimum wage), (2019)) Graph 3.3.6: Correlation between the transition rate (2018) and participation in ALMPs (2017) Graph 3.3.7: STEM wage premium (as% of the wage of a non-STEM worker; average 2014-2017) Graph 3.3.8: Potential wage and productivity growth by sector from increased training (2008-2017) Graph 3.3.9: Job seniority by age bracket Graph 3.3.10: Average PISA score for reading, by region, gender, type of programme and socio-economic and migrant background Graph 3.3.11: Self-reported unmet needs for medical examination by main reason declared ("Too expensive") and income quintile (2018 data, % quintile population, inter-quintile differences (Q1-Q5))

Graph 3.4.1: Export market share Graph 3.4.2: Market dynamism and competitiveness of goods exports for top-10 sectors (2000-2018) Graph 3.4.3: Productivity growth (2010 = 100) Graph 3.4.4: Services content of manufacturing (in 2015) in percent Graph 3.4.5: Unit labour cost decomposition Graph 3.4.6: Employment in fast-growing enterprises in 50% most innovative industries and employment in all fast-growing enterprises, both as % of total employment, 2016 Graph 3.4.7: GDP per head, 2017 – Index EU=100 Graph 3.5.1: Contribution of non-ETS sectors (%, 2016) Graph 3.5.2: Building stock energy consumption, KWh/m² (2016) LIST OF Boxes Box 2.1: EU FUNDS AND PROGRAMMES TO ADDRESS STRUCTURAL CHALLENGES AND TO FOSTER GROWTH AND COMPETITIVENESS IN BELGIUM Box 3.1.2: Unequal tax treatment of rental income taxation Box 3.3.3: The importance of skills in the Belgian labour market Box 3.3.4: Monitoring performance in light of the European Pillar of Social Rights Box 3.4.5: Investment challenges and reforms in Belgium Executive summary Structural reforms and targeted investment should contribute to more sustainable and inclusive growth in Belgium. Reforms in the areas of pensions, corporate and labour taxation, wage indexation, the labour market and the business environment have been introduced in recent years. Nevertheless, Belgium is still midway in this process and adopting and implementing further reforms is needed if it is to address remaining challenges, especially in the context of population ageing and subdued productivity growth. Addressing skills shortages, low innovation diffusion, as well as barriers to competition in the product and services market will help to boost productivity growth. Increasing the still relatively low labour participation, will also have a positive impact on public finances. Improving the composition and efficiency of public spending, notably through spending reviews, could create room for an increase in the share of growth-friendly expenditure, such as public investment. However, while reforms can be pursued at regional and communities level, the protracted situation of a caretaker government has led to an almost complete stop of the reform process at the federal level.( )

Economic growth is set to gradually slow down. The economy grew at an average rate of 1.8% per year in the wake of the financial crisis although it has been trailing behind the euro area average since 2015. In 2019, GDP growth is expected to have stood at 1.4% of GDP against 1.2% in the euro area. Economic activity is forecast to moderate further to just above 1% in the near future. According to the latest Commission forecast, private consumption is set to continue driving economic growth, supported by robust fundamentals and offsetting a slowdown in investment growth. Net exports are forecast to weigh negatively on growth, amid subdued prospects of growth in world trade. Employment growth remains robust. Almost 4.9 million people are expected to have been employed in 2019, the highest figure in the past 10 years. Recent employment growth is mainly concentrated among older workers and in the high skilled and – to a lesser extent - low-skilled professions. Wage and labour costs are expected to continue to grow moderately in the coming years. Combined with a drop in unemployment, wage increases are expected to support growth in households’ disposable income, which has been sluggish in recent years. The high level of public debt, combined with the structural budget deficit, limits the fiscal space available in case of an economic downturn. According to the Commission's 2019 Autumn Forecast, under a no-policy-change assumption, the general government headline deficit is expected to widen to 2.6% of GDP in 2021, following a notable improvement in 2017 and 2018 when the deficit was at 0.7 % of GDP. Some tax reforms adopted in recent years are expected to weigh on revenues. Rising age-related expenditure, notably due to higher pension, long-term care and health expenditure, will further worsen the headline deficit. Public debt is set to remain high at around 100% of GDP. Belgium has significant investment needs in education, sustainable transport, energy, digital infrastructure such as 5G and social housing. Belgium’s commitment to fully phasing out nuclear energy by 2025 means there is a need for major investment in power generation, as well as interconnection capacity, smart grids and storage. Addressing labour shortages, especially of employees with backgrounds and skills in science, technology, engineering and mathematics, will require investment in the training and education system. Important investments are on-going in suburban rail infrastructure and signalling. Renovating the old building stock, which predates the introduction of energy norms, will help Belgium meet its 2020 and 2030 emission reduction targets. There are important needs in terms of social infrastructure (early childhood education and care, social housing, schools) and workers in the social sector. Digitalisation of public services and justice, and the reinforcement of certain key enforcers and public bodies, would improve institutional governance. Overall, Belgium has made limited ( ) progress in addressing the 2019 country-specific recommendations, due in part to the lack of government with full powers at the federal level. There has been some progress in the following areas. ·After remaining low for several years, government entities have designed and launched major multiannual investment plans in transport infrastructure. There has been limited progress in the following areas. ·There is still ample room to improve the composition and efficiency of public spending, at all levels of government. ·Disincentives to work remain and there is still a need to strengthen the effectiveness of activation measures, in particular for vulnerable groups. Reforms have been initiated to improve educational outcomes and make the education and training systems more inclusive, but there is still a significant amount of work ahead. There have been initiatives to address skills mismatches, but more needs to be done. ·There are still barriers to competition in services. There has been no progress in the following area: ·Coordination of fiscal policies of all levels of government. Belgium performs well on a number of indicators of the Social Scoreboard supporting the European Pillar of Social Rights, although challenges remain. Belgium scores well on gender equality, childcare and fair working conditions. Nevertheless, a number of Pillar principles merit attention. The employment rate continues to be well below the EU average, mainly driven by poor labour market outcomes for specific groups. Moreover, the share of individuals living in low work intensity households continues to be high. Participation in adult learning is relatively low. Educational outcomes show considerable variation linked to socio-economic and migration background, but also between schools. Compared to other countries, people with disabilities are more at risk of poverty or social exclusion. Child poverty is high, in particular in Brussels. Regarding Belgium’s progress towards its national targets under the Europe 2020 strategy, the employment rate target of 73.2 %, although the country is getting closer, is still out of reach. Belgium has reached the targets for reducing early school leaving and increasing tertiary educational attainment. By contrast, additional efforts are needed to meet the targets for greenhouse gas emissions, renewable energy, energy efficiency and reducing the risk of poverty. In terms of the United Nations’ Sustainable Development Goals (SDGs), Belgium is progressing relatively well. While performing well in relation to good health and well-being (SDG 3), and reduced inequalities (SDG 10),more efforts are needed to progress on underachievement in reading, maths and science (SDG 4).( ) Key structural issues analysed in this report, which point to particular challenges for the Belgian economy are the following: Regulatory barriers and insufficient investment in infrastructure networks have weighed on productivity growth. Weak labour productivity growth can be observed both in manufacturing and services sectors, where Belgium has underperformed. Exit and entry rates of firms are among the lowest in the EU, in particular in services sectors, which are affected by high regulatory burden. The combination of high regulation, high wage costs and labour market rigidities weighs on the retail sector's performance. In spite of recent reforms, professional and craft services continue to be highly regulated. Belgium risks lagging behind in 5G. Weak competition in the telecommunication sector, in particular in fixed network, leads to higher prices. Belgium performs well in railway freight, port and rail infrastructure, but scores low in road quality. Growing traffic volumes boosted by commuting subsidies like tax advantages create congestion and are putting land transport infrastructure under pressure while inland infrastructure investments remain low. Uncertainty remains over the opening of passenger rail services to competition. ·Administrative burden, weak policy coordination and highly concentrated innovation are weighing on investment and productivity growth. Belgium performs well in innovation, but the efficiency of the high level of public support for business R&D is not proven, as overall investment is high but remains concentrated in a limited number of large firms. The gap between the best and the least performing firms is widening, which might signal an insufficient diffusion of technological advances. Ineffective coordination between government levels and, ineffective evaluations processes combined with understaffing of key enforcers weigh on the regulatory environment and the delivery of a certain number of policies. The State's slow payments to businesses has significantly deteriorated. In addition, long delays for building permits, a costly property registration procedure and lengthy judicial proceedings are perceived as obstacles hindering business investment. Despite gradual improvements, insufficient digitalisation and a lack of resources remain a challenge for the justice system. ·In spite of recent reforms, some structural challenges in the labour market remain unaddressed. Recent economic growth has been job intensive. The employment rate reached a long-time high of 69.7% in 2018 and the unemployment rate fell at a record low of 5.5% of the active labour force. Nevertheless, the labour market remains characterised by a relatively low participation rate and remaining regional disparities in unemployment. The employment rate is particularly low for some groups such as low-skilled, older workers, people with a migrant background (in particular non-EU born women) and people with disabilities. Disincentives to work stemming from the taxation and social benefits systems further weaken the effectiveness of active labour market policies, including for those with a low earning potential.

·A shortage of adequate skills hampers potential growth. There are considerable shortages in professional, technical and scientific occupations. The mismatch between the skills demanded by employers and those offered by jobseekers leads to one of the highest vacancy rates in the euro area. Education and training systems may not be delivering all the skills needed in the labour market, in particular basic, language and digital skills. The shares of low and high achievers in basic skills show that the Communities have difficulties combining both equity and excellence in their education and training systems. The shortage of well-qualified teachers is increasing and the need for professionalisation is a growing concern. Reforms promoting efficiency and effectiveness could release resources for urgently needed investment. Reforms, such as the ‘Pacte d’Excellence’ in the FrenchCommunity, to reverse the decline in the educational outcomes are progressing slowly and will take time to achieve their full impact. However, participation in adult learning remains low, with a potential adverse impact on the skills mismatch. Seniority pay, among other elements, contributes to low job mobility. ·There is room to make the taxation system greener, fairer, simpler and more sustainable. Belgium has a high level of taxation, but also substantial tax expenditures. Their extensive use makes the tax system complex for businesses. The high level of taxation on labour weakens labour participation and discourages lifelong learning. The existence of the ‘marital quotient’ generates work disincentives for second earners. Some features of the taxation system for real estate hinder labour mobility and contribute to distort investment choices and overinvestment in real estate. Environmental taxes have increased but there is scope for further alignment with carbon emissions. The company car scheme continues to provide adverse incentives in terms of mobility. ·There is room for improving the composition and efficiency of public spending, in order to better support economic growth. The structurally low level of public investment, considered key in boosting long-term economic potential, has resulted in a deterioration of the public net capital stock. The low level of public investment calls for an in-depth reflection on the quality of public finances through the implementation of spending reviews across all levels of government. Moreover, budgetary coordination is not sufficiently effective yet, as the 2013 cooperation agreement has not been fully implemented. Fiscal rules are scarce at subnational level, while Regions and Communities have important expenditure-recurring tasks. ·Belgium faces substantial challenges in relation to the medium- and long-term sustainability of its public finances. Concerns related to the high level of public debt and large age-related liabilities are compounded by the deterioration in Belgium’s budgetary situation. The effective retirement age remains well below the statutory retirement age, in particular for civil servants. Spending on long-term care is also projected to increase substantially over 2016-2070. ·Banks’ vulnerabilities in relation to the residential real estate market have deepened in a context of deteriorating credit standards and rising household debt. Faced with intense competition on prices, which squeezed their margins, banks have loosened their credit standards to increase lending volumes. The National Bank of Belgium has urged the financial sector to exercise more caution in granting risky mortgage loans. Though measures have been taken, the design of the Belgian macroprudential framework could hamper the decision-making process. ·Belgium faces important investment and regulatory challenges for sustainable growth and to ensure the low-carbon transition. . The Belgian National Energy and Climate Plan has low ambition in terms of energy targets. Large public and private investment needs have been identified and will be required to adapt mobility solutions, energy production and housing quality. Despite proactive policies, the building sector is responsible for a fifth of emissions in Belgium, notably due to the old age of the building stock and still low renovation rates. Road users pay around 43% (passenger) and 27% (freight) of their external and variable infrastructure costs .Intensive agriculture, especially in Flanders, and relatively high population density exert strong pressures on land and biodiversity. ·The low-carbon transition may impact vulnerable consumers, notably through energy prices, and employees in energy-intensive industries. The energy bill remains high for low revenues households, partly due to distribution costs. The Commission’s proposal for a Just Transition Mechanism under the next multi-annual financial framework for the period 2021-2027, includes a Just Transition Fund, a dedicated just transition scheme under InvestEU, and a new public sector loan facility with the European Investment Bank. It is designed to ensure that the transition towards EU climate neutrality is fair by helping the most affected regions in Belgium to address the social and economic consequences. Key priorities for support by the Just Transition Fund, set up as part of the Just Transition Mechanism, are identified in Annex D, building on the analysis of the transition challenges outlined in this report. 1. Economic situation and outlook Economic growth Growth is forecast to have eased to 1.4% in 2019 after a robust economic expansion of 1.5% in 2018. After growing at an average rate of 1.8% per year from 2014 to 2017, economic activity remained robust in 2018. The expansion was driven exclusively by rising domestic demand, as household consumption increased by 1.5% and investment by 4%. Net trade weighed negatively on growth, explaining most of the slowdown compared to 2017. According to the Commission 2020 Winter Forecast, economic activity in Belgium is forecast to have eased to 1.4% in 2019 , due to weaker domestic demand compounded by a drag from net export and inventories (Graph 1.1). This is mostly due to more moderate private consumption growth and to a large negative change in inventories. Graph 1.1:GDP growth and components Source: European Commission Economy activity is forecast to moderate further in 2020 and 2021. According to the Commission 2020 Winter Forecast, economic activity in Belgium is forecast to slow down further to 1.2% in 2020 and to 1.0% in 2021 (Graph 1.1). Domestic demand growth is forecast to rise slightly compared to 2019 as household consumption picks up pace, offsetting a slowdown in investment growth. Net trade is projected to make a negative contribution to growth in 2020 and 2021, as subdued world trade growth weighs on exports while rising domestic demand supports imports. The recent revision ( ) of national accounts shows that domestic consumption played a stronger role in the recent economic expansion. In 2019, the Belgian Institute of National Accounts published (Institut des comptes nationaux, 2019) a benchmark revision of its national accounts which slightly revised up average annual economic growth (+0.1pp of GDP per year between 1995 and 2017). Private consumption was revised up, among others due to a better estimate of financial services, housing expenditure and e-commerce spending. Graph 1.2:Potential growth estimates and components Source: European Commission The moderate growth outlook is consistent with the current estimate for potential growth. In recent years, actual economic output has exceeded potential growth, estimated at around 1.5% over 2017-2019 (Graph 1.2), bringing the output gap to a positive 0.8% of GDP in 2018. Potential growth bottomed out at around 0.8% in 2013 and has since been trending upward, although it remains below the pre-2009 estimates. This is a feature Belgium shares with several Member States and, in general, the euro area as whole. Potential growth is projected to broadly stabilise at 1.5% until 2021 and then decrease to about 1.1%. This is due to a much weaker contribution from labour, as population ageing weighs on the growth of the labour force. Private consumption, supported by robust fundamentals, is set to continue driving economic growth. Private consumption grew by 1.5 % on average in 2013-2018, broadly in line with the trend observed since the early 2000s. This was achieved despite modest increases in real disposable income until 2016, which reflected a wage moderation policy aimed at correcting for past losses in cost competitiveness. Income growth has picked up since 2016 and is expected to rise further as wages are being adjusted for the cost of living through indexation. Some real wage increases have been agreed between social partners, while income tax cuts have also been introduced since 2016 as part of a multiannual tax reform. A relatively strong labour market performance is expected to continue contributing to growth in households’ purchasing power. However, deteriorating consumer confidence is estimated to have slowed down household consumption growth in 2019 to 1.1 %. Combined with a rise in disposable income, this has led to a pick-up in the households saving rate. Household consumption is forecast to rise by 1.3 % in 2020 and 2021, which will stabilise the saving rate Investment growth has been strong in recent years, but is forecast to moderate. Investment grew by 4.0% in 2018, slightly above the yearly average growth of 3.6% observed since 2014, and is expected to have grown by 3.4% in 2019. Business investment growth has been broad-based, underpinned by favourable financing conditions and substantial corporate liquidity reserves. It also reflected the need to address high capacity utilisation rates. However, the investment cycle is forecast to turn amid deteriorating confidence indicators and weaker order books, despite a recovery in January 2020. Household investment growth has remained relatively contained in recent years with an average 2.2% annual growth rate between 2013 and 2018. It is estimated to have picked up significantly to 6.5% in 2019 amid very favourable financing conditions, and is forecast to return to its past growth trend in 2020-2021. Public investment increased markedly in 2018 (13.3%) and is estimated to have grown very moderately in 2019 (1.8%), in line with the electoral cycle. It is forecast to grow by 6.2% in 2020 and 8.2% in 2021. External trade is forecast to weigh negatively on growth, amid subdued world trade growth prospects. Net trade has made a negative contribution to growth on average since 2010, most notably in 2016 and 2018. The recovery of the goods balance in volume since 2009, though notable, has been insufficient to fully offset the steady decline in the balance of services in volume, which became negative in 2018. The subdued growth of world trade, notably among Belgium’s main trading partners in the EU, has contributed to these developments. In addition, Belgium has lost export market shares over the past decade (Graph 1.3), both in goods and services, notably due to the lower dynamism of imports in its relevant export markets (see Section 3.4). This trend is expected to continue in 2020-2021 and be compounded by rising unit labour costs, which might negatively affect Belgium’s price competitiveness. Graph 1.3:Changes in merchandise export market share Source: European Commission

Labour market and social developments Employment growth remains robust in spite of a slowdown in economic activity throughout the last year. In 2019, employment growth remained robust at 1.4%, but is likely to be restrained by a slowdown in economic growth due to a weakening of the world economy. More than 4.7 million people are expected to be employed in 2019, the highest figure in the past 10 years. Employment growth is mainly concentrated among older workers, in the high skilled and – to a lesser extent - low skilled professions (Graph 1.4). Graph 1.4:Employment growth by occupation, cumulative, thousands Source: Eurostat Despite the overall improvement in the labour market, outcomes vary widely across population groups and regions. Strong job creation combined with a limited increase in the working-age population, increased the employment rate to 70.7% in 2019Q3, one of the highest levels ever. However, the employment rate, which is held back by a low activity rate, remains below the Europe 2020 objective of 73.2%. Despite recent improvements for some groups, employment rates remain particularly low for the low-skilled, people with migrant background, older workers and people with disabilities. The unemployment rate has continued to decrease and reached 5.2% in 2019Q4. However, there remain large regional disparities in labour market outcomes. In 2018, the unemployment rate ranged from 3.4% in Flanders to 13.2% in Brussels. Further disparities exist with regard to long-term unemployment. In Flanders 33.9% of all unemployment is long-term unemployment, compared to 56.9% in Brussels and 56.2% in Wallonia. The share of temporary contracts increased to 9.8% in 2018, which is 1.7 pp. higher than in 2014, but below the EU average of 13.2%. Income inequality and poverty are below the EU average. The income quintile ratio (S80/S20) in 2018 remained constant at 3.8, well below the EU average of 5.1 in 2017. The inequality-reducing impact of the tax and benefit system is high, substantially reducing market income inequality. An effective tax and benefit system also keeps the risk of poverty or social exclusion under the EU average (19.8% in 2018 compared to EU average of 21.9%), though the impact of social transfers keeps declining. Challenges remain in inequality of opportunity: the risk of poverty or social exclusion for children with low educated parents (65.1%) remains very high especially in comparison with children of higher educated parents (5.6%). Opportunities are also hindered by challenges in education and healthcare (see Section 3.3). Prices, wages and costs Inflation decelerated in 2019 and is expected to rise moderately in 2020. Headline inflation measured by the harmonised index of consumer prices fell from 2.3 % in 2018 to 1.2% in 2019, driven by lower energy and food prices. The prices of services and non-energy industrial goods grew at a slightly higher pace, supporting core inflation. According to the Commission 2020 Winter Forecast, headline inflation is expected to pick-up slightly to 1.4% in 2020 and to 1.5% in 2021, reflecting higher food and services prices. Core inflation is also expected to pick up from 1.6 % in 2019 to 1.7 % in both 2020 and 2021. The inflation gap compared to the euro area average has continued to narrow, from 1.6 pp in 2016 and closed in 2019, but is forecast to increase slightly to 0.1 pp in 2020 and 2021. Belgium’s real effective exchange rate increased in 2018, suggesting weaker price competitiveness. The real effective exchange rate ( ) aims to assess a country’s price or cost competitiveness relative to its main competitors in international markets, which depend not only on exchange rate movements but also on cost and price trends. Efforts to improve Belgium’s price competitiveness, notably through wage moderation policies, helped decrease the real effective exchange rate from 2014 to 2016. However, Belgium’s price competitiveness appears to have weakened as the rate increased in 2017 and 2018, amid rising inflation and unit labour costs. Wage growth is expected to remain moderate in the coming years. In the period 2019-2021, labour costs are expected to grow on average by 1.9% per year. The most important driver is inflation, which is passed on to wages via the system of automatic wage indexation. In addition, it is assumed that the maximum margin of 1.1% for negotiated wage increases in the period 2019-2020 will be fully used (see Section 3.4). Real wage growth has increased slightly by 0.3% in 2018, from 0.1% in 2017, in contrast with the negative growth recorded between 2013 and 2016. Combined with a decline in unemployment, wage increases are expected to enhance growth in disposable household income, which has been sluggish in the past years. According to the Commission autumn Forecast, unit labour costs are expected to continue growing by 1.8% per year on average, slightly above that of the euro area (1.6%). The slowdown in productivity growth continues. Large private capital accumulation, a highly skilled workforce and strong innovation performance in some sectors (pharmaceuticals, minerals, chemicals) have contributed to a relatively high level of productivity. However, as explained in previous country reports (European Commission, 2019) labour productivity has grown very little in the past decade, broadly flattening since 2015. As in other advanced economies, this is largely due to the growing importance of services in the economy and to policies to increase the participation rate (including by the “service vouchers” measure). Policies to support total factor productivity growth are therefore expected to play an important role. Productivity is discussed in Section 3.4. External accounts The current account balance is expected to have remained negative in 2019. Belgium’s current account balance fell from 1.2% of GDP in 2017 to -1.0% of GDP in 2018, and is forecast to remain negative at - 0.8% of GDP in 2019 (Graph 1.5). The current account balance is below its norm ( ) and has been negatively affected by the relatively weak trade balance. The goods balance improved gradually and was positive from 2015 to 2017, although changes in oil prices go a long way in explaining this. In contrast, the services balance has recorded a steady deterioration. The primary income balance remained positive despite a significant deterioration in the net investment income balance, the latter stemming partly from higher revenue paid to foreign direct investors than that received from the rest of the world. From a sectoral perspective, the deteriorating savings position of corporations, in particular non-financial corporations, was the biggest reason for the decline of the net lending balance in 2018. Graph 1.5:External accounts developments Source: European Commission Belgium has a net creditor position in relation to the rest of the world. The balance between external financial assets and liabilities accounted for 41.3% of GDP in 2018, one of the highest figures in the EU. This surplus has decreased compared to 2017, when it reached 56.7% of GDP, mostly due to valuation effects. Belgium’s net creditor position has its origin in the private sector, in particular Belgian households, which owned gross assets — foreign and domestic — representing 289% of GDP in 2018, with a net financial asset position of 225% of GDP. Private indebtedness Private debt was relatively high at 179 % of GDP in 2018. The bulk of it is constituted by non-financial corporate debt, at 118.8 % of GDP in 2018 (Graph 1.6), a much higher level than what fundamental drivers would suggest. Non-financial corporation debt is also above the prudential benchmark (i.e. the level generally associated with heightened risks of banking crisis). Most of the increase since 2007, when non-financial corporate debt accounted for a more moderate 88 % of GDP, has been linked to cross-border intra-group lending, which is included in the consolidated figures in national accounts. The liabilities stemming from intra-group lending are estimated at around 62.8 % of GDP in 2018 and therefore push up the debt-to-GDP ratio. However, these liabilities are matched by an almost equivalent amount of assets and thus bear minor risks. Excluding intra-group lending, the debt of Belgian non-financial corporations is actually close to the various benchmarks, at about 60 % of GDP in 2018 (National Bank of Belgium 2019, p 110), suggesting that deleveraging needs are actually more modest. Cross-border intra-group lending has been stimulated by the notional interest deduction, an allowance for corporate equity within corporate income taxation. Nevertheless, recent changes made to the notional interest scheme are likely to render it less interesting for corporations. Graph 1.6:Private indebtedness Source: Household debt increased slightly and remains moderate, both as a share of GDP and of disposable income. Household debt has increased slightly to 59.7% of GDP, from 58.9% of GDP in 2017. It accounted for 104.1% of gross disposable income in 2018, up from 102.7% in 2017. This remains below what fundamental drivers would suggest is sustainable (see Section 3.2). However, it continues to rise above the level of the prudential benchmark (i.e. the level generally associated with heightened risks of banking crisis). In contrast, households’ debt still account for a relatively modest share of their financial assets, at 21.2% in 2018, due to a very favourable aggregate net asset position. Graph 1.7:Deflated house price index, index 2002Q1=100 Source: European Commission Housing prices have increased moderately in recent years. Real house prices, as measured by the house price index, have increased by 1.1% year-on-year as of 2019 Q2, broadly in line with their evolution in recent years (1.2% per year since 2015). This moderate expansion follows a period of strong growth of about 5% per year from 1998 to 2007. Over the past few years, Belgian housing prices have grown much more slowly than those in neighbouring countries (Graph 1.7). Nevertheless, some indicators point to overvaluation risks in the Belgian residential real estate market (see Section 3.2).

Credit growth has remained robust and broad-based. Total net credit to the non-financial private sector accounted for 4.5% of GDP on a yearly basis as of 2019 Q2, slightly below the level recorded in 2018 but above the average annual credit growth of previous years (see Graph 1.8). Credit growth is predominantly driven by corporate lending, although credit to households registered a robust growth in 2018 before slowing down in the first half of 2019. The cost of credit in Belgium has continued to diminish and has gradually aligned with that registered in the euro area, both for corporations and households (see Section 3.2). Graph 1.8:Monetary and financial institutions lending to the non-financial private sector Source: European Commission Public finance The government deficit is expected to deteriorate. According to the Commission's 2019 Autumn Forecast, the general government deficit is expected to have increased to 1.7% of GDP in 2019, following a notable improvement in 2017 and 2018 when the fiscal deficit was recorded at 0.7% of GDP. The deterioration is expected to have been driven both by a decrease in revenue of 0.9% of GDP and an increase in expenditure of around 0.2% of GDP. Some tax reforms adopted in recent years are expected to have weighed on revenues. Corporate income tax revenue is expected to decrease in 2019 as it reverts to trend after a temporary peak in 2017 and 2018. In addition, a cut in personal income tax has taken effect as part of measures to shift taxation away from labour. Furthermore, weaker macroeconomic conditions are expected to weigh on the growth of the tax base. On the expenditure side, rising social benefits and transfers in kind, notably due to higher pensions and health expenditure, further worsened the headline deficit. Under a no-policy-change assumption, the headline deficit is expected to further widen to 2.3% of GDP in 2020 and to 2.6% of GDP in 2021, respectively. Public debt is forecast to stabilise at close to 100% of GDP. After peaking at 107.0% of GDP in 2014, public debt fell gradually to 100% of GDP in 2018. According to the Commission 2019 Autumn Forecast, the debt-to-GDP ratio is expected to have fallen to 99.5% of GDP in 2019 and to hedge up to 99.6% in 2020 (see Section 3.1). Regional disparities Inter- and intra-regional disparities remain high in Belgium. They concern various economic dimensions including GDP per head and GDP growth, employment and unemployment as well as competitiveness (see Section 3.4). Sustainable Development Goals. Belgium is overall an average performer in achieving the Sustainable Development Goals. According to Eurostat’s Sustainable Development Goals (SDGs) indicators (see Annex E), over the past 5 years Belgium has been making uneven progresses. Belgium performs well with regard to industry, innovation and infrastructure (SDG 9) thanks to the relatively high R&D expenditure as share of GDP and the share of employment in high and medium-high technology manufacturing and knowledge-intensive industries, despite going slightly backwards in sustainable transport. Belgium is also good performer in health and well-being (SDG 3) in line with the high standard of its health system, where all indicators apart one are above the EU average and in reduced inequalities (SDG 10) thanks to its tax and benefit system. However, in relation to waste generation and management, Belgium performance is mixed as good indicator for the recycling and circular material use are offset by a larger (than EU average) production of waste per capita. Finally, Belgium has well above-average nitrates and phosphate pollution problems.



Table 1.1:Key economic and financial indicators – Belgium Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for real GDP and HICP, Autumn forecast 2019 otherwise). 2. Progress with country-specific recommendations Since the start of the European Semester in 2011, 60% of all country-specific recommendations addressed to Belgium have recorded at least ‘some progress’ ( ). ’‘Limited' or ‘no progress’ has been made on 40% of the recommendations (see Graph 2.1). Substantial progress has been achieved by reforming the wage bargaining framework to safeguarding and restore the cost-competitiveness of the economy, and the recommendation on increasing the resilience of the financial sector has been fully implemented. Important measures were adopted as well in the areas of pensions, labour market (Jobs deal) and taxation, including the reform of the corporate taxation and the ‘Tax shift’. Since 2011, Belgium has made some progress in strengthening public finances. However, a more structural budget consolidation could have been undertaken, as a significant share of the improvement stemmed from a reduction in interest spending thanks to low interest rates. In the absence of additional measures, the general government deficit is projected to widen in the near future. Meeting the target of a structurally balanced budget has been repeatedly postponed now to 2021 by the Federal Government. The public debt-to-GDP ratio peaked at 107.0 % of GDP in 2014 and is forecast to have declined below 100% in 2019. However, it remains high and is not expected to decrease further in the near future, contributing to fiscal sustainability risks. Measures have been introduced to address the projected increase in age-related expenditure, yet the sustainability of the pension system remains a challenge. Since 2012, age and career length requirements for early retirement have been repeatedly increased. In 2015, legislation was passed increasing the statutory retirement age by two years : it will increase from 65 to 66 years from 2025 and will increase to 67 as of 2030. In addition, the option of leaving the labour market prematurely through the system of unemployment with company allowance has been progressively tightened. Smaller pension reforms concerned civil servant pensions, for example the reduction of preferential accrual rates and the way years of study are taken into consideration. The continued decline in total factor productivity is an obstacle to potential growth. Limited progress in lifting restrictions on competition in services, in alleviating a rather heavy administrative burden on companies, in broadening the diffusion of technological advances, combined with a low resource allocation have constrained the growth contribution of total factor productivity. By contrast, the implementation of various labour cost moderation policies has been successful in stimulating job creation, leading to an increasing labour participation rate and a record-low unemployment rate. Similarly, the contribution of capital deepening to the potential growth estimate remained stable compared to the pre-crisis years thanks to resilient private investment counterbalancing the low level of public investment. Graph 2.1:Overall multiannual implementation of 2011-2019 CSRs to date Source: European Commission Investment is crucial to ensure longer-term growth. Although overall investment did not experience the steep decline observed in other countries in the wake of the financial crisis, the situation is far less positive when it comes to public investment. The latter has been structurally low for several decades, as a result of policy choices within a context of prolonged fiscal consolidation. Sustained cut in investment budgets have resulted in net public investment averaging zero since the 1990s, eroding the quality of public infrastructure (see Section 3.4). The political agreement on a national pact for strategic investments, the announcement of an inter-federal energy pact in 2017 and calls to agree an inter-federal mobility strategy could provide renewed impetus for investment, including in energy and transport infrastructure.

Belgium has made limited progress in addressing the 2019 country-specific recommendations. There has been no progress on distributing fiscal targets among the various levels of government in a way that can be enforced. Limited progress has been also made on improving the composition of public expenditure, although regional governments are making progress in introducing spending review mechanisms in their budgetary process. Meanwhile, some progress was made in fostering investment in transport through the National Pact for Strategic Investment, an increase in infrastructure investment is projected. There has also been limited progress on vocational education and training, quality of education reforms with regard to performance and inclusiveness, although the Communities are phasing in education reforms (e.g. reforms covering several sectors in the Flemish Community and the French Community's ‘Pacte d'Excellence’). There is limited progress on reducing the financial disincentives to work, implementing labour market reforms with regard to disadvantaged groups and addressing skills mismatches. Limited progress has been made in fostering investment in knowledge-based capital, even if measures vary in scope at regional, community and federal level. Limited progress has been made in lifting barriers to competition in services. For certain professional services, regulatory restrictions continue to hamper competition. Also, limited progress has been made in improving the functioning of the retail sector for the benefit of businesses and consumers. Finally, limited progress has been made in improving mobility. Upon request from a Member State, the Commission can provide tailor-made expertise under the Structural Reform Support Programme to help design and implement growth-enhancing reforms. Since 2018, such support has been provided to Belgium for more than 20 projects. In 2019, several projects were delivered on the ground. The Commission, for example, supported the Port of Antwerp’s efforts to address road congestion through a more efficient use of rail and waterways. Moreover, the Service provided support for the introduction of spending reviews in Flanders through a pilot project and technical advice on how to systematically introduce spending reviews in the budgetary process. This has informed the Flemish government’s plan to carry out regular spending reviews In 2019, work started on exploring the use of spending reviews at the federal level, strengthening the fiscal coordination between the different levels of government, and reducing the administrative burden for citizens and businesses in the Brussels Region. Table 2.1:Progress with the implementation of the 2019 CSRs Source: European Commission For CSR3 the regulatory framework underpinning the programming of the 2021-2027 EU cohesion policy funds has not yet been adopted by the co-legislators, pending inter alia an agreement on the multiannual financial framework (MFF). Box 2.1: EU FUNDS AND PROGRAMMES TO ADDRESS STRUCTURAL CHALLENGES AND TO FOSTER GROWTH AND COMPETITIVENESS IN BELGIUM The financial allocation from the EU Cohesion policy funds ( I ) for Belgium amounts to € 2 billion in the current Multiannual Financial Framework with a national co-financing of €2.6 billion. This total investment of €4.7 billion is equivalent to around 0.2 % of the GDP annually. By the end of 2019, some €4.3 billion (around 91% of the total amount planned) were allocated to specific projects and €1.6 billion were reported as spent by the selected projects ( II ), showing a level of implementation below the EU average. EU Cohesion policy funding supports structural challenges in Belgium. The Cohesion Policy programmes for Belgium have allocated € 526 million for smart growth, € 358 million for sustainable growth and sustainable transport and € 1.1 billion for inclusive growth. In 2019 following a performance review ( III ) € 240 million have been made available for Belgium. EU Cohesion policy funding is contributing to major transformations of the Belgian economy by promoting growth and employment via investments, among others, in research, technological development and innovation, competitiveness of enterprises, sustainable transport, employment and labour mobility. By 2019, investments driven by EU Funds have already led to 165 new research projects supported to market products. Support was already decided for 20,380 enterprises including 5,345 start-ups, generating 9,845 new jobs. ESI funds contributed to the reduction of greenhouse gas emissions by 15,958 tons of CO2. The ESF provided specific and tailor-made support for young people not in education, employment or training. Thanks to the European Social Fund (ESF) and Youth Employment Initiative more than 150,000 young people have benefitted to date from targeted support for their integration in the labour market. The ESF also reinforced improved access to and development of training support, including through dual learning. To make skills and qualifications more relevant to the job market, the ESF improved access to dual training for more than 222,000 people. For instance, in order to address the issue of youth unemployment, the Public Employment Service in Brussels implements a specific action, the Youth Guarantee Service, dedicated to assist young people at the end of their studies with a job, a traineeship or a training within four months after their registration. Benefiting from a total support of € 3.4 million (of which 50 % ESF), this service has accompanied 17,500 young people between 2014-2018. Likewise, TechnoCampus is a training center for future jobs in Hainaut-Namur. With a total cost of € 2.7 million (ERDF € 1.1 million), it proposes a wide range of trainings covering the most important competences for the enterprises of the industrial sector. Agricultural and fisheries funds and other EU programmes also contribute to addressing the investment needs. The financial allocations from the European Agricultural Fund for Rural Development (EAFRD) and the European Maritime and Fisheries Fund (EMFF) in the current Multiannual Financial Framework amount to € 648 million and € 41.7 million respectively (€1.4 billion and €68 million in total cost respectively). In addition, Belgium also benefits from other EU programmes, such as the Connecting Europe Facility, which allocated EUR 638 million to specific projects on strategic transport networks, Horizon 2020, which allocated EU funding of EUR 2.3 billion (including 496 SMEs with about EUR 359.3 million). EU funding contributes to mobilization of private investment. ESI funds supported programmes alone mobilise additional capital by allocating about € 283 million in the form of loans, guarantees and equity. As of end of 2018, 7 % of the ESI funds were paid in a form of financial instruments. EU funds already invest on actions in line with the Sustainable Development Goals (SDGs). In Belgium European Structural and Investment Funds support 12 out of 17 SDGs and up to 97 % of the spending is contributing to those goals. 3. Reform priorities 3.1.Public finances and taxation 3.1.1.Fiscal policies The Belgian general government deficit is projected to increase. The headline deficit is estimated to have increased from 0.7% of GDP in 2018 to 1.7% in 2019 and is projected to increase further to 2.3% of GDP in 2020 according to Commission 2019 Autumn Forecast. Revenue growth is expected to be affected by a drop in corporate and personal income taxation as well as by a lowering of social security contributions in the context of the ’tax shift‘, a multi-year tax reform reducing the tax pressure on labour. Expenditure growth is expected to be driven by rising social benefits and social transfers, in line with the trend observed in previous years. The fiscal stance is expected to have become expansionary in 2019, with the structural balance deteriorating. From a deficit of 3.9% of GDP in 2011, the structural balance improved to a deficit of 1.8% of GDP in 2018. However, this improvement is expected to have come to a halt in 2019 with the structural balance deteriorating by 0.3 pps of GDP. This is forecast to be repeated in 2020, resulting in an expansionary fiscal stance. Up to 2018, more than half of the structural balance improvement stemmed from a reduction in interest spending, thanks to low interest rates. In its stability programme of April 2019, Belgium confirmed its target of a balanced structural budget but postponed its achievement by one year to 2021. Due to the protracted period with a caretaker government, no measures were undertaken in 2019 to resume the consolidation effort. Public debt has declined further, but is expected to stabilise at its currently high level. Debt declined to 100% of GDP in 2018, from a peak of 107% of GDP in 2014. Public debt is expected to have decreased further in 2019 to 99.5% of GDP, but is forecast to rise again in 2020 to 99.6% of GDP according to the Commission 2019 Autumn Forecast. Combined with the structural budget deficit, high debt limits the authorities’ scope for new or countercyclical policies in case of a downturn. The projected increase in age-related spending, if left unaddressed, would amplify those risks. The bulk of the debt and of its recent decrease is at federal level. The decomposition of debt across the different government tiers shows that in 2018 85.2% of the overall debt was held by the federal government. The social security sector has almost no debt (0.4% of total debt). The regions and local governments debt have reached 13.2% and 5.1% respectively (see Graph 3.1.1). The decrease in public debt since its peak in 2014 was mostly due to the efforts of the federal government and of the social security sector. Graph 3.1.1:Breakdown of gross public debt Source: European Commission 3.1.2. Composition of public spending Total public expenditure as a share of GDP had decreased, but remains among the highest in the euro area. While decreasing since its peak in 2012 at 56.5% of GDP, it still stood at 52.1% of GDP in 2018 compared to 47.0% of GDP in the euro area. France and Finland were the only euro-area countries with a higher level of public spending, respectively at 56.0% and 53.1% of GDP. Interest spending contribute to the higher level of total public expenditure, due to Belgium’s high public debt. Primary expenditure (total public expenditure net of interest payments) stood at 50.0% of GDP in 2018, also well above the euro area average of 45.2% of GDP. Only France, Finland and Denmark recorded a higher level of primary expenditure in 2018. Expenditure started to increase again in 2018. It increased from 51.8% in 2017 to 52.1% of GDP. Public investment increased by 0.2 percentage point of GDP in 2018 compared to the previous year. As the increase was not financed by saving in other spending items, this halted a downward trend that started in 2013. Total spending decreased steadily from a peak of 56.5% of GDP in 2012 to 51.8% in 2017. The consolidation benefitted from lower interest spending thanks to low interest rates. The implicit interest rate on public debt shrank from 3.5% to 2.3% of GDP over the same period of time. The recent expenditure consolidation only partially counterbalanced previous increases. In 2018, primary expenditure stood 7.3 percentage points of GDP higher than its level in 2000 (see Graph 3.1.2). Primary expenditure increased by 2.2 pp. in the euro area over the same period of time. The increase in social spending ( ) explained more than half of the increase (around 4 percentage points of GDP). The remaining share stems from an increase in compensation of employees (+1.1 percentage points) and in subsidies (+2.0 percentage points). Belgium spends comparatively more than the euro area average on public wages and subsidies to the private sector (see European Commission, 2019). Despite significant investment needs, public investment barely increased and remained below the euro-area average. Belgium has important investment needs in social housing, education (see Section 3.3), sustainable transport, energy and digital infrastructure (see Section 3.4). However, in line with previous electoral cycles, in 2018 gross fixed capital formation increased to 2.6% of GDP from 2.4% in the previous year. The increase is mostly due the regional and local governments, while investment from the federal government barely changed. At 2.6% of GDP, public investment in Belgium remains below the level in France (3.4%) and the Netherlands (3.3%), but above Germany (2.4%).

Graph 3.1.2:Evolution of primary expenditure Source: European Commission A prolonged policy of low public investment has resulted in a depletion of the public net capital stock. Public investment in Belgium has merely compensated for the depreciation of the existing capital stock since 1995 (see Graph 3.1.3). As a result, the public net capital stock has declined by 15 percentage point of GDP since 1995. Germany initially experienced a similar evolution, but since 2006 the drop has halted. By contrast, France managed to slightly increase its capital stock over the same period. The operationalisation of the National Pact for Strategic Investment could help increase the overall level of public investment by improving the coordination, including budgetary, of the different investment plans. The regions and communities plan to increase their investment rates. Almost 90% of public investment is carried out by the federated entities (regions and communities) and local authorities, reflecting the distribution of competences across the different tiers of government. Nevertheless, their overall investment has remained rather stable since 2000, hovering at around 2% of GDP ( ). Regional governments have announced major investment plans in their programmes. However, these are expected to be deficit-increasing as they do not appear to be financed by an increase in revenues nor by a decrease in other expenditure. ( ) Graph 3.1.3:Evolution of public net capital stock Source: European Commission 3.1.3.SPENDING REVIEWS Spending reviews could contribute to improving the composition and the efficiency of public spending and make it more growth friendly. Belgium’s high level of public spending coexists with a low level of public investment. Spending reviews could serve as a key tool for reprioritising expenditure towards spending outlays that better meet the country’s economic and societal goals. By unlocking efficiency gains, they can generate savings without constraining growth. Budgetary processes currently does not fully satisfy the prerequisites for introducing spending reviews. Budgets of the federal and federated entities tend to present spending without making a link to policy objectives and therefore hampering their evaluation. With the exception of Flanders, annual budgets rather than multiannual budgets are produced. More collaboration between budgetary and policy-oriented departments at different administrative levels would notably allow for a better exchange of data as basis for proper evaluations. Important expenditure-incurring tasks have been devolved to regions, communities and local authorities. The sixth state reform in 2016 devolved some competencies and related resources to the regional authorities. In 2018, about 32.6% of total public expenditure was spent at regional and community level and 13.2% at local level with health care and social protection being the biggest items ( ). It is the responsibility of each level of government to make efficient use of public money, in particular as Belgium has no hierarchy of norms between its different levels of government. The devolution of an increasing share of spending responsibilities from the Federal Government to the Federated entities combined to the need for the latter to upgrade the regions’ infrastructure call for a continued scrutiny of their expenditure in order to identify potential efficiency gains. Subnational fiscal rules are scarce. According to the Commission database ( ) existing fiscal rules in Belgium cover the general government, the social security sector and the local authorities. There are no fiscal rules covering the regional government. Of the different kind of fiscal rules, expenditure rules for regional governments in federal states could be easier to be envisaged in light of their higher share in general government expenditure. The cost-efficiency ratio of several public services could be improved. A recent analysis of the National Bank of Belgium (Cornille, D. et al., 2017) pointed to education (see Section 3.3), health (see infra) and mobility (see Section 3.4) policies as area where further efficiency gains could be pursued. There is also room to improve Belgium’s rank in certain public services for businesses (see Section 3.4.2) digital public services to citizens and justice (see Section 3.4.4). Belgium performs well in health, but strengthened prevention (see section 3.3) and a more appropriate use of services and pharmaceuticals(see infra) could improve overall efficiency, and reduced inequalities. Flanders announced its intention to roll out spending reviews after having carried out a spending review pilot exercise in 2018-2019. With the support of the Commission a spending review on services vouchers (dienstencheques/titres services) and a technical analysis of how to systematically introduce spending review in the budgetary process ( ) were finalised in 2019. The new Flemish government announced its intention to roll out spending reviews further with the aim to conduct at least one in every policy domain within every legislature. The Federal level, Brussels and Wallonia have recently shown interest in introducing spending reviews, even if at different extent.( ) The French Community has currently no plans to introduce spending reviews. 3.1.4.Fiscal framework The current budgetary framework put the burden of the fiscal consolidation on the federal government. Final expenditure by the federal government represents only a limited share of its total expenditure. The service of the debt and the transfers to the other government tiers represented the bulk of it in 2018 (respectively 1.9% and 17.1% of GDP). Large transfers to the social security sector, to compensate for insufficient own revenues, put an additional strain on the federal government budget. These transfers are expected to increase (see Table 3.1.1) ( ) given the projected increase in ageing cost (see Section 3.1.5) and in particular of pension and health care. Table 3.1.1:Government size by subsector in 2021, (% of GDP) Source: European Commission Budgetary coordination is not sufficiently effective yet, as the 2013 cooperation agreement has not been fully implemented. As described in previous country reports, Belgian federated entities and the federal government signed a cooperation agreement in 2013 to ensure effective budget coordination. The Concertation Committee did not approve but merely ’took note‘ of the overall fiscal trajectory presented in the 2019 Stability Programme and the postponement of the achievement of fiscal target to 2021 by all government levels. Although this is a step back compared to the formal approval of the fiscal trajectory expressed in 2018, this is explained by the national and regional elections in May 2019. A lack of agreement on the targets at each level of government may undermine the viability of the overall trajectory towards the medium-term objective. It also prevents the Public sector borrowing requirements section of the High Council of Finance from effectively monitoring compliance with these targets (see High Council of Finance, 2018, pp 13-14). The 2013 Cooperation Agreement entrusted the High Council of Finance to advise and supervise all government levels on their budget trajectories in order to effectively implement the European Union’s Fiscal Compact. The High Council of Finances (HCF) aims to promote coordination and discipline in the design and implementation of fiscal policy in the context of a federal state structure. In this regard, the 2013 Cooperation Agreement entrusted it with a double role. ( ) First, the Public Sector Borrowing Requirement section of the High Council (HCF-PB) contributes to the budgetary policy through its recommendations for the budget targets of general government and its sub-sectors, including subnational government.( ) Second, the HCF-PB is entrusted with an important supervisory and advisory role in the area of budgetary policy that extends beyond the central government. However, the reinforcement of the autonomy of the High Council of Finance (HCF) has not been fully implemented yet. The Royal Decree of 23 May 2018 provided for a reinforcement of the staff of the High Council of Finance. It increased the number of full-time staff to 10, equally representing the federal state and the federated entities (regions and communities). However, due to the presence of a caretaker government, the measure has not been implemented yet. 3.1.5.Debt sustainability analysis and fiscal risks Belgium’s rapidly ageing population is expected to put increasing pressure the country’s budgetary situation. The most recent projections of the Study Committee on Ageing (High Council of Finance, 2019) point to ageing-related expenditure items increasing by 5.6 percentage points of GDP by 2070. The 2018 Ageing Report (European Commission, 2018b), projected a comparable increase of 5 percentage points of GDP. Short-term sustainability challenges are limited in spite of the high public debt ratio. Short-term sustainability is assessed by the indicator S0( ). Both the fiscal and the financial competitiveness sub-indexes stand below their respective critical threshold, so that the overall S0 indicator does not flag a significant risk. This low short-term risk is consistent with the ‘AA stable’ rating given to Belgian government debt by the three major credit rating agencies.

In the medium term, Belgium’s fiscal sustainability risks are high. According to the baseline scenario in the debt sustainability analysis (see Annex B), at unchanged policies, the public debt ratio is projected to remain high at 97.4% of GDP in 2030, the last projection year. The favourable snowball effect (i.e. the difference between the implicit interest rate on government debt and the nominal growth rate of the economy) is expected to more than counterbalance the impact from the negative primary balance. The S1 sustainability indicator( ), indicates a high medium-term risk, mainly due to insufficient fiscal effort. This indicator implies that a cumulative gradual improvement in the Belgian structural primary balance of 4.1 percentage points of GDP, relative to the baseline scenario, would be required over 5 years (starting from 2022) to reduce the debt ratio to 60% of GDP by 2034. Specifically, 3.4 percentage points of the required fiscal adjustment would be due to the debt ratio’s distance from the 60% reference value, and 1.1 percentage points to the projected increase in age-related public spending. This would be only partially counterbalanced by the favourable initial budgetary position (defined as the gap to the debt-stabilising primary balance). Adhering to the existing fiscal rules ( ) would significantly reduce the public debt-to-GDP ratio compared to a baseline scenario of unchanged fiscal policy (Graph 3.1.4). Over the long-term, Belgium is deemed to be at medium fiscal sustainability risk. The long-term fiscal sustainability indicator S2 ( ) shows that an improvement in the structural primary balance of 4.8 percentage points of GDP would be required to stabilise the debt-to-GDP ratio over the long-term. This is mostly due to the projected increase of ageing costs (contribution of 4.0 percentage points of GDP, mainly from higher spending on pension and long-term care) and to a lesser extent to the unfavourable initial budgetary position (0.8 percentage points of GDP). Moreover, under more adverse scenarios involving more dynamic age‑related expenditures, the sustainability gap S2 indicator would increase to 6.5 percentage points of GDP, thus pointing to high long-term fiscal risks. Vulnerabilities linked to the high debt burden, as captured by the debt sustainability analysis, already result in overall high sustainability risks in the long term ( ). Graph 3.1.4:Public debt medium-term projections and scenarios (% of GDP) Source: European Commission Pension Pension expenditure is projected to increase by almost 3 percentage points of GDP by 2070. Over the same time span, pension expenditure in the EU is projected to decrease by 0.2 pp. on average. (European Commission, 2018b). The bulk of this increase will materialise in the short to medium term with an increase of 2.4 percentage point of GDP by 2040 (European Commission, 2018b). The latest projections of the Monitoring Committee ( ) confirm that the steady increase in pension spending is already kicking in. ( ) According to the report, pension outlays will increase by 22.6% between 2020 and 2024, and over the same period health care spending will increase by 23.9%. The effective retirement age remains substantially below the statutory retirement age, in particular in the public sector. At 61.7 years for men and 60.1 for women in 2017 the effective retirement age was substantially lower than the statutory retirement age of 65 years ( ). Despite of recent reforms tightening eligibility criteria for early retirement which resulted in an increase in the employment rate of older workers (see section 3.3), in 2017 a substantial share of pensioners was younger than 65 years. In the public sector, 53.8% of civil servants draw a pension at the age of 60 or earlier (58.8% for women). In the private sector, even if the share of people leaving the labour market with a pension before the age of 60 is lower (15.1% of employees and 9.6% of self-employed people), a significant share of employees (34.4%) and self-employed (37.7%) leaves before the age of 65). An agreement on the reform of ‘arduous job’ could not be reached. The previous government attempt to find an agreement on a definition of an ‘arduous job’ covering both the private and the public sectors failed. However, social partners drew up a detailed list with categories of arduous professions in the civil service. The current system in the public sector of preferential career fractions and preferential schemes (with lower early or statutory retirement age) would have been replaced by the new system for arduous jobs, under which fewer civil servants would qualify (about 50% instead of more than 60%). The build-up of complementary pension remains low, in spite of recent government measures. In 2018, measures were adopted to promote supplementary pension schemes. One of the measures allows independent workers to build up a supplementary pension, similar to the existing possibilities for self-employed company managers. A second measure introduced mixed pensions in the public sector, attributing pension rights as an employee for the period as a contractual agent and a public sector pension for the period as a statutory civil servant( ). A third measure allows employees, who do not benefit from a supplementary pension organised by their employer or sector or whose supplementary pension plan is insufficient, to ask their employer to make deductions from their salary in order to build up a (higher) supplementary pension. Health care Total public health spending has increased slowly in recent years and there is room to improve its efficiency in specific areas, notably prevention ( ). Health spending accounted for 10.3% of GDP in 2017, up from 8.9% in 2006, which is above the current EU average of 9.8% ( ). Public spending accounted for 77% of overall health spending (close to the EU average of 79%). The remaining spending comes from direct out-of-pocket spending (18%) and voluntary health insurance (5%). Population ageing will continue to exert pressure on health and long-term care systems ( ). The reduction in the ceiling for health public spending growth since 2013 has contributed to keeping the growth rate in line with GDP growth. While efficiency gains have been achieved in hospitals, promoting more appropriate use of services and pharmaceuticals could help to free up resources to respond to these growing needs. Networks of hospitals are being created, while e-prescriptions and medical data exchange are being developed (see Section 3.4.4). Another challenge is to strengthen primary care and improve care coordination – in particular for people with chronic conditions. Long-term care Spending on long-term care is expected to increase significantly in the long term (European Commission, 2018b). It stood at 2.3% of GDP in 2016 (above the EU average of 1.6%) and is projected to increase steadily to 4.0% in 2070 according to the ’Ageing Working Group reference scenario‘. The increase will be even more significant (up to 5.8%) according to the ’Ageing Working Group risk scenario‘, which accounts for additional cost drivers in terms of demography and health status. The underlying pressure coming from ageing still challenges long-term fiscal sustainability in the current structure of service delivery. Belgium’s density of residential beds for over-65 years old is among the highest in the EU. This has decreased from 2011 to 2014, but went up again from 2015 to reach 68 beds (per 1,000 65+ years old) in 2018, and the need is projected to further increase in the future. Whereas Belgium has already started to strengthen the use of home care and a process to ensure that only those who actually need it have access to residential care, there seems to be room for additional efficiency gains, based on available indicators, to respond to the future fiscal sustainability challenge. To assess the current use of resources, KCE, the Belgian Health Care Knowledge Centre, has developed an indicator (ELD-5) to monitor whether/to what extent independent users and those with low levels of dependency (category 0 and A respectively on the Katz scale), for whom institutionalisation may be unnecessary or at least premature, are currently receiving residential care. Though on a positive trend, with a steady decline from 32% in 2011 to 25% in 2018, these data indicate that there is still room for improvement in light of differences observed between the regions. In Brussels, more than one third (34%) of elderly people living in residential structures still have some autonomy. In Flanders, this proportion does not exceed 20% ( ). The current governance model seems to guarantee spending oversight but not control. Most of the competences for long-term care have now been almost devolved to the regions, meaning budgetary and quality control mechanisms are now decentralized too. Federal institutions retained responsibility for overarching activities related to the social protection system, e.g. managing statistics to monitor and report on current and projected dynamics of spending and participating in international reporting activities in this regard (Federal Public Service Social Security, Federal Planning Bureau), however the lack of a centralised approach may weaken the effectiveness of overall expenditure control. For the part which is still a federal competence, there are different monitoring systems in place. Different bodies are involved in the elaboration and execution of the budget, and there are checks built in into the system (e.g. a budgetary control commission); in addition, corrective action is foreseen in the event of general budget overrun. 3.1.6.Taxation Belgium has a high level of taxation, but also substantial tax expenditures. In 2017, Belgium tax revenues represented 44.8% of GDP (EU average 39.2%), however the share of tax expenditure in most tax categories is high (23.1% of personal income tax receipts; 13.4% of corporate income tax receipts; 32.3% of value-added tax receipts)(), which reduces the efficiency of the tax system. Some 47% of the foregone tax revenue resulting from tax expenditures supports social measures (e.g. pensions). The rest covers employment (13.5%), real estate (15.9%), R&D (8.3%) and specific sector provisions (6.4%). In addition, tax expenditures are not subject to spending reviews and do not appear to undergo impact assessments, resulting in a low efficiency for some of them (e.g. R&D tax schemes – see section 3.4), while others create economic, social or environmental distortions (cf. infra). The complexity of tax law, also because of tax expenditures, weights in the business environment (see Section 3.4.1). Some tax expenditures create a certain number of economic and social distortions. For instance, the existence of ‘marital quotient’ helps create work disincentives for second earners (see Section 3.3). Moreover, most tax expenditures, like the tax deductibility of service vouchers and housing loans interest deductibility on secondary residence, disproportionally benefit high-income earners. Mortgage tax deductibility has contributed to drive the increase in private debt (see Section 3.2). ( ) While well-designed tax expenditures can be justified and enhance positive spill overs and welfare, they may cause economic distortions and not be the most cost-efficient means of achieving economic and social policy goals. Some tax expenditures also lead to undesirable environmental consequences. Although alternative tax expenditures (e.g. the ’cash-for-car’ and ‘mobility budget’) were introduced in 2018 and 2019, recent data from the human resources provider from the social secretariat show that very few taxpayers opted for the cash for car system ( ), which in the meantime has been ruled unconstitutional by the Constitutional Court and is therefore annulled (). The favourable company car scheme therefore continues to provide adverse incentives in terms of road travel. The deductibility of fuel costs is particularly harmful, since it induces employers to cover the cost of fuel consumed for private purposes (‘fuel card’). Employer-purchased fuel encourages the use of company cars for private purposes and runs counter the incentives provided by energy and vehicle taxation to reduce fuel consumption (European Commission, 2017). Graph 3.1.5:Tax wedge on average wage, single earner (2018) Source: European Commission

The high level of taxation on labour weakens labour participation and discourages participation on lifelong learning. The tax reform that took place in several steps between 2016 and 2020 ( ) reduced the tax wedge for the lowest income earners. In particular, the labour tax wedge for those earning 50% of the average wage decreased by 6.2 percentage points from 2015 to 2018. However, for those earning the average wage, the tax wedge remains the highest in the EU (Graph 3.1.5). Although the personal income tax system offers several tax brackets, the latter are rather narrow. As a consequence, even average income earners are subject to the highest income tax rates (45 and 50%), limiting the real progressivity of the system. Moreover, tax brackets are not systematically indexed to inflation. Overall, high labour taxation not only contributes to the financial disincentive to work, it also discourages participation in lifelong learning, since an important share of the additional income is taxed away (see Section 3.3). Environmental taxes have increased, but there is still scope to better aligning taxation to carbon emissions, possibly also increasing tax revenues ( ). Environmental taxes increased from 2.5% of GDP to 2.7% of GDP in 2018thanks to the alignment of excise duties on diesel with those on petrol. However, energy taxes do not reflect the carbon content of fuels and therefore do not foster the most energy-efficient fuels and technologies (see Section 3.5.1). In particular, excise duties on fossil fuels used for heating (gas oil, natural gas, etc.) are low and set at the EU minimum level ( ). Beyond the company car scheme, there are gaps in vehicle taxation which do not allow to fully address negative environmental externalities and congestion, and to raise revenues (see Section 3.5.1). Professional transporters and agriculture still benefit from a reduced excise rates on diesel. In spite of recent measures, transaction taxes on immovable property remain high in Belgium, hindering amongst other negative effects, labour mobility. These taxes are among the highest in the EU at 2.3% of GDP (1.0% average in the EU) in 2018 ( ). According to the 2020 World Bank Ease of Doing Business Report, the process of transferring a property has become the most expensive among the EU Member States at 12.7% of the property value (Luxembourg being at second place with 10.1%). High transaction taxes on immovable property contribute to hamper the functioning of the real estate market, increase commuting and appear to have an effect on labour mobility. Moreover, reliance on transaction taxes generates a more volatile revenue stream. Further shifting away from transaction taxes towards recurrent property taxes would maintain a constant level of revenue while reducing economic distortions and commuting congestion( ). The current tax rules governing housing contribute to overinvestment in real estate as compared to other types of investment (see Section 3.2). Differentiated tax rates and tax expenditures for several types of capital investment, make the tax system complex and lead to misallocation of capital. While mortgage tax deductibility for primary residences is now abolished in all regions except Wallonia, it still applies for secondary residences and rented housing ( ). In addition, income from rented housing benefits from a favourable tax treatment as compared to income from other types of investment. Rental income from housing property located in Belgium is taxed based on the outdated cadastral income (indexed value of 1975 estimated income), which is on average substantially lower than the actual rental income received. Calculation by the European Commission’s Joint Research Centre have estimated that taxing the net rental income would have a positive budgetary and redistributive impact (see Box 3.1.1). Any reform should, however, be carefully considered against the background of (rental) housing market policies, of the overall country taxation system and the possible impact on the real estate market. Box 3.1.2: Unequal tax treatment of rental income taxation Unlike in most EU Member States, rental income is taxed based on a fictitious amount rather than the received housing rent in Belgium. ( IV ) The tax treatment of rental income depends on the purpose for which the property is used. When immovable property is rented out for professional purposes, the actual rental income received is added to the personal income tax base. Related expenses are estimated to 40% of the rental income received and tax deductible. When immovable property is rented out for housing purposes, not the actual rental income but 140% of the indexed cadastral value (since 1991) is used to calculate the tax base. The cadastral value is on average approximately 20% to 25% V of the actual rental income received. Incurred related expenses are not tax deductible but a standard deduction of 40% applies. A substantial amount of tax revenue is lost due to the current tax treatment of rental income. Based on EUROMOD, the budgetary and redistributive effect of the current tax treatment of housing rents was quantified by comparing it to a scenario in which households’ actual rental income is subject to personal income tax. Results show that taxing actual rents under the personal income tax system, would generate additional tax revenue of approximately 0.15% of GDP on an annual basis. Moreover, the overall distributional effects of the current tax system seem regressive VI . Given that some properties are over-valued while others are under-valued, the use of outdated cadastral values also entails distributional concerns. Since high-income earners own relatively more immovable property than low-income earners, they benefit most from the favourable tax treatment of rental income. Moreover, given the progressive tax rate schedule in Belgium, they benefit proportionally more than high-income earners. Hence, taxing actual rental income would mainly affect the highest income groups. Finally, the current tax treatment does not incentivise property owners to invest in the maintenance of their rented property. Currently only financing costs for acquiring rental housing can be deducted from the tax base. Other expenses related to the rental activity, like maintenance costs, are not tax deductible. Granting tax deduction to maintenance and renovation costs could stimulate the building sector. Moreover, it could help reduce the informal economy, as invoices would be needed for the tax deduction to apply. In addition, deductibility of renovation costs could improve the quality and the energy efficiency of the housing stock and help easing the energy transition. 3.2. Financial sector 3.2.1.BANKING SECTOR AND INSURANCE The financial sector appears relatively sound, but its profitability is under pressure. Banks solvency is good, with a capital adequacy ratio relatively stable at 18.5% in June 2019. Credit quality is high, with low non-performing loans ratios. Nevertheless, banks are only moderately profitable, with a return on equity ratio of 8.2% in 2018, in continuous erosion since 2016. Banks' challenges remain largely the same as last year: persistently low interest rates, a cost-to-income ratio among the highest in the EU, a relatively high banking tax, the obligation to pay a minimum interest rate (0.11%) on regulated savings accounts which puts net interest margins under pressure in the current low interest rate environment, digitalisation, compliance costs and intense competition. Table 3.2.1:Domestic banking groups and standalone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and non-EU) controlled branches Source: ECB - CB2 - Consolidated Banking data - European Commission calculations In order to maintain profitability and productivity, the financial sector has significantly reduced its headcount, its number of branches and invested in digitalisation. The total employment in the financial sector has been declining from 144,200 employees in 2001 to 117,800 employees in 2018, and this trend has accelerated since 2015. Likewise, the number of branches has dropped continuously from 7,358 in 1997 to 2,983 in 2018. In parallel, banks have embarked on digitalisation. A survey (Bégasse, P., 2018) shows that Belgian banks have a relatively positive outlook on the way they will manage the challenge of digitalisation. On average, large banks tend to have more developed approaches towards the new business models and supporting technologies, although there are significant differences in approach and maturity between banks. Banks’ biggest weakness is their legacy IT systems, which make it difficult to implement changes. It is difficult for bank to attract the necessary staff resources, which leads to a lack of in-house skills that are needed to evolve. Smaller Belgian banks are being forced to act as ‘followers’ on the market as they lack the financial capacity to experiment with the abundance of fintech solutions that are being developed. Moreover, fintech companies are somewhat reluctant to collaborate with smaller banks due to their limited customer base to test innovative solution, despite the will and interest shown by these banks to establish such partnerships. The contributions to the Belgian Deposit Guarantee Scheme (DGS) are not invested into a segregated and diversified portfolio of low-risk assets. As explained in previous country reports (European Commission, 2018a, 2019a) and in the IMF’s 2017 Financial Sector Assessment Program, the absence of a ring-fenced and autonomous DGS is not optimal from a financial stability perspective. The annual contributions to the Belgian DGS directly enter the federal budget as tax revenues and contribute to improve the government headline balance. However, if the DGS needs to intervene and compensate depositors, Belgium will have to finance the entire cost of the intervention from the budget. Moreover, in light of the delayed privatisation of Belfius, state ownership in the financial sector (namely in Belfius, BNP Paribas, bpost, Dexia and Ethias) remains substantial and aggravates spill-over risks between the sovereign and the financial sector. Dexia still constitutes a sizeable, but relatively stable contingent liability of €32.9 billion (7.4% of GDP) for the Belgian state. Insurers’ average solvency has slightly deteriorated due to an interest rate curve lower than ever, but remains broadly satisfactory. The average Solvency Capital Requirement coverage ratio dropped from 219% in December 2018 to 196% in June 2019, but some individual players present much lower ratios, close to 100%, or even below 100% without the volatility adjustment. Like in other Member States, this ratio may sometimes benefit significantly from particular adjustments of the Long-Term Guarantee package ( ) and may overestimate the actual solvency since the shock for negative basic risk-free interest rates is assumed to be nil ( ). As a consequence of the low interest rate environment, life insurers have expanded further their unit-link business. They have also increased their exposure to the real estate markets, which might have been partly encouraged regulatory arbitrage, since capital requirements for counterparty risk can sometimes be lower for insurers than for banks. Several (re)insurers have recently received a license and opened an office in Brussels in order to facilitate their access to the single market. This relocation of activities led to an increase in non-life gross premiums of about 25% in 2019 and represents a sizable additional workload for the National Bank of Belgium which has scaled up its resources accordingly. Furthermore, the new tax advantage granted to legal protection insurance as of 1 September 2019 is expected to have a positive impact on the profitability of those insurers active in this line of business. Access to finance Lending to non-financial corporations has continued to grow in 2019 at a much faster rate than GDP. Although it has decreased since last year, the year-on-year growth of loans to euro area non-financial corporations corrected for sales and securitisation has been consistently the highest in the euro area for a while (7.2% in December 2019 compared to 3.2% in the euro area). Against this background, on 28 June 2019 the National Bank of Belgium decided to increase the countercyclical buffer rate for credit risk exposures to the Belgian private non-financial sector as from 1 July 2020( ).

Banks’ vulnerabilities in relation to the residential real estate market have deepened in a context of deteriorating credit standards and rising household debt. The Belgian mortgage market is characterised by strong competition on prices, where any individual attempt to significantly increase the commercial margin is immediately sanctioned by a decline in market share. Faced with squeezed margins, banks have loosened credit standards like the loan-to-value ratio or the maturity to increase their volumes (for details see National Bank of Belgium, 2019, pages 24-25). As a consequence, lending to households has grown dynamically for several years around 6% year-on-year, which is significantly above GDP growth. ( ) Furthermore, the exposure of banks to companies active in the construction and the commercial real estate has increased significantly in recent years. Belgian banks’ exposures to the Belgian real estate and construction sector has increased significantly in recent years. The strong dynamism in the residential real estate market is reflected in the significant increase of bank credit to companies in the real estate sector. Between the end of 2007 and the end of 2018, the share of Belgian mortgage loans in total assets increased from 8% to 21%. At the same time, the importance of loans to companies active in the construction and real estate sector increased from 2% to 5.5% over the same period of time ( ). Belgian banks are also indirectly exposed to the commercial real estate market. For instance, they also grant loans to companies active in other sectors for which commercial real estate (such as offices, shops, etc.) is provided as collateral. Banks may have become more vulnerable to an increase in interest rates. According to the National Bank of Belgium, by redirecting their balance sheet to more (fixed-rate) lending and (retail) deposit funding, banks might have widened their exposure to interest rate risk. Although they typically use interest rates derivatives to hedge the interest rate risk, “it is not excluded that banks, in their search for yield in the current low interest rate environment, have been inclined to increase their duration gaps by leaving a larger share of their positions unhedged” (National Bank of Belgium, 2019, page 65). By doing so, their transformation margin and net interest income can increase when interest rates remain low. However, this strategy is risky because a larger duration gap makes banks more vulnerable to a large and abrupt interest rate increase. On 25 October 2019, the National Bank of Belgium urged the financial sector to exercise more caution in granting risky mortgage loans. The European Systemic Risk Board concluded on 10 July 2019 that the macroprudential measures that are in place in Belgium are partially appropriate and partially sufficient to address the vulnerabilities on the residential real estate market. Therefore, on 23 September 2019 it recommended ( ) the activation of legally binding borrower-based measures targeting the new production of loans, in complement to the existing capital-based measures targeting the existing stock of loans (see (European Commission, 2019a) for details on the existing national measure under Article 458 of the Capital Requirement Regulation). As a first step, the National Bank of Belgium decided ( ) to establish new prudential expectations based on the ’comply or explain‘ principle, asking banks and insurers to be more cautious about granting loans with a very high loan-to-value ratio particularly for buy-to-let loans, and setting out expectations for certain combinations of specific risks. These supervisory expectations came into force on 1 January 2020. Activating binding borrower-based measures will only be considered envisaged as a potential second step should these supervisory expectations prove insufficient. However, the introduction of such binding measures could be complicated by Belgium’s design of the macroprudential framework, which requires the government to impose binding borrower-based measures (on recommendation by the National Bank). The Belgian venture capital market is close to the EU average in terms of volumes. Venture capital might benefit from the launch of the Belgian Growth Fund in June 2019 and from a more neutral taxation framework. The Belgian Growth Fund launched in June 2019, is a fund of funds, and focuses on later stage venture capital rather than start-ups. The first closing of July 2019 delivered €213 million, but the Fund targets an ultimate size of € 300-400 million. The goal of the Belgian Growth Fund is to increase the size of the funds and to provide diversification and leverage to participating institutional investors. The remaining major obstacle to equity financing remains the biased tax framework, namely the persistence of a debt-equity tax bias, although partially corrected with the new incremental Notional Interest Deduction ( ), the existence of a tax incentive for savings and the rigid design of the long-term savings and pension schemes. Green finance has received more attention from the investors, the financial industry and the regulators. Sustainable investments are estimated to have increased from €7.7 billion in 2013 to €24 billion in 2017 (Van den broeck, R., et al., 2018). Febelfin ( ) launched a quality standard for sustainable and socially responsible financial products on 7 February 2019, in order to qualitatively and quantitatively increase the level of socially responsible and sustainable financial products, and to mainstream its principles towards traditional financial products. From a prudential perspective, the National Bank of Belgium sent, at the end of 2018, a questionnaire to banks on the various risks associated with climate change. According to their replies, although financial institutions seem to be aware of the potential risks, they have so far made relatively little progress in quantifying and integrating them into their risk management. The share of green investments in their portfolio also seems very limited. Nevertheless, institutions are indicating their willingness to contribute to a more sustainable economy (National Bank of Belgium, 2019). 3.2.2.Private debt The level of private debt (as per cent of GDP) declined compared to its peak in 2016, nevertheless it remains high. The private debt ratio set at 178.5% of GDP in 2018, down from 194.8% in 2016. Household debt accounted for 59.7% of GDP versus 118.8% for non-financial corporations. The decline was on the back of a reduction in non-financial corporations’ debt, while households’ debt continued to increase steadily. High corporate debt is mainly driven by the intra-group debt of multinationals (see Section 1). Mortgage debt is the main driver of household debt, accounting for 86% of total household debt in 2018. At the end of 2018, outstanding mortgage loans amounted to more than € 200 billion, about four times the amount at the beginning of 2000. This increase is explained both by a rise in the number of outstanding contracts and by the constant increase in average amounts borrowed, which is correlated with the increase in house prices. Between 2000 and 2018, the average amount borrowed for the purchase of a house increased from less than €75,000 to nearly €160,000. Graph 3.2.1:Evolution of households debt Source: European Commission Belgian house prices currently present signs of a limited overvaluation. After a period of dynamic growth between 1998 and 2008 (5% average annual increase) house prices have risen by 2.2% on average annually in nominal terms since 2008 and by 0.7% per year in real terms. Steadily increasing house prices might explain part of the increase in households’ debt, as the latter is mostly mortgage-based. Traditional indicators (price to income, i.e. affordability and price-to-rent i.e. dividend) signal a potential 20% overvaluation gap of Belgian house prices. However, a more sophisticated indicator developed by the European Commission (Philiponnet, N. et al., 2017), which takes into account housing demand and supply fundamentals like interest rates shows no evidence of overvaluation, whereas the National Bank of Belgium valuation model only finds a moderate overvaluation (5.9%) (National Bank of Belgium, 2019). Graph 3.2.2:Households indebtedness, selected indicators Source: European Commission The tax framework might also have played a role in the increase in housing prices and in mortgage debt by providing borrowers with several signifi