Analysis: By Morningstar DBRS
The formation of a new government in Belgium is reducing policy uncertainty, but the political stability of the coalition will be tested by European Union fiscal rules calling for fiscal consolidation efforts.
The new government led by prime minister Bart De Wever of the New Flemish Alliance (N-VA) was sworn into office on Monday after the unveiling of a new five party government coalition three days earlier.
An agreement between four centre-right parties (N-VA, CD&V, Mouvement Réformateur, Les Engagés) and one centre-left party (Vooruit), known as “Arizona” because of the respective parties’ colours, was reached after more than seven months of protracted negotiations, complicated by diverging views on budget consolidation measures.
Belgium faces fiscal pressures as deficits are already relatively large and are projected to widen on a no policy change basis.
Planned Measures Reduce Policy Uncertainty
The government declaration put forward by De Wever is indicating intent to improve Belgium’s fiscal trajectory with tax, pension and labour market reforms. Revenue enhancing measures include the introduction of a 10% capital gains tax and the elimination of some tax deductions.
The government aims to increase the employment rate to 80%, up from 72.1% in 2023, through various fiscal incentives including the raising of tax brackets boosting net incomes (starting in 2027), lowering social contributions and by halving the marital quotient (from 2029 onwards).
On pensions, the proposals include the use of bonus-malus incentives to lower early retirement and motivate the elderly to continue working, although also opening the door for early retirement from the age of 60 after 42 years of work.
Preferential pension benefits for public officials will be reduced. Uncooperative long-term sick claimants will face reinforced sanctions to speed up their reintegration into the labour market.
Unemployment benefits, which currently are unlimited in time and not means-tested, would be limited to two years maximum (except for persons older than 55 years).
Health spending increases are planned to be contained by limiting the growth rate (“norme de croissance”) to 2-3% annually over 2026-29. Plans are in place to increase defence spending to 2% of GDP by 2029, up from a comparatively low 1.3% of GDP in 2024.
EU Fiscal Rules Raising Pressure
The medium-term impact of the proposed reforms on economic growth and the fiscal balance generally seem positive. The country has to deliver its budget to the European Commission by April.
The National Bank of Belgium (NBB) projects general government budget deficits to rise continuously to more than 6% of GDP by 2027 under a no-policy-change scenario, up from already relatively large deficits of more than 4% of GDP in 2023 and 2024.
The country’s debt burden is projected to increase to more than 110% of GDP over the same period, thus again returning to its pandemic peak level after temporary deleveraging as result of strong nominal GDP growth.
Rising interest expenditures and increasing ageing costs are projected to drive the further deterioration of Belgium’s fiscal trajectory. In this context, the excessive deficit procedure (EDP) initiated in July 2024 and EU fiscal rules call for large fiscal consolidation, thus increasing consolidation pressure for the new government.
Stability Tested by Challenging Budgetary Picture
The coalition’s formation took almost eight months and was complicated by disagreements about budgetary measures.
In principle, the solid parliamentary majority (81 out of 150 seats) and the detailed agreement on reforms prior to the government formation should ensure political stability. Nevertheless, broad and durable political consensus over the fiscal consolidation strategy has yet to fully crystallise.
While the long list of proposed measures in the government agreement is ambitious it faces implementation risks.
In general, we view the fragmentation of the domestic political landscape between the main linguistic groups (Flemish and Walloon) and across the political spectrum as an obstacle for reaching consensus in important policy areas and, therefore, for the adoption of structural reforms.
At the same time, the institutional framework in Belgium is strong, which is reflected in very high scores in the Worldwide Governance Indicators for rule of law, low levels of corruption and stable political and economic institutions.
Yet, further periods of political instability that lead to delays in fiscal consolidation could be considered negative for Belgium’s credit fundamentals.
