REPORT FROM THE COMMISSION Belgium Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2018-05-23
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Belgium, budget deficit, budgetary expenditure, economic conditions, gross domestic product, public debt, stability pact, stability programme, structural adjustment, tax reform

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.5.2018  COM(2018) 429 final  REPORT FROM THE COMMISSION Belgium  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
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  set  out  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. That 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.  

Data  notified  by  the  Belgian  authorities  on  29  March  20183  and  subsequently  validated  by 
Eurostat4 show that the general government deficit in Belgium reached 1.0% of GDP in 2017, 
while debt stood at 103.1% of GDP, above the 60% of GDP reference value. For 2018, the 
notification  planned  a  deficit  of  0.9%  of  GDP  and  a  debt  ratio  of  100.5%  of  GDP,  while 

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). 

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  69/2018,  http://ec.europa.eu/eurostat/documents/2995521/8824490/2-23042018-

AP-EN.pdf/6e5b346e-e302-4132-920a-854b00ac196d 

1 

 
 
 
                                                            
Belgium’s  2018  Stability  Programme  (SP),  received  by  the  Commission  on  27  April  2018, 
plans a deficit of 1.0% of GDP and a debt ratio of 101.2% of GDP. 

The notified data show that Belgium did not comply with the debt reduction benchmark5 in 
2017  (see  Table  1),  as  the  gap  to  the  benchmark  is  0.9  percentage  points  (pp.)  of  GDP. 
Belgium is forecast not to comply with the debt reduction benchmark in 2018 and 2019 as its 
debt-to-GDP  ratio  is  expected  to  remain  0.9  pp.  of  GDP  above  the  forward-looking  debt 
reduction benchmark according to the Commission 2018 spring forecast. On the basis of the 
scenario included  in  the 2018 SP compliance  with  the debt criterion is planned  as of 2018, 
with an overachievement of the forward-looking debt reduction benchmark by 0.1pp. and 0.7 
pp. of GDP in 2018 and 2019 respectively.  

Belgium's non-compliance with the debt reduction benchmark in 2017 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 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 
2018 spring forecast, released on 3 May 2018. 

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

2. 

DEFICIT CRITERION 

Belgium’s general government deficit narrowed from 2.5% of GDP in 2016 to 1.0% in 2017. 
According to the Commission 2018 spring forecast, the deficit would widen slightly to 1.1% 
in  2018,  still  respecting  the  3%  of  GDP  Treaty  reference  value.  In  2019,  the  Commission 
forecast  projects  the  deficit  to  rise  further  to  1.3%  of  GDP  under  a  no-policy-change 
assumption.  

The multiannual trajectory included in the 2018 SP puts forward a stabilisation of the deficit 
to  1.0%  in  2018  and  a  reduction  to  0.7%  in  2019.  The  difference  in  2018  between  the 

5    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. 

2 

COMSPCOMSPDeficit criterionGeneral government balance-3.1-2.5-2.5-1.0-1.1-1.0-1.3-0.7General government gross debt107.0106.1105.9103.1101.5101.2100.299.4Gap to the debt reduction benchmarkn.r.n.r.n.r.0.90.9-0.10.9-0.7Change in structural balance0.10.70.10.8-0.10.2-0.30.2Required MLSA1.42.23.2n.r.n.r.n.r.n.r.n.r.20152014Debt criterion201720162019Source: 2018 Stability Programme (SP) and Commission 2018 spring forecast (COM)2018 
 
 
 
                                                            
Commission  forecast  and  the  SP  stems  from  a  number  of  measures  that  have  not  been 
included  in  full  in  the  Commission  forecast,  e.g.  tax  regularisation  or  anti-fraud  measures. 
For 2019 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  

Public debt peaked at  107%  of GDP in  2014 and fell  to 105.9%  in  2016. In  2017 debt  fell 
further to 103.1% of GDP thanks to a growing primary surplus, a downward snowball effect 
(lower  interest  payments  combined  with  higher  nominal  GDP  growth)  and  negative  stock-
flow adjustments. Debt dynamics are discussed in more detail in Section 4.3. 

The Commission forecast expects a mild debt reduction in coming years, to 101.5% of GDP 
in  2018  and  100.2%  in  2019.  The  annual  downward  impact  of  2.1  pp.  of  GDP  on  average 
rendered  by  primary  surpluses  and  the  snowball  effect  is  projected  to  be  partially  offset  by 
upward stock-flow adjustments in 2018-2019. The gap towards the debt reduction benchmark 
would remain unchanged in 2018 and 2019 at 0.9 pp. These projections do not account for 
the impact of potential financial sector asset sales. 

According to Belgium's 2018 SP the debt ratio would decline to 101.2% of GDP at the end of 
2018  and  to  99.4%  of  GDP  in  2019.  The  difference  from  the  Commission's  projection  at 
unchanged policy mainly stems from a lower planned headline deficit in the SP with broadly 
similar nominal growth assumptions, and slightly lower stock-flow adjustments in 2018.   

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. Since 2017, after the end of the transition 

3 

2014201520162017COMCOMCOMCOMCOMSPCOMSPGovernment gross debt ratio 107.0106.1105.9103.1101.5101.2100.299.4Change in debt ratio b (1 = 2+3+4)1.5-0.9-0.1-2.8-1.6-1.9-1.4-1.9Contributions:• Primary balance (2)-0.2-0.5-0.4-1.4-1.2-1.3-0.8-1.5• 'Snowball' effect (3)1.20.4-0.3-1.3-1.1-1.1-1.2-1.1of which:     Interest expenditure3.33.02.92.52.32.32.22.2Real GDP growth-1.4-1.4-1.5-1.7-1.8-1.8-1.7-1.7Inflation (GDP deflator)-0.7-1.1-1.6-1.9-1.6-1.6-1.7-1.5• Stock-flow adjustment (4)0.5-0.70.6-0.10.70.50.70.7Notes:20192018where t is a time subscript; D, PD, Y and SF are the stock of government debt, the primary deficit, nominal GDP and the stock-flow adjustment respectively, and i and y represent the average cost of debt and nominal GDP growth. The term in parentheses represents the “snow-ball” effect, measuring the combined effect of interest expenditure and economic growth on the debt ratio.Source: 2018 Stability Programme (SP) and Commission 2018 spring forecast (COM)a In percent of GDP.b The change in the gross debt ratio can be decomposed as follows:tttttttttttttYSFyyiYDYPDYDYD1*1111 
 
 
period,  the  standard  debt  reduction  benchmark  is  applicable.  The  notified  data  show  that 
Belgium did not comply with the debt reduction benchmark in 2017 (see Table 1), as the gap 
to the benchmark is 0.9 % of GDP. Belgium is forecast not to comply with the debt reduction 
benchmark  in  2018  and  2019  as  its  debt-to-GDP  ratio  is  expected  to  remain  0.9%  of  GDP 
above the debt reduction benchmark according to the Commission 2018 spring forecast.  

On  the  basis  of  the  scenario  included  in  the  2018  SP,  compliance  with  the  debt  criterion 
would  be  ensured  as  of  2018  as  the  gap  to  the  forward-looking  debt  reduction  benchmark 
would  be  -0.1%  of  GDP  in  2018  and  -0.8%  of  GDP  in  2019.  The  2017  SP  planned 
compliance with the debt criterion as of 2019. The difference with the Commission forecast 
is due to a deficit reduction that is 0.1% higher in 2018 and 0.6%. higher in 2019 given that 
the Commission forecast is based on a no-policy change assumption whereas the SP reflects 
the planned effort. Part of the difference for 2018 also stems from lower expected stock flow 
adjustments  in  the  SP.  In  addition,  the  differences  in  the  forward-looking  debt  reduction 
benchmark  between 
the  SP  also  reflect  different 
macroeconomic  assumptions  taken  from  2020,  beyond  the  Commission  spring  forecast 
horizon, which impact the estimate of public debt in the medium term. Broadly speaking, the 
technical  assumptions  followed  by  the  Commission  beyond  its  forecast  horizon  are  more 
conservative than those of the SP, resulting in a slower debt reduction. 

the  Commission  forecast  and 

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  2017  outturn  data  and  the 
Commission  2018  spring  forecast  as  well  as  the  2018  SP  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; 

4 

 
 
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 
(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  makes  it  more 
demanding for a Member State to comply with the debt reduction benchmark. 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 

Macroeconomic  conditions  have  improved  and  can  no  longer  be  argued  to  be  a  major 
mitigating factor in explaining Belgium’s gaps to compliance with the forward-looking debt 
reduction  benchmark.  Although  a  protracted  period  of  low  inflation  until  2015  made  debt 
reduction more difficult, nominal growth is expected to remain robust until 2019.  Belgium 
made  limited  progress  in  addressing  the  2017  CSRs,  but  undertook  important  structural 
reforms in the past years to increase the sustainability of the pension system and to reform 
taxation and wage indexation so as to support competitiveness.  

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 slighlty dipped to 1.2% in 2016 as the security situation linked to 
the  terrorist  attacks  of March  2016  is  considered  to  have had  a  negative,  though  transitory, 
impact  on  the  Belgian  economy.  Growth  rose  again  to  1.7%  in  2017  and  is  expected  to 
continue growing at around the same pace according to the Commission 2018 spring forecast, 
reaching 1.8% in 2018 and 1.7% in 2019 on the back of domestic demand, more specifically 
private consumption and investment. 

Potential growth estimates for Belgium are rather moderate, at 1.4% on average over 2015-
2019.  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 

5 

 
 
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  2017 
compared to a trough of -1.6% in 2013. It is expected to close in 2018 and rise to 0.4% in 
2019. 

After  a  protracted  period  of  low  domestic  price  growth  until  2015,  inflation  accelerated  in 
Belgium to 1.8% in 2016 and 2.2% in 2017. 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 benchmark. 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 debt reduction benchmark in past years.  

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 (0.9% of GDP in 2017). While the GDP deflator is expected 
to decline slightly from 1.9% in 2017 to 1.6% in 2018, nominal growth is expected to remain 
robust at 3.4% in 2018 and 2019. 

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  2017  interest  expenditures  fell  by  approximately  1.5  pp.  of  GDP 
amounting to a decrease in interest expenditure of 0.1 pp. of GDP in 2016 and 0.4 pp. of GDP 
in 2017. Against that background of falling interest expenditure, the change in the structural 
balance  in  2017-2018  according  to  the  Commission  forecast  (0.8  pp.  and  -0.1  pp. 
respectively)  is  accompanied  by  an  improvement  in  the  structural  primary  balance  in  2017 
and a deterioration in 2018 (0.5 pp. and -0.3 pp. respectively). The sensitivity analysis in the 
2018 SP highlights how a linear increase of the yield curve by 100bp would imply 0.07% of 

6 

 2014201520162017COMCOMCOMCOMCOMSPCOMSPReal GDP (% change)1.41.41.51.71.81.81.71.7GDP deflator (% change)0.71.11.61.91.61.61.71.6Potential GDP (% change) 1.01.21.41.41.41.31.41.4Output gap (% of potential GDP)-0.8-0.6-0.5-0.20.10.10.40.4General government gross debt107.0106.1105.9103.1101.5101.2100.299.4General government balance-3.1-2.5-2.5-1.0-1.1-1.0-1.3-0.7Primary balance0.20.50.41.41.21.30.81.5One-off and other temporary measures0.30.10.00.40.20.00.1-0.1Government gross fixed capital formation2.32.32.22.22.42.42.52.4Cyclically-adjusted balance-2.6-2.1-2.2-0.9-1.2-1.1-1.6-1.0Cyclically-adjusted primary balance0.70.90.71.61.11.20.61.2Structural balanceb-2.9-2.2-2.1-1.3-1.4-1.1-1.7-0.9Structural primary balance0.30.80.71.20.91.30.51.320192018Source: 2018 Stability Programme (SP) and Commission 2018 spring forecast (COM)b Cyclically-adjusted balance excluding one-off and other temporary measures.a In percent of GDP unless specified otherwise.Notes: 
 
 
 
 
GDP higher costs in 2018, rising to 0.25% of GDP in 20216, 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. 

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 2018 Country report for Belgium concluded that the country had 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 and with improving 
the composition of public expenditure. While the Concertation Committee for the first time 
approved the overall budgetary trajectory included in the 2018 SP, no agreement was made 
on  annual  fiscal  targets  at  all  levels  of  government.  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.  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  still  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. Additional measures were announced after the Country report publication. Further 
steps  have  been  made  towards  the  adoption  of  the  necessary  amendments  to  increase  the 
independence of the national fiscal council.  

The Country report highlights as well the reform of the corporate income tax, adopted at the 
end of 2017, which lowered statutory rates and contributes to simplify the tax system through 
the revision of possibile deductions and exemptions. Still, many exemptions and distortionary 
incentives remain and the opportunity to shift taxes to more growth-friendly bases could have 
been  further  used.  The  report  also  aknowlegdes  that,  over  the  course  of  the  last  few  years 
some progress has been made regarding a number of challenges. Measures have notably been 
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. Nevertheless, despite the recent reforms, the Belgian tax system 

6 Stability Programme Belgium 2018-2021, p. 20. 

7 

 
 
                                                            
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.  

As was already discussed in previous Article 126(3) reports, Belgium has also modernised its 
public pension system in recent years. Pension reforms were adopted in 2015, reducing early 
exit possibilities 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 2015 projections of 
the  Ageing  Working  Group:  pension  expenditures  are  projected  to  rise  by  1.3  pp.  of  GDP 
between 2013 and 2060, compared to 3.3 pp. before the most recent reforms. The difference 
is  mostly  due  to  the  pension  reform  itself  (-1.6%  of  GDP).  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. While the positive impact of the 2015 
pension  reforms  is  not  put  in  question,  the  forthcoming  2018  projections  of  the  Ageing 
Working  Group  project  a  higher  than  previously  expected  increase  in  the  pension 
expenditure;  the  upward  revision  is  almost  exclusively  due  to  less  favourable  demographic 
projections. In 2017 an agreement was reached about the harmonisation of the valorisation of 
years  of  study  in  the  three  pension  schemes,  which  is  estimated  to  lower  the  projected 
increase  in  ageing  costs  by  0.1%  of  GDP  in  2060.  Thus,  although  already  enacted  reforms 
have 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  term.  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% per 
year until 2007 to 1.9% in 2016.  By the end of its term in 2019, the 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.  

4.2.  Medium-term budgetary position 

The ex-post assessment of Belgium’s compliance with the preventive arm finds that there is 
currently  not  sufficiently  robust  evidence  to  conclude  on  the  existence  of  a  significant 
deviation from the adjustment path towards the MTO in Belgium in 2017 and over 2016 and 
2017  together.  As  regards  2018,  the  fiscal  adjustment  is  not  expected  to  be  sufficient  to 
comply with the preventive arm requirements for Belgium.  

Headline, structural balance and adjustment towards the MTO  

Headline balance 

Belgium's headline deficit fell from 2.6% of GDP in 2016 to 1.0% in 2017. The revenue-to-
GDP ratio rose by 0.4 pp. of GDP while the expenditure-to-GDP ratio fell by 1 pp. of GDP. 
The  2017  headline  deficit  was  impacted  by  additional  expenditure  related  to  exceptional 
security  measures  in  the  light  of  the  terrorist  threat.  According  to  the  Commission,  the 
eligible additional expenditure in 2017 amounted to 0.02 % of GDP. 

8 

 
 
MTO and structural balance 

The 2018 Stability Programme does not provide information on the budgetary impact of the 
exceptional  security-related  measures  in  2017.  However,  the  Belgian  authorities,  in  a  letter 
dated  9  May  2018,  provided  adequate  evidence  of  the  scope  and  nature  of  those  additional 
budgetary costs. According to the Commission, the eligible additional expenditure linked to 
the security measures amounted to 0.02% of GDP in 2017. The provisions defined in Article 
5(1) and Article 6(3) of Regulation (EC) No 1466/97 allow for that additional expenditure to 
be catered for, in that the severity of the terrorist threat is an exceptional event, its 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 2017 has consequently been reduced from 0.6% of GDP to 0.58% 
of GDP.   

In the 2016 SP, 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 2018 SP, Belgium confirmed the MTO but 
postponed the planned achievement of it from 2019 to 2020. According to the Commission 
2018 spring forecast, this would require a structural improvement of 1.4% of GDP over 2018-
2020. At the same time, the Commission forecast expects the structural balance to deteriorate 
by 0.1 pp. of GDP in 2018 and 0.3 pp. of GDP at unchanged policy in 2019, the last year of 
the  Commission  projections.  According  to  the  High  Council  of  Finance  the  implied 
deterioration  in  2020  would  represent  0.02%  of  GDP7.  As  a  result,  achieving  the  MTO  in 
2020 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. 

Compliance with the recommended adjustment towards the MTO 

In  2017,  Belgium  was  recommended  to  pursue  an  annual  structural  adjustment  towards  the 
MTO    –  corrected  for  the  impact  of  unusual  events  –  of  at  least  0.58%  of  GDP.  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),  leading to  a  gap  of  0.4%  of  GDP,  pointing  to 
some  deviation.  The  structural  balance  is  estimated  to  have  improved  by  0.8%  of  GDP  in 
2017,  0.2%  of  GDP  above  the  recommended  effort  of  0.58%  of  GDP,  pointing  to 
compliance. 

However,  over  2016  and  2017  together,  the  average  deviations  were  larger  in  view  of  the 
deviation  that  was  also  observed  in  2016,  when  Belgium  was  recommended  to  pursue  an 
annual structural adjustment towards the MTO  – corrected for the impact of unusual events – 
of  at  least  0.47%  of  GDP.  Indeed,  over  those  two  years,  the  deviation  based  on  the 
expenditure  benchmark  amounted  to  0.5%  of  GDP,  above  the  treshold  of  significance.  In 
turn, the structural balance points to a deviation of 0.1% of GDP, pointing to some deviation.  

This  calls  for  an  overall  assessment,  in  which  the  following  three  main  factors  are  to  be 
considered: 

7 High Council of Finance (2018), Avis 'Trajectoire budgétaire en préparation du Programme de Stabilité 2018-
2021'. Based on data provided by the Federal Planning Bureau. 

9 

 
 
                                                            
First, the change in the structural balance was inter alia positively impacted by lower interest 
expenditure,  contributing  to  0.4  pp.  of  GDP  of  the  change.  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. 

Second, both in 2016 and 2017, the expenditure aggregate was negatively impacted by higher 
than expected inflation. Whereas the reference growth rate for the expenditure benchmark is 
based  on  a  GDP  deflator  forecast  of  1.0%  for  2016  and  1.5%  for  2017,  the  actual  GDP 
deflator used for the structural balance amounted to 1.6% in 2016 and 1.9% of GDP in 2017. 
The impact on expenditure growth from higher than anticipated inflation transpired in the fact 
that the automatic indexation of social benefits and public sector wages occurred earlier than 
expected  in  the  Commission  forecast.  While  the  inflation  surprise  resulted  in  higher-than-
expected public expenditure, it had a positive impact on tax revenues (as private wages are 
generally  indexed  to  inflation).  However,  the  expenditure  benchmark  only  captures  the 
expenditure side and thus the negative impact of the inflation surprise, and therefore under-
estimates the underlying fiscal effort. The impact of higher inflation was estimated at around 
0.2% of GDP for 2016 and 0.1%  of GDP in 2017, correcting the GDP deflator for the share 
of  public  expenditure  directly  indexed  on  inflation.  The  deviation  for  the  expenditure 
benchmark would thus be reduced from 0.43% to 0.37% of GDP in 2017 and from 0.5% to 
0.4% of GDP over 2016 and 2017 together. 

Third, there are substantial uncertainties regarding the treatment of the substantial increase in 
advanced corporate income tax payments collected in 2017 (around ½ % of GDP in 2017). 
This  revenue  increase  stems  notably  from  the  introduction,  in  2017,  of  significantly  higher 
surcharges for non-payment of advanced tax payments. This measure introduces a permanent 
change in the timing of recurrent revenue, by shifting -at least in part- tax collection from ex-
post  tax  settlement  to  advance  tax  payments,  and  therefore  it  creates  an  exceptional  and 
temporary peak in tax revenue in 20178. In the baseline scenario of the 2018 spring forecast, 
the Commission considered that any tax collection in excess of the trend was to be considered 
as  a  one-off,  temporary  revenue,  which  would  eventually  be  offset  by  lower  tax  settlement 
revenue in the following years.  

However, other analyses, such as that of the National Bank of Belgium or of the government, 
consider  a  higher  share  of  the  CIT  revenue  increase  in  2017  as  structural.  While  the 
Commission acknowledges that this is indeed a possibility which should not be discarded, it 
considered it as an upside risk rather than a factor to be integrated in the baseline scenario. 
The uncertainty surrounding this measure is highlighted by the fact that its permanent impact 
will only be measurable after several years, while the outturn corporate income tax data for 
2018 will provide a preliminary indication of the magnitude of the impact.  

This  issue  will  remain  relevant  over  the  coming  years,  given  that  from  1  January  2018  the 
surcharge  rate  will  further  increase,  from  the  current  2.25%  to  6.75%,  while  the  currently 
applicable  credit  rate  rewarding  sufficient  tax  advanced  payment  will  also  be  adjusted. 
Advanced payments are thus expected to become considerably more important for companies 
that are interested in avoiding extra tax liabilities. 

8 European Commission, Report on Public Finances in EMU 2015, p. 58. 

10 

 
 
                                                            
Amid such uncertainty as to the future evolution of corporate income tax revenue, it is worth 
noting  that  an  ex  post  upward  revision  of  the  permanent  effect  of  the  measure  could 
considerably  improve  the  assessment  of  the  underlying  budgertary  position  and  potentially 
reduce  the  deviation  from  the  expenditure  benchmark  in  2017,  bringing  it  below  the 
significance threshold.  

Therefore,  in  the  context  of  this  report,  the  relatively  more  conservative  stance  from  the 
Commission  clearly  represents  a  relevant  factor to  be  considered  in  the overall  assessment, 
given both the magnitude of the extra revenues (around ½ % of GDP in 2017), as well as the 
high level of uncertainty as regards the extent of their temporary nature.  

On  that  basis,  while  the  deviation  from  the  adjustment  path  towards  the  MTO  in  2016  and 
2017  together  remains  significant  when  taking  into  account  the  impact  of  the  higher-than-
anticipated  inflation  on  the  share  of  public  expenditure  directly  indexed  on  inflation,  the 
Commission  is  of  the  view  that,  given  the  high  uncertainty  regarding  the  treatment  of  the 
additional corporate income tax revenues, there is currently not sufficiently robust evidence 
to  conclude  on  the  existence  of  a  significant  deviation  in  Belgium  over  2016  and  2017 
together. 

In  2018,  Belgium  is  recommended  to  pursue  an  annual  structural  adjustment  towards  the 
MTO  translating  into  a  nominal  growth  rate  of  net  primary  government  expenditure  which 
does not exceed 1.6%, which would correspond to a structural adjustment of at least 0.6% of 
GDP.  Based on the Commission spring forecast, the growth rate of the expenditure aggregate 
is  projected  to  exceed  the  expenditure  benchmark,  leading  to  a  gap  of  0.8%  of  GDP  that 
points to a risk of significant deviation. At -0.1% of GDP in 2018, the projected deterioration 
in  the  structural  balance  also  significantly  deviates  from  the  recommended  structural 
adjustment. Over 2017 and 2018 taken together, the expenditure benchmark points to a risk 
of significant deviation, with an average deviation of -0.6% of GDP. The projected 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 2017 discussed supra (estimated at 
0.1% of GDP), the deviation for the expenditure benchmark in 2017-2018 remains 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. As a 
result,  the  overall  assessment  points  to  a  risk  of  a  significant  deviation  from  the 
recommended adjustment path towards the MTO in 2018 over 2017 and 2018 taken together.   

Public investment 

Over the forecast horizon, public investment is projected to rise 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. From 2009 to 2016, public investment was lower 
than the general government deficit, but the latter fell below the investment ratio in 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 

11 

 
 
Between  1997  and  2007,  Belgium's  government  debt-to-GDP  ratio  decreased  by  36  pp., 
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 107% of GDP in 2014, 
an increase of 20 pp. It compares to an increase of 27 pp. in the euro area.  

The  main  drivers  behind  the  increase  between  2007  and  2014  were  the  upward  snowball 
effect (+10.5 pp.) and stock-flow adjustments (+9.4 pp.), 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  pp.  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.  

Graph 1. Drivers of "snowball effect" on government debt 

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  3.9%  of  GDP  in  2012-
2017.  Remaining  participations  include  a  share  of  7.8%  in  BNP  Paribas,  100%  of  Belfius, 
100% of insurer Ethias (including stakes of regional and local authorities), and 50% of Dexia 
bank. Dividends paid by financial institutions represented about 0.1% of GDP in 2017.  

The  negative  stock-flow  adjustment  of  0.1%  of  GDP  in  2017  mainly  reflects  interest  rate 
swaps, income from the sale of shares in BNP Paribas, 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 

12 

 
 
 
the  attainment  of  substantial  primary  surpluses  allowed  for  an  annual  debt  reduction  of 
around 5 pp. 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 
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  2018  spring  forecast,  the  debt-to-GDP  ratio  would  fall  by 
1.6 pp. in 2018. A primary surplus of 1.2% of GDP and a sizeable downward snowball effect 
of 1.1% of GDP as a result of rising nominal growth and decreasing interest expenditures are 
partially offset by upward stock-flow adjustments stemming from loans at the regional level 
for  the  financing  of  social  housing  investment  and  interest  rate  swaps.  The  same  trend  is 
expected in 2019 when debt would decrease to 100.2% 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 averaged 0.85% during the first quarter of 2018. The 
spread  between  Belgian  and  German  bonds  has  been  broadly  stable  for  several  years.  It 
averaged    32,  37,  41  and  30  basis  points  in  2015,  2016,  2017  and  the  first  quarter of  2018 
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 2.4% in 2017. It 
is projected to decline further to 2.1% in 2019.  

Debt sustainability 

Graph 2 : Debt projections in successive stability programmes (% GDP) 

Belgian  authorities  have  been  using  favourable  market  conditions  to  refinance  the 
outstanding  debt  against  much  lower  rates  at  considerably  longer  maturity.  The  average 
maturity  of  long-term  issuance  remained  at  a  high  level  at  15  years  in  2017  (17.5  years  in 
2016  and  13.6  years  in  2015)  with  an  average  weighted  yield  of  0.9%  (0.8%  in  2016  and 

13 

 
 
 
0.9% in 2015). As a result, the average life to maturity of the total federal debt portfolio9 rose 
to 9.3 years at the end of 2017 and 9.2 years at the end of February 201810. It is the longest 
ever  and  compares  to  around  6  years  until  2009  and  8  years  at  the  end  of  201511.  The  12-
month and 60-month refixing risk12 of the federal debt decreased from around 20% and 57% 
at the end of 2012 to around 18.5% and 41.9% at the end of 201713. 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 94.8% of GDP by 202814. A 1 pp. 
increase in the interest rate assumptions or 0.5 pp. lower GDP growth would bring the debt 
level to 100% of GDP in 2028. 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 
76%  of  GDP  by  2028.  However,  the  fiscal  effort  required  for  reaching  the  MTO  is 
substantial,  considering  that  the  structural  deficit  is  estimated  at  1.6%  of  GDP  in  2019  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).  

9  The federal debt represents 84% of the general government debt. 
10   Belgian Debt Agency, Annual report 2017. 
11  Belgian Debt Agency, Borrowing requirements & Funding plan 2018. 
12  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. 

13  Belgian Debt Agency, Borrowing requirements & Funding plan 2018. 
14  2017  Debt  Sustainability  Monitor.  Those  projections  start  from  the  European  Commission  2018  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 (2019). 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 

 
 
                                                            
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% of GDP as of 2017 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 7.8% of GDP as of April 2018, down from 8.7% at the end of 2016.  

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 2018 pointed to 
a  risk  of  non-compliance  with  the  provisions  of  the  SGP  in  2017-2018  and  invited  the 
authorities to implement  all  planned  measures  within the national budgetary  process and to 
ensure  that  the  2018  budget  complies  with  the  SGP.  The  federal  budget  was  adopted  by 
Parliament  on  14  December  2017  without  major  changes  compared  to  the  Draft  Budgetary 
Plan.  In  March  2018  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  and revenue measures announced as well. The 
overall impact of the March review on the Commission projections is estimated at 0.1 pp. of 
GDP in 2018. 

4.5. 

Other factors put forward by the Member State 

On  9  May  2018,  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. 

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. The authorities also highlight the planned increase 
in  public  investment  through  a  national  strategic  investment  pact,  which  is  expected  to 
support potential growth. In their letter, the Belgian authorities also point to the fact that the 
debt  ratio  has  fallen  since  2015  and  would  continue  decreasing.  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.  According  to  the  authorities' 
calculations, the budgetary path presented in the 2018 SP should enable compliance with the 
debt criterion by 2018. 

Furthermore,  the  authorities  invoke  exceptional  costs  related  to  the  refugee  situation  and 
security measures. While they are neutralised with respect to the adjustment path towards the 
MTO  through  the  application  of  the  unusual  event  clause  (see  section  4.2),  they  have  an 
impact  on  the  headline  balance  and  thus  on  public  debt  developments.  Overall,  the 
exceptional costs amounted to 0.3% of GDP in 2017 according to the authorities. The letter 
provides adequate evidence of the scope and nature of those additional budgetary costs linked 
to  the  exceptional  security-related  measures.  According  to  the  Commission,  the  eligible 
additional  expenditure  linked  to  the  exceptional  security  measures  amounted  to  0.02%  of 
GDP, in 2017. 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 severity of the terrorist 

15 

 
 
threat  is  an  exceptional  event,  its  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  2017  has 
consequently been reduced from 0.6% of GDP to 0.58% of GDP. 

The letter also provides some explanatory factors for the significant rise in corporate income 
tax advanced payments in 2017. On the one hand, it is presented as the result of a structural 
increase  in  advance  payments  due  to,  among  other  things,  the  reduced  notional  interest 
deduction  rate  and  the  increase  in  the  gross  operating  surplus  of  companies.  On  the  other 
hand, the government considers there is a one-off effect due to a shift from tax enrolments to 
prepayments  as  a  result  of  the  increased  penalty  for  companies  that  do  not  make  advance 
payments as from 1 January 2017.The letter argues that the high tax payments received in the 
first quarter of 2018 lend additional credibility to the authorities' assumption. 

Finally,  the  authorities  detail  the  main  factors  behind  the  higher-than-expected  inflation  in 
2017, which can be mostly explained by a strong year-on-year increase in the price of energy 
products. 

 5. 

CONCLUSIONS 

General government gross debt stood at 103.1% of GDP at the end of 2017, well above the 
60% of GDP reference value. Belgium did not comply with the debt reduction benchmark in 
2017. Moreover, the Commission forecast does not expect Belgium to comply with the debt 
reduction  benchmark  either  in  2018  or  in  2019,  based  on  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 2017. In line with 
the Treaty, this report also examined the relevant factors.  

Based  on  an  overall  assessment  of  compliance  with  the  preventive  arm,  and  given  large 
uncertainties  related  to  key  factors  of  fiscal  performance  in  2017,  there  is  no  sufficient 
evidence  to  conclude  that  Belgium  is  non-compliant  with  the  required  adjustment  path 
towards the MTO in 2017 and over 2016 and 2017 together. However, Belgium is assessed to 
be  at  risk  of  significant  deviation  in  2018  and  over  2017  and  2018  together.  Hence,  the 
necessary measures should be taken as of 2018 to comply with the provisions of the Stability 
and  Growth  Pact.  The  use  of  any  windfall  gains  to  further  reduce  the  general  government 
debt ratio would be prudent. 

Belgium  has  made  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 to the Commission on 9 May 2018, the Belgian 
authorities  highlighted  their  commitment  to  continue  structural  reforms,  in  particular 
regarding the pension system and the implementation of a strategic public investment plan. 

Finally, unfavourable economic conditions in the recent past partly explain non-compliance 
with the debt criterion in 2017. However, economic conditions have been improving and are 
no  longer  considered  a  mitigating  factor  in  explaining  Belgium's  gap  compared  to  the 

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forward-looking  dimension  of  the  debt  reduction  benchmark  in  both  2018  and  2019 
according to the Commission forecast. 

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  there  there  is  currently  not  sufficiently  robust 
evidence to conclude on the existence of a significant deviation in Belgium in 2017 and over 
2016 and 2017 together; 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. Overall, as there is currently not sufficiently robust evidence to conclude 
on  the  existence  of  a  significant  deviation  in  Belgium  in  2017  and  over  2016  and  2017 
together,  the  current  analysis  is  not  fully  conclusive  as  to  whether  the  debt  criterion  as 
defined  in  the  Treaty  and  in  Regulation  (EC)  No  1467/1997  is  or  is  not  complied  with.  
However,  the  adjustment  in  2018  appears  inadequate  to  ensure  compliance  with  the 
adjustment path  towards  the MTO in  2018 based  on the Commission  2018 spring forecast. 
The  Commission  will  reassess  compliance  on  the  basis  of  the  ex-post  data  for  2018  to  be 
notified in Spring 2019. 

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