EUROPEAN COMMISSION Brussels, 27.2.2019 SWD(2019) 1000 final COMMISSION STAFF WORKING DOCUMENT Country Report Belgium 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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 {COM(2019) 150 final}



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 and housing 3.3.Labour market, education and social policies 3.4. Competitiveness and investment Annex A: Overview Table Annex B: Commission Debt Sustainability Analysis and fiscal risks Annex C: Standard Tables Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Belgium References LIST OF Tables Table 1.1:Key economic and financial indicators - Belgium Table 2.1:Progress with the implementation of 2018 CSRs 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 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 LIST OF Graphs Graph 1.1: Breakdown of GDP growth Graph 1.2: Composition of investment spending ( %GDP) Graph 1.3: Breakdown of potential growth Graph 1.4: Real labour productivity growth (2010=100) Graph 1.5: Regional disparities in Belgium Graph 1.6: Consumer inflation Graph 1.7: Employment growth by sector (thousands, year-on-year changes) Graph 1.8: Disparities in the employment rate for specific population groups (2017) Graph 1.9: Breakdown of current account balance ( %GDP) Graph 2.1: Overall multiannual implementation of 2011-2018 CSRs to date Graph 3.1.1: Primary expenditure versus gross fixed capital formation in 2017 Graph 3.1.2: Primary expenditure by type - % of GDP

Graph 3.1.3: Government investment: breakdown by functional classification (average 2008-2016), % of GDP Graph 3.1.4: Share of direct expenditure (net of intra-government transfers) and investment by level of government Graph 3.1.5: Public debt medium-term projection and scenarios ( % of GDP) Graph 3.1.6: Increase in pension expenditure - selected scenarios – percentage points of GDP Graph 3.1.7: Tax wedge on labour, single earner, average wage (2017) Graph 3.3.1: Unemployment rate by region and level of urbanisation ( % of active population) Graph 3.3.2: Reasons for inactivity by age (2007-2017) Graph 3.3.3: Transition rate from unemployment/inactivity to employment, 2014-2017 ( % total inactive or unemployed) Graph 3.3.4: Activity rate by age and educational attainment (20-64, %) Graph 3.3.5: Activity rate for older workers ( %) Graph 3.3.6: Graduates in STEM (ISCED 5--8) as a percentage of total graduates (2016) Graph 3.4.1: Distribution of labour productivity growth, selected countries, 2014 Graph 3.4.2: Public R&D intensity (government plus higher education) and GDP per capita (PPS) - 2016 Graph 3.4.3: Change in GDP per head (PPS), index point difference, 2007-2016 Graph 3.4.4: Regions in Belgium and factors endowment Graph 3.4.5: Target and emission under the effort-sharing legislation - Belgium (percentage change from 2005) LIST OF Boxes Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in Belgium Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights

Box 3.4.1: Investment challenges and reforms in Belgium Box 3.4.2: R&D tax incentives Executive summary Recent reforms have supported a job rich economic expansion. The Belgian economy has grown at a moderate but steady pace over recent years. Growth rates, however, remain below those recorded before the financial crisis. Strengthening potential growth would require a combination of further investment and productivity-enhancing reforms. This would imply maintaining the reform momentum while progressing with the implementation of previously announced reforms. Challenges have been identified and have yet to be addressed, notably: by removing barriers to competition and investment in the product and services market; by tackling infrastructure weaknesses in the energy and transport sectors; and by ensuring the long-term sustainability of public finances. Labour market participation rates remain low, despite high vacancy rates in some segments. This points to significant skills mismatches and to the need for further investment in training and in the education system. The current political situation, with a caretaker government at federal level, risks to slow down reforms. ( ) Economic growth is expected to slowdown gradually. In 2018, GDP growth was underpinned by robust, albeit weakening domestic demand. Growth in consumer spending is expected to strengthen, as household income should rise owing to employment growth and new tax reductions as part of the continuing of the ‘tax shift’, a multi-year tax reform lowering the tax pressure on labour. Business investment growth is expected to increase only moderately, reflecting lower economic growth expectations. After contributing significantly to growth in 2017 and 2018, net exports are expected to start weighing on growth from 2020, as Belgium’s cost competitiveness compared to neighbouring countries is forecast to weaken. Overall, GDP growth in Belgium is forecast to slow down from 1.4 % in 2018 to 1.3 % in 2019 and 1.2 % in 2020. In recent years, growth in Belgium has been jobrich. This has led to the lowest unemployment rate since 2000, at 5.9 % in 2018. However, the impact of policies to help create jobs, in particular wage cost moderation, is gradually fading. Combined with labour shortages in some sectors, this is expected to hold back employment growth. The unfavourable inflation gap in Belgium compared to the euro area is projected to narrow gradually. Budget consolidation could have been more structural given the relatively supportive macroeconomic conditions. From its trough of a deficit of 4.1 % of GDP in 2011, the structural balance has improved by 2.7 pps of GDP. However, almost half of the improvement stems from the low interest rates environment, which reduced interest payments. According to the Commission’s autumn forecast, Belgium’s structural deficit is expected to reach 1.4 % of GDP in 2018. The gradual reduction of public debt is projected to continue, allowing a debt-to-GDP ratio of 98.7 % in 2020. Further investment in transport infrastructure and energy transition, innovation, education and training would strengthen Belgium’s long-term growth potential, while helping to address regional disparities. Total investment in Belgium is among the highest in the EU at 23.5 % of GDP in 2017. The relatively good performance overall is due to private investment. By contrast, low public investment has led to a decrease in the quality of the national infrastructure, especially roads and railways. The renovation of the old building stock, which predates the introduction of energy norms, will contribute to meet the 2020 and 2030 emission reduction targets. In the light of Belgium’s commitment to fully phasing out nuclear energy by 2025, 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 in science, technology, engineering and mathematics, will require investment in the training and education system. 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, as well as the reinforcement of certain regulators, would improve institutional governance. Annex D identifies key priorities for support by the European Regional Development Fund and the European Social Fund Plus, building on the analysis of investment needs and challenges outlined in this report. Overall, Belgium has made limited ( ) progress in addressing the 2018 country-specific recommendations. There has been some progress in the following areas. ·Measures have been taken to tackle investment needs in existing transport infrastructure There has been limited progress in the following areas. ·Disincentives to work remain and there is still a need to strengthen the effectiveness of active labour market policies, in particular for vulnerable groups. ·Further action is needed to improve the efficiency and composition of public expenditure. ·Sectoral regulation is still high in some professional services, which remain sheltered from competition, and in retail. Addressing mobility issues remains a priority. Regarding Belgium’s progress towards its national targets under the Europe 2020 strategy, the employment rate target of 73.2 % is still out of reach despite substantial job creation. Belgium is broadly on track to reach the targets for R&D intensity, 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. Belgium performs well on a number of indicators of the Social Scoreboard supporting the European Pillar of Social Rights, whilst challenges remain. It scores well on fair working conditions. Nevertheless, a number of Pillar principles merit attention (e.g. employment rate). Participation in adult learning is relatively low and educational outcomes show considerable variations linked to the socio-economic status. Some population groups, in particular people with a migrant background, could be better integrated in the labour market. Compared to other countries, persons with disabilities are more at risk of poverty or social exclusion. Belgium presents good outcomes in terms of gender equality and childcare. Key structural issues analysed in this report, which point to particular challenges for the Belgian economy are the following:

·The concentration of innovation in a few industries and barriers to competition and investment in product and services markets are weighing on productivity growth. Belgium is lagging behind its neighbours in terms of total factor productivity growth. Among the explanatory factors, the rate of business creation and failure appears to be lower than in peer countries, which represents an obstacle to higher productivity growth, as it may lock resources in lower-productivity firms. Restrictions to competition and investment remain high in several legal, accounting, architectural, real estate and transport services; this has adverse implications for the manufacturing sector. The retail sector still faces a complex operational environment that hinders productivity and discourages investment. While a fourth mobile operator might enter the mobile telecom market, competition in telecommunication services remains weak, in particular in fixed networks, creating obstacles to bundled services. Another factor weighing on productivity growth is that high R&D spending, partly driven by tax incentives, are concentrated in a few industries and there is insufficient diffusion of innovation to the rest of the economy. ·In spite of efforts, heavy administrative burden, legislative complexity, and low digitalisation of public services weighs on entrepreneurship and investment. The complexity of administrative procedures is perceived by most firms as a problem for doing business. In particular, long delays for building permits, a costly property registration procedure and lengthy judicial proceedings are perceived as obstacles hindering business investment. The government is simplifying the company code and its tax system. However, some areas of taxation remain complex. Policy-making still has room to benefit from improved analytical support. The quality of digital public services for business is low. The lack of digitalisation of the justice system remains a serious challenge. ·Deteriorating road infrastructure, distortive incentives in transport, and infrastructure bottlenecks also hinder productivity growth. Roads in Belgium are among the most congested in the EU. The quality of road infrastructure is deteriorating after years of low public investment. The maintenance of a large and dense network does not seem cost-effective for regions and local authorities. The rail infrastructure is dense and of good quality, but it is congested around Brussels and in the access to ports (Antwerp, Zeebrugge). The quality of rail services is low and there is insufficient urban and urban-rural public transport. Regulatory barriers to competition and investment in domestic passenger railway services, intercity coach services and taxis constrain the supply of alternative collective and low-carbon transport services. Important investments are planned in suburban rail infrastructure and signalling, but are being held back notably by budgetary allocation rules across regions. ·Skills mismatches and low job mobility hamper job and productivity growth. Labour shortages are observed in many sectors, and concern mostly professionals in information and communication technologies, and workers in the construction and health sectors. Growth of the construction sector is also impacted by uneven reforms across regions regulating construction and craft professions. Tertiary education attainment is high, yet there are too few graduates in science, technology, engineering, and mathematics, which are particularly important for innovation and economic growth. Shortages of professionals with an entrepreneurship knowledge in these areas hold back the development of start-ups. The overall level of digital skills is good, but not improving. There are important needs in terms of re-skilling and up-skilling the labour force in some sectors. Adult participation in education and training and job mobility are also low. Poor linguistic skills are an important issue, in particular in Brussels. ·Reforms to reverse the decline in educational outcomes and to tackle disparities are progressing slowly. The decline in the educational performance and the existence of significant disparities in the education systems remain a concern. The percentage of young people not mastering basic skills can be improved in all Communities, and in particular in the French Community. The early school-leaving rate has decreased, but remains high in Brussels and among non-EU born young people and young men in cities. Educational inequalities are also observed in tertiary education. There is room to improve the cost-effectiveness of the education system. ·Disincentives to work and weaker activation reduce labour market participation. Labour market participation is low for the young, older workers and the low-skilled. The activity rate of low-skilled is significantly below the EU average. Youth unemployment is well above the EU average, notably in Brussels. Existing labour activation measures are less effective for persons with a migrant background. Some concerns emerged about the full enforcement of the principle of "active availability" by the Regions, and the potential impact on federal and local public finances. Although the tax shift reduced the labour tax wedge (income tax plus employer and employee contributions) for very low wage earners (fifty percent of the average wage), it remains the highest in the EU for average wage earners. High tax disincentives for second income earners – mainly women – remain, contributing to high part-time employment among women. For single parents there is little financial incentive to take-up full-time employment. Belgium remains the only country in which unemployment benefits are not limited in time, though they gradually fall. In the context of the envisaged ‘jobs deal’ the federal government announced its intention to increase their degressivity. ·The composition and efficiency of public spending can be improved in order to create space for more public investment. Primary expenditure is high. At the same time, public investment, which is mostly carried out by regions, communities and municipalities, remains relatively low. It has recently dropped at local level notably because of rising expenditure trend and tight budgetary constraints imposed by the regions. While a large portion of public spending is mandated by permanent legislation, limiting the government's ability to review and change spending priorities, the use of spending reviews and policy evaluations to improve the efficiency of public spending is still limited. ·The extensive use of tax expenditures reduces the efficiency of the tax system, makes it complex and creates economic, social and environmental distortions. While tax expenditures may be justified to correct market failures, streamlining them would simplify the tax system and would allow tax rates to be reduced. Taxes on rental income are low in Belgium. Revenues from environmental taxes remain among the lowest in the EU. The taxation framework for financial investments is also relatively complex and reduced value-added tax (VAT) rates create economic distortions. In addition, high transaction taxes on immovable property, combined with the company car scheme, adversely affect mobility and the environment. ·In spite of recent reforms, the medium-long term sustainability of the pension and the long-term care systems remains a challenge. The latest projections point to a considerable increase in the expected cost of demographic ageing despite the measures on long-term care and the positive impact of recent pension reforms, highlighting risks to the sustainability of public finances. The previously envisaged introduction of a credit-based public pension system is intended to improve long-term fiscal sustainability by providing for automatic adjustment mechanisms in response to structural demographic or economic developments. Public debt is decreasing but its high level aggravate sustainability concerns. ·Policy coordination between the different government levels is complex and not always effective, weighing on public investment and the efficient delivery of certain policies. Budget coordination between entities is currently not sufficiently flexible to create room for public investment in large-scale projects. There is still no formal agreement on annual targets at all levels of government, in spite of the cooperation agreement signed in 2013, complicating budget coordination. The responsibility for the social protection systems is split between the federal and the sub-national levels, which may lead to coordination problems. Policy coordination in climate, energy, digital and transport policies is complex and not always effective. Other key structural issues analysed in this report, which point to particular challenges for Belgium’s economy, are the following. ·Economic disparities across regions and provinces in Belgium remain. While the GDP per capita is on average higher in Belgium than in the EU, there are important inter- and intra-regional disparities in terms of revenue, employment, education and innovation. Unemployment is high in Walloon cities and in Brussels, where there are also important revenue disparities. ·Although Belgium has an effective social redistribution system, pockets of poverty remain. The at-risk of poverty rate for low working intensity households increased significantly. It is above the EU average especially for households with children. There are strong inequalities in health access and outcomes by socio-economic status. People with disabilities face particularly strong challenges. In terms of long-term care, there is also a very large gap for unmet needs in formal home care services, well over twice the EU average. 1. Economic situation and outlook Economic growth Economic growth is expected to largely match developments in the euro area, having slowed down to 1.4 % in 2018. Growth is expected to have been driven by still robust domestic demand and positive net exports in 2018. However, while household consumption growth is expected to have weakened slightly to 0.8 %, investment growth decelerated more markedly from 1.8 % in 2017 to 1.4 % in 2018, while government consumption grew moderately (0.9 %). Public investment is projected to have edged up to 2.3 % of GDP due to the local electoral cycle. The contribution of net exports is expected to have remained largely positive in 2018, after a notable increase in 2017 (see Graph 1.1). Graph 1.1:Breakdown of GDP growth Source: European Commission Economic growth is expected to ease to 1.3 % in 2019 and 1.2 % in 2020. According to the Commission’s 2019 winter interim forecast, economic growth from 2018 to 2020 is expected to ease gradually to a level below the average growth of 1.6 % over the previous three years. As the contribution from net exports is forecast to become neutral in 2019 and slightly negative in 2020, GDP growth is projected to be driven exclusively by internal demand. Households' purchasing power is projected to increase slightly as the job market continues to develop favourably and further income tax cuts are implemented. Investment by both business and households is expected to contribute less markedly to growth. The start of major infrastructure works and defence investments are forecast to drive public investment growth, particularly from 2020. Public investment is projected to account for 2.4 % of GDP in 2020. Domestic demand has been the main growth driver in recent years, notably thanks to sustained investment. Since 2013, household consumption and investment growth have contributed roughly evenly to economic growth, with private consumption expected to become the main driver until 2020. Investment has held up well in Belgium compared to other Member States, accounting for 22.5 % of GDP on average from 2007 to 2017. It is expected to increase to 23.7 % of GDP in 2018-2020 on average. Investment growth has been primarily driven by business investment, especially in recent years.

Household consumption is expected to gain momentum in 2019-2020 as a result of job and wage growth. Private consumption growth slowed from 1.3 % per year in 2000-2011 to 1 % per year in 2012-2017. This stems from modest increases in real disposable income until 2016, reflecting wage moderation policies aimed at recovering part of the cost competitiveness lost in the past. Income growth has picked up since 2016, with the resumption of wage indexation and of real wages increases, together with strong job creations, while income tax cuts have been made as part of the ‘tax shift’, a multi-year tax reform lowering the tax pressure on labour. A sustained improvement in labour market performance has also supported households’ purchasing power, as employment grew by 1.2 % and the unemployment rate fell to 5.9 % in 2018. Overall, household consumption is estimated to have grown by 0.8 % in 2018 and is projected to rise by 1.2 % in 2019 and 1.6 % in 2020. Net exports are no longer expected to support growth from 2019. After contributing significantly to growth in 2017 and 2018, net exports are forecast to provide limited support in 2019, and to start weighing on growth from 2020. This is expected for several reasons. First, weakening world trade is likely to slow-down export growth. Second, a pick-up in internal demand is forecast to drive up imports. Third, Belgium’s gains in export market share over 2012-2017, based on improved cost-competitiveness, are expected to come to an end and to be followed by a slight deterioration over the coming years. Investment The particularly robust business investment seen in 2016 and 2017, supported by relatively favourable financing conditions, high capacity utilisation and rising profitability, slowed down in 2018. Belgian businesses have benefited in recent years from historically low financing costs. Although capacity utilisation fell into line with its historical average at the end of 2018, its high level since 2016 has supported investment growth. Meanwhile, measures taken to reduce labour costs have contributed to a steady increase in profit margins. The slow-down in business investment in 2018 came after sustained growth in the three previous years, in a context of weaker final demand, deteriorating confidence and rising supply constraints in some segments of the labour market. Risks surrounding the outlook are mainly rooted in the external environment, as illustrated by worsening leading indicators regarding order expectations and business climate. A gentle weakening of business investment growth is expected in 2019-2020. Investment has also been supported by housing and the public sector. Low mortgage interest rates and low yields on alternative investment assets played a role in the sustained real estate investment growth seen since 2014, which slowed down however in 2017. The local government investment cycle in the run-up to local elections in 2018 drove public investment in 2017-2018, although to a lesser degree than in previous cycles. The public investment-to-GDP ratio of around 2.2 % is expected to edge up over 2018-2020 (see Graph 1.2), but to remain among the lowest in the EU. Graph 1.2:Composition of investment spending ( %GDP) Source: European Commission Potential growth The weaker growth outlook is consistent with modest estimates for potential growth. Although, the estimate for potential growth has improved since 2013, it has remained broadly stable at around 1.4 %, which is significantly below pre-crisis levels (see Graph 1.3). This subdued improvement reflects the long-term trend of limited gains in total factor productivity (see Section 3.4), as well as the declining contribution of labour due to slow growth in the working-age population and a fall in average hours worked. These factors have been offset by increased private sector capital accumulation and large job creations in recent years. The output gap( ) became positive in 2017, from a trough of -1.2 % in 2013. The positive output gap is forecast to widen slightly in 2018-2020 as growth remains above its potential. Demographic ageing, which is projected to affect Belgium and almost all European countries, will increasingly depress labour's contribution to potential growth. This means that potential growth is rather unlikely to return to the pre-crisis level. Graph 1.3:Breakdown of potential growth Source: European Commission Productivity is among the highest in the EU, but it has grown relatively slowly over the past decade. The high level of productivity is notably due to large private capital accumulation, a highly skilled workforce and strong innovation performance in key sectors (pharmaceuticals, minerals, chemicals). However, labour productivity growth has been relatively muted in the past decade (Graph 1.4). This can largely be explained by the growth of services, which represent more low-skilled professions. This was facilitated by policies aimed at increasing labour force participation. Analyses at industry level (Dumont and Kegels, 2016) also suggest that employment shifted from industries with high productivity growth towards lower-productivity sectors (non-tradable services for example). Over the medium term, the factors weighing on productivity growth are expected to remain relevant (such as the growth of the share of services and the efforts to increase labour participation) or gain a stronger impact (population ageing). Therefore, policies to increase total factor productivity are expected to play an important role in raising productivity growth prospects (see Section 3.4.1). Graph 1.4:Real labour productivity growth (2010=100) Source: European Commission Regional disparities Disparities in economic performance between the various Belgian regions persist. The GDP of the Brussels capital region, which accounted for 18 % of Belgium's GDP in 2016, grew by 0.2 % annually from 2009 to 2016, well below the national average of 0.8 %. Over the same period, GDP per capita grew in line with the EU average (1.2 %) in the Flemish provinces, and at a slower pace in Wallonia. GDP per capita increased more slowly in Brussels than in the rest of Belgium from 2010 to 2016, mainly because of stronger demographic growth there. Nevertheless, Brussels’ GDP per head remains much higher than the national and EU averages (Graph 1.5). The contrast in GDP per capita between Brussels and the rest of Belgium also stems from the fact that a large commuter population works in Brussels but lives in the other two regions. Although labour productivity (measured in volume) is higher in Belgium than in the EU, it fell by 0.5 % in the Brussels region and by 0.7 % in Wallonia from 2010 to 2016 relative to the EU. In 2015, the investment rate was below the national average in Brussels, in one Flemish province and in two Walloon provinces, while only Brussels underperforms relatively to the EU average. There are also regional disparities in terms of labour market opportunities. In 2017, the unemployment rate in Flanders (4.4 %) was well below the EU average (7.6 %), while it was substantially higher in Brussels (14.9 %) and Wallonia (9.7 %). The share of the working-age population with tertiary education varies considerably across Belgium. In Wallonia, it varies from 57.1 % (Walloon Brabant) to 27.3 % (Hainaut). In Flanders, it ranges from 50.7% (Vlaams-Brabant) to 35.4% (Limburg). The rate of young people neither in employment nor in education and training also differs widely, from 7.2 % in Flanders to 11.6 % in Wallonia and 13.3 % in Brussels. Graph 1.5:Regional disparities in Belgium Source: Eurostat, European Commission Inflation Headline inflation rose to 2.3 % in 2018 and is expected to slow down by 2020. Price pressures persisted in 2018, reflecting crude oil and electricity prices developments and rising processed food prices. Although energy and food prices are expected to grow at a slower pace from 2019, rising labour costs are forecast to contribute to higher inflation in services. Headline inflation is projected to slow down gradually, reaching 1.9 % and 1.7 % in 2019 and 2020, respectively. Comparatively high inflation remains a feature of the economy. Between 2012 and 2018, headline inflation was on average 0.5 pp. higher in Belgium than in the euro area as a whole. For core inflation — which excludes energy and unprocessed food items — the difference over the same period amounted to 0.6 pp. (see Graph 1.6). This structural difference is driven among others by the more direct transmission of oil price fluctuations to Belgian energy prices, by fiscal measures, by relatively weaker competition in some service sectors in Belgium (European Commission, 2018a) and by the automatic indexation of wages.

Graph 1.6:Consumer inflation Source: European Commission Labour market and social developments The labour market continues to benefit from economic expansion and policies to reduce the high cost of labour. Employment growth is expected to remain positive (1.2 %), but to slow down compared to 2017 as a result of increasing labour skills mismatches and rising labour costs. Until the beginning of 2017, employment growth was particularly significant in the public and non-profit sectors, where a third of new jobs were created. However, since the second half of 2017, employment growth in the private sector intensified, especially in industry and non-tradeable services (Graph 1.7). In 2018, the unemployment rate continued to decrease and reached 5.9 %. Despite an overall improvement in performance, the labour market remains highly segmented. More than 25 % of the working age population is not in the labour market. In 2017, the activity rate reached 73.7 %, which is well below the level in neighbouring countries and the EU average (78 %). Labour market participation remains particularly low for specific groups, in particular older (55+) and low skilled workers and those with a non-EU immigrant background (see Graph 1.8). Youth unemployment has declined markedly but remained above the EU average in 2018 (16.6 % vs. 15.6 %). Graph 1.7:Employment growth by sector (thousands, year-on-year changes) Source: Eurostat Income and wealth inequality remain stable and below the EU average. In 2017, the income of the top quintile of the income distribution was 3.8 times larger than the income of the bottom quintile (against 5.1 times larger for the EU in 2017). Taxes and the benefit system, especially, have a large impact on reducing income inequality ( ). Compared to other euro area countries, wealth is relatively evenly distributed in Belgium. Nonetheless, children with disadvantaged backgrounds face inequalities of opportunity. The variation in science scores of the 2015 Programme for International Student Assessment (PISA) explained by parental background remained much higher than in other EU countries, indicating a lack of equal opportunities to quality education. The gap in the risk of poverty and social exclusion for children due to parental educational background is high (62.1 % against an EU average of 53.4 % in 2017). There are also specific concerns for children with a migrant background. In addition, the share of children younger than 6 years old living in very low work intensity households remains high in 2017 at 13.3 % (against 8.1 % for the EU in 2017). Graph 1.8:Disparities in the employment rate for specific population groups (2017) Source: Eurostat Competitiveness Belgium’s share of global export markets has declined for most of the years since 2000. While the downward trend ended in 2013, the accumulated losses remain substantial: 21 % (in nominal terms) of international market shares were lost between 2000 and 2017. Over the same period, the export market shares of France and the Netherlands fell by 26.3 % and 12.9 % respectively while Germany's export market share increased by 0.4 %. The downward trend in export market shares was driven by a lower export performance in goods, while export performance in services was broadly stable. The less favourable geographical distribution (Belgian companies export mainly towards countries whose import growth is less dynamic than global imports) does not entirely explain the negative performance. Belgian exports tend to be in below-average quality goods. This specialisation has been stable in recent years, according to estimates (Vandenbussche, 2014). These segments could be, to some extent, subject to harsh price competition and this makes Belgium’ export performance more dependent on cost factors (see Section 3.4.1). Graph 1.9:Breakdown of current account balance ( %GDP) Source: NBB External position In 2018, the current account is expected to record a small surplus for the second year in a row. From an average deficit of 0.7 % of GDP in 2011-2016, it improved to a surplus of 0.7 % in 2017 and to an estimated 0.2 % in 2018 (see Graph 1.9). The recent improvement is reflected in both the trade balance and the primary income. Exports of goods have been the more volatile component, with exports of services recording a gradually decreasing surplus in recent years. Private indebtedness Corporate leverage remains moderate despite non-financial companies' high gross debt. Belgian corporate financial assets and liabilities figures are inflated by widespread intra-group lending, notably encouraged over the years by the notional interest deduction, an allowance for corporate equity within corporate income taxation. Therefore the debt-to-financial assets ratio provides for a better measure of companies' financial situation. This leverage measure, at 47 % in 2018 on a consolidated basis, compares favourably to the euro area average, suggesting that deleveraging needs remain relatively modest. Household debt is dealt with in Section 3.2. Public finances According to the Commission's 2018 autumn forecast, drafted prior to the adoption of a provisional budget in December 2018, the general government deficit is expected to have reached 1.0 % of GDP in 2018. Belgium's headline deficit has steadily decreased in recent years, from 4.2 % of GDP in 2012 to 0.9 % of GDP in 2017. Expenditure, as a share of GDP, is expected to have continued on a downward path. Revenues were positively impacted by resilient social contributions, rising indirect taxes and by a measure aimed at incentivising ex ante corporate income tax payments. The authorities have postponed their objective of achieving a structural balanced general government budget from 2019 to 2020. Nevertheless, the latest available information points to a better fiscal performance than that presented in the authorities’ 2019 Draft Budgetary Plan (-1.1 %) or the Commission's 2018 autumn forecast.

The tendering of the Prime Minister’s resignation in December 2018 opens a scenario of rolling budgets that increase uncertainty. In the absence of a formal budget, Parliament has approved a "current affairs" budget. This aims to ensure appropriate resources are available to keep the state running. It uses a percentage of the previous year's approved credits (generally granted for periods of 3-4 months, strictly used on a monthly basis) and can be adapted, to ensure that, at a minimum, all the government’s contractual and legal obligations are fulfilled. Policy initiatives outside the scope of the provisional budget need to be separately approved by Parliament. Public debt is forecast to have fallen to 101.4 % of GDP in 2018. The Commission 2018 autumn forecast predicts a further reduction in public debt, with the debt-to-GDP ratio falling to 99.8 % and 98.7 % of GDP in 2019 and 2020, respectively. The debt of rail infrastructure manager Infrabel was consolidated within public debt in 2018, with retroactive effect from 2014. The most recent budget made no mention of future disinvestments in the financial sector, to which the Belgian State has a large exposure. Public finances are discussed in Section 3.1. Table 1.1:Key economic and financial indicators - Belgium Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for real GDP and HICP, Automn forecast 2018 otherwise) 2. Progress with country-specific recommendations Since the start of the European Semester in 2011, 48 % of all country-specific recommendations addressed to Belgium have recorded at least ‘some progress' ( ). 'Limited' or 'no progress' has been made on 52 % of these recommendations (see Graph 2.1). Substantial progress has been achieved in improving the cost-competitiveness of the economy, while full implementation has been achieved in the stabilisation of the financial sector. Since 2011, Belgium has made some progress in strengthening public finances. However, a significant share of the improvement stemmed from a reduction in interest spending thanks to the low interest rates environment. A more structural budget consolidation could have been undertaken. Meeting the target of a structurally balanced budget has been postponed to 2020. After peaking at 106.8 % of GDP in 2014 the public debt-to-GDP ratio has started to decline though remains at a high level, contributing to fiscal sustainability risks. Measures have been introduced to increase the effective retirement age, but 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, an increase by two year in the statutory retirement age was legislated, with an impact in 2025 and 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. In spite of recent improvements, potential growth estimates remain below pre-crisis levels. The subdued improvement reflects the declining contribution of labour, due to the slow growth in the working-age population and the fall in average hours worked. Between 2013 and 2017, various wage moderation policies were implemented to stimulate job creation, including a real wage freeze, changes to parameters of the indexation calculation mechanism and a temporary suspension of wage indexation agreements. Measures have been taken to reduce the tax wedge on labour. Gradual decreases in personal income taxation and employers' social security contributions, with more than proportional reductions for lower salaries have been legislated. The targeting of low wages favours the young and the low-skilled, who tend to have lower wages, but also the lowest employment rates; thus it supports activation for some of the most vulnerable groups. Overall, estimates by the Federal Planning Bureau and the National Bank of Belgium suggest additional job creation of 45 000–65 000 jobs by 2021. These measures will also contribute to improving the cost-competitiveness, which is gradually being eroded. Recent changes to the corporate income tax system will further reinforce the cost-competitiveness of the economy. The move towards a system with lower statutory rates and fewer tax exemptions will also help to simplify an overall complex tax system and to increase the attractiveness of the Belgian economy for doing business. The extension of the tax shelter scheme to SMEs removes one of the constraints to the development of dynamic, fast-growing firms, by providing easier access to financing. Graph 2.1:Overall multiannual implementation of 2011-2018 CSRs to date Source: European Commission Investment is also crucial within a longer-term perspective. 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 rosy when it comes to public investment. This has been structurally low for several decades, as a result of policy choices within a context of prolonged fiscal consolidation. Sustained cutbacks 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 2018 country-specific recommendations. There has been limited progress on distributing fiscal targets among the various levels of government in a way that can be enforced. Limited progress has been made on improving the composition of public expenditure. No spending review has been undertaken at the federal level, despite the high needs for expenditure reprioritisation. Meanwhile, through the National Plan for Strategic Investment, an increase in infrastructure investment is projected. There is also limited progress on vocational training, quality of education reforms with regard to equity, although Communities are phasing in major 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 labour market reforms with regard to disadvantaged groups. Limited progress has been made in fostering investment in knowledge-based capital, even if measures vary in scope at regional, community and federal level. Progress on sector regulation has been limited overall. 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, some progress has been made in improving mobility. Table 2.1:Progress with the implementation of 2018 CSRs Source: European Commission

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in Belgium The financial allocation of the European Structural and Investment Funds (ESI Funds), aimed to support Belgium in facing development challenges, amounts to up to some EUR 2.7 billion in the current Multiannual Financial Framework, with a national co-financing of EUR 3.3 billion. The total investment is around 0.2 % of the country’s GDP. As of the end of 2018, some EUR 2.27 billion (around 83 % of the total) has already been allocated to specific projects. Competitiveness of SMEs, sustainable and quality employment, social inclusion, educational and vocational training as well as research and innovation were the main themes covered by ESIF Funds. About 28 % of the total ESI funds spent in Belgium aims to increase the competitiveness of SMEs. This is achieved by supporting innovation and research activities and stimulating the growth of the e-economy by developing synergies between businesses, R&D centres and higher education, supporting entrepreneurship and by improving skills of the workers. The European Social Fund has contributed to the improvement of the social situation at all levels. EUR 1.1 billion in investment will contribute to the development of human capital growth and improve labour market participation, promoting social inclusion, improving the outcomes of the education and training systems and helping the most vulnerable groups in society (in particular the young and long-term unemployed) to find work. Over the period, EUR 657 million will be spent to shift towards a low-carbon economy through investment in energy efficiency, by encouraging the sustainable and efficient use of natural resources. EUR 114 million will be spent on making buildings more energy efficient and improving district heating and high-efficiency cogeneration and EUR 64 million will be allocated to the move towards an energy-efficient, decarbonised transport sector. Investments will be made on the sustainability of fisheries and aquaculture as well as of agriculture practices and ecological management, alongside investments in new technologies. Belgium is among the top participating countries in the H2020 projects, being the 7th largest participant. 886 SMEs participated in H2020 projects. EU funds have helped to address policy challenges identified in the 2018 CSRs. ESI Funds contributed in addressing two of the three recommendations of the 2017 and 2018 reports, namely through the above mentioned investments in educational and vocational training as well as through research and innovation and support to SMEs. In addition, the Commission can provide tailor-made technical support upon a Member State's request via the Structural Reform Support Programme to help Member States implement growth-sustaining reforms to address challenges identified in the European Semester process or other national reforms. Belgium, notably Flanders, for example, is receiving support to carry out spending reviews to ensure better management of public expenditure. The Commission is also assisting the authorities in their efforts to improve traffic conditions in the Antwerp port area through better use of inland waterways. In addition, work will soon start on promoting integrated primary care in Flanders and on a feasibility assessment for introducing advanced new technologies in customs procedures. In Belgium, the overall volume of approved operations by the European Investment Bank with European Fund for Strategic Investments (EFSI) backing amounts to EUR 1.8 billion, which is set to trigger a total of EUR 8.3 billion in additional private and public investments (February 2019). Belgium ranks 18th as to the overall volume of approved operations as a share of GDP. Under the Infrastructure and Innovation window, 22 projects financed by the EIB with EFSI backing were approved, for a total of about EUR 1.6 billion set to trigger EUR 7.1 billion in total investment. On the SMEs side, 17 approved projects were financed by the EIB with EFSI backing, for approximately EUR 169 million in total financing set to trigger EUR 1.2 billion in total investment with some 8 254 SMEs and mid-cap companies expected to benefit from improved access to finance. An EFSI-backed project in Belgium is "Northern Offshore Wind", for which the EIB is lending EUR 450 million to build the Northest wind farm off the Belgian coast. It will comprise 44 wind turbines and supply electricity to around 324 000 Belgian families. More information at: https://cohesiondata.ec.europa.eu/countries/BE 3. Reform priorities 3.1.Public finances and taxation 3.1.1.Fiscal policies According to the Commission 2018 Autumn Forecast, the Belgian general government deficit was projected to remain broadly stable. The headline deficit was estimated to have increased from 0.9 % of GDP in 2017 to 1.0 % in 2018 and is projected to increase further to 1.1 % of GDP in 2019. Revenue growth is expected to be affected by cuts in personal income taxation and social security contributions in the context of the "tax shift", a multi-year tax reform lowering the tax pressure on labour. Expenditure growth is expected to remain contained by lower interest payments and by moderate growth in public sector wages and social transfers in kind. These moderating factors are expected to be partially offset by an increase in public investment. Budget consolidation is expected to have paused in 2018, with the structural balance remaining broadly unchanged. From a deficit of -4.1 % of GDP in 2011, the structural balance improved by 2.8 pps of GDP. However, almost half of the improvement stemmed from a reduction in interest spending thanks to the low interest rates environment. A more structural budget consolidation could have been undertaken, given the relatively supportive macroeconomic conditions. However, due to the caretaker government, structural reform will most likely stall in 2019, slowing the consolidation effort. Public debt is on a declining trend, but its high level is a source of vulnerability. Debt is projected to have declined to 101.4 % of GDP in 2018, from a peak of 107.6 % of GDP in 2014. The gradual reduction of public debt is expected to continue, allowing a debt-to-GDP ratio of 98.7 % in 2020 according to the Commission 2018 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 (see Section 3.1.5). Moreover, Belgium will have to cope with important public investment in defence and infrastructure in the years to come. 3.1.2.Composition of public spending General government expenditure In spite of a recent decrease, total expenditure as a share of GDP in Belgium remains among the highest in the euro area. This is still true even when netted out from interest spending. Primary expenditure (total public expenditure net of interest payments) stood at 49.8 % of GDP in 2017, down from a peak of 52.5 % of GDP in 2014, but still 3.5 percentage points of GDP above the 2009 level. Lower interest spending played a leading role by in the decrease in total public expenditure since 2014. At the same time, public investment is low at 2.4 % of GDP, representing less than 5 % of total primary spending (Graph 3.1.1). The high level of public expenditure suggests that there is scope for a more spending-based fiscal adjustment. A large portion of public spending is mandated by permanent legislation, which limits governments’ ability to review and change spending priorities. However, integrating spending reviews on broad spending aggregates at each level of government could support such a spending-based fiscal adjustment and medium-term expenditure control and create space for much-needed investment. Spending reviews and policy evaluations can improve the efficiency of public expenditure. Spending reviews are a key tool for reprioritising expenditure towards spending outlays to better meet a country's economic and societal goals. By unlocking efficiency gains, they can generate savings without constraining growth. Most Member States have embarked on spending reviews, partly prompted by the 2016 Eurogroup common principles. Belgium has so far not undertaken a spending review at the federal level, despite the high needs for expenditure reprioritisation. Graph 3.1.1:Primary expenditure versus gross fixed capital formation in 2017 Source: European Commission Federal and regional authorities have recently expressed interest in integrating spending review in their budgetary mechanism. At regional level, Flanders is working to incorporate spending reviews in its budgetary process with the support of the Commission. As a first step, the Flemish government is carrying out a pilot project on service vouchers (dienstencheques/titres services) to be finalised in spring 2019. A key ingredient for the success of such reviews is sound policy evaluation. Despite the apparent consensus about the usefulness of such a system, its design and implementation are made more difficult by the fragmented allocation of responsibilities across different federal services and government levels. ( ) Spending reviews can help Belgium prioritise expenditures. A selectivity index (which is equal to 0 when all fiscal categories grow at the same pace) shows how Belgium’s spending policy has not been as selective as that of other EU Member States( ). This likely reflects a reliance on containing expenditures across-the-board, compared to targeted measures. In addition, indexation of wages and of social transfers generates unavoidable growth trends. Belgium spends comparatively more than the euro area average on public wages, private sector subsidies and social benefits (Graph 3.1.2). The public wage bill represents about a quarter of public expenditure in Belgium, notably due to one of the highest number of public sector workers as a share of the labour force (IMF, 2016). Additionally, subsidies have doubled, as a percentage of GDP, since 2000 as they include some targeted reductions in taxes and employer social security contributions, as well as the subsidies for the service voucher system. Finally, social benefits, mainly pensions, healthcare and elderly care services, account for around half of public expenditure in Belgium. Due to population ageing, the growth of social expenditure is expected to accelerate (see Section 3.1.5). Given the high level of public expenditure, the outcomes of certain policies and the quality of certain public services raises questions of costefficiency. The National Bank of Belgium has questioned the overall efficiency of education, health and mobility policies. In particular, the quality of educational outcomes does not reflect the high spending on education in Belgium, though there are important regional differences (see Section 3.3.2). Health spending increased steadily over the past 10 years and is higher than in most EU countries. Although the healthcare system performs generally well, primary care and prevention can improve and there are important disparities in unmet care needs by income group. The provision of informal care is above the EU average (see Section 3.3.3). The World Economic Forum has ranked Belgium 41st in terms of efficiency of railway services and 52nd in terms of quality of roads (see section 3.4.2).

Graph 3.1.2:Primary expenditure by type - % of GDP Source: European Commission Investment Public investment, commonly considered key in boosting the economy's long-term growth potential, remains relatively low. Successive governments have chosen to reduce capital spending over current expenditure under budgetary constraints. As a result, public investment in Belgium merely compensated for the depreciation of the existing capital stock in recent years. Since 1995, the public net stock of capital has declined by around 15 percentage points of GDP. Germany experienced similar evolution, but since 2006 the drop halted. By contrast, France managed to slightly increase its capital stock over the same period. In 2017, government fixed capital formation expenditure stood at 2.2 % of GDP, in line with Germany, but less than in the euro area (2.6 % of GDP) and well below France and the Netherlands (both at 3.4 % of GDP). The composition of public investment has changed over time, with the share of public investment in infrastructure on a declining path. Infrastructure investment decreased by 0.1 percentage point of GDP between 2005 and 2016. Over the same period, investment in hospitals and schools increased by 0.4 % percentage point of GDP (Biatour, Kegels, Van der Linden and Verwerft, 2017). Investment in infrastructure is supposed to have a larger effect on economic growth than other types of government investment. This is because public investment in network infrastructure such as roads, railways, energy and high-speed data has a positive effect on the productivity of the private sector. In 2016, infrastructure investment in Belgium stood at 0.5 % of GDP compared to 0.6 % in the euro area and more than 1 % in France and the Netherlands (Graph 3.1.3). An increase in public investment or even a change in its composition would positively impact on medium to long-term economic growth. Available empirical studies (Biatour, Kegels, Van der Linden and Verwerft, 2017) suggest that increasing public investment permanently by 0.5 pp. of GDP would increase the economic output by 0.24 pp. after 1 year and by 2.77 pps after 20 years. Alternatively, raising infrastructure investment by 0.5 % of GDP, keeping total public investment unchanged (implying a reduction in non-infrastructure investment), could raise GDP by more than 1 pp. after 3 years and by more than 8 pps after 20 years. Graph 3.1.3:Government investment: breakdown by functional classification (average 2008-2016), % of GDP Source: European Commission Most public investment is carried out by the federated entities (regions and communities) and local authorities. Almost 90 % of total public investment is at the level of regions/communities and local governments (Graph 3.1.4). The figures are even higher for infrastructure investment, with local government responsible for almost all infrastructure investment carried out in recent years. This reflects the distribution of competences across the different levels of government, where the federal administration focused its investment on public goods (mostly defence and general public services). Regions and communities are responsible for education and most research; they share responsibility for the road network with municipalities. Local government invested in transport and redistribution (in particular social protection, recreation, culture and religion). Overall investment by the federated entities (regions and communities) and by local authorities has remained stable since 2000, hovering at around 2 % of GDP, but over this period the trend has diverged among them. Capital expenditure by the regions and communities increased from 1.0 % of GDP in 2000 to 1.3 % in 2017. By contrast, investment by local government fell from 1.0 % of GDP to 0.7 % of GDP in 2017. It has also fallen from 16.5 % of total local government primary spending in 2000, to 10.1 % in 2017. Increased budgetary constraints explain most of the drop in local government investment. In 2017, wages represented around 60 % of local governments' expenditure. The increase in social contributions to be paid stemming from the 2012 reform of the financing system of their statutory staff pensions is expected to continue to push up labour costs for local government in the medium term. Social spending is also increasing. The "integration income" paid by the local public welfare centres (CPAS/OCMW) accounted for 0.3 % of GDP in 2017, up from 0.1 % of GDP in 2000. This notably reflects higher needs associated with new restrictions on unemployment benefits and the limitation in time of the "insertion allowance" for jobseekers. Budgetary rules to which municipalities are subjected are rather strict. Municipalities are requested to observe the principle of an annual balanced budget. In 2002 the monitoring of the local public finances was handed over to the regions. Since then, different rules governing the budget of the local governments budget have been introduced at regional level. However, on average the framework has been reinforced, keeping the principle of the annual balanced budget (which led to an overall positive balance as well in the European System of Accounts - ESA 2010 terms). It is likely that those rules, in combination with rising staff and pension costs, have also put a lid on investment spending, which is easier to reduce than operational expenditure. Initiatives have been taken to increase the efficiency of local public spending. To achieve economies of scale and rationalise operations, the Flemish and Walloon regions decided to streamline the competencies of provinces and offer municipalities incentives to merge. In Flanders, municipalities and the CPAS/OCMW will merge their governance, budgetary planning and some of their key support functions. More broadly, increased collaboration across local government in some specific functions (public works management, financial planning, IT platforms, public procurement, and debt management) can yield efficiency gains through economies of scale and the spread of best practice. Graph 3.1.4:Share of direct expenditure (net of intra-government transfers) and investment by level of government Source: European Commission On the initiative of the federal government, a committee of experts outlined a National Pact for Strategic Investment identifying public and private investment needs and addressing investment recommendations to authorities at all government levels. The report recommends EUR 144-155 billion additional investments by 2030, coming from both the public (45%) and the private sector (55%), as well as support measures. This would increase the annual investment rate to between 3 % and 3.5 % of GDP. Investment would target digitisation, cyber security, education, health care, energy and mobility. Due to the separation of competences, the Pact's implementation will require close coordination across all levels of government. A step in this direction has been the creation of an inter-ministerial conference, which aims to facilitate coordination across all government levels with regard to inter-federal investment projects and associated regulatory barriers. A global agreement on an enforceable distribution of fiscal targets among government levels could incorporate investment space, taking into account large-scale projects in every region and their timing. The EU budgetary framework of the Stability and Growth Pact (SGP) applies to Belgium as a whole, and not to its individual entities. Under the 2013 Cooperation agreement (see Section 3.1.3) each individual entity has a commitment to achieve a balanced budget in the medium term. Cooperation between all entities could allow for greater flexibility, and a temporary softening of the budgetary constraints for an entity facing substantial investment needs, without exceeding the limit imposed by the SGP at national level. 3.1.3.Fiscal framework The autonomy of the High Council of Finance (HCF) has recently been reinforced. The Royal Decree of 23 May 2018 boosted the independence of the Public Sector Borrowing Requirements section of the High Council (HCF-PB), which was appointed as the independent monitoring institution envisaged by the TSCG ( ). The royal decree also provided the section with additional staff and ensured its capacity to communicate freely. The authorities also signed a protocol on the free exchange of information between the National Accounts Institute and the HCF-PB. Progress has also been achieved in formalising the ‘comply or explain’ principle, whereby the opinion of the HCF-PB would either be followed, or the government would explain why it departed from it. Budgetary coordination is not sufficiently effective yet, as the 2013 cooperation agreement has not been fully implemented. As described in the 2018 country report, Belgian federated entities and the federal government signed a cooperation agreement in 2013 to ensure effective budget coordination. In contrast with the practice of previous Stability Programmes, when the Concertation Committee ‘took note’ of the fiscal trajectory, all levels of government approved the overall fiscal trajectory presented in the 2018 Stability Programme and supported the achievement of the fiscal targets by 2020 for all government levels. Although this approval added credibility to the overall trajectory, there was no formal agreement on the annual fiscal targets at each level of government. 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. In addition, this 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). 3.1.4.Debt sustainability analysis and fiscal risks Short-term debt sustainability does not seem to give cause for concern. The short-term indicator S0 ( ) does not flag significant risks, as the identified short-term fiscal challenges are not acute enough to generate overall risks of fiscal stress. The low short-term risk is consistent with the ‘AA’ rating category given to Belgian government debt by the three major rating agencies.

In the medium and long term, Belgium fiscal sustainability faces substantial challenges. Both the debt sustainability analysis and the S1 indicator ( ) (4.3 pps of GDP) indicate high risk in the medium term. This is mostly due to the high level of public debt and to a lesser extent to the projected increase in age-related expenditure. Adhering to the existing fiscal rules (full compliance with the requirements of the preventive arm of the SGP and convergence with the medium-term objective) would significantly reduce the public debt over GDP ratio compared to a baseline scenario of unchanged fiscal policy (Graph 3.1.5). In the long term, the S2 indicator (4.3 percentage points of GDP) ( ) points to medium sustainability risk. However, vulnerabilities linked to the high debt burden, as captured by the debt sustainability analysis, indicate high sustainability risks overall in the long term ( ). Graph 3.1.5:Public debt medium-term projection and scenarios ( % of GDP) Source: European Commission 3.1.5.pensions and long-term care Pension system The sustainability of the pension system is expected to worsen in the medium term. At 12.1 % of GDP in 2016, pension expenditure in Belgium was above the EU average of 11.2 % of GDP. Public pension expenditure is projected to increase by 2.9 percentage points of GDP between 2016 and 2070, compared to an average decrease of 0.2 pp. in the EU (European Commission, 2018d). The bulk of this increase is expected to emerge in the next few decades. The main driver of this development is demographic ageing. Graph 3.1.6 illustrates the impact on the projections of changes in the underlying assumptions. Lower migration or lower employment rates would increase pension expenditure by around 0.5 pps of GDP relative to the baseline. A main downward risk relates to the prospect of lower-than-assumed productivity growth. Also, more pronounced ageing (through greater gains in longevity or lower fertility) risks pushing up baseline projections considerably. Conversely, increased employment among older workers or higher productivity growth would help contain ageing costs. The same holds for introducing a link between the statutory retirement age and gains in longevity. Past government measures are projected to help raise the employment rate of older people and lower the coverage ratio ( ). The average effective age of exit from the labour market is projected to increase from 61.8 years in 2016 to 64.3 years by 2030 as a result of the tightening of early retirement conditions and the increase in the statutory retirement age in 2025 and 2030. Projections show an increase in the participation rate of those aged 55-64, with an upward convergence in female participation. However, the lower coverage ratio is partly offset by the rise in the benefit ratio ( ) until 2040, which is currently below the EU average of 43.5 % (Federal Planning Bureau, 2018). The average length of retirement is projected to increase considerably. According to the 2018 Ageing Report projections, life expectancy would increase faster than the effective retirement age. The outgoing government planned to lay the groundwork for revising the public pension scheme from a defined benefit system to a point system, with the prospect of introducing stabilisation mechanisms. However, plans were delayed and eventually abandoned. The envisaged "credit-based public pension system" could have contributed to the sustainability of the public pension system by adjusting to life expectancy or the dependency ratio. Graph 3.1.6:Increase in pension expenditure - selected scenarios – percentage points of GDP Source: European Commission Considerations related to the definition of ‘arduous jobs’ might slow down the increase in the effective retirement age. An agreement was reached between the authorities and labour unions on public sector jobs that could be considered arduous; about half of all public sector jobs would fall under the scheme. The same guiding principles were meant to apply to private sector jobs. However, following extensive negotiations, social partners failed to reach an agreement on the criteria for arduous work in the private sector. As a result, it is unclear whether the new scheme will still start in 2020 and, if so, which jobs will qualify. A broad application of the ‘arduous jobs’ notion risks undoing, at least partially, the impact of earlier reforms on the effective retirement age. Poverty risks among pensioners are projected to decrease. The increasing employment rate, the higher average exit age and especially the increasing activity rate of women are expected to translate into higher pension benefits. In 2016, 16.4 % of people aged 65 or over were "at risk of poverty and social exclusion" (AROPE). This is below the EU average (18.2 %), but higher than in France and the Netherlands (both 10.0 %). Long-term care There are challenges to the fiscal sustainability of long-term care, both in the medium and in the long term. With demographic changes, public spending on long-term care, at 2.3 % of GDP (above the EU average of 1.6 % in 2016) is projected to steadily increase up to 4.0 % according to the "Ageing Working Group reference scenario" and up to 5.8 % according to the "Ageing Working Group risk scenario", which accounts for additional cost drivers to demography and health status. Higher long-term care expenditure will add to pressure on the budget, contributing 0.2 pp. of GDP to the S1 indicator for the medium term and 1.3 percentage point of GDP to the high long-term fiscal sustainability risk indicator S2. Spending on long-term care is almost exclusively devoted to in-kind services. In-kind services ( ) accounted for 99.7 % of long-term care spending in 2016 (EU average: 84.4 %). In-kind benefits are more often provided as institutional care rather than home-care. As the cost of institutional care appears relatively high in Belgium compared to that of home care, long term care provision may gain in efficiency by further focusing on home care, even if Belgium relies already on home care for 43.7 % (EU average: 33.7 % in 2016) (Commission services-EPC, 2019). The provision of informal care in Belgium is above the EU average (see Section 3.3.3). The devolution to the regions of long-term care does not appear to question the fundamentals of the current system, but it is too early to assess its impact. This transfer of responsibilities might render the organisation of an already complex system more challenging. However, despite the risk of regional divergence, there seems to be a consensus on giving priority to in-kind benefits, keeping the role of cash allowances limited, rolling out a new long-term care insurance scheme, and using sickness funds in the new insurance scheme. Whether devolved long-term care management proves more efficient, and thereby has an impact on fiscal sustainability, will largely depend on the quality of governance at regional level. 3.1.6.Taxation Labour is highly taxed as a factor of production in Belgium. The recent ‘tax shift’ ( ) reduced the tax wedge for the lowest income earners. In particular, the labour tax wedge for those earning 50 % of the average wage fell by 4.7 pps from 2015 to 2017. Nevertheless, for those earning a low wage (67 % of the average wage) or average wage, the tax wedge remains the highest in the EU (Graph 3.1.7). This high tax burden on labour is due to narrow personal income tax brackets. Even average income earners are subject to the highest income tax rate. Broadening the tax base by reducing tax expenditures could generate the necessary revenue to broaden tax brackets. In addition, the ceiling for claiming the ‘marital quotient’, applied in the personal income tax, is a high disincentive to work for second earners.( ) The extensive use of tax expenditures reduces the efficiency of the Belgian tax system. The proportion of tax expenditure in most tax categories is high ( ) and this leads to economic distortions. For instance, reduced VAT rates, widely used in Belgium, are not an efficient redistribution mechanism, as they do not allow targeting low-income households. While tax expenditures may be justified to correct market failures, streamlining their use would simplify the tax system and generate the necessary revenue to reduce tax rates. Taxes on rental income are low in Belgium. When immovable property is rented out for housing purposes, it is not the rental income received but the outdated cadastral income (indexed value of 1975 estimated income) that is included in the personal income tax base. Using the actual rental income received as the tax base and granting a tax deduction for related expenses would make the tax system more asset-neutral and less distortive. A Commission study (European Commission, 2019a) estimated that taxing net rental income would have a positive budgetary impact of 0.3 % of GDP. This additional revenue could be used in a more growth-friendly way, for example to further reduce the tax burden on labour. Moreover, making all rental expenses fully tax-deductible could stimulate the building sector, improve the quality of the housing stock (encouraging energy-saving investments) and help reduce the informal economy. Any reform should, however, be carefully considered against the background of (rental) housing market policies and of its budgetary impact. Graph 3.1.7:Tax wedge on labour, single earner, average wage (2017) Source: European Commission

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 2017 ( ). According to the World Bank Ease of Doing Business report, the process of transferring a property has become the second most expensive among the EU Member States at 12.7 % of the property value. High transaction taxes on immovable property 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. The Walloon and Brussels-Capital regions increased the transaction tax deduction for first dwellings in 2017, while keeping the tax rate at 12.5 %. Flanders reduced the transaction tax rate for the purchase of the first dwelling from 10 % to 7 % in 2018. 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 company car scheme adversely affects mobility and the environment and makes the tax system complex. In 2018, the so-called 'cash-for-car'( ) was introduced as alternative to the company car scheme. Rather than having a company car as part of their remuneration package, certain employees can choose to give up the car for additional net pay. As the extra pay is often not high enough to match the private use of a company car, the alternative schemes are expected to have only a limited impact on congestion and pollution. Moreover, the new schemes adds to the complexity of the Belgian tax system and favour a subgroup of the working population. Revenues from environmental taxes remain among the lowest in the EU ( ). Environmental taxes accounted for 2.2 % of GDP in 2017 against a EU average of 2.4 %. These include energy taxes amounting in 2016 to 1.5 % of GDP against an EU average of 1.8 %. In 2017, the federal Ministry for Energy and Environment launched a national debate on carbon pricing, which ended in June 2018. The final report concluded that the introduction of a budget-neutral carbon price in the building and transport sectors is particularly promising and manageable if the proceeds are used to compensate for the potential adverse effects, and provided there is successful coordination between the different authorities. ( ) Belgium is implementing a reform to simplify its corporate income tax system. The 2017 reform provides for a move towards lower statutory rates and fewer exemptions and deductions. The statutory tax rate has been lowered from 33.99 % (including a 3 % austerity surcharge) to 29.58 % in 2018 and should be reduced to 25 % in 2020 (and the austerity surcharge cancelled). ( ) The reform also introduced amendments to ease taxation on start-ups and small companies. The corporate income tax reform also adjusted the application of the notional interest deduction, limiting the risk of aggressive tax planning. In addition, in August 2018, Belgium introduced a specific anti-abuse rule to further limit the potential abuse of the Notional Interested Deduction scheme for Aggressive Tax Planning purposes (anti-cascading measure). The taxation of financial income is complex and creates economic distortions. Financial income is excluded from the personal income tax base and subject to a final withholding tax rate of 30 % in Belgium. However, reduced rates apply to several types of investment, distorting resource allocation and potentially generating tax-induced over-investment in certain types of assets. Moreover, differentiated tax rates add to the complexity of the system and are rarely the most cost-efficient means of achieving given economic and social policy goals. For instance, the new tax of 0.15 % on securities accounts exceeding EUR 500 000 is likely to create distortions, given the number of products excluded from its scope (life insurance, pension products, nominal shares, term saving option, liquidity). More details on this can be found in last year’s Country report. 3.2. Financial sector and housing The financial sector appears relatively sound, but its profitability is under pressure. Bank solvency is good; the capital adequacy ratio was stable at 18.4 % in June 2018. Credit quality is high, with low non-performing loan ratios. Banks remain relatively profitable, with return on equity ratio close to 9 % in 2017 (above the euro area average of 5.6%), but slightly weakening since the beginning of 2018. The challenges for banks remain largely the same as last year: a high cost-to-income ratio, 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, clients changing preferences and intense competition. In light of the delayed privatisation of Belfius, state ownership remains substantial. Dexia still represents a sizeable, but relatively stable contingent liability of EUR 33.5 billion (7.4 % of GDP) for the Belgian state. The contributions to the Belgian Deposit Guarantee Scheme (DGS) are not invested in a segregated, diversified portfolio of low-risk assets. As explained in previous country reports, the absence of a ring-fenced and autonomous DGS is not optimal from a financial stability perspective. Contributions to the Belgian DGS (around EUR 3.4 billion altogether in December 2017) directly enter the federal budget as tax revenues and contribute to reducing the deficit. If the DGS needs to intervene and compensate depositors, Belgium will have to finance the entire cost of the intervention from the budget. Insurers’ solvency has been broadly stable, even though traditional life insurance business continues to suffer from the low interest rate environment. Insurers’ average solvency ratio has improved slightly from 176 % in 2016 to 192 % in 2017. As in other Member States, this ratio sometimes benefits significantly from particular adjustments of the Long-Term Guarantee package of EU measures. Life insurance slowly moves from traditional, guaranteed interest rate contracts to unit-linked contracts. Some insurers have also taken measures to accelerate the transition to a more sustainable business model, including by selling part of their legacy portfolio (see European Commission, 2018a). Finally, life insurance premiums are taxed more than contributions to accumulating investment funds (‘SICAV de capitalisation’), limiting the asset-neutrality of the tax system. Access to finance Small and medium-sized enterprises (SMEs) continue to have good access to finance although the situation has relatively deteriorated. Belgium is performing well in equity funding and professional ‘business angel’ funding for new and growing firms. Belgian corporates tend to be significantly less dependent on loans from the financial sector than their EU peers. This relative (albeit decreasing) preference for equity over debt might be partly due to the former Belgian regime of "notional interest deduction". The market capitalisation of Belgian quoted non-financial corporations reached 67.3 % of GDP in 2017, higher than the EU average (54.2 % of GDP) confirming the preference for equity. The borrowing cost for small loans relative to large ones is half the average cost in the EU. However, the number of rejected SME loan applications has increased marginally. This finding is in line with the 13.6 % of respondents to the SAFE survey who indicated that banks were less willing to provide loans in 2017, against 9.7 % in 2016. Meanwhile, access to public financial support appears to improve, with only 9.7 % those respondents indicating a drop in 2017, against 14.2 % in the previous year. Lending to non-financial corporations has accelerated and will require specific monitoring. Because of the persistent low interest rate environment, credit growth remains substantial. In particular, the year-on-year growth of loans to non-financial corporations, corrected for sales and securitisation, is the highest in the euro area (10.1 % in October 2018, against 2.8 % in the euro area) and needs to be closely monitored. While credit developments are supported by a broad-based trend, specific one-off factors also played a role, like merger and acquisition operations and advance payments of taxes by non-financial corporations. Households’ indebtedness The increase in households' debt since 2005 remains in line with fundamentals, while substantial. Belgian households’ indebtedness overtook the euro area average in 2015 and reached 59.8 % of GDP in 2017, against 56.9 % of GDP in the euro area. By contrast, indebtedness has started to decline on average in the euro area in the wake of the financial crisis. Households' debt remains however close to the level suggested by economic fundamentals. Households' private debt norm ( ) points to limited deleveraging needs for Belgium (around 10 %) according to the prudential threshold. 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 - CBD2 - Consolidated Banking data - European Commission Belgium house prices currently present limited signs of 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 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 15 % overvaluation gap of Belgian house prices. However, a more sophisticated indicator developed by the European Commission, 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 slight overvaluation (6.5 %) (National Bank of Belgium, 2018). In April 2018, a macroprudential measure addressing risks in the residential mortgage market entered into force. ( ) The measure aimed at addressing several risks, including loose credit standards, rising households indebtedness, a substantial share of vulnerable households, a relatively high banking exposure to mortgages and the possibility of a future correction in real estate prices. By increasing banks’ resilience to a downturn in the mortgage market, this measure has achieved its primary objective. At this (still early) stage, it does not seem to have affected mortgage interest rates or credit growth. The generally favourable wealth position of households is considered as a positive factor further softening sustainability concerns about households debt. Belgium households hold more assets on average than euro area households and have positive net assets positions. Nevertheless, the distribution of assets and debt points to pockets of vulnerability. 3 % of outstanding mortgage debt is held by households that have a mortgage loan-to-value above 80 % and pay more than half of their income in debt service. Moreover, 5.9 % of debt is held by households that have a mortgage loan-to-value above 80 % and do not have enough liquid assets to serve more than 2 months of debt payments. It implies that, because financial wealth is unequally distributed, a severe unemployment shock with income loss could hurt many mortgage-indebted households involving a significant part of total outstanding mortgage debt (Du Caju, 2017). 3.3. Labour market, education and social policies 3.3.1.Labour market

The labour market continued to improve, in a context of sustained economic growth. In 2017, employment grew the fastest since 2009 (1.4 %). More than 4.7 million people were employed, which is the highest level in the past ten years. In particular, there is a growing number of older workers (55-64) due to the combined effect of longer working lives and the ageing of the population. It resulted in a steady increase in the employment rate to 69 % in the second quarter of 2018, still below the EU average (73.2 %). The activity rate (20-64) remains low (73.7 % in 2017), well below the EU average of 78 %, having increased only moderately (less than 1 pp) over the last ten years. The unemployment rate declined (5.5 % in Q3 2018), and is now below the 2018 level of structural unemployment. Large differences in unemployment rates persist between regions. Regional disparities are the highest for unemployment. Unemployment is particularly high in Brussels (14.9 % in 2017, 5.2 pps higher than in Wallonia and 10.5 pps higher than in Flanders). This can only partly be explained by the urban context. The difference with Wallonia disappears when only urban areas are considered, but with Flanders an important gap remains (Graph 3.3.1). A similar pattern can be observed for long-term unemployment. The inactivity rate is among the highest in the EU and an increasing share of the inactive are sick or have disabilities. In 2017, the inactivity rate (25-64) was 23.4 %, well above the EU average of 20.4 %. While the inactivity rate has remained stable over time, the reasons for inactivity have changed considerably. The inactive population between 25 and 64 years that self-report to be sick or to have disabilities increased from 16 % in 2007 to 30 % in 2017. The increase is found across all regions, ages and skill levels but is particularly large for women, middle-aged (35-54) and older (55-64) workers (Graph 3.3.2). It is linked to increased labour participation of older workers, an increase in muscular and psychological diseases and low levels of re-integration into the labour market. Low labour market participation coincides with a high vacancy rate, suggesting a high level of skills mismatches. The vacancy rate (3.6 % in 2018 Q3) is amongst the highest in the EU (average 2.2 %) and is higher in Flanders (4.1 %) than in Brussels (3.3 %) or Wallonia (2.8 %). The gap between the employment rates of low-, medium-, and high-skilled workers remains among the widest in the EU in all three Regions (see Graph 3.3.2 in European Commission, 2018a). Skills mismatches are, among other factors, associated with high labour costs and taxation, low transitions to employment and low job mobility. Graph 3.3.1:Unemployment rate by region and level of urbanisation ( % of active population) Source: European Commission Graph 3.3.2:Reasons for inactivity by age (2007-2017) Source: Eurostat Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights is designed as a compass for a renewed process of convergence towards better working and living conditions in the European Union. ( I ) It sets out twenty essential principles and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and social protection and inclusion. Belgium performs well on a number of indicators of the Social Scoreboard supporting the European Pillar of Social Rights. The labour market improved driven by sustained economic growth. It is becoming increasingly tight in spite of a relatively low employment rate. The vacancy rate is amongst the highest in the EU (3.5 % vs. an EU average of 2.1 %). The high vacancy rate and the increasing skills shortages contrast with high inactivity and unemployment for some groups, notably the low skilled and the young. Resolving these issues will require addressing remaining financial disincentives to work (also for second earners), increasing job mobility and participation in lifelong learning and upskilling. Furthermore, employment rates are low for third country immigrants and this affects to some extent as well their descendants. Promoting their labour market integration would contribute to increasing labour supply and productivity. Inequalities of opportunities persist between different population groups. The income gap between persons with low and high educational attainment is amongst the highest in the EU for the working age population. Educational inequalities limit social mobility. There are strong inequalities in the health system. Self-reported unmet medical needs are low on average but high for the lower income quintile. The effectiveness of social transfers in reducing poverty is at EU average level. It has been however declining since 2005 for the working age population. Income inequality remains stable and below the EU average (S80/S20 of 3.8 against 5.1), due to the combination of an intermediate level of market income inequality with a highly redistributive tax and benefit system. Though wealth is evenly distributed compared to other euro area countries, pockets of poverty persist as part of the population lacks access to the labour market. Labour shortages are observed in most sectors, in particular because of lack of adequate skills. The vacancy rates in almost all sectors are significantly above the EU and euro-area averages. Analyses by the Public Employment Services (PES) show that the list of occupations most in demand is relatively stable, including health care workers, information and communication technologies analysts and certain occupations in the construction sector. ( ) Many of them require secondary training and not always a tertiary degree. ( ) Employer surveys point to a lack of applicants with appropriate experience and skills as the most important driver of labour shortages (Manpower Group, 2018). In particular, shortages are linked to the lack of graduates in science, technology, engineering and mathematics and more broadly digital skills (see Section 3.3.2). Poor language skills are also an important issue, in Brussels for instance, where only 27 % of the job seekers declare an average/good knowledge of the other national language. Finally, some sectors also face image problems or working conditions are not sufficiently attractive (e.g. in accommodation and food service activities). Despite increasing labour demand, transitions from inactivity or unemployment to employment are low, in particular for the low-skilled. Participation in Active Labour Market Policies (ALMPs) is among the highest in the EU. In 2016, 67 % of those wanting to work were enrolled in an ALMP. Nevertheless, transition rates from unemployment or inactivity to employment remain well below the EU average (Graph 3.3.3). Transitions to employment are in particular low for low skilled (6 % vs. 11 % for medium skilled and 19 % for high skilled). For all skills levels, transitions in Wallonia are lower than in Flanders and Brussels. In addition, job mobility (i.e. the willingness of employees to change work) is low, which may limit productivity growth ( ). Low job mobility is among others linked to seniority pay, long notice periods, and low levels of adult learning. Given the inter-regional differences in unemployment rates, inter-regional mobility of workers has room for improvement. According to FOREM, 11 % of Walloon workers work in Brussels, but only 4.4 % work in Flanders, despite higher vacancy rates in these two regions compared to Wallonia. In February 2018, Flanders and Wallonia have developed an action plan to ease inter-regional labour mobility, through reinforced cooperation between the Walloon and Flemish public employment services (respectively FOREM and the VDAB, the improvement of linguistic skills and campaigns. Graph 3.3.3:Transition rate from unemployment/inactivity to employment, 2014-2017 ( % total inactive or unemployed) Source: European Commission Important financial disincentives to take up employment remain. Although the tax shift reduced the labour tax wedge (income tax plus employer and employee contributions) for very low wage earners (fifty percent of the average wage), it remains the highest in the EU for average wage earners. Moreover, Belgium remains the only country in which unemployment benefits, though degressive, are not limited in time ( ). High tax disincentives for second earners – mainly women – remain, contributing to high part-time employment among women (40.9 %) (European Commission, 2018a). There are also financial disincentives for beneficiaries of sickness and disability schemes to take up full-time employment. In particular, single parents (and to a lesser extent couples with children) face limited financial incentives to take up (full-time) employment due to a combination of costs and withdrawal of benefits (Hufkens, T., and others, 2016). This effect is particularly strong in case beneficiaries start working at a lower wage than in previous employment. The responsibility for the social protection systems is split between the federal and sub-national levels, which may lead to coordination problems. The unemployment benefits and invalidity allowances are administered at the federal level (representing 1.8 % of GDP in 2016), while social assistance is partly financed by the municipalities, whose finances are strained (see Section 3.1.4). Target group activation measures and the control of availability are run at the regional level. The data from the monitoring frameworks applied by the Regional Public Employment Services are not directly comparable any more. This complicates the analysis of “active availability”, which implies that unemployed have to actively look for employment and respond to the offers of the Public Employment Service, set in the federal normative framework. Current figures might indicate that the control obligations are not fully met by all Regions. This may have an impact on federal and local public finances. At regional level, governments have reformed and simplified the employment incentives and the monitoring and guidance activities of their respective public employment services (PES). The situation on the regional labour markets and the functioning of the regional PES remain very different. This is reflected in their reform agendas. Regional governments and PES have concluded ambitious management contracts for 2017 – 2022 with challenging objectives for each of the PES. But their capacity to carry-out the necessary monitoring and act on the information generated seems uneven. In Wallonia, Forem has started an ambitious reorganisation project to improve its efficiency and effectiveness. In Brussels, Actiris is working on improving quality, efficiency and effectiveness of services. The Flemish Region aims to improve employment performance through a new policy approach called 'Focus on Talent', which provides bespoke guidance to jobseekers and inactive people. It is also focussing on career security for all citizens and a new approach to employers. At the federal level, major reforms were announced to improve incentives to work in the so-called 'Jobs Deal'. The 28 measures announced in Summer 2018 cover training, wage costs, career end, activation and the interaction between federal and sub-national measures. The political situation, with the federal care-taker government, may complicate the adoption of these measures. In addition, several of these would need concrete agreements between social partners or with the Regional Governments. If implemented, the impact of the reform of the degressivity of unemployment benefits on the unemployment trap as a function of the salary level would need careful assessment.( ) The measure allowing for EUR 6 000 of tax-free professional income for employees working at least 80 % of a full-time job equivalent, self-employed and pensioners became effective in July. As approximately 166 000 self-employed declared less than EUR 5 000 per year ( ), the uptake and the budgetary impact will need to be monitored. Labour market situation of vulnerable groups Labour market participation remains particularly low for specific socio-economic groups. There are large differences in inactivity and unemployment rate