EUROPEAN COMMISSION Brussels,7.3.2018 SWD(2018) 200 final COMMISSION STAFF WORKING DOCUMENT Country Report Belgium 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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(2018) 120 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 3.3.Labour market, education and social policies 3.4. Investment and Competitiveness 3.5. Sectoral policies Annex A: Overview Table Annex B: Macroeconomic Imbalance Procedure Scoreboard Annex C: Standard Tables References LIST OF Tables Table 1.1:Key economic and financial indicators – Belgium Table 2.1:CSRs progress Table 3.2.1:Financial soundness indicators, all banks in Belgium

Table B.1:The MIP scoreboard for Belgium (AMR 2018) Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard indicator 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: GDP - comparison across countries, index 2009=100 Graph 1.3: Potential growth across time and countries Graph 1.4: Breakdown of households disposable income growth Graph 1.5: Harmonised consumer price inflation Graph 1.6: Employment growth (y/y % change); self-employed and employees) Graph 1.7: Breakdown of the current account balance Graph 1.8: NFC debt and benchmarks Graph 1.9: Valuation levels and latest housing price growth Graph 2.1: Overall multiannual implementation of 2011-2017 CSRs to date Graph 3.1.1: Government primary expenditure in 2016, % of GDP

Graph 3.1.2: Public debt medium-term projection and scenarios ( % of GDP) Graph 3.1.3: Tax burden on labour for a single person at the average wage (2016) Graph 3.2.1: Overvaluation gap with respect to price/income, price/rent and fundamental model valuation gaps Graph 3.2.2: Gap to the fundamental-based and prudential benchmarks Graph 3.3.1: Key labour market indicators Graph 3.3.2: Relative dispersion of employment rates by education level, 2005 and 2016 Graph 3.3.3: Change in average take-home pay after the tax-shift Graph 3.3.4: Characteristics of the employed, unemployed and inactive (20-64), 2014 Graph 3.3.5: Pay gap between older (50+) and younger (30-39) workers , 2014 Graph 3.3.6: Likelihood of employment by origin, gender and educational attainment Graph 3.3.7: Share of the population (25-54) living in very low work intensity households, 2005-2016 Graph 3.3.8: Between schools variation in performance explained by schools' and students' social-economic status (PISA 2015- Science) Graph 3.4.1: Developments in labour productivity growth (Gross value added per hours worked) Graph 3.4.2: Distribution of labour productivity growth, Belgium, (average 2011-2013) Graph 3.4.3: Federal fiscal measures in support of R&D (left scale in billion EUR) and business R&D (right scale in billion EUR), 2008-2015 Graph 3.4.4: Determinants of changes in unit labour cost Graph 3.4.5: Contribution of the main product groups to the inflation differential with the EA LIST OF Boxes Box 2.1: Tangible results delivered through EU support to structural change in Belgium

Box 3.3. 1: Monitoring performance in light of the European Pillar of Social Rights Box 3.3.2: Policy highlight: Reform of early childhood and compulsory education in the French Community (Pact for Excellence in Teaching, 2015-2030) Box 3.4.1: Investment challenges and reforms in Belgium Executive summary The favourable economic environment provides a window of opportunity to boost the reform momentum tackling long-term challenges in the area of public finances, labour market participation and investment( ). Recent structural reforms have borne fruit in terms of an improved competitiveness and a job-rich recovery. Potential growth is trending upward since it bottomed out in 2013. Nevertheless, it remains below its pre-crisis estimates as remaining barriers to competition in market services and a narrow innovation base weigh on productivity growth. While recent government measures have spurred employment growth, a high inactivity rate combined with a high vacancy rate is suggesting a high level of skills mismatches. The quality of the transport network is low and reflects the low level of public investment. Economic growth is expected to have accelerated to 1.7 % in 2017 underpinned by robust domestic demand for both private consumption and investment purposes. Household consumption is expected to gain momentum in 2017-2019 in line with the projected increase in disposable income. Business investment is expected to continue expanding over the forecast period, supported by sizeable liquidity reserves and favourable financing conditions with persistently low interest rates. The contribution of net exports is estimated to have improved after being a drag on growth in the previous year. Recent developments suggest that the inflation differential with the euro area is decreasing Between 2018 and 2019 Belgium's economic growth is projected to accelerate, progressing to an average annual pace of 1.8 %. This compares with an average growth of 1.4 % between 2014 and 2016. Though falling public debt is still high. Since peaking in 2014 at 106.8 % of GDP, public debt has been falling very gradually. The general government deficit is expected to have dropped significantly in 2017. In 2018, only a moderate progress is expected unless additional budget measures are taken. There remains a wide gap between the estimated structural deficit in 2017 and the country’s medium-term objective of a balanced budget in structural terms. Belgium has made limited progress in addressing the 2017 country-specific recommendations. There has been limited progress with distributing fiscal targets among the various levels of government in a way that can be enforced and with improving the composition of public expenditure. Some progress has been made with eliminating tax breaks that causes distortions. There are no plans at federal level to introduce a systematic review of public spending as a permanent feature of budget planning. However, the National Plan for Strategic Investment provides for an increase in infrastructure investment. Some progress has been made as regards equal opportunities to participate in quality education and vocational training, as Communities are phasing in major school reforms, but progress on equal access to the labour market remains limited. There has been some progress with encouraging investment in knowledge-based capital, even if measures vary in scope at the regional, community and federal levels. Progress on sectoral regulation has been overall limited. For certain professional services regulatory restrictions impact competition. Limited progress has been made in improving the functioning of the retail sector for the benefit of businesses and consumers and in improving market mechanisms in network industries. 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. It is at risk of failing to meet the targets for greenhouse gas emissions, renewable energy, energy efficiency and reducing the risk of poverty. By contrast, Belgium reached its early school leaving target in 2016 and is broadly on track to reach the targets for R&D intensity and increasing tertiary educational attainment. Belgium performs globally well on the indicators of the Social Scoreboard supporting the European Pillar of Social Rights, whilst challenges remain. Participation in adult learning is relatively low and educational outcomes show considerable variations linked to socio-economic status and migrant background. Some population groups including people with a migration background could be better integrated in the labour market. Belgium has one of the largest gaps between the risk of poverty or social exclusion for persons with disabilities and those without. Belgium has good outcomes in terms of gender equality and childcare. Key structural issues analysed in this report, which point to particular challenges for Belgium's economy, are the following: ·Sustainability of public finances remains a challenge. The pension reforms enacted in 2015 were a first significant step to address risks related to the long-term cost of ageing. Nevertheless, recent projections point to a large increase in long-term expenditure for both pensions and long-term care. Fully implementing the different steps envisaged by the reform would help reduce these risks. In particular, plans to introduce a credit based public pension system may improve long-term fiscal sustainability, by providing for automatic adjustment mechanisms in response to structural demographic or economic changes. Risks of fiscal stress appear to be contained in the short term. Furthermore, contributions to the Belgian Deposit Guarantee Scheme are not invested in a separate portfolio of low-risk assets. ·There is scope to give spending restraint a larger role in fiscal consolidation. Total public expenditure as a percentage of GDP is above the euro area average. At present, no level of government in Belgium is bound by domestic expenditure rules, with the exception of a ceiling for healthcare spending. This prevents spending-based fiscal consolidation. ·Low productivity growth remains a challenge, for future economic prosperity. Investment in research and innovation and other ‘intangibles’ assets, which have the most potential for innovation output, is high but rather narrowly focused.Innovation must be better diffused and the innovation base must be broadened. There is a wide and increasing productivity gap between the most productive firms and the rest. The share of firms directly connected to foreign markets, which appear to have higher productivity, is small. Public support for R&D has grown much faster than business R&D spending. This raises questions about the efficacy of the schemes, in the absence of in-depth evaluations. ·Mobility in Belgium suffers from insufficient public investment in infrastructure, distortive tax incentives, lack of competition in transport services, causing major congestion and hindering productivity growth. Shortfalls in infrastructure investment, especially in the road, waterways and rail networks, reflect the persistently low level of public investment. Combined with perverse tax incentives (for company cars), this contributes to aggravating Belgium’s traffic congestion, which is already Europe’s heaviest. The environmental gains of the planned change in the system of company cars may be very limited. Belgium remains Europe’s most congested country in terms of hours wasted in traffic and delays, in particular around Antwerp and Brussels. This is unlikely to change in the short run, partly because of long delays in several major public infrastructure projects. Several transport services markets are also not open to competition. ·Belgium ranks among the poorest performers in the EU on entrepreneurship. A still heavy administrative burden weighs on businesses and digitisation of public services, including courts. Although several policy measures have been adopted in recent years to foster entrepreneurship, there is evidence that start-ups or businesses without a mature balance sheet have difficulty accessing traditional bank financing. ·High restrictions in some professional services and the construction sector hold back competition, and the retail sector still faces challenges. Belgium's productivity would benefit from tackling barriers in services. Low competitive pressures in services markets are also harming manufacturing industries, which increasingly depend on services inputs. Retail prices remain relatively high despite recent measures to improve the functioning of the retail sector. Recent legislatives changes, such as the regulation of night work, are welcome, but more flexibility is needed to fully exploit their potential.

·Employment growth has recently been sound, but labour market participation remains low. Unemployment has declined to pre-crisis levels. Nevertheless, the employment rate remains low and a relatively large proportion of the labour force is inactive. Disincentives to work remain high in spite of efforts to reduce the labour tax wedge (the difference between the total employer’s labour cost and the worker’s take-home pay). At the same time, the vacancy rate is among the highest in the EU. This suggests major skills mismatches related to, among other factors, historical high labour costs and taxation, low mobility and inadequate language skills. There are also persistent strong regional disparities in labour market performance. Inactivity and unemployment are largely concentrated among low-skilled, young, people with a migrant background, older workers and people with disabilities. There is evidence that activation measures are not equally effective for all population groups. Some specific groups, such as persons in quasi jobless households with children, show higher poverty rates than the EU average. ·Belgium combines good overall education performance with high educational inequalities. Children with a disadvantaged background including those with a migrant background do not have equal opportunities to access quality education. The proportion of graduates in science, technology and mathematics is one of the lowest in the EU. Top performance is declining, particularly in mathematics. There are wide performance gaps between schools and major differences between the Communities. Growth in the school population is one of the highest in the EU. The share of disadvantaged groups will increase, making challenges in education more difficult to address. Both the Flemish and the French Communities have embarked on major reforms of their education systems. Their implementation is planned over the next decade and beyond. ·In spite of recent reforms, the Belgian tax system remains complex. The reform of the corporate income tax will lower statutory rates and help simplify the system. Nevertheless, many exemptions and distortionary incentives remain, as the rising trend in the total amount of tax breaks shows. The opportunity to shift taxes to more growthfriendly bases could be further used. Revenues from environment related taxes are still among the lowest in the EU. Finally, some features of the Belgian taxation system, in particular the lack of specific anti-abuse rules for the notional interest deduction regime may facilitate aggressive tax planning via ‘cascading’. ·The distribution of debt and assets across households reveals some pockets of vulnerability, despite their overall favourable wealth position. A prolonged period of house prices increasing faster than households' disposable income has made the financial situation of households more fragile through an almost mechanical increase in their debt. Although measures have been announced, the complex national macro-prudential decision-making process may leave financial stability risks unaddressed. House prices appear currently to be slightly overvalued. ·Belgium’s environment and climate policies, although performing well in some areas, are still not doing enough to reduce local air pollution and greenhouse gas emissions. Belgium is not fully exploiting its potential to become a low-carbon innovation leader. Plans to decarbonise the economy while guaranteeing the security of supply will require significant investment in the energy system and in innovation. The EU’s investment instruments could be deployed to support these efforts. 1. Economic situation and outlook Economic growth Economic growth is expected to have accelerated to 1.7 % in 2017, underpinned by robust domestic demand, both in terms of consumption and investment. The contribution of net exports is expected to become flat after being a drag on growth in 2016. In the absence of a positive contribution from net exports, growth in economic activity is projected to remain comparable in 2018 at 1.8 % and 2019 at 1.7 % (see Graph 1.1). Between 2017 and 2019 economic growth in Belgium is projected to accelerate, progressing at an average annual pace of 1¾ %. This compares with an average growth of 1½ % over the previous three years. The Belgian economy proved fairly resilient in the wake of the global economic recession in 2009. GDP quickly regained pre-crisis levels, thanks to strong economic growth in 2010 and 2011. That recovery period was followed by near stagnation, in 2012 and 2013. Economic activity rebounded over the next two years, with growth reaching 1.4 % both in 2014 and 2015. In 2016 GDP grew by 1.5 %, despite the drag from the March terrorist attacks and their aftermath, which is nevertheless assessed as limited and transient. Economic growth is expected to rise to 1.7 % in 2017 and 1.8 % in 2018. As in the recent years, domestic demand is expected to be the main driver of growth. Households' purchasing power is projected to pick up as a new collective wage agreement comes into effect and the job market continues to develop favourably. Investment by both business and households is also expected to contribute significantly to growth. The local investment cycle, the start of major infrastructure works and defence investments are expected to drive public investment growth in 2018. Public investment is projected to slightly edge up to 2.3 % of GDP in 2018. The contribution of net exports to growth is expected to remain broadly neutral, as stronger domestic demand will raise the demand for imports, with exporters making only modest market share gains. Graph 1.1:Breakdown of GDP growth Source: European Commission Belgium has done better on average than the euro area as a whole, even though it has lagged behind Germany, since the global economic recession broke (see Graph 1.2). Nevertheless, Belgium's economic performance, though robust, has recently underperformed compared to the euro area where growth has averaged 2 % between 2015 and 2017 (compared to 1.5 % in Belgium). In this regard, it is important to recall that the euro area aggregate includes countries, which have experienced large swings in their economic performance during and after the recent economic crisis. By contrast Belgium's growth has been much more resilient with a fairly stable pace of growth in recent year. This is a sign of an economy with broadly based fundamentals. Moreover, the recent consolidation measures imposed by the government (see the section on public finances) are likely to have depressed domestic demand to some extent, at least in the short term. Graph 1.2:GDP - comparison across countries, index 2009=100 Source: European Commission Actual economic output already exceeds potential growth, estimated at around 1.5 % over 2017-2019. Potential growth bottomed out at around 0.8 % in 2013 and has since been trending upward. Nevertheless it remains below the pre-2009 estimates for potential growth. This is a feature Belgium shares with several member states and, in general, the euro area as whole. The major exception is Germany, where potential growth is predicted to accelerate in the near future (see Graph 1.3). The decline in Belgium's potential growth compared to the pre-2009 period is broad-based across its determinants (see European Commission, 2017a). The low potential growth is mainly driven by declining long-term trend in gains in total factor productivity, which are estimated to have stabilised at a low level in recent years. The contribution of labour has also fallen as result of slower growth in the working-age population, without any change in the average hours worked. Finally, capital accumulation has been somewhat lower than in the pre-crisis period. As for the post-crisis period between 2015 and 2019, potential growth is projected to make a subdued recovery, mainly because total factor productivity (TFP) growth remains relatively low compared with the pre-crisis period. Demographic ageing (see section 3.1), 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 (see section 3.4.1). Graph 1.3:Potential growth across time and countries Source: European Commission Since 2014 domestic demand has been the main driver of growth, with the contribution of net export going from negative to neutral. Within domestic demand, the contribution of public consumption has declined over time, in line with the authorities' recent consolidation efforts. Real current public consumption growth (deflated by GDP deflator) slowed from an average of 2.4 % over 2000-2013 to an average of 0.4 % between 2014 and 2017. By contrast, private consumption growth has proved fairly resilient even during the recession years, and it has picked up recently. Household consumption is expected to gain momentum in 2017-2019 in line with the projected increase in disposable income. Following the financial crisis, the purchasing power of Belgian households abated, growing by an average of 1.4 % between 2010 and 2014 (compared with 3.7 % between 2000 and 2009). This trend mostly reflects a sustained effort by successive governments to moderate wage growth in order to correct for past losses in cost competitiveness. In response to the erosion of their purchasing power, households cut their spending, but not enough to keep pace with the fall in their disposable income resulting in a gradual reduction in the savings ratio. Income growth has picked up since 2016. Following a real wage freeze and a temporary suspension of nominal wage indexation schemes, wages are again being adjusted for the cost of living. Some real wage increases are again being allowed, while income tax reductions have also been introduced since 2016 as part of a multiannual tax reform (see Section 3.1). A relatively strong labour market performance is also contributing to growth in households’ purchasing power. By contrast, the recent sharp downturn in nominal interest rates has substantially reduced net household interest income (see the section on household indebtedness). Overall, household consumption is estimated to have grown by 1.8 % in 2017 and to rise to 1.9 % in 2018 and 1.8 % in 2019. Business investment is shored up by favourable financing conditions, and more specifically by the sizeable liquidity reserves and the persistently low interest rates. Recent government measures to rein in wage growth are expected to have improved the cost competitiveness of Belgian companies, resulting in a steady increase in profit margins. Given the projected favourable international environment, business investment is expected to continue expanding in the forecast horizon. Graph 1.4:Breakdown of households disposable income growth Source: European Commission

Investment in construction has also been buoyant thanks to housing and public infrastructure projects. Historically low mortgage interest rates and low yields on alternative investment assets are attracting mounting investment flows. At the same time, the local government investment cycle in the run-up to local elections in 2018 and the start of large infrastructure works are forecast to drive public investment in 2017-2019. However, the public investment-to-GDP ratio of around 2.4 % is nevertheless expected to remain among the lowest in the EU (see section 3.4). Inflation After peaking in February 2017 at 3.3 % y-o-y, headline inflation growth slowed in the rest of the year. Headline inflation rose to 2.2% in 2017, up from 1.8% in 2016, mainly due to higher energy prices. The inflation gap between Belgium and the euro area narrowed to 0.7 pps. in 2017 (see Graph 1.5). Comparatively high headline and core inflation has been a recurrent feature of the Belgian economy in the recent past. However, as the impact of the specific government measures contributing to the gap is fading out, the difference with the euro area inflation is expected to further narrow over the forecast period. The headline inflation gap with the euro area is discussed in Section 3.4. Graph 1.5:Harmonised consumer price inflation Source: European Commission Labour market and social developments Employment growth has recently been sound. In 2016, robust economic growth, supported by competitiveness gains, resulted in sound employment growth (1.3 % in 2016) and a drop in the unemployment rate (7.2 % in 2017Q3), which is now close to the pre-crisis level (7.0 % in 2008). The employment is rate well below the EU average (68.5 % vs. 72.6 % in the EU in 2017Q3). High inactivity and low employment rates in some population groups pose risk to the sustainability of public finances in the context of an ageing population. Belgium combines a low employment rate with a high inactivity rate (26.7 % in Belgium vs 22.5 % in the EU). The average working life in Belgium is one of the shortest in the EU: 32.6 years, versus 35.6 years in the EU28 in 2016. The labour market remains highly fragmented across the regions and population groups. Older and low-skilled workers and people with a migrant background are particularly affected by poor labour market outcomes. The number of people living in households with very low work intensity is among the highest in the EU (see section 3.3). Graph 1.6:Employment growth (y/y % change); self-employed and employees) Source: European Commission Though income and wealth inequality remain stable and below the EU average, children from disadvantaged backgrounds suffer from inequality of opportunity. The combination of a highly progressive personal income tax and generous cash benefits reduces inequality of household income to below the EU average, while the Gini coefficient for net wealth is below the average for the euro area countries ( ). However, the variation in 2015 PISA science score by parental background remained much higher than in other EU countries, indicating a lack of equal opportunities to quality education and specific concerns for children with a migrant background (see Section 3.3 on Skills and Education). This inequality is compounded by the high and rising poverty risk facing the children of low-skilled parents (58.3 % in 2016, as compared with an EU average of 52.4 %). External position In 2016 the current account balance moved to a small surplus position after 5 years of deficit. The deficit gradually shrank from -1.1 % of GDP in 2011 to -0.1 % of GDP in 2015, and in 2016 it moved to a surplus of 0.1 % of GDP, (see Graph 1.7). The main component of the improving trend has been the trade balance. By contrast, while the services and the investment income balance went through a gradual but steady decline, the surplus of the labour income has increased over time. Graph 1.7:Breakdown of the current account balance Source: European Commission After seven years of deficit, the goods balance returned to surplus in 2015 and this surplus remained broadly stable in 2016. Changes in the oil price go a long way in explaining developments in the goods balance. Nevertheless there was also a marked volume effect in recent years. Following a steady decline in global export market shares by volumes since 2002 — only interrupted in 2003, 2007 and 2013 — significant gains have been measured in 2016 (mostly linked to the reorganisation of the commercial activity of one large enterprise). Belgium's net international investment position (NIIP) maintains a solid net creditor position in relation to the rest of the world. The balance between external financial assets and liabilities is about 50 % of GDP, one of the highest figures in the EU. This surplus has its origin in the private sector, more in particular Belgian households, who own gross assets — foreign and domestic — representing about 240 % of GDP. Private indebtedness Private debt was relatively high at 190.1 % of GDP in 2016. The bulk of it is constituted by corporate debt. At 131 % of GDP in 2016 is much higher than fundamental drivers would suggest. It is also above the level generally associated with higher risks of a banking crisis. A closer analysis shows that most of the increase since 2007 is actually linked to cross-border intra-group lending, which is included in the consolidated figures in national accounts. The increase in liabilities as a result of intra-group lending (estimated at around 100 % of GDP) pushes up the debt-to-GDP ratio, though these liabilities are matched by an almost equivalent amount of assets and thus bear a lesser degree of risk (National Bank of Belgium, 2017a). Excluding debt from other companies, be they domestic or foreign, the debt of Belgian non-financial corporations is actually much closer or below the various benchmarks suggesting that deleveraging needs are actually modest (Graph 1.8) ( ). The practice of cross-border intra-group lending has been stimulated by the notional interest deduction, an allowance for corporate equity within corporate income taxation. Nevertheless, the recent changes introduced by the government in the notional interest scheme are likely to make it less interesting for corporations. Graph 1.8:NFC debt and benchmarks Source: National Bank of Belgium, European Commission Household debt stood at 60 % of GDP in 2016. This represents an increase of about 20 percentage points of GDP since 2000, when it stood at 40 % of GDP. One of the main reasons for the rise is the rapid increase in lending for housing purchases. This lending is underpinned by the recent sharp drop in interest rates, although mortgage interest tax deductions have been made less beneficial. House prices rose sharply in real terms before 2008, and there are now indications of price overvaluation in the Belgian real estate market (cfr. Section 3.2). They increased by around 70 % in 1997-2008 or 5 % on average annually (see Graph 1.9). They have been broadly flat since, increasing by an average of 0.5 % annually. A prolonged period of housing prices increasing at a quicker pace than households' disposable income has made the financial situation of households more fragile and contributed to their indebtedness. Massive refinancing of mortgage loans and the closing of new loans at lower rates have brought down interest payments from around 3 % of disposable income in 2007-2008 to below 1 % in recent years. While supportive financing conditions thus appear to have prevented a house price correction, this also suggests how rising interest rates might put pressure on house prices. Graph 1.9:Valuation levels and latest housing price growth Source: European Commission

As a result of the rapid increase in household indebtedness and price developments, the European Systemic Risk Board (ESRB) has warned of medium-term vulnerabilities in the Belgian residential real estate sector ( ). Although household debt amounts to only around 20 % of total assets held by Belgian households (up from 14 % in 2000), there are sizeable pockets of vulnerability. Specific groups of highly indebted households (i) hold large mortgage loans in relation to the value of their real estate property, (ii) spend a large proportion of income on debt service, or (iii) have a low level of net financial wealth compared to their indebtedness (ESRB, 2016). Risk concentrations could materialise in the event of an economic downturn with knock-on effects on income. Such a scenario might lead to credit losses to banks, especially if accompanied by a decline in house prices, following the depreciation of the collateral held by the banks. The National Bank of Belgium proposed a new macro-prudential measure in November 2017, consisting of a flat 5 percentage points add-on (prolongation of the original measure) and a multiplier of 1.33 on mortgage risk weights. However, the ESRB has pointed out that no measures have been taken to directly address vulnerabilities due to highly indebted households,, and that the tightening of credit standards applied in recent years appears to have halted. The financial sector is covered in Section 3.2 of the report. Public finances According to the Commission's 2017 Autumn forecast, the general government deficit is expected to have dropped to 1.5 % of GDP in 2017 ( ), continuing the process of consolidation of Belgium’s public finances which started in 2009, when the fiscal deficit was recorded at 5.4 % of GDP. This process halted in 2016 when the deficit stalled at 2.5 % of GDP, and the terrorist attacks temporarily affected the economic environment, with generally disappointing tax collection and revenue measures that fell short of expectations. Conversely, additional spending to improve security and cope with the influx of asylum-seekers hampered the government consolidation strategy. Higher than-initially-anticipated inflation led, due to the indexation mechanism, to higher spending for public wages and social benefits. The authorities have postponed their originally planned objective of achieving a balanced budget for general government until 2019. Public debt peaked at 106.8 % of GDP in 2014, falling to 105.7 % in 2016 and 103.8% in 2017. The Commission 2017 autumn forecast predicts a continuation of this trend, with the debt-to-GDP ratio falling to 102.5 % and 101.2 % of GDP in 2018 and 2019, respectively. The authorities organised a partial sale of the Belgian state's share in BNP Paribas in May 2017, a transaction representing 0.45 % of GDP. The most recent budget made no mention of future divestments in the financial sector. Public finances are discussed in Section 3.1. Table 1.1:Key economic and financial indicators – Belgium Source: European Commission for forecast figures (Winter forecast 2018 for real GDP and HICP, Autumn forecast 2017 otherwise) 2. Progress with country-specific recommendations Progress with the implementation of the recommendations addressed to Belgium in 2017 has to be seen as part of a process which started with the introduction of the European Semester in 2011( ). Looking at the multi-annual assessment of the implementation of the CSRs since these were first adopted, 64 % of all the CSRs addressed to Belgium have recorded at least 'some progress'. In particular, substantial progress has been made in safeguarding the country competitiveness by ensureing that wages evolve in line with productivity. First steps to ensure the long-term sustainability of the public finances have also been adopted. Nevertheless, 36 % of these CSRs recorded 'limited' or 'no progress' (see Graph 2.1). The general government deficit has declined from 4.1 % to 1.5 % of GDP between 2011 and the end of 2017. However, the achievement of the target of a structurally balanced budget has been postponed to 2019, with only limited progress projected in 2018. The public debt-to-GDP ratio has entered a declining trend since it peaked at 106.8 % of GDP in 2014 and contributes to soften long-term sustainability concerns related to expected rise in population ageing costs. In this regard, the full implementation of the different steps of the reform of the pension system decided in 2014 will be a significant step towards addressing the long-term cost of ageing. Legislation already passed has tightened up the minimum age and career requirements for early retirement and raise the legal pension age for the years to come. The more favourable pension scheme for civil servants underwent a reform as of 2016. Measures have taken to reverse previous losses in competitiveness. Between 2013 and 2017, various wage moderation policies have been implemented to improve the gradually eroding cost-competitiveness, including a real wage freeze, parametric changes to the indexation calculation mechanism and a temporary suspension of wage indexation agreements. In addition, in the framework of the on-going tax reform measures have been taken to reduce the tax wedge on labour through gradual decreases in personal income taxation and employers' social security contributions, with more than proportional reductions for lower salaries. The targeting of low wages favours the young and the low-skilled, who tend to have lower wages, but also the lowest employment rates, and thus supports activation for some of the most vulnerable groups. Overall, estimates by the Federal Planning Bureau and the National Bank of Belgium suggest an additional job creation of 45,000–65,000 jobs by 2021. Additional positive effects are expected from reductions targeting SMEs and self-employed. The recently adopted reform of the corporate income tax system, once enacted, would further reinforce the cost-competitiveness of the Belgian economy. The move towards a system with lower statutory rates and fewer tax deductions and exemptions will also help simplify an overall complex tax system and increase the attractiveness of the Belgian economy for doing business. The extension of the tax shelter scheme to SMEs lifts one of constrains to the development of dynamic fast growing firms, providing easier access to financing. Graph 2.1:Overall multiannual implementation of 2011-2017 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 (cf. section 3.4). The political agreement for a national pact for strategic investments, the announcement of an inter-federal energy pact in 2017 and calls for agreeing an inter-federal mobility strategy could provide renewed impetus for investment, including in energy and transport infrastructure, but details of each still need to be announced. Belgium has made limited progress in addressing the 2017 country-specific recommendations. There has been no progress on distributing fiscal targets among various levels of government in a way that can be enforced. The federal government has announced steps to reinforce the autonomy of the High Council and the independence of its members. Some progress has been made with regard to the removal of distortive tax expenditure. Limited progress has been made on improving the composition of public expenditure. There are no plans at federal level to introduce a systematic review of public spending as a permanent feature of the budget planning. Nevertheless, through the National Plan for Strategic Investment, an increase in infrastructure investment is projected. There is also some progress on vocational training, quality of education reforms and labour market with regard to disadvantaged groups, as communities are phasing in major school reforms (e.g. French-speaking community's Pacte d'Excellence). Some progress has been recorded to foster investment in knowledge based capital, even if measures vary in scope at regional, community and federal level. Progress on sector regulation has been overall limited. For certain professional services regulatory restrictions continue to hamper competition. Also, limited progress has been made in improving the functioning of the retail sector for the benefit of businesses and consumers. Finally, limited progress has been made in enhancing market mechanisms in network industries. Table 2.1:CSRs progress Source: European Commission ESI Funds are important in addressing key challenges to inclusive growth and convergence in Belgium, notably by investing in research, development and innovation, redressing educational inequality, fighting early school leaving and boosting the employment rate of the young. The funds are instrumental in fighting poverty and social exclusion as well as helping the country to reach its Europe 2020 targets for greenhouse gas emissions. Box 2.1: Tangible results delivered through EU support to structural change in Belgium Belgium is a beneficiary of the European Structural and Investment Funds (ESI Funds) support and can receive up to EUR 2.7 billion until 2020. This represents around 3 % of annual public investment ( I ) over the period 2014-2018. By 31 December 2017, an estimated EUR 1.9 billion ( II ) (69 % of the total) was allocated to projects on the ground. This has paved the way for 15 669 enterprises to receive support with an increase of about additional 8 000 full time job equivalents created. ESI Funds help address structural policy challenges and implement country-specific recommendations. In this way, the Funds contribute to reaching the 2020 targets for reducing greenhouse gas emissions from non-ETS activities especially as regards buildings and urban transport. About 38 % of the ESI Funds are devoted to supporting actions in the field of employment, social inclusion and education, helping Belgium to reach its Europe 2020 targets (reduction of poverty, reduction of early school leaving and reaching an employment rate of 73.2 % by 2020). In this context, specific attention is devoted to young people, in particular with the implementation of the Youth Employment Initiative in Wallonia and in Brussels. Various reforms were undertaken already as precondition for ESI Funds support ( III ). ESI Funds helped implement a number of structural reforms in 2015 and 2016 via ex-ante conditionalities and targeted investment. These included establishing regional Smart Specialisation Strategies. Belgium is advancing the take up of the European Fund for Strategic Investments (EFSI). As of December 2017, overall financing volume of operations approved under the EFSI amounted to EUR 1.9 billion, which is expected to trigger total private and public investment of EUR 5.8 billion. More specifically, 16 projects have been approved so far under the Infrastructure and Innovation Window (including 10 multi-country projects), amounting to EUR 1 billion in EIB financing under the EFSI. This is expected to trigger nearly EUR 4.6 billion in investments. Under the SME Window, 8 agreements with financial intermediaries have been approved so far. European Investment Fund financing enabled by the EFSI amounts to EUR 256 million, which is expected to mobilise more than EUR 1.1 billion in total investment. Over 4 400 smaller companies or start-ups will benefit from this support. Energy ranks first in terms of operations and volume approved, followed by RDI, SMEs and Digital. Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By the end of 2017, Belgium has signed agreements for EUR 482 million for projects under the Connecting Europe Facility. Belgium also benefitted from EUR 341 million from Horizon 2020 project grants signed in 2017. https://cohesiondata.ec.europa.eu/countries/BE

3. Reform priorities 3.1. Public finances and taxation 3.1.1.Fiscal policies After stalling in 2016, the Belgian general government deficit is expected to have dropped significantly in 2017 thanks to favourable cyclical conditions one-off factors as well as a structural adjustment. According to the Commission 2017 autumn forecast, the deficit is estimated to have decreased from 2.5 % of GDP in 2016 to 1.5 % in 2017. Both revenue (+0.2 pps of GDP) and expenditure (-0.8 pps) are expected to have contributed to this improvement. In 2018, the headline deficit is forecast to decline only moderately, to 1.4 % of GDP. The revenue-to-GDP ratio is projected to decline by 0.6 pps. The drop mostly reflects the implementation of additional reductions in personal income taxation and social security contributions in the context of the tax reform to lower the tax pressure on labour. This decline is counterbalanced by a comparable reduction in expenditure. The latter stems from lower expenditure on social benefits, interest payments, public sector wages and subsidies. In structural terms, the budget consolidation is expected to halt in 2018, with the structural balance remaining broadly unchanged. Since 2011, when it peaked at 4.0 % of GDP, the structural balance improved by 2.5 % of GDP (up to 2017), whereas the primary ( ) structural balance over the same period improved by only 1.5 % of GDP. It means that almost half of the structural improvement is due to interest windfalls. Belgium thus appears to have partly missed the opportunity to use the accommodative monetary policy for a more ambitious and timely budget consolidation. Total public expenditure remains well above the EA average; this is also true for the primary expenditure (see Graph 3.1.1). While in the early 2000s, primary government expenditure in Belgium stood at a level fairly similar to the EA average, since then a gap has opened up. For instance, primary expenditure increased from 42.4 % of GDP in 2000 to 50.3 % in 2016. This rise of 7.9 pps of GDP compares to a more modest average increase in the EA of around 4 pps of GDP. Capital expenditure, commonly considered key in boosting the economy's long-term growth potential, was one of the few declining spending categories in the considered period (National Bank of Belgium, 2014). Graph 3.1.1:Government primary expenditure in 2016, % of GDP Source: European Commission The high level of public expenditures offers scope for larger spending restraint in fiscal consolidation. In this regard, the introduction of expenditure rules setting multi-year ceilings on broad spending aggregates at each level of government would support a spending-based consolidation and medium-term expenditure control (European Commission, 2015a). At present, however, with the exception of a ceiling for health care spending, no level of government in Belgium is applying domestic expenditure rules. At regional level, Flanders is planning to introduce a spending review approach in its budgetary process. This contrasts with the increasing adoption of such rules across the EU. Nevertheless, the largest portion of public spending is not mandated by discretionary annual budget decisions but by permanent legislation, which limits legislatures’ ability to review and change spending priorities in several ways. The general government debt peaked at 106.8 % of GDP in 2014, increasing from 87 % of GDP in 2007. This development followed from the absence of primary budget surpluses, unfavourable interest-growth differentials, substantial support to the financial sector, loans to Greece and contributions to the European Stability Mechanism and its precursor. A gradual reduction of the public debt level is ongoing, which should allow for a debt-to-GDP ratio of 101.2 % in 2019 according to the Commission 2017 autumn forecast. The high level of public debt increases economic vulnerabilities. Combined with the lasting budget deficit, it limits the authorities’ margin for initiating new or countercyclical policies in case of a downturn. Not tackling the projected increase in age-related spending would amplify those risks (see following section). Moreover, Belgium will have to cope with important public investments in defence and infrastructure in the years to come. At the same time, short-term risks linked to high public indebtedness appear to be contained. Belgian authorities have been using favourable market conditions to refinance the outstanding debt. The active management of the debt stock has led to an extension of the average maturity of the existing debt (9.3 at the end of 2017 compared to 8.7 at the end of 2016). Its cost has also decreased with its average yields falling to 2.5% in 2017. As a result, Belgium is more protected in case of a sudden hike in the interest rates. For instance a linear increase by 100 basis points would imply higher costs of EUR 0.5 billion (0.1 % of GDP) in 2017, and of EUR 1.6 billion (0.4 % of GDP) by 2020 (Stability programme 2017). 3.1.2.sustainability of PUBLIC FINANCES In the medium term Belgium faces high fiscal sustainability risks as measured by both the debt sustainability analysis and the S1 indicator ( ). This is due to the high level of public debt and to a lesser extent to the projected increase in age-related expenditure. Reaching a debt ratio of 60 % of GDP by 2032 would require a fiscal adjustment of as much as 4.4 pps of GDP between 2019 and 2024 relative to the baseline scenario assuming no policy change. Adhering to the existing fiscal rules (full compliance with the requirements of the preventive arm of the SGP and convergence to the Medium-Term Objective) would bring about a significantly higher decrease in gross public debt over GDP relative to the baseline scenario at unchanged fiscal policy. Indeed, in this case, public debt would reach 76.1 % of GDP in 2028, a level around 18.7 percentage points of GDP lower than what is projected under the baseline scenario (Graph 3.1.2). Conversely, potential shocks in nominal growth and interest rates would project public debt at around 100.6 % of GDP. Graph 3.1.2:Public debt medium-term projection and scenarios ( % of GDP) Source: European Commission (Debt Sustainability Monitor 2018) In the long term, sustainability risks are assessed at medium level. As indicated by the S2 indicator ( ), an upfront fiscal adjustment of 4.5 pps of GDP would be needed to ensure the sustainability of the public finances in the long term. This is mainly driven by the projected impact of the age-related costs (3.8 pps of GDP), with an additional contribution from the initial budgetary position (0.7 pps of GDP). The 2018 Ageing Report (European Commission – EPC (AWG), 2018) projects pension expenditure to increase by 2.9 pps of GDP in 2070. This compares with an increase of 1.3 pps of GDP in the previous update and a decrease of 0.1 ppt of GDP on average for the EA (2015 Fiscal Sustainability Report). The substantial upward revision is mostly grounded on the new demographic projections (European Commission, 2017b). Compared to the previous vintage, the increase in total population for Belgium in 2060 has been revised downward ( ), with a significant and unfavourable impact on the dependency ratio. The pension reforms enacted in 2015 were a significant first step towards addressing the long-term cost of ageing. Nevertheless, because of the sustainability risks outlined above, various still pending issues in the government's reform roadmap require further action. This is the case, for instance, for the introduction of a credit-based pension system as of 2030, which would allow automatic adjustments to changes in life expectancy or the dependency ratio. The pension reform also helped reducing the poverty risk for pensioners according to the analysis carried out for the forthcoming Pension Adequacy Report. Expenditure projections for health and long-term care contribute to the sustainability challenge in the long term. According to the findings of 2018 Ageing Report, health and long-term care expenditure would increase by 2070, adding to the sustainability challenge. Notably, according to the AWG Reference Scenario, expenditure on long-term care is, as a proportion of GDP, projected to increase by 1.7 pps during the period from 2016 to 2070, above the EU average increases of 1.2 pps. According to the Risk Scenario this increase becomes more pronounced, with 3.5 pps (above the EU average of 2.7 pps). This would bring expenditure up to 5.8 % of GDP by 2070 and pose an important challenge to the future fiscal sustainability of Belgium (2018 Ageing Report, forthcoming). 3.1.3.Fiscal framework Effective budget coordination is essential in a federal country like Belgium. A large part of spending power has been devolved to sub-national governments. In addition, the central government — which is responsible for most of the debt and faces the bulk of age-related costs — does not have the legal authority to impose budget targets on regions and communities. In an attempt to improve internal coordination and to transpose the Treaty on Stability, Coordination and Governance in the EMU (the ‘Fiscal Compact’), the federal government and the regional and community governments concluded a cooperation agreement in 2013. It requires the Public Sector Borrowing Requirement Section of the High Council of Finance to propose multiannual budget targets for each government in preparation for the annual Stability Programme. On the basis of this proposal, the federal, regional and community governments are expected to reach a binding agreement on overall and individual multiannual fiscal paths. The High Council of Finance is responsible for monitoring compliance with the agreed targets and if it signals a significant divergence, the government concerned has to adopt corrective measures; progress on the corrective measures is, in turn, monitored.

Implementation of the 2013 cooperation agreement has been poor. In 2017 as in 2015 and 2016, the federal government, regions and communities did not achieve an agreement to formally commit to the fiscal trajectory proposed by the High Council of Finance. This lack of internal cooperation and burden sharing undermines the viability of the country’s overall trajectory towards its MTO as laid down in the Stability Programme. The federal government has announced steps to reinforce the autonomy of the High Council of Finance and the independence of its members. The adoption of the necessary amendments (including to the Royal Decree of 3 April 2006 on the High Council of Finance) requires prior consultation with the federated entities. The calendar for consultation and adoption has however not been communicated. 3.1.4.Taxation In spite of the on-going efforts to reduce the tax burden on labour, it is still comparatively high. The tax reform initiated in 2014 is currently being phased in. Taxes on labour, including social contributions, are being reduced in several steps between 2016 and 2020, while others, mainly consumption taxes, have been increased, thus partially compensating for the labour tax cuts (European Commission, 2016a and 2017a). Despite labour tax wedge reductions, average income earners in Belgium remain the most taxed in the EU and in the euro area (see Graph 3.1.3). The 2016 country report detailed and assessed the measures mainly from a budgetary and labour market perspective. Positive effects on competitiveness, employment and growth are also expected to help funding the tax cuts, although the overall budget-neutrality of the reform does not seem assured ( ). Additional positive effects are expected from reductions targeting small and medium-sized enterprises (SMEs) and self-employed people. In 2016, the tax wedge for low income earners (67 % of the average wage) decreased by 1.9 percentage points compared to 2015, although it remains one of the highest in the EU. For very low income earners (50 % of the average wage) a larger reduction of 4.1 percentage points could be seen. While it remains above the EU average, the tax wedge at 50 % of the average wage has moved from being the 3rd highest in the EU in 2014 to the 10th highest in 2016 ( ). Despite labour tax wedge reductions, average income earners in Belgium remain one of the highest taxed in the EU (see section 3.3). Graph 3.1.3:Tax burden on labour for a single person at the average wage (2016) Source: European Commission Tax and Benefit Indicator Database based on OECD data The Belgian tax system remains complex, with tax bases eroded by numerous exemptions, deductions and reduced rates. These may entail revenue losses, economic distortions and additional administrative burden. The latest figures for the federal government show that the total amount of tax expenditures is sizeable, and that the rising trend as a percentage of GDP continues ( ). Belgian revenues from environmentally related taxes remain among the lowest in the EU. Environmental taxes accounted for 2.2 % of GDP in 2016 against an EU28 average of 2.4 %, and energy taxes to 1.4 % of GDP against an EU average of 1.9 %. In the same year environmental tax revenues accounted to 5.0 % of total revenues from taxes and social security contributions against an EU28 average of 6.3 %, excluding imputed social contributions ( ). Fossil fuel subsidies showed no decrease in the past decade, with even some increasing trend in the last year ( ). Belgium has adopted at the end of 2017 ( ) a reform of its corporate income tax system. The current corporate income tax system is characterised by a high statutory rate of 33.99 %, including the 3 % crisis surcharge (with lower rates for SMEs), with numerous exemptions and deductions. .It provides for a move towards a system with lower statutory rates and fewer exemptions. The statutory tax rate should be reduced to 29.58 % in 2018 and to 25 % in 2020 (for SMEs: 20 % on the first 100.000€ as from 2018). The reform introduces a de facto minimum tax with the limitation to a deductible basket of the new incremental notional interest deduction and of the carry forward of the following items: deduction of the notional interest, innovation income, losses and deduction of dividends received. However the Conseil d'Etat/Raad van State expressed doubts on the compatibility with EU law of the limitation of RDT deduction. Belgium has taken measures to amend some aspects of its tax system that facilitated aggressive tax planning (ATP) ( ). The Code of Conduct on Business Taxation Group has approved the replacement of the Belgium patent box by an innovation box. The old patent box is subject to a grandfathering clause which last until June 2021. The new "nexus" regime requires a stronger link between the intellectual property (IP) that can benefit from the regime, and the R&D that created this IP. While the economic evidence on the effectiveness of patent/innovation boxes as a means to encourage R&D remains limited, it may be used as a tax competition tool (cf. 3.4.1). The excess profit rulings scheme, which had the potential to facilitate aggressive tax planning, was put on hold by Belgium since 2015 and effectively abolished in 2017. Finally, Belgium will have to transpose the provisions of the Anti-Tax Avoidance Directive (ATAD) into national law by the end of 2018 and 2019. This is covered by the project that provides for new anti-abuse rules including an alignment of the thin cap rule (limitation based on the highest of 30 % of the EBITDA and EUR 3 million) on the recent ATAD Directive. An assessment of the extent to which the new measures, in conjunction with the effect of the transposition of the EU ATAD, limit the scope for aggressive tax planning in Belgium would be warranted. The former Notional Interest Deduction (NID) regime that was based on the stock of equity has been replaced by an incremental system. The new NID, which shares an incremental baseline with the Allowance for Growth and Investment (AGI) proposed in the common corporate tax base (CCTB) will be limited to incremental equity capital calculated on the basis of a 5-year average. This change is meant to contribute to the budget-neutrality of the corporate tax reform while addressing the potential use of the regime in ATP and still alleviating the debt/equity bias issue. It has to be noted that the absence of some specific anti-abuse rules to address the cascading of deductions and notably targeting transactions between related parties are features of the tax system which may facilitate aggressive tax planning by multinational groups that locate financial companies in Belgium. At the current stage of the reform, the anti-abuse framework seems to remain unchanged under the new system. 3.2. Financial sector The financial sector appears relatively stable, but low interest rates, digitalisation, clients' evolving preferences and intense competition remain a challenge for the traditional business model. Banks are moderately profitable, with a return on equity close to 9 % in 2016. Their solvency is good, with a capital adequacy ratio stable at 18.5 % in June 2017 (see Table 3.2.1). Credit quality is at a high, with low non-performing loans (NPL) ratios for both non-financial corporations and households. Because of the persistent low interest rate environment, credit growth remains substantial. State ownership remains significant, and still represents a sizeable risk for the public finances and the financial sector, although the expected progressive privatisation of Belfius would partly address the issue. Banks' challenges remain the same as last year: a high cost-to-income ratio, a relatively high banking tax only partially compensated by the exoneration of savings accounts, 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' evolving preferences and intense competition. Dexia still constitutes a sizeable, but relatively stable contingent liability of EUR 35 billion (8.2 % of GDP) for the Belgian state. The contributions to the Belgian Deposit Guarantee Scheme (DGS) are not invested into a segregated and diversified portfolio of low-risk assets. The contributions to the Belgian DGS (around EUR 3.4 billion in December 2017) directly enter the budget of the state as tax revenues and contribute to reduce the deficit. As a consequence, they cannot be invested in a segregated and diversified portfolio of low-risk assets. If the DGS needs to intervene and compensate depositors, the Belgian state will have to finance the entire cost of the intervention from its budget. It will not be able to rely, like other Member States, on the accumulated contributions paid by the banks into a safe ring-fenced fund. It should be noted that the issue is of a temporary nature. Under the Commission´s proposal on a European Deposit Insurance Scheme (EDIS) all banks in the Banking Union are (gradually) contributing to a single European fund. Depending on the level of financial means a national DGS has already raised, it may compensate its member banks by reimbursing previously received contributions. Traditional life business is suffering, mostly due to the 2 % tax on life-insurance premiums and the low interest rate environment. Many insurers have decided to stop, or at least significantly reduce, the underwriting of traditional life contracts. In parallel, they are taking various measures to increase their profitability and strengthen their capital position. Faced with the legacy of old contracts with a high guaranteed interest rate, some insurers have carried out quite successful buy-back operations, sometimes facilitated by the uncertainty surrounding the state guarantee on life insurance contracts (up to EUR 100,000, like for banking deposits) after the sale of an insurance portfolio to a foreign entity. Many insurers benefit to some extent from the volatility adjustment ( ) of the long-term guarantee package. For one insurer, the volatility adjustment raises the Solvency II ratio from 97 % to 165 %. On average, the value adjustment allows Belgian insurers to improve their Solvency II ratio by 20 percentage points. The 2 % tax on life insurance premiums is also a handicap to efficiently compete with accumulating investment funds ("SICAV de capitalisation") that are only subject to a stock exchange transaction tax of (typically) 0.12% at the purchase and the sale of the shares in the fund. Table 3.2.1:Financial soundness indicators, all banks in Belgium Source: ECB CBD The taxation reform of financial investments reduces some economic distortions but also creates new ones, and generates more complexity. On the positive side, the reduction by half of the exonerated amount of interests from regulated savings accounts (from EUR 1 880 to EUR 940) and the exoneration of the first EUR 627 of dividends reduces the taxation gap between deposits and equity. The reduction of the nominal corporate income tax rate also reduces the taxation gap between debt instruments and equity. On the negative side, the increase of the different stock exchange transaction tax rates works in the opposite direction, by penalising investment in securities. Likewise, the exoneration of dividends only benefit to individual shares, and not to funds, which penalises diversification and encourages concentration risk. Finally, the new tax of 0.15 % on securities accounts exceeding EUR 500 000 is based on solidarity principles. It likely creates distortions given the number of products excluded from its scope (life insurance, pension products, nominal shares, term savings options, liquidity). The efficiency and efficacy seem questionable, given the small amounts concerned, the possibilities to circumvent the tax and the administrative burden it imposes on banks and brokers. Moreover, it suffers from a cliff effect: since the tax applies from the very first euro as soon as the threshold of EUR 500 000 is reached, net income decreases as the gross income increases in the neighbourhood of the threshold. Housing

House prices have continued to steadily increase recently, showing some signs of overvaluation, and currently they stand at a level, in nominal terms, above to their peak before the financial crisis. It is difficult to measure overvaluation and undervaluation in property markets, since the results depend on the underlying assumptions. Traditional indicators (price to income, i.e. affordability and price-to-rent i.e. dividend), used to assess over-valuation on the housing market, suggest that Belgium's housing prices might be around 20% above their long term average. However, taking into account a broader set of factors, a model-based approach actually finds that house prices are currently in line with their fundamental value, providing a more benign assessment of recent price developments (Graph 3.2.1). Overall, house prices are assessed to be slightly overvalued (Philiponnet and Turrini, 2017). The prolonged increase in the price-to-income ratio has made the financial situation of households more fragile through an almost mechanic increase in their debt. Between 2001 and 2016 households' disposable income has increased at annual average rate of 2.4 %, while over the same period of time nominal house prices have increased at an annual average rate of 4.6 %. The mortgage related indebtedness of the Belgium household is steadily increasing since 2002, and stood at the start of 2016 at around 103 % of their disposable income. Graph 3.2.1:Overvaluation gap with respect to price/income, price/rent and fundamental model valuation gaps Source: European Commission Despite the favourable wealth position of Belgian households, the distribution of debt and assets reveal some pockets of vulnerability. Belgium households hold on average more assets than in EA and have positive net assets positions. However, micro-level data shows that for around one mortgage out of five, the service of debt absorbs more than half of the households' disposable income (National Bank of Belgium, 2017b). Figures from the National Bank of Belgium (NBB) also show that the banks' lending criteria have not tightened and that the share of risky mortgages in overall banks assets has stopped falling since 2015. Those risky credits are characterised by a high loan-to-value ratio, or a high debt service-to-income ratio, longer than average maturity or a combination of the previous risks factors. The time-to-maturity length of the average mortgage debt is shorter than in the EA, but it has recently started to lengthen. The increase in households' debt since 2000 is substantial although in line with fundamentals. Households' debt is close to but below the level suggested by the economic fundamentals. Nevertheless its level is above the estimated prudential threshold, which indicates that current households' debt level could have amplifying impact in the case of a financial crisis (Graph 3.2.2) (Bricongne, J.-C., L. Coutinho and N. Philiponnet, 2018). Graph 3.2.2:Gap to the fundamental-based and prudential benchmarks Source: European Commission The complex national macroprudential decision-making process may leave financial stability risks unaddressed. A macroprudential measure addressing financial stability risks originating in the residential real estate (RRE) was implemented in Belgium in 2014. The measure was based on Article 458 of the CRR and consisted of a general 5 percentage points add-on on risk weights for mortgage exposures. In the light of increasing RRE risks (see ESRB 2016), the NBB proposed to replace that measure, following its expiration in May 2017, by a more stringent measure. The latter was not enacted by the Belgian government, effectively resulting in the temporary absence of a formal macroprudential measure to address RRE risk. The NBB proposed a new macroprudential measure in November 2017, consisting of a flat 5 percentage points add-on (prolongation of the original measure) and a multiplier of 1.33 on mortgage risk weights. This stricter measure has the support of the government and is currently in the notification process with European institutions. 3.3. Labour market, education and social policies 3.3.1.Labour market Employment growth has recently been sound but overall labour market participation remains low. In 2016, robust economic growth, supported by competitiveness gains and wage moderation (see page 29), has resulted in sound employment growth (1.3 % in 2016). The unemployment rate fell to 7.2 % in 2017Q3, which is only slightly above the pre-crisis level (7.0 % in 2008). However, serious challenges persist. The employment rate is well below the EU average (68.5 % vs. 72.6 % in the EU in 2017Q3) (Graph 3.3.1) and disincentives to work remain relatively high. Graph 3.3.1:Key labour market indicators Source: European Commission High inactivity coincides with a high vacancy rate, suggesting a high level of skills mismatches. Belgium's inactivity rate, at 26.7 % in 2016, is higher than that of its neighbours (FR: 22.5 %; DE: 18.0 % and NL: 18.4 % for population aged 20-64 year olds). This is also reflected in a large number of very-low-work-intensity households concentrated among single adult households (Vandenbroucke & Corluy, 2015). At the same time, the vacancy rate was among the highest in the EU (3.6 % in 2017Q3), and matching efficiency ( ) has dropped by a long way (European Commission, 2017f). The gap between the employment rates of low-, medium-, and high-skilled workers was among the widest in the EU in all three Regions, well above the level in the neighbouring countries (Graph 3.3.2) (Kiss & Vandeplas, 2015). Skills mismatches are, among other factors, associated high labour costs and taxation, including taxation on low wage employment (see section 3.1), low mobility and inadequate language knowledge (especially in Brussels), as well as historical factors, such as shifts in economic activity. Graph 3.3.2:Relative dispersion of employment rates by education level, 2005 and 2016 Source: Eurostat Labour Force Survey, European Commission Disincentives to work remain relatively high. In recent years, the targeted measures to reduce the tax wedge on labour have significantly increased the net income of employees especially those on low wage (Graph 3.3.3). Despite these measures the tax wedge for a single household earning the average wage remained among the EU's highest in 2016 (54 %), although it has declined since 2015 (55.3 %) (see section 3.1). The unemployment trap for low wage earners (67 % of the average wage for a single household) is also one the EU's highest. Belgium is also the only country where unemployment benefits are not limited in time ( ). In addition, high tax disincentives for second earners – mainly women – remain (see Box 3.3.1). Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights, proclaimed on 17 November 2017 by the European Parliament, the Council and the European Commission, sets out 20 principles and rights to benefit citizens in the EU. In light of the legacy of the crisis and changes in our societies driven by population ageing, digitalisation and new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better working and living conditions. Belgium performs well on the indicators of the Social Scoreboard IV supporting the European Pillar of Social Rights. This is notably the case for gender equality, active support to employment and social protection and inclusion, in particular childcare. The low employment rate and the high share of part-time working of women remain challenges. Belgium combines a relatively low employment rate (67.7 %) with a high inactivity rate (26.7 %). In particular labour market outcomes for the low-qualified, older workers, single parent households and people with a migration background are far below the levels recorded for similar groups in other Member States. This is largely explained by structural and group specific factors hindering integration on the labour market. Since 2015, several measures, such as the tax shift and the revision of the 1996 Law on wage formation, are implemented to reduce labour costs, improve cost competitiveness and strengthen incentives to work. While a relative high share of women is engaged in the labour market, the share of part-time work of women is high as well. In addition, women are more likely to work with flexible contracts than men. The high marginal effective tax rate and joint taxation system create disincentives for second earners, mainly women, to work longer. The effectiveness of social transfers in reducing poverty and promoting social inclusion is comparatively high. Childcare is particularly important to enhance equal opportunities and promote social inclusion of children from disadvantaged background. It has reached the Barcelona targets, with half the children younger than 3 in childcare, and 99 % of those between 3 and the minimum compulsory school age. Several factors contribute to this result but some capacity problems seem to be emerging, particularly in the larger cities. It is culturally acceptable to put very young children in child care. Affordable full coverage is an important policy objective in all communities and from 2.5 years onwards, child care is basically free and linked to the school system. There is a formal and well-regulated system of care for very young children with child minders who operate from their private home.

As a result, part-time work is relatively widespread in particular among women (41.9 % of the female employees worked part-time in 2016 compared to 9.3 % of the male employees) (see Box 3.3.1). Graph 3.3.3:Change in average take-home pay after the tax-shift Source: OECD, Tax-Benefit Models; OECD, Taxing Wages database obtained from the 2017 Belgium economic survey At federal level measures have focussed on controlling the cost of labour, strengthening financial incentives to work and making the labour market more flexible. The government amended the Competitiveness Law, which regulates the wage formation process in Belgium. The principal aim of the reform was to better safeguard cost competitiveness and keep wage growth in line with that in Belgium’s main trading partners (the Netherlands, France and Germany), but without interfering with wage indexation clauses in collective bargaining agreements, cf. Section 3.4 (see also European Commission, 2017a). The new law on ''workable and flexible work'' allows for more flexible worktime arrangements and is designed to promote in-company training. Further measures aim at improving labour market flexibility, but some entail risks regarding the social security. They include revising the labour law to facilitate e-commerce; revising the notion of 'suitable job' for recipients of unemployment benefits; making provisions to lower gross salaries for young workers between 18 and 21 while keeping net salaries unchanged; and a slower build-up of the notice period and extending "flexi-jobs" to new sectors and opening them up for pensioners. The government also plans introducing a tax-free professional income up to EUR 6 000 per year for employees who work at least 80 %, self-employed and pensioners. This only applies on voluntary work and services in the peer-to-peer economy. Both the extension of flexi-jobs and the envisaged EUR 6 000 of tax-free additional income could provide financial incentives to shift some professional activities from regular full-time employment or from part-time self-employment to less taxed or even tax-exonerated statures. In particular the latter measure could entail reduced financing of the social security and slower build-up of social rights. Other measures that have been announced include combining a partial pension with part-time work, lowering employer charges in the construction business, a system of 'soft-end-of career' jobs and the option of part-time retirement. To the extent that some of the measures (flexi-jobs, EUR 6 000 tax free) seem to target mainly those already on the labour market they may have little impact on activity or employment rates. At subnational level, governments have reformed and simplified the employment incentives and the monitoring and guidance activities of their respective public employment services (PES). The new schemes were introduced in the course of 2016 and 2017 (see European Commission, 2017a). It is not yet possible to evaluate whether the newly reformed schemes are properly targeted and cost-effective. The capacity of the various public employment services to carry-out the necessary monitoring and act on the information generated seems uneven. The Walloon public employment service (Le Forem) has started an ambitious reorganisation project to improve its efficiency and effectiveness. The Flemish government and social partners reached an agreement on reforming training for employees. The Flemish Region aims to improve employment performance through a new policy approach called 'Focus on Talent', which provides bespoke guidance to workers and jobseekers. Implementation of the Upskilling Pathways Recommendation offers an opportunity for all those who are disadvantaged in adulthood due to educational inequalities and skills deficits.

Inactivity and unemployment are largely concentrated among specific population groups. There are differences depending on age, educational attainment level and origin (Graph 3.3.4). People with a migrant background and young are overrepresented among the unemployed, while low-skilled and older workers are more likely to be inactive. In 2014, the unemployment rate for foreign-born immigrants (17.1 %) and for native-born with foreign-born parents (14.0 %), which together account for 27.4 % of the working age population, was much higher than for native-born with native-born parents (5.6 %) ( ). The inactivity rate of low skilled, which represent 24 % of the working age population, is 45.9 % (2016; 20 to 64 years). Graph 3.3.4:Characteristics of the employed, unemployed and inactive (20-64), 2014 Source: Commission calculation based on the Eurostat AHM Labour Force Survey Youth unemployment is falling. The youth (<25 years) unemployment fell from 23.7 % in 2013 to 20.1 % in 2016 but is still above the EU average (18.7 %). The rate of young people not in education, employment, or training (NEETs) is below the EU average (9.9 % vs 11.5 %). There are very large regional differences, with major challenges in the Brussels Region. On average, more than seven in ten NEETs aged 15-24 years were registered with the Youth Guarantee Scheme. Three in five of those leaving the scheme were known to be in employment, education or training 6 months later. Abolishing of the reductions of the minimum wage for young people does not seem to have affected employment (European Commission, 2017f). The number of recipients of an 'insertion allowance' has dropped sharply over the past four years, as a consequence of their limitation in time. The number of people making the transition into employment has risen even if some of those coming to the end of their rights move on to other forms of social security support (Rijksdienst voor Arbeidsvoorziening, 2017). The employment rate of older workers remains low. The employment rate of older workers (50-64) is increasing but still well below the EU average (56.6 % vs 63.4 %). The low employment rate of older workers reflects high inactivity in this age group. A large proportion (12.1 %) of the inactive older workers who are not yet retired is discouraged and not looking for a job as they believe there is nothing available (the rate is 2.4 % for 20-49 year-olds). Generous early exit schemes used to provide the wrong incentives to both employers and employees. These have been addressed by earlier reforms which tightened age and career requirement and strengthened availability to work requirements. Low activity of older workers may also be linked to the higher pay for older workers in Belgium (Cockx, Dejemeppe and Van der Linden, 2017). In 2014 workers aged over 50 years earned 23 % more than 30 to 39 year-olds, controlling for educational attainment, type of contract, occupation and sector of employment, see Graph 3.3.5. Only 7 % of the 25-64 population engage in life-long learning activities. This is lower than the EU average (11 %) and considerably below top innovators such as Sweden, Denmark and Finland (which are on average above 25 %). The March 2017 law on 'workable and feasible work' is designed to encourage firms to step up their efforts to provide training. Non-EU born migrants are less well integrated in the labour market than persons with Belgian origin. In 2016, the employment rate of non-EU born was 49.1 %, which is 21.1 percentage points lower than for native born. This is one of the highest gaps in the EU (and even more pronounced for women at 27.4 percentage points). Several factors drive the unfavourable labour market outcomes of immigrants, notably an overrepresentation of lower education and skills levels. Moreover, employment outcomes of immigrants differ strongly across origin, gender and reason for migration (FOD Werkgelegenheid, Arbeid en Sociaal Overleg, 2017). In particular those having arrived for family reasons are less likely to be employed (40 % on average, 35 % among women) ( ). Factors impeding integration include the lack of recognised qualifications, limited professional networks and insufficient language skills. Graph 3.3.5:Pay gap between older (50+) and younger (30-39) workers , 2014 Source: Commission calculations based on the 2014 Structure of Earnings Survey This adverse employment situation is found among immigrants as well as among native-born people with at least one foreign-born parent ('second generation') (see European Commission, 2017a). Part of this gap can be partly explained by the fact that they have less favourable educational outcomes ( ). However, even after adjusting for differences in individual characteristics (age, sex, education level), native-born people with non-EU born parents remain less likely to be in employment ( ), although the gap narrows with education (Graph 3.3.6). Graph 3.3.6:Likelihood of employment by origin, gender and educational attainment Source: Commission calculations based on the 2014 AHM of the Labour Force Survey The lower probability of employment for people with a migrant background suggests that discriminatory practices may be involved. Existing studies based on tests conclude that being of foreign origin directly affects a person's chance to be hired, all other things being equal (OECD, 2013) though the effect seems to decline with experience (Baert et al, 2017). There is also evidence that activation measures do not reach all the sectors of the population equally efficiently. Participation in activation measures varies markedly depending on people's origin (FOD Werkgelegenheid, Arbeid en Sociaal Overleg, 2017). In Flanders, taking part in activation measures helps people with a migrant background of the second generation find a job, although to a lower extent than for people with a Belgian origin (Vandermeerschen et al, 2018). This is also corroborated by measurements of subjective perception of discrimination, which are higher in Belgium than in other EU countries (Fundamental Rights Agency, 2017). A few measures to help newly arrivals integrate and to tackle discrimination, including discrimination on the basis of ethnic origin, have been adopted. The three Regions have now adopted integration measures that are compulsory for newly arrived non-EU nationals. Belgium adopted a federal law designed to make it easier to prove ''discriminatory'' infringements through testing (based on fake CVs) or 'mystery calls'. The Flemish Region updated its action plan to combat work-related discrimination while, the Brussels Region adopted a specific decree to tackle discrimination in recruitment practices through 'mystery calls'. However, little progress has been made towards setting the diversity objective for the federal public services that was announced in the government agreement. There is still a lack of coordination across policy domains and political levels to address the challenge of integrating people with a migrant background into work. 3.3.2.Poverty and social inclusion Social transfers are very effective in Belgium ( ). Pre-transfer poverty was reduced by 41 pp thanks to social transfers, whereas the EU28 average was 33 pp (in 2016). A uniform ‘right to social integration’ covers all aspects from eligibility conditions to governance arrangements. The right to social integration main aims are being a pathway to employment and the provision of a guaranteed minimum income. However, for a country with a relatively low level of income inequality and a comparatively high level of social spending, Belgium has a comparatively high level of relative income poverty ( ). At 15.5 % it is lower than the EU and EA averages (17.3 % and 17.4 % respectively). It is also lower that the figure for Germany (16.5 %) but above those for the Netherlands (12.7 %) and France (13.6 %). Certain groups have higher poverty rates than the EU average. This is notably the case for people in quasi jobless households with children (80.7 % versus an EU average of 68.3 %) or for people born outside of the EU (44.9 % versus an EU average of 30.8 %). This at-risk-of-poverty rate among people born outside of the EU has risen to 44.9 % in 2016 (when it was 41.5 % in 2015) and is four times higher than among native Belgians (11.1 %). Severe material deprivation was found to be more than five times higher (18.3 % versus 3.6 % among native Belgians). The main reason for this is the lower employment rates among people born outside of the EU but another reason is higher in work poverty within this group (19.5 % versus 3.3 %). Child poverty is also comparatively high and driven mainly by the number of children in quasi-jobless households. This applies particularly for children with parents educated to less than lower secondary level. The poverty rate for this group is above the EU and EA averages and the rates for the Netherlands and France though lower than for Germany. Belgium has one of the largest gap between the risk of poverty or social exclusion for persons with disabilities and those without. Among people of working age, the poverty risk rises significantly for those with low educational attainment. It is worth noting that it is also increasing for those with a ‘medium’ educational attainment (FOD Sociale Zekerheid, 2017). Despite increased employment the rate of very low working intensity households has barely decreased. Many people find themselves excluded from the labour market and, despite a slight decrease in 2016, the proportion of the working age population (25-54) living in very low work intensity households remains high by comparison with the neighbouring countries (Graph 3.3.7). The proportion of women at risk of poverty increased in 2016, probably because of the increase in relative poverty among single-parent households which reached 41.4 % ( ). The risk of very low work intensity in these households has increased in recent years. The federal government announced that it will automatically grant social rights to beneficiaries who meet the criteria and increase the tax deductibility of child care costs for working parents at the bottom of the pay scale. It has restated its intention to raise the level of benefits to the level of the poverty threshold. Graph 3.3.7:Share of the population (25-54) living in very low work intensity households, 2005-2016 Source: Eurostat Belgium has a well-developed social protection system for the self-employed but differences with employees remain. Social contributions are lower than for employees but also confer fewer rights. Belgium is one of the nine countries where the self-employed are not entitled to unemployment benefits. Public provision can be complemented by private insurance. Self-employed people and family workers are much more likely than employees to be at risk of poverty. This can hamper the attractiveness of entrepreneurship (see section 3.4.3 and 3.4.4). In recent years, the authorities have taken important steps to harmonise the protection levels for the self-employed and the employed. The federal government has announced a number of measures, and a few have been adopted, notably additional support for pension build-up of self-employed individuals and a reduction of the social security contribution limit for self-employed at the start of their activities. The lag time at the beginning of a work incapacity period during which no substitution income is granted was cut by half to two weeks. Access to quality healthcare is an issue for vulnerable groups. The level of unmet needs for medical care is high in the lowest income quintile compared to other EU countries and has been rising in recent years ( ). The difference between the 5th and the 1st income quintile in self-reported unmet health needs has increased steadily since 2011, reaching 6.8 pps in 2015 (6th highest in EU) and 7.4 pps in 2016. It is not clear what caused the increase. Non take up or deteriorated income situations could be possible causes.

3.3.3.Education, training and skills, Belgium combines an overall good education performance with major education inequalities; this is intricate with wide performance gaps between schools and differences between the Communities. The two main education systems face longstanding structural problems relating to equal opportunities and inclusive education. However reforms are being implemented. The challenges could increase as the strong growth of the school population should be concentrated in disadvantaged groups (European Commission 2016a). Both communities had lower than average results than the EU-average at the 2016 Progress in International Reading Literacy Study (PIRLS), with the French Community score being the EU's lowest one and with the sharper downward trend recorded for the Flemish Community. Participation in life-long-learning is very low (7.0% against an EU average of 10.8%). In the Cedefop's European Skills index () and on the Skills Matching pillar Belgium ranks amongst the lowest with a poor performance for structural vacancies (27th) and for Skils obsolescence (19th). To prevent skills obsolescence and to enable people to handle transitions, more commitment by individuals and employers to continuous adult learning would be important. The March 2017 law on 'workable and feasible work' is designed to encourage firms to step up their efforts to provide training. Whilst Belgium performs well on top achievers, the downward trend and differences among communities are raising concerns. The PISA 2015 survey confirms that the Belgian share of top performers is above the OECD in all tested areas with a downward trend in mathematics and communities' differences (see European Commission, 2017a). Moreover, disadvantaged groups are much underrepresented amongst top achievers in science, mathematics and reading. The proportion of tertiary graduates is high. Yet, educational inequalities, skills shortages and regional disparities are observed. At 45.6 % in 2016, the percentage of 30 to 34 year-old graduates is high. The Brussels Region attracts highly skilled young people, but it has the lowest proportion of students likely to successfully complete tertiary education (Statistics Belgium, 2015). Inequalities linked to socioeconomic status, family and migrant background persist in tertiary education. The attainment gap between people with disabilities and those without far exceeds the EU average (18.3 pps. vs. 13.7 pps., EU-SILC 2015). The share of STEM graduates is one the lowest in the EU (see section 3.5.3). The different language Communities face different levels of teaching staff shortages. Large performance gaps between schools go hand-in-hand with unequal educational opportunities. Disadvantaged pupils are more likely to be steered towards certain schools and towards lower educational pathways. The variance in science performance between schools is high by international and EU comparison. Explanatory factors include teachers' lower expectations, greater turnover in teaching staff, difficulties in attracting experienced teachers, levels of cooperation between teachers, cultural differences. (King Baudouin Foundation, 2017) and unequal access to educational resources (European Commission, 2017b). There is limited monitoring of schools performance. The French Community has developed new indicators such as the proportion of schools whose pupils' average score is below the basic level. The lower performance of pupils with a migrant background is a concern, with differences across the Communities. Belgium is one of the EU countries with the largest share of students with a migrant background (17 % vs 11.3 % EU average), mostly concentrated in big cities. PISA 2015 shows that 36.9 % of those pupils are low achievers and only 2.9 % top achievers, compared with 15 % and 10.5 % respectively for students without a migrant background. After adjusting for socioeconomic status, migrant background has an impact above the EU average in Belgium. The adjusted performance gap in the Flemish Community is the highest in the OECD. In the other Communities it is below average (Universiteit Gent, 2016). Graph 3.3.8:Between schools variation in performance explained by schools' and students' social-economic status (PISA 2015- Science) Source: DG EAC based on Pisa 2015(science), averages weighted, More attention may need to be given to gender differences in education. Boys and girls make different study choices of in secondary and tertiary education. Boys significantly outperform girls in science (12 points vs 3.5 OECD average, Pisa 2015). Female students' underrepresentation in sciences, mathematics and statistics is among the highest internationally (OECD, 2017c,). In addition, there are some indications of recent potentially worrying trends. Despite the quasi universal enrolment in pre-primary at the age of three, a recent survey suggests that the profile of the few cases of non-enrolment and/or irregular attendance after enrolment are mostly immigrant girls in large cities.(Vlaams Ministerie van Onderwijs and Vorming, 2016). Such analysis is not available for the French Community. The implementation of major schools reforms and measures is at an early stage. Major school reforms to improve equity, basic competences and vocational training have been launched by both the French and the Flemish Communities. In 2017, the Communities introduced new measures on early childhood education (European Commission, 2017b). In 2017 the French Community adopted a set of objectives, a multi-annual budget, and an implementation calendar for the reform ('Pacte pour un enseignement d’excellence 2015-2030') and the 2017-2018 key measures. In July 2017, the Flemish government gave its initial approval for a draft decree on the structure and organisation to modernise secondary education. It decided in November 2017 to postpone the incremental implementation of the decree from 2018 to 2019. On related reforms, the adoption of the decree on dual learning reform has been postponed to 2019, although the new system of dual learning has been in a trial phase for the last two years. A draft decree on the basic principles of the attainment targets has been adopted. New measures also support the implementation of the 2015-2016 decree to include students with special educational needs in the mainstream system (M-Decree). Full implementation will take time to materialise. Specific measures target groups or schools with disadvantaged pupils. The Communities have taken and plan to take specific measures (European Commission 2017b). An evaluation (Rekenhof, 2017) of Flemish equal opportunities policy for the most disadvantaged schools ('GOK') in primary education found no overall improvement but identified success factors enabling policy to be improved and adapted to take account of growing pupil diversity. These included a broad support base, parents involvement and a student follow-up system. The French Community improved its funding formula for such schools in 2017. Since 2012 enrolment policy in the Flemish Community has required all schools to reserve a share of places for both disadvantaged and advantaged pupils. The first positive impacts on social mix have been observed. The long awaited evaluation and reform of the French Community's enrolment policy is pending. New quality assurance and school governance measures are designed to reduce inequalities between schools. In the French Community central steering will be stepped up while giving schools greater autonomy. To support a collaborative approach, all schools will establish by 2018/2019 a six-year plan covering pupil performance, school climate, inclusive education, pupil pathways and professionalization. Support measures will be taken to help underperforming schools. On the Flemish side, measures may help strike a balance between autonomy and accountability (OECD, 2015) and address concerns about the possible unequal value of the qualifications awarded. In 2017-2018, centrally validated tests to be used in the award of primary school certificates will become part of schools’ internal quality assurance systems. A new quality framework is available for the inspectors. The need to adapt teachers' continuous professional development is recognised. There are few measures to help teachers combine teaching and continuous professional development (CPD). The existing system is not well-suited to helping school teams deal with an increasingly diverse school population. It is neither well developed nor mandatory in all Communities. Nor is it recognised for career development (European Commission, 2017a). It involves actors at central, intermediate and school levels. The French Community plans to step up continuous professional development from 2019. Postponement of retirement age for Belg