REPORT FROM THE COMMISSION Belgium Report prepared in accordance with Article 126(3) of the Treaty
Date: 2017-05-22
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Belgium, budget deficit, budget policy, economic stabilisation, gross domestic product, labour market, pension scheme, public debt, stability pact, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 531 final   REPORT FROM THE COMMISSION Belgium  Report prepared in accordance with Article 126(3) of the Treaty  
 
 
REPORT FROM THE COMMISSION 

Belgium 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union  (TFEU  or  the  Treaty) 
lays  down  the  excessive  deficit  procedure  (EDP).  That  procedure  is  further  specified  in 
Regulation  (EC)  No  1467/97  on  speeding  up  and  clarifying  the  implementation  of  the 
excessive deficit procedure1, which is part of the Stability and Growth Pact (SGP). Specific 
provisions  for  euro  area  Member  States  under  EDP  are  laid  down  in  Regulation  (EU)  No 
473/20132. 

According  to  Article  126(2)  TFEU,  the  Commission  has  to  monitor  compliance  with 
budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned 
or actual government deficit to gross domestic product (GDP) exceeds the reference value of 
3 %;  and  (b) whether  the  ratio  of  government  debt  to  GDP  exceeds  the  reference  value  of 
60 %,  unless  it  is  sufficiently  diminishing  and  approaching  the  reference  value  at  a 
satisfactory pace. 

Article 126(3) TFEU provides that, if a Member State does not fulfil the requirements under 
one or both of those criteria, the Commission has to prepare a report. This report must also 
“take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”. 

This report, which represents the first step in the EDP, analyses Belgium's compliance with 
the deficit and debt criterion of the Treaty, with due regard to the economic background and 
other relevant factors.  

On  18  May  2016,  the  Commission  issued  a  previous  report  under  Article  126(3)  TFEU,  as 
Belgium  did  not  make  sufficient  progress  towards  compliance  with  the  debt  reduction 
benchmark in 2015. The report concluded that, after the assessment of all relevant factors that 
might justify the prima facie lack of compliance, the debt criterion as defined in the Treaty 
and  in  Regulation  (EC)  No  1467/1997  should  be  considered  as  complied  with  at  the  time. 
Those  relevant  factors  included  notably:  (i)  the  unfavourable  economic  conditions  which 
made the respect of the transitional debt rule particularly demanding; (ii) the expectation that 
compliance  with  the  required  adjustment  towards  the  medium-term  budgetary  objective 
(MTO)  was  broadly  ensured;  and  (iii)  the  expected  implementation  of  ambitious  growth-
enhancing structural reforms in line with the authorities' commitment, which was expected to 
contribute to debt reduction in the medium to long term.  

1  OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation of the 
Stability  and  Growth  Pact  and  guidelines  on  the  format  and  content  of  stability  and  convergence 
programmes”, adopted by the Economic and Financial Committee on 5 July 2016, available at:  
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm . 

2  Regulation  (EU)  No  473/2013  of  the  European  Parliament  and  of  the  Council  on  common  provisions  for 
monitoring  and  assessing  draft  budgetary  plans  and  ensuring  the  correction  of  excessive  deficit  of  the 
Member States in the euro area (OJ L 140, 27.5.2013, p. 11). 

2 

 
 
 
                                                            
Data  notified  by  the  Belgian  authorities  on  31  March  20173  and  subsequently  validated  by 
Eurostat4 show that the general government deficit in Belgium reached 2.6% of GDP in 2016, 
while debt stood at 105.9% of GDP, above the 60% of GDP reference value. For 2017, the 
notification planned a deficit of 1.7% of GDP and a debt ratio of 105.6% of GDP, while the 
2017 Stability Programme, received by the Commission on 28 April 2017, plans a deficit of 
1.6%  of  GDP  and  a  debt  ratio  of  105.2%  of  GDP.  Eurostat  has  made  a  reservation  on  the 
quality  of  the  data  reported  by  Belgium  in  relation  to  the  sector  classification  of  hospitals. 
Eurostat considers that, under ESA 2010, government-controlled hospitals in Belgium should 
be classified inside the government sector, which is currently not the case. A possible future 
reclassification would entail a limited increase in government debt of around 0.3 pp. of GDP. 

The  notified  data  shows  that  Belgium  made  insufficient  progress  towards  compliance  with 
the debt reduction benchmark in 2016 (see Table 1). The change in the structural balance is 
estimated  to  have  been  0.1%  of  GDP  in  2016,  compared  to  a  required  minimal  linear 
structural  adjustment  (MLSA)  of  2.2%  of  GDP5.  Moreover,  in  2017  and  2018,  Belgium  is 
forecast  not  to  comply  with  the  debt  reduction  benchmark  as  its  debt-to-GDP  ratio  is 
expected to remain 2.7 pps. and 2.1 pps. of GDP above the debt benchmark according to the 
Commission 2017 spring forecast. On the basis of the scenario included in the 2017 Stability 
Programme  the  gap  would  be  0.8 pp.  of  GDP  in  2017  and  just  0.1 pp.  in  2018,  with  the 
Stability Programme planning compliance with the debt criterion as of 2019. The difference 
with the Commission forecast is due to a deficit reduction that is 0.3 pp. higher in 2017 and 
1 pp.  higher  in  2018  as  the  Commission  forecast  works  on  the  basis  of  a  no-policy  change 
assumption  whereas  the  Stability  Programme  includes  the  planned  effort.  That  difference 
highlights the importance of deficit reduction for compliance with the debt criterion. 

Overall,  Belgium's  insufficient  progress  towards  compliance  with  the  debt  reduction 
benchmark in 2016 provides evidence of a  prima facie existence of an excessive deficit for 
the purposes of the Stability and Growth Pact before, however, considering all factors as set 
out below.  

The Commission has therefore prepared this report to comprehensively assess the departure 
from the debt reduction benchmark and the excess over the Treaty reference value in order to 
examine whether the launch of an excessive deficit procedure is warranted after all relevant 
factors have been considered. Section 2 of the report examines the deficit criterion. Section 3 
examines the debt criterion. Section 4 deals with public investment and other relevant factors, 
including the assessment of compliance with the required adjustment path towards the MTO. 
The  report  takes  into  account  the  Commission  2017  spring  forecast,  released  on  11  May 
2017,  and 
the  Commission's  evaluation  of  subsequent  macroeconomic  and  fiscal 
developments. 

3  According to Regulation (EC) No 479/2009, Member States have to report to the Commission, twice a year, 
their planned and actual government deficit and debt levels. The most recent notification of Belgium can be 
found  at:  http://ec.europa.eu/eurostat/web/government-finance-statistics/excessive-deficit-procedure/edp-
notification-tables. 

4  Eurostat  news  release  No  67/2017,  http://ec.europa.eu/eurostat/documents/2995521/7997684/2-24042017-

5 

AP-EN.pdf/d83f50f3-ecab-457a-a46b-f58d3e42a030 
Initially,  an  annual  structural  adjustment  of  0.9%  of  GDP  over  2014-2016  would  have  ensured  that  –  if 
followed  –  Belgium  would  comply  with  the  debt  reduction  benchmark  at  the  end  of  the  transition  period. 
Given  the  shortfall  in  2014,  the  required  annual  structural  adjustment  over  2015-2016  rose  to  1.4%.  The 
additional shortfall in 2015 from this increased MLSA brought the required annual structural adjustment to 
comply with the debt reduction benchmark in 2016, the last year of the transition period, to 2.2%. 

3 

 
 
                                                            
Table 1. General government deficit and debt (% of GDP) 

2. 

DEFICIT CRITERION 

Belgium’s general government deficit widened from 2.5% of GDP in 2015 to 2.6% in 2016. 
According  to  the  Commission  2017  spring  forecast,  the  deficit  would  narrow  to  1.9%  in 
2017,  hence  respecting  the  3%  of  GDP  Treaty  reference  value.  In  2018,  the  Commission 
forecast  projects  the  deficit  to  rise  again  to  2.0%  of  GDP  under  a  no-policy-change 
assumption.  

The multiannual trajectory included in the 2017 Stability Programme puts forward a deficit 
reduction  to  1.6%  in  2017  and  to  0.7%  in  2018.  The  difference  in  2017  between  the 
Commission  forecast  and  the  Stability  Programme  stems  from  a  number  of  measures  that 
have  not  been  included  in  full  in  the  Commission  forecast,  e.g.  fiscal  regularisation,  the 
activation  of  long-term  ill  or  anti-fraud  measures.  For  2018  the  difference  is  caused  by  the 
fact  that  the  Commission  projections  only  include  measures  that  have  been  sufficiently 
detailed.  

Belgium thus  complies  with  the deficit criterion as  defined in  the Treaty and in  Regulation 
(EC) No 1467/97.  

3. 

DEBT CRITERION  

General government gross debt increased from 87% of GDP in 2007 to 106.7% of GDP at the 
end of 2014, an increase of almost 20 pps. of GDP. In 2015 it fell back to 106% thanks to a 
downward  stock-flow  adjustment  linked  to  the  repayment  of  support  granted  to  a  financial 
institution.  Debt  broadly  stabilised  in  2016  as  a  small  primary  surplus  compensated  for  an 
upward stock-flow adjustment with the snowball effect (the interest-growth rate differential) 
about neutral. Debt dynamics are discussed in more detail in Section 4.3. 

4 

COMSPCOMSPDeficit criterionGeneral government balance-3.1-3.1-2.5-2.6-1.9-1.6-2.0-0.7General government gross debt105.6106.7106.0105.9105.6105.2105.1103.4Gap to the debt reduction benchmarkn.r.n.r.n.r.n.r.2.70.82.10.1Change in structural balance0.60.00.60.10.60.9-0.30.6Required MLSAn.r.0.91.42.2n.r.n.r.n.r.n.r.Debt criterion2016Source: 2017 Stability Programme (SP) and Commission 2017 spring forecast (COM)20172018201520132014 
 
 
The Commission forecast expects a mild debt reduction in coming years, to 105.6% of GDP 
in 2017 and 105.1% in 2018. The annual downward impact of 1.5 pps. of GDP rendered by 
primary  surpluses  and  the  snowball  effect  are  projected  to  be  partially  offset  by  upward 
stock-flow  adjustments  in  2017-2018.  The  Commission  forecast  was  finalised  on  25  April 
2017,  before  the  sale  of  part  of  the  Belgian  State's  participation  in  BNP  Paribas  on  3  May 
2017.  That  divestment  represents  around  0.5%  of  GDP.  When  adjusting  the  Commission 
forecast for this downward stock-flow adjustment (assuming proceeds are fully used for debt 
reduction), general government debt would be 105.2% of GDP in 2017 and 104.6% in 2018. 
The gap towards the debt reduction benchmark would narrow slightly in 2017 (from 2.7 pps. 
to 2.6 pps.) and remain unchanged in 2018 at 2.1 pps. 

According to Belgium's 2017 Stability Programme the debt ratio would decline to 105.2% at 
the end of 2017 and to 103.4% in 2018. The difference from the Commission's projection at 
unchanged  policy  stems  from  a  lower  planned  headline  deficit  and  smaller  stock-flow 
adjustments  with  nominal  growth  assumptions  broadly  similar.  In  addition,  the  scenario 
included  in  the  Stability  Programme  does  not  include  the  partial  divestment  from  BNP 
Paribas.  Adjusting  for  that  element  (under  the  assumption  proceeds  are  fully  used  for  debt 
reduction) would bring general government debt to 104.7% of GDP in 2017 and to 102.9% in 
2018.  The  gap  towards  the  debt  reduction  benchmark  would  slightly  narrow  to  0.7  pp.  in 
2017 (from 0.8 pp.) and remain unchanged in 2018 at 0.1 pp.  

Table 2: Debt dynamics 

Following  the  abrogation  of  the  excessive  deficit  procedure  in  June  2014,  Belgium  was 
subject to a three-year transition period to comply with the debt reduction benchmark. That 
transition  period  started  in  2014  and  ended  in  2016.  In  order  to  ensure  continuous  and 
effective  progress  towards  compliance  during  the  transition  period,  Member  States  should 
respect simultaneously the two conditions below: 

a. 

First, the annual structural adjustment should not deviate by more than ¼% of 
GDP from the MLSA ensuring that the debt reduction benchmark is met by the 
end of the transition period; 

5 

 
 
 
b. 

Second,  at  any  time  during  the  transition  period,  the  remaining  annual 
structural adjustment should not exceed ¾% of GDP (unless the first condition 
implies an annual effort above ¾% of GDP, which is the case for Belgium). 

Based  on  the  Commission  2017  spring  forecast,  a  structural  effort  of  1.4%  of  GDP  would 
have been required in 2015 to  make sufficient progress towards  meeting the debt reduction 
benchmark, which was significantly above the adjustment towards the MTO of at least 0.6% 
of  GDP  recommended  by  the  Council  in  July  2015.  The  structural  balance  is  estimated  to 
have improved by 0.6% of GDP in 2015, so that the first condition is not respected.  

In  view  of  the  shortfall  in  2015,  the  remaining  required  adjustment  in  the  last  year  of  the 
transition  period,  2016,  reached  2.2%  of  GDP.  The  structural  balance  is  estimated  to  have 
improved  by  0.1%  of  GDP  in  2016.  As  a  result,  Belgium  did  not  comply  with  the  debt 
reduction benchmark by the end of the transition period.  

The  analysis  thus  suggests  that  prima  facie  the  debt  criterion  for  the  purpose  of  the  Treaty 
and  Regulation  (EC)  No  1467/1997  is  not  fulfilled  based  on  the  2016  outturn  data  and  the 
Commission 2017 spring forecast as well as the 2017 Stability Programme before, however, 
consideration is given to all relevant factors set out below. 

4. 

RELEVANT FACTORS 

Article  126(3)  TFEU  provides  that  the  Commission  report  “shall  also  take  into  account 
whether  the  government  deficit  exceeds  government  investment  expenditure  and  take  into 
account  all  other  relevant  factors,  including  the  medium-term  economic  and  budgetary 
position  of  the  Member  State”.  Those  factors  are  further  clarified  in  Article  2(3)  of 
Regulation  (EC)  No  1467/97,  which  also  provides  that  “any  other  factors  which,  in  the 
opinion  of  the  Member  State  concerned,  are  relevant  in  order  to  comprehensively  assess 
compliance with the deficit and debt criteria and which the Member State has put forward to 
the Council and to the Commission” need to be given due consideration.  

In  case  of  apparent  breach  of  the  debt  criterion,  the  analysis  of  the  relevant  factors  is 
particularly warranted given that debt  dynamics are to  a larger extent  influenced  by factors 
outside  the  control  of  the  government  than  is  the  case  for  the  deficit.  This  is  recognised  in 
Article 2(4) of Regulation (EC) No 1467/97, which provides that the relevant factors shall be 
taken into account when assessing compliance on the basis of the debt criterion irrespective 
of the size of the breach. In that respect, at least the following three main aspects need to be 
considered (and have been considered in the past) when assessing compliance with the debt 
criterion given their impact on the debt dynamics and sustainability: 

1.  adherence to the MTO or the adjustment path towards it, which, is supposed to ensure 
sustainability  or  rapid  progress  towards  sustainability  under  normal  macroeconomic 
circumstances.  As  by  construction  the  country-specific  MTOs  take  into  account  the 
debt  level  and  implicit  liabilities,  compliance  with  the  MTO  or  the  adjustment  path 
towards it should ensure convergence of the debt ratios towards prudent levels at least 
in the medium term; 

2.  structural reforms, already implemented or detailed in a structural reform plan, which 
are  expected  to  enhance  sustainability  in  the  medium  term  through  their  impact  on 
growth,  thereby  contributing  to  bring  the  debt-to-GDP  ratio  on  a  satisfactory 
downward  path.  Overall,  adherence  to  the  MTO  (or  the  adjustment  path  towards  it) 
alongside  with  the  implementation  of  structural  reforms  (in  the  context  of  the 
European  Semester)  is  expected  under  normal  economic  conditions  to  bring  debt 
dynamics on a sustainable path through the combined impact on the debt level itself 

6 

 
 
(through  the  achievement  of  a  sound  budgetary  position  at  the  MTO)  and  on 
economic growth (through the reforms).  

3.  unfavourable  macroeconomic  conditions,  and  in  particular  low  inflation,  which  can 
hamper  the  reduction  of  the  debt-to-GDP  ratio  and  make  compliance  with  the  SGP 
provisions  particularly  demanding.  A  low-inflation  environment  requires  a  Member 
State  to  achieve  more  demanding  structural  adjustments  to  comply  with  the  MLSA 
during  the  transition  period  and  negative  inflation  surprises  may  contribute  to  the 
upward  revisions  of  the  required  MLSA  over  time.  In  addition,  the  debt  reduction 
benchmark  assumes  by  construction  that  GDP  deflator  growth  returns  to  the  long-
term  average  value  of  2%  by  2021,  which  makes  compliance  with  the  forward-
looking debt benchmark particularly demanding. Under such conditions, adherence to 
the  MTO  or  the  adjustment  path  towards  it  is  a  key  relevant  factor  in  assessing 
compliance with the debt criterion. 

In view of those provisions, the following subsections consider in turn (1) the medium-term 
economic  position;  (2)  the  medium-term  budgetary  position,  including  an  assessment  of 
compliance  with  the  required  adjustment  towards  the  MTO  and  the  development  of  public 
investment; (3) the developments in the medium-term government debt position, its dynamics 
and  sustainability;  (4)  other  factors  considered  relevant  by  the  Commission;  and  (5)  other 
factors put forward by the Member State. 

4.1.  Medium-term economic position 

Cyclical conditions, potential growth and inflation 

The Belgian economy proved to be rather resilient following 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 stagnation, though, with flat GDP growth in 
2012  and  2013.  In  2014  and  2015,  economic  activity  rebounded  and  growth  reached  1.7% 
and 1.5% respectively. It fell back to 1.2% in 2016 with the terrorist attacks of March 2016 as 
well as the security situation in the months before and after those events considered to have 
had  a  negative,  though  transitory,  impact  on  the  Belgian  economy.  According  to  the 
Commission  2017  spring  forecast,  economic  growth  is  expected  to  pick  up  again,  reaching 
1.5% in 2017 and 1.7% in 2018 on the back of domestic demand, more specifically private 
consumption and investment. 

Potential growth estimates for Belgium are rather low, at 1.2% on average over 2014-2018. 
The  slowdown  compared  to  the  pre-2009  situation  is  broad-based  as  it  reflects  the 
continuation  of  a  long-term  trend  of  declining  gains  in  total  factor  productivity  (which  is 
estimated  to  have  stabilised  at  a  low  level  in  recent  years),  a  decline  in  the  contribution  of 
labour  to  potential  growth  (due  to  a  slower  growth  of  the  working  age  population)  and 
somewhat  lower  capital  accumulation.  The  negative  output  gap  narrowed  to  -0.3%  in  2015 
compared to a trough of -1.6% in 2013. It widened again slightly in 2016 as growth fell short 
of  potential  but  is  expected  to  narrow  in  2017  and  2018,  when  the  output  gap  would  be 
closed. 

As was the case for other euro area Member States, Belgium experienced a protracted period 
of low domestic price growth. The GDP deflator rose by 0.7% in 2014 and by 0.9% in 2015 
compared  to  the  historical  average  of  around  2%.  It  accelerated  to  1.6%  in  2016.  The 
relatively low GDP deflator until 2015 has had an important impact on the evolution of the 
debt-to-GDP ratio in past years and increased the structural adjustment required to assure that 
the  debt  ratio  stays  on  a  firm  downward  path  as  required  by  the  forward-looking  debt 

7 

 
 
benchmark6.  As  a  result,  the  MLSA  for  Belgium  (2.2%  of  GDP  in  2016,  see  Table  1)  was 
substantially  higher  than  the  fiscal  effort  of  0.6%  of  GDP  recommended  by  the  Council  in 
July 2016. In view of the above-mentioned cyclical circumstances, such a high effort may be 
neither  feasible  nor  desirable.  Moreover,  the  primary  balance  was  also  impacted  by  those 
cyclical  conditions,  which  fed  through  in  public  debt.  Economic  conditions  thus  partly 
explain non-compliance with the MLSA in 2016.  

However,  the  ongoing  improvement  in  macroeconomic  conditions  means  that  they  can  no 
longer  be  regarded  as  a  major  mitigating  factor  in  explaining  the  gap  compared  to  the 
forward-looking  debt  benchmark  (2.7%  in  2017).  The  GDP  deflator  is  expected  to  reach 
1.8%  in  2017 as  price  growth  moves closer to the long-term average,  with  nominal growth 
rising to 3.4% both in 2017 and 2018. 

Table 3: Macroeconomic and budgetary developmentsa 

Declining  interest  rates  have  created  a  supportive  context  for  budgetary  consolidation.  The 
implicit nominal interest rate on Belgian public debt has fallen continuously over the past two 
decades  and  that  trend  has  accelerated  in  recent  years.  As  a  consequence,  total  interest 
expenditure  by  the  general  government  has  continued  to  decrease  as  a  share  of  GDP. 
Between 2007 and 2016 interest expenditures fell by approximately 1.1 pps. of GDP. These 
windfall gains amounted to 0.2 pp. in 2015 as well as in 2016, with similar gains expected in 
2017-2018.  Against  that  background  of  falling  interest  expenditure,  the  change  in  the 
structural  balance  in  2016-2017  according  to  the  Commission  forecast  (+0.1%  and  +0.6% 
respectively) is accompanied by a deterioration in 2016 in  the structural primary balance (-
0.1%) and a lower improvement in 2017 (0.3%). The sensitivity analysis in the 2017 Stability 
Programme highlights how a linear increase of the yield curve by 100bp would imply 0.1% 
of GDP higher costs in 2017, rising to 0.4% of GDP in 20207, though relative to a baseline of 
falling  interest  payments.  It  underscores  the  risks  inherent  to  a  consolidation  strategy  that 
leans significantly on windfall gains stemming from lower interest expenditures. 

6   Compliance  with  the  debt  benchmark  is  assessed  on  the  basis  of  three  different  configurations:  the 
backward-looking,  the  forward-looking  and  the  debt  reduction  benchmark  adjusted  for  the  impact  of  the 
cycle. 

7 Stability Programme Belgium 2017-2020, p. 18. 

8 

 
 
 
 
 
                                                            
Structural reforms 

In  its  Communication  of  13  January  2015,  the  Commission  strengthened  the  link  between 
effective  implementation  of  structural  reforms,  investment,  and  fiscal  responsibility  in 
support of jobs and growth, within the existing rules of the SGP.  

The 2017 Country Report for Belgium concluded that the country had made some progress in 
addressing the 2016 country-specific recommendations. Substantial progress was made with 
regard to the reform of the legal framework on wage negotiations, the so-called Law of 1996 
on  the  promotion  of  employment  and  the  safeguarding  of  competitiveness.  The  reform 
approved by Parliament in March 2017 strengthens the preventive aspect of the law in order 
to avoid that in the future the growth of hourly labour costs would again outpace that in the 
three main trading partners. To that end, social partners need to respect a safety margin when 
setting the ceiling for real wage increases, to anticipate potential higher domestic inflation or 
lower  wage  growth  in  the  reference  countries.  Moreover,  the  altered  Law  requires  the 
progressive  reduction  of  the  hourly  wage  gap  built  up  prior  to  1996.  The  new  law  also 
prevents  that  reductions  of  social  security  contributions  are  fully  translated  into  wage 
increases.  If  new  gaps  were  nevertheless  to  occur,  enhanced  correction  mechanisms  should 
ensure  an  automatic  narrowing.  Those  reforms  implemented  an  important  element  of  the 
country-specific  recommendations  and  allow  for  a  steady  continuation  of  competitiveness 
gains achieved over the past years, which in 2016 led to the conclusion that Belgium was no 
longer experiencing macroeconomic imbalances. 

The Country Report also saw some progress regarding the functioning of the labour market. 
Robust job creation, in particular in the private sector, has been fuelled by labour tax cuts and 
wage moderation efforts. Progress with regard to other recommendations since July 2016 has 
been  less  tangible.  However,  over  the  course  of  the  last  few  years  important  progress  has 
nevertheless  been  made  on  a  number  of  fronts.  These  relate  primarily  to  pensions  and 
taxation.  As  has  been  discussed  in  previous  Article  126(3)  reports,  Belgium  has  been 
reforming its public pension system in recent years. In order to raise the effective retirement 
age,  early  exit  possibilities  have  been  reduced  by  further  tightening  the  standard  eligibility 
requirements for both early and pre-retirement. The legal retirement age will also rise from 
65  to  66  in  2025  and  to  67  in  2030.  The  long-term  impact  of  that  set  of  measures  is 
discernible in the latest projections of the Ageing Working Group: pension expenditures are 
projected to rise by 1.3 pps. of GDP between 2013 and 2060, compared to 3.3 pps. before the 
most recent reforms. The difference is  mostly due to the pension reform itself (-1.6 pps. of 
GDP),  while  other  measures,  such  as  the  temporary  suspension  of  indexation  and  lower 
public  employment  (-0.4  pp.  of  GDP),  will  also  curb  expenditure  growth.  Those  more 
positive  ageing  projections  allowed  Belgium  to  lower  its  MTO  under  the  SGP  from  a 
structural surplus of 0.75% of GDP to a balanced budget in structural terms.  

Although already enacted reforms have thus substantially reduced the projected rise in public 
pension  spending,  curbing  the  expected  increase  in  age-related  spending  further  through 
additional reforms would improve fiscal sustainability in the long term8. Moreover, there are 
signs of a strong shift from early exit through the pension and unemployment systems to the 
sickness  and  disability  schemes,  which  would  partially  offset  the  projected  gains  from  the 
enacted reforms. Spending on sickness and disability has been rising rapidly: from a broadly 
stable level of around 1.2% until 2007 to 1.9% in 2016.  By the end of its term in 2019, the 

8 E.g. the harmonisation of the valorisation of years of study in the three pension schemes is estimated to lower 
the  projected  increase  in  ageing  costs  by  0.1 pp.  of  GDP  in  2060.  See  Federal  Planning  Bureau  (2017),  Une 
réforme  de  la  régularisation  des  périodes  d'études  dans  les  régimes  belges  de  pension  –  Estimation  des  effets 
budgétaires. 

9 

 
 
                                                            
government  intends  to  lay  the  groundwork  for  the  introduction  of  a  credit-based  public 
pension system as of 2030. Once fully implemented such a system would allow for automatic 
adjustment mechanisms in response to demographic or economic developments.  

Within  the  framework  of  a  multi-annual  tax  reform  initiated  in  2016,  the  tax  pressure  on 
labour is being reduced. Both employers and employees benefit from measures to narrow the 
tax wedge. On the one hand, the statutory rate of employers’ social security contributions will 
be gradually reduced to 25% by 2018, with lower effective rates for low to medium wages. In 
addition,  wage  subsidies  for  shifted  and  night  labour  have  been  increased.  SMEs  and 
independents  are  exempted  from  social  security  contributions  for  the  first  newly  hired 
employee,  while  contributions  are  reduced  for  the  next  five  employees.  On  the  other  hand, 
the take-home pay of employees is being increased through a combination of increases in the 
lump  sum  allowance  for  professional  expenses,  the  work  bonus,  the  tax  exempted  amount, 
and a reshuffling of tax brackets. The announced labour tax cuts represent EUR 11.5 billion 
by  2020,  or  2.2%  of  GDP.  While  the  reduction  of  the  tax  pressure  on  labour  goes  in  the 
direction recommended repeatedly by the Council in the past, the tax reform package has not 
been designed in a budgetary neutral way (even when accounting for the positive effects on 
growth and employment). That factor contributed to the budgetary slippage in 2016 discussed 
below  and  weighs  on  the  budget  outlook  for  future  years  as  well.  In  addition,  despite  the 
recent  reforms,  the  Belgian  tax  system  remains  hampered  by  widespread  distortions  which 
narrow tax bases and contribute to the system's complexity. Taxation also continues to lean 
heavily on labour taxation, even after the recent reforms, and additional tax reductions at the 
lower end of the pay scale would contribute to reducing unemployment and low wage traps 
for second earners, singles and single parents.  

The  2017  Country  Report  listed  a  number  of  other  structural  bottlenecks  of  the  Belgian 
economy  and  elements  which  hamper  economic  and  budgetary  policy  making.  Those 
challenges were reflected in the country-specific recommendations issued by the Commission 
on 16 May 2017. Aside from the obligations stemming from the Stability and Growth Pact, 
those  recommendations  call  for  more  effective  fiscal  coordination  between  the  several 
Belgian government levels; further tax reforms to reduce complexity and distortive features 
of  the  system;  better  targeting  of  labour  market  and  education  policies  on  the  most 
disadvantaged  groups;  improved  functioning  of  certain  service  markets;  fostering  both 
tangible and intangible investment, inter alia by reorienting overall government spending in 
favour of investment. 

4.2.  Medium-term budgetary position 

Headline, structural balance and adjustment towards the MTO  

Belgium's  headline  deficit  increased  from  2.5%  of  GDP  in  2015  to  2.6%  in  2016.  The 
revenue-to-GDP  and  the  expenditure-to-GDP  ratios  fell  by  0.7 pp.  and  0.5 pp.  respectively. 
The 2016 headline deficit was impacted by additional expenditure related to asylum-seekers 
and security measures.  

In  the  2016  stability  programme,  the  Belgian  authorities  revised  their  MTO  to  a  balanced 
budget  in  structural  terms,  down  from  a  structural  surplus  of  0.75%  of  GDP.  The  MTO 
appears sufficiently stringent under what can be considered as normal economic conditions to 
ensure debt rule compliance in the medium and long term.  In the 2017 stability programme, 
Belgium  confirmed  the  MTO  but  postponed  the  planned  achievement  of  it  from  2018  to 
2019.  According  to  the  Commission  forecast,  it  would  require  a  structural  improvement  of 
1.6%  of  GDP  over  2018-2019.  At  the  same  time,  the  Commission  forecast  expects  the 
structural balance to deteriorate by 0.3 pp. of GDP at unchanged policy in 2018, the last year 

10 

 
 
of the Commission projections, while according to the High Council of Finance the implied 
deterioration in 2019 represents 0.4% of GDP9. As a result, achieving the MTO in 2019 will 
require  substantial  additional  measures  and  a  strict  execution  of  the  budget  in  view  of 
implementation risks towards the end of the current legislative period. 

The 2017 Stability Programme indicates that the budgetary impact of the exceptional inflow 
of  refugees  and  security-related  measures  has  been  significant,  and  provides  adequate 
evidence  of  the  scope  and  nature  of  those  additional  budgetary  costs.  According  to  the 
Commission, the eligible additional expenditure linked to the exceptional inflow of refugees 
and  security  measures  amounted  to  0.08%  and  0.05%  of  GDP,  respectively,  in  2016.  The 
provisions defined in Article 5(1) and Article 6(3) of Regulation (EC) No 1466/97 allow that 
additional expenditure to be catered for, in that the inflow of refugees as well as the severity 
of  the  terrorist  threat  are  exceptional  events,  their  impact  on  Belgium's  public  finances  is 
significant  and  sustainability  would  not  be  compromised  by  allowing  for  a  temporary 
deviation from the adjustment path towards the MTO.  The required structural improvement 
in 2016 has consequently been reduced from 0.6% of GDP to 0.47% of GDP. In 2017, the 
additional  security-related  expenditure  is  currently  estimated  at  0.01%  of  GDP.  A  final 
assessment, including  on the eligible amounts,  will be made in  spring  2018 on the basis of 
observed data as provided by the Belgian authorities for 2017. 

Based  on  outturn  data  and  the  Commission  forecast,  the  growth  of  primary  government 
expenditure,  net  of  discretionary  revenue  measures  and  one-offs,  exceeded  the  expenditure 
benchmark – corrected for the impact of unusual events – by 0.6% of GDP in 2016, pointing 
to  a significant deviation. The structural  balance  is  estimated  to  have improved by 0.1%  of 
GDP  in  2016,  0.4%  of  GDP  below  the  recommended  effort  of  0.47%  of  GDP,  suggesting 
some deviation. The expenditure aggregate was negatively impacted by higher than expected 
inflation in 2016. Whereas the reference growth rate for the expenditure benchmark is based 
on a deflator of 1%, the actual GDP deflator used for the structural balance amounted to 1.6% 
of GDP, closer to the long-term average. The impact on expenditure growth from higher than 
anticipated inflation transpires in the fact that the automatic indexation of social benefits and 
public  sector  wages  occurred  four  months  earlier  than  expected  in  the  Commission  2015 
autumn forecast at the time of the draft budget for 2016. The impact is estimated at around 
0.2% of GDP. Correcting for this brings the deviation for the expenditure benchmark at 0.4% 
of  GDP,  with  both  pillars  providing  the  same  signal  and  leading  to  a  conclusion  of  some 
deviation from the  recommended adjustment path towards the MTO in 2016. In 2015-2016 
together both pillars suggest a significant deviation took place. However, when correcting the 
expenditure benchmark for the above-mentioned higher than anticipated inflation in 2016 and 
the structural balance for revenue shortfalls in 2015 compared to standard elasticities – due to 
low wage and price growth – (discussed in the spring 2016 assessment), both pillars point to 
some deviation in 2015-2016. 

In 2017, the growth rate of the expenditure aggregate is projected to exceed the expenditure 
benchmark  by  0.4%  of  GDP,  pointing  to  a  risk  of  some  deviation.  At  0.6%  of  GDP  the 
improvement in the structural balance is in line with the recommended structural adjustment. 
Over 2016 and 2017 taken together, however, the expenditure benchmark points to a risk of 
significant deviation, with an average deviation of -0.5% of GDP. The average deviation for 
the  structural  balance  over  the  same  period  amounts  to  -0.2%  of  GDP  according  to  the 
Commission forecast, indicating a risk of some deviation. When correcting for the impact of 
unforeseen inflation in 2016 discussed supra, the deviation for the expenditure benchmark in 

9 High Council of Finance (2017), Avis 'Trajectoire budgétaire en préparation du Programme de Stabilité 2017-
2020'. Based on data provided by the Federal Planning Bureau. 

11 

 
 
                                                            
2016-2017 narrows to 0.4% of GDP, still above the threshold for significant deviation.  The 
remaining difference with the average gap for the structural balance reflects the impact of the 
decline in interest expenditure in both years. That windfall improves the reading of the fiscal 
effort  based  on  the  structural  balance  but  does  not  affect  compliance  with  the  expenditure 
benchmark, which is therefore considered to reflect more appropriately the underlying fiscal 
effort. As a result, the overall assessment points to a risk of a significant deviation from the 
recommended adjustment path towards the MTO over 2016 and 2017 taken together, but the 
projected deviation can still be corrected in 2017.  

Public investment 

Public investment peaked at 2.5% of GDP in 2012, due to the investment cycle at local level. 
For the same reason, it decreased again to 2.4% of GDP in subsequent years and to 2.3% in 
2016.  Investment  grants 
to  non-financial  corporations  (among  others  for  railway 
infrastructure,  hospitals,  and  elderly  homes)  are  not  included  in  those  figures.  Over  the 
forecast  horizon, investment is  projected to  return  to  2.5% of GDP due to  large investment 
projects at regional level and an acceleration of local government investment in the run-up to 
municipal elections in 2018. Since 2009, public investment has been lower than the general 
government deficit, though the latter is expected to fall below the investment ratio again as of 
2017.  

The  federal  government  has  been  pursuing  a  'National  Investment  Pact',  which  aims  to 
accelerate  investment  in  key  areas  by  mobilising  public  and  private  means  as  well  as  by 
identifying obstacles for private investment. Regions and Communities can join the initiative.  

4.3.  Medium-term government debt position 

Debt dynamics 

Between  1997  and  2007,  Belgium's  government  debt-to-GDP  ratio  decreased  by  36  pps., 
thanks to sizeable (although gradually declining) primary surpluses. That trend of sustained 
debt reduction was halted by the financial and economic crisis of 2008. At the end of 2007, 
Belgium's general government debt stood at 87% of GDP. It rose to 106.7% of GDP in 2014, 
an increase of almost 20 pps. It compares to an increase of 27 pps. in the euro area.  

12 

 
 
Graph 1. Breakdown of change in debt ratio 1997-2018 (pp. of GDP) 

The  main  drivers  behind  the  increase  between  2007  and  2014  were  the  upward  snowball 
effect  (+10.5  pps.)  and  stock-flow  adjustments  (+9.4  pps.),  with  the  erstwhile  primary 
surpluses  gone  (see  Graph  1).  The  snowball  effect  reflects  how  interest  spending  generally 
surpassed nominal growth since 2008. Yet, at 1.4 pps. on average, the annual upward impact 
of that dynamic in 2008-2015 was similar to that in 1997-2007, as the denominator effect of 
lower  nominal  growth  was  offset  by  the  nominator  effect  stemming  from  lower  interest 
spending  in  terms  of  GDP.  The  latter  ratio  continued  to  decline  after  2007  as  continuously 
declining interest rates compensated for an increasing debt ratio. A further decline in interest 
spending in recent years resulted in a slightly downward snowball effect in 2016 for the first 
time since 2011.  

The substantial debt increase due to stock-flow adjustments occurred predominantly in 2008 
and 2011, when the Belgian State had to intervene in the financial system. In 2008 authorities 
had  to  step  in  to  save  Fortis,  KBC,  Dexia  and  Ethias.  In  2011  the  Belgian  State  acquired 
Dexia  Belgium,  the  current  Belfius  bank.  The  recovering  of  part  of  the  financial  sector 
bailout  resulted  in  downward  stock-flow  adjustments  representing  3.4%  of  GDP  in  2012-
2015.  There  was  no  change  in  2016.  Remaining  participations  include  a  share  of  7.8%  in 
BNP Paribas – 10.3% before the partial divestment in May 2017 –, 100% of Belfius, 100% of 
insurer  Ethias  (including  stakes  of  regional  and  local  authorities),  and  50%  of  Dexia  bank. 
Dividends paid by BNP Paribas and Belfius represented 0.1% of GDP in 2016.  

The positive stock-flow adjustment of 0.2% of GDP in 2016 was mainly the result of interest 
rate  swaps,  the  difference  between  accrued  and  paid  interest  and  regional  loans  for  social 
housing.  

While the accumulated impact on the debt ratio from the primary balance has been about zero 
since 2008, the contrast with the situation prior to 2008 is striking. Between 1997 and 2007 
the  attainment  of  substantial  primary  surpluses  allowed  for  an  annual  debt  reduction  of 
around 5 pps. In that respect, the disappearance of the primary surplus can be considered the 
main  driving  force  behind  the  increase  in  the  debt  ratio  since  2007.  It  highlights  how  the 

13 

 
 
 
return to substantial primary surpluses is a precondition for putting debt on a clear downward 
trajectory and complying with the debt reduction benchmark.  

According  to  the  Commission  2017  spring  forecast,  the  debt-to-GDP  ratio  would  fall  by 
0.3 pp. in 2017. A primary surplus of 0.7% of GDP and a sizeable downward snowball effect 
of 0.8% of GDP as a result of rising nominal growth and decreasing interest expenditures are 
largely  offset  by  upward  stock-flow  adjustments  stemming  from  loans  at  the  regional  level 
for  the  financing  of  social  housing  investment  and  interest  rate  swaps.10  The  same  trend  is 
expected in 2018 when debt would decrease to 105.1% of GDP at unchanged policy. 

Interest expenditure 

In line with the general trend in the euro area, interest rates on Belgian debt instruments are at 
historical lows. The ten-year bond yield stood at 0.8% at the end of April 2017. The spread 
between Belgian and German bonds has been broadly stable for several years. It averaged 50, 
32, 37 and 48 basis points in 2014, 2015, 2016 and the first four months of 2017 respectively, 
compared  to  a  maximum  of  366  basis  points  at  the  end  of  November  2011.  The  implicit 
interest  rate  declined  steadily  in  recent  years,  from  4.6%  in  2007  to  2.7%  in  2016.  It  is 
projected to decline further to 2.3% in 2018.  

Debt sustainability 

Belgian  authorities  have  been  using  those  favourable  market  conditions  to  refinance  the 
outstanding  debt  against  much  lower  rates  at  considerably  longer  maturity.  The  average 
maturity of long-term issuance rose to 17.5 years in 2016 (14.1 years in 2015 and 15 years in 
2014) with an average weighted yield of 0.8% (0.9% in 2015 and 2.2% in 2014). As a result, 
the average life to maturity of the total federal debt portfolio11 rose to 8.7 years at the end of 
2016 and 9.2 years at the end of April 201712. It is the longest ever and compares to around 6 
years until 2009 and 8 years at the end of 201513. The 12-month and 60-month refixing risk14 
of the federal debt decreased from around 20% and 57% at the end of 2012 to around 19% 
and 43% at the end of 201615. Currently, Belgium does not appear to face a risk of financial 
stress  in  the  short  term.  If  interest  rates  were  to  start  rising,  the  high  debt  level  implies  a 
substantial  hike  in  interest  expenditure  over  time,  though  the  high  average  life  to  maturity 
means that that hike would materialise only gradually.  

The  sensitivity  to  potential  shocks  in  nominal  growth  and  interest  rates  as  well  as  the 
unfavourable  starting  point  result  in  high  sustainability  risks  in  the  medium  term.  At 
unchanged policy, the debt level is projected to decline to 102% of GDP by 202716. A 1 pp. 
increase in the interest rate assumptions or 0.5 pp. lower GDP growth would bring the debt 

10   When adjusting the Commission forecast for the sale of part of the BNP Paribas participation in May 2017, debt would fall from 105.9% of GDP in 2016 to 105.2% in 

2017 and to 104.6% in 2018, provided proceeds are fully used to bring down debt. 

11  The federal debt represents 84% of the general government debt. 
12   Belgian Debt Agency, Annual report 2016. 
13  Belgian Debt Agency, Borrowing requirements & Funding plan 2017. 
14  The proportion of outstanding debt which matures in a given time period or which is subject to changes in 

interest rates because of a floating interest rate. 

15  Belgian Debt Agency, Borrowing requirements & Funding plan 2017. 
16  2016  Debt  Sustainability  Monitor.  Those  projections  start  from  the  European  Commission  2017  winter 
forecast,  with  the  no-policy  change  assumption  translated  into  a  structural  primary  balance  kept  constant 
(excluding ageing costs) at the level of the last year of the forecast (2018). The baseline scenario is based on 
the following macroeconomic assumptions for the long term: potential GDP growth remains around 1.4%; 
inflation and the change in the GDP deflator stabilise at 2% in the medium term; long-term interest rates on 
new and rolled-over debt converge to 3% in real terms by 2026 and short-term rates to a value consistent 
with  the  long-term  interest  rate  and  historical  (pre-crisis)  euro  area  yield  curve  (see  also  European 
Commission, 2012). Projected ageing costs are based on the 2015 Ageing Report.  

14 

 
 
                                                            
level to 108-109% of GDP in 2027. Adequate progress towards Belgium's MTO, as required 
by the Stability and Growth Pact, would put the debt on a sustained downward path, arriving 
at  80%  of  GDP  by  2027.  However,  the  fiscal  effort  required  for  reaching  the  MTO  is 
substantial,  considering  that  the  structural  deficit  is  estimated  at  2.0%  of  GDP  in  2018  at 
unchanged  policy.  Moreover,  rising  expenditure  might  require  additional  measures  once  at 
the MTO. 

Lastly, the sustainability of public debt is also determined by the economy's growth potential. 
As  described  above,  the  gradual  decline  of  total  factor  productivity  growth  since  the 
beginning  of  the  1990s  has  lowered  potential  growth.  It  underscores  the  importance  of 
implementing  structural reforms in  order  to boost  potential  growth.  Progress  with regard to 
reforms was discussed in Section 4.1. 

4.4. 

Other factors considered relevant by the Commission 

Among the other factors considered relevant by the Commission, particular consideration is 
given to financial contributions to fostering international solidarity and achieving the policy 
goals of the Union, the debt incurred in the form of bilateral and multilateral support between 
Member  States  in  the  context  of  safeguarding  financial  stability,  and  the  debt  related  to 
financial  stabilisation  operations  during  major  financial  disturbances  (Article  2(3)  of 
Regulation (EC) No 1467/97).  

Rescue  operations  in  the  financial  sector  explain  part  of  the  debt  increase  since  2007  as 
discussed  in  section  4.3.  The  direct  cumulative  debt  impact  of  those  operations  reached 
almost 7% of GDP in 2011 but declined to around 3.5% of GDP as of 2015 due to the sale of 
some  of  the  acquired  assets  as  well  as  the  reimbursement  of  loans.  Contingent  liabilities 
related  to  guarantees  granted  to  the  financial  sector  all  relate  to  Dexia.  Awaiting  full 
resolution,  the  Belgian  State  guarantees  51.4%  of  Dexia's  liabilities.  Those  guarantees 
reached 8.7% of GDP at the end of 2016, up from 7.7% at the end of 2015.  

Article  12(1)  of  Regulation  (EU)  No  473/2013  requires  that  this  report  considers  also  "the 
extent  to  which  the  Member  State  concerned  has  taken  into  account  the  Commission's 
Opinion  on  the  country's  Draft  Budgetary  Plan,  as  referred  in  Article  7(1)"  of  the  same 
Regulation. The Commission Opinion on Belgium's draft budgetary plan for 2017 pointed to 
a  risk  of  non-compliance  with  the  provisions  of  the  SGP  in  2016-2017  and  invited  the 
authorities to implement  all  planned  measures  within the national budgetary  process and to 
ensure  that  the  2017  budget  complies  with  the  SGP17.  The  federal  budget  was  adopted  by 
Parliament  on  22  December  2016  without  major  changes  compared  to  the  Draft  Budgetary 
Plan.  In  March  2017  the  federal  government  carried  out  a  budget  review,  which  largely 
consisted  of  updated  assessments  of  earlier  announced  measures  and  of  underlying 
assumptions, with some additional spending measures announced as well. The overall impact 
of the March review on the Commission projections is therefore limited. 

17   In  its  comments  and  remarks  on  the  2017  budget,  the  Belgian  Court  of  Auditors  made  a  number  of 
reservations, in line with issues raised by the Commission in its draft budgetary plan evaluation, and stressed 
several  risk  factors  surrounding  the  budget.  A  general  remark  concerned  the  lack  of  detail  for  several 
measures and projections. See Commentaar en opmerkingen bij de ontwerpen van staatsbegroting voor het 
begrotingsjaar 2017, Rekenhof, 2016. 

15 

 
 
                                                            
4.5. 

Other factors put forward by the Member State 

On  9  May  2017,  the  Belgian  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous sections already broadly covers the key factors put forward by the authorities. 

The  authorities  notably  argue  that  the  MLSA  for  Belgium  was  excessively  demanding, 
referring to the Commission reports under Article 126(3) TFEU of 27 February 2015 and 18 
May 2016 which stated that such an effort was neither feasible nor desirable. Secondly, the 
authorities  refer  to  the  continuation  of  the  structural  reform  agenda  by  the  Belgian 
government, in line with what is mentioned in Section 4.1. On top of reforms in the area of 
competitiveness, the federal government highlights the tax shift  away from labour  in  2015-
2020  as  well  as  planned  changes  to  the  pension  system  such  as  a  reform  of  assimilated 
periods,  the  extension  of  the  second  pension  pillar  to  all  workers  and  the  introduction  of  a 
partial pension. 

In  their  letter,  the  Belgian  authorities  also  point  to  the  fact  that  the  debt  ratio  has  fallen  in 
2015-2016,  for  the  first  time  since  the  economic  and  financial  crisis  of  2008,  and  would 
continue  decreasing  as  of  2017.  The  letter  highlights  the  upward  impact  that  weak  growth, 
support to financial institutions, lending to Greece and contributions to the EFSF/ESM have 
had  on  the debt  ratio. The  letter  announces  that  the  recent  sale  of  part  of  the  stake  in  BNP 
Paribas will reduce the debt level by almost 0.5 pp. of GDP from 2017 onwards. According 
to the authorities' calculations, the budgetary path presented in the 2017 Stability Programme 
should enable compliance  with  the debt  criterion by 2019 at  the latest. The authorities also 
invoke  exceptional  refugee-related  costs  and  security  measures.  While  they  are  neutralised 
with respect to the adjustment path towards the MTO, they have an impact on the headline 
balance and thus on public debt developments.  

16 

 
 
5. 

CONCLUSIONS 

General government gross debt stood at 105.9% of GDP at the end of 2016, well above the 
60% of GDP reference value. Belgium did not make sufficient progress towards compliance 
with  the  debt  reduction  benchmark  in  2016.  Moreover,  the  Commission  forecast  does  not 
expect  Belgium  to  comply  with  the  debt  reduction  benchmark  either  in  2017  or  in  2018, 
based a no-policy-change assumption. This suggests that before consideration is given to all 
relevant  factors,  the  debt  criterion  as  defined  in  the  Treaty  does  not  appear  to  have  been 
fulfilled prima facie in 2016. In line with the Treaty, this report also examined the relevant 
factors.  

Unfavourable economic conditions in the recent past partly explain non-compliance with the 
debt criterion in 2016. However, economic conditions have been improving and are no longer 
considered a strong mitigating factor in explaining Belgium's gap compared to the forward-
looking dimension of the debt reduction benchmark in both 2017 and 2018 according to the 
Commission forecast. 

On  the  basis  of  the  Commission  2017  spring  forecast  Belgium  was  found  to  be  broadly 
compliant with the required preventive arm adjustment towards the MTO in 2016. The same 
holds with regard to 2017. However, for 2016 and 2017 taken together Belgium is considered 
to  be  at  risk  of  non-compliance  given  the  accumulated  deviation.  That  projected  deviation 
can, however, still be corrected in 2017. 

Belgium has been making progress in implementing the structural reforms announced since 
the  beginning  of  2015,  notably  in  the  area  of  pensions,  competitiveness  and  taxation.  For 
several of those reforms progress is considered substantial. They are expected to contribute to 
enhancing  the  economy's  growth  potential  and  reducing  the  risks  of  macroeconomic 
imbalances,  thereby  having  a  positive  impact  on  debt  sustainability  in  the  medium  to  long 
term.  The  non-budgetary  neutral  nature  of  the  tax  reform  undertaken  has  worsened  the 
budgetary  position,  though.  In  a  letter  sent  on  9  May  2017,  Belgium  announced  further 
reforms, in particular regarding pensions. 

Overall,  the  analysis  presented  in  this  report  includes  the  assessment  of  all  the  relevant 
factors  and  notably:  (i)  the  previously  unfavourable  but  improving  macroeconomic 
conditions,  which  makes  them  less  of  a  factor  to  explain  Belgium's  large  gaps  as  regards 
compliance with  the debt  reduction benchmark;  (ii) the fact that, based on the Commission 
forecast,  the  deviations  from  the  required  adjustment  towards  the  MTO  point  to  a  risk  of 
some deviation in 2016 and 2017 individually, but to a significant deviation in 2016 and 2017 
together,  which  can  still  be  corrected  in  2017;  and  (iii)  the  implementation  of  growth-
enhancing structural reforms in recent years, several of which are considered substantial and 
projected to help improve debt sustainability. In concluding, the current analysis suggests that 
the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 should be 
considered as currently complied with. At the same time, additional fiscal measures are to be 
taken in 2017 to ensure broad compliance with the adjustment path towards the MTO in 2016 
and 2017 together. 

17