## 1. Macroeconomic Developments

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### Context and recent growth trends
- Growth outcomes and drivers:
  - Growth decelerated to 1.3 percent in 2023 and 1.2 percent (y/y) in 2024Q3.
  - Overall, growth in 2024 is expected at 1 percent.
  - Drivers of the slowdown: declining private investment, a drawdown in inventories, and a recent negative contribution from net exports.

### Labor market
- Key indicators:
  - Unemployment rate: 5.7 percent in 2024Q3.
  - Vacancy rates: declined from 5 percent in June 2022 to 4.2 percent in September 2024.
  - Employment rate: stabilized around 67 percent.
- Wages and productivity:
  - Nominal private sector wage growth moderated to 2.6 percent in September 2024 (from a high of 10.1 percent in March 2023).
  - Labor productivity growth remained sluggish.
  - Nominal unit labor costs rose more than the euro-area average.

### Inflation and expectations
- Headline and core:
  - Peak headline inflation: 13.1 percent y/y in October 2022.
  - Headline inflation remained at 4.4 percent y/y in January 2025.
  - Core inflation peak: 8.6 percent y/y in March 2023; stabilized around an elevated 3½ percent in 2024H2.
  - Core inflation dropped to 2.5 percent in January 2025 (helped by a decline in non-energy industrial goods prices).
  - Services price inflation: 4.1 percent in January 2025.
- Expectations:
  - Inflation expectations declined from their peak in 2022 but have been inching up again since 2024Q3.

### Financial sector soundness
- Asset quality, liquidity, profitability:
  - Non-performing loans: 2.1 percent of total gross loans at end-2024Q2.
  - System-wide liquidity buffers remained well above regulatory thresholds; overall buffers rose to €3.6 billion on October 1, 2024, from €2 billion in 2024Q1.
  - Bank profitability and capital adequacy remained robust; net interest margins benefitted from faster repricing of assets than deposits during monetary policy tightening.
  - Insurance sector profitable and solvent.
- Notable developments:
  - A one-year government bond that collected € 22 billion expired in September 2024 and was only marginally rolled over, leading to deposit inflows.
  - Share of new loans with loan-to-value (LTV) above 90 percent fell from 30 percent in 2019Q4 to 14 percent in 2024Q2.
  - Sectoral systemic risk buffer (SSyRB) lowered from 9 percent to 6 percent.

### External sector
- 2024 (preliminary) assessment and trends:
  - External position 2024 (preliminary): assessed as weaker than implied by medium-term fundamentals and desirable policies (Annex I).
  - Current account (CA) deficit narrowed to 0.2 percent of GDP in 2024Q1-Q3, from 0.7 percent of GDP in 2023.
  - Both exports and imports declined in 2024, driven by chemicals, pharmaceuticals, and transport equipment, with a larger decline in imports against stable terms of trade.
- Outlook:
  - Medium-term projection: external CA projected to return to small surpluses supported by improvements in the trade balance as energy prices ease and external demand increases.
- Annex I specific metrics (2024Q3, % GDP):
  - NIIP: 57.3
  - Gross Assets: 423.9
  - Debt Assets: 128.9
  - Gross Liab.: 366.6
  - Debt Liab.: 150.3
- External assessment (2024, % GDP):
  - CA: -0.3
  - Cycl. Adj. CA: 0.0
  - EBA Norm: 3.3
  - EBA Gap: -3.3
  - IMF staff CA gap range: –3.7 to –2.9 percent of GDP (standard error ±0.4 percent of GDP).
- REER and valuation:
  - ULC-based REER cumulative appreciation since Feb 2022: 18.0 percent; CPI-based REER cumulative appreciation: 4.6 percent.
  - IMF staff-assessed REER overvaluation range: 4.3 to 5.4 percent (midpoint 4.9 percent, elasticity 0.68).
  - EBA REER index and level models point to larger overvaluations (8.9 percent and 17.4 percent respectively).

### Fiscal developments and public debt
- Deficits and composition:
  - Overall deficit increased to 4.4 percent of GDP in 2024 from 4.2 percent in 2023.
  - Federal government overall deficit narrowed to 3.0 percent of GDP in 2024 from 3.3 percent in 2023.
  - Regions and communities’ aggregate deficit widened to 1.6 percent of GDP in 2024, driving the overall increase.
  - Key expenditure pressures: wage, social benefits, and interest expenses remained higher than pre-crises in percent of GDP.
- Debt and borrowing:
  - Public debt: 104 percent of GDP in 2024.
  - Aggregate debt of regional and community governments increased to 18 percent in 2024Q3 from 13 percent in 2019.
  - Average residual maturity of central government debt: 11.1 years in 2024.
  - Share of gross debt with residual maturity up to one year: 14 percent.
  - Belgium’s spreads: 61 bps as of 2/21/2025.
  - Public debt benefited from refinancing at low interest rates in 2017–21; spreads remain among the lowest in the euro area.

### Political context and planned reforms (coalition 2025–29)
- Government formation:
  - Federal and regional elections on June 9, 2024; federal coalition government formed on February 3, 2025.
  - New government led by Prime Minister De Wever; coalition of five parties: New Flemish Alliance, Mouvement Réformateur, CD&V, Les Engagés, and Vooruit.
- Selected planned reforms (high-level):
  - Tax and social benefits: enlarge zero-rate first PIT bracket; abolish tax reductions for unemployment benefits; reduce social security contributions on low wages; link social benefits to income/status; halve marriage quotient for non-pensioners by 2029; indexation exceptions for living wage and long-term unemployment benefits; central register of social assistance.
  - Capital gains: 10 percent on future realized capital gains of financial assets with an exemption of the first €10,000 of profit (indexed annually).
  - VAT/climate: increase VAT on coal from 12 percent to 21 percent; reduce VAT for supply/installation of heat pump from 21 percent to 6 percent for next 5 years; extend 6 percent VAT to demolition/reconstruction of dwellings; increase VAT for fossil fuel boilers from 6 percent to 21 percent.
  - Pensions: phased pension bonus/malus (2 percent to 5 percent bands), sectoral Pillar II employer contribution at least 3 percent by 2035, raise retirement age for some civil servants from 2027, allow retirement at 60 with 42 years of work from Jan 1, 2027 (current requirement 44 years), shift civil servant pension calculation to career-wide salary.
  - Labor market: limit unemployment benefits to max two years (exceptions for older workers); companies (except SMEs) to contribute 30 percent of sick pay for months 2–3; increase flex-jobs max annual income to €18,000 from €12,000; introduce annualization of working hours before June 30, 2025; limit severance pay to 52 weeks for new hires; maintain automatic-wage indexation (AWI) but request social partners to provide reform options by end-2026.
  - Institutional: abolish the Senate at next federal elections; create inter-federal frameworks for budget, energy, and climate.
  - Healthcare: increase preventive care, reduce cost of medicines, reduce dependence on traditional hospital admissions.

### Outlook and risks
- Baseline projections and fiscal path:
  - Output growth expected to gradually return to 1.3 percent potential in 2027.
  - Under unchanged policies, fiscal path: fiscal deficit would widen to 7.2 percent and public debt would continue rising to 123 percent of GDP in 2030.
- Risk assessment:
  - Baseline risks sizeable, tilted down for growth and up for inflation.
  - Downside growth risks: weaker external demand, deeper geoeconomic and trade fragmentation, further tariff barriers.
  - Upside inflation risks: adverse energy price developments, persistently-high core inflation affecting expectations.
  - Fiscal sustainability risk: higher borrowing costs in a scenario of increased global risk aversion could require abrupt fiscal consolidation with negative consequences for growth and financial stability.

---

### Fiscal consolidation, expenditure priorities, and reform recommendations

### Need, scale, and sequencing
- Rationale:
  - Pandemic and energy crisis increased deficits structurally via automatic indexation and higher healthcare spending.
  - Short-term consolidation needed to support disinflation given still-positive output gap, rising unit-labor costs, loosening of ECB policy, and upside inflation risks.
  - Longer-term aim: rebuild fiscal space for future shocks and preserve core of Belgium’s social model.
- EU excessive deficit procedure (EGF) and staff recommendation:
  - Since July 2024 Belgium subject to EGF: minimum reduction of structural fiscal balance of 0.5 percent of GDP per year until overall deficit falls below 3 percent of GDP (2029 in staff projection).
  - Staff recommendation: seven-year adjustment accompanied by significant credible growth-enhancing reforms and public investments.
  - Under seven-year adjustment scenario:
    - annual reduction of the structural primary balance of 0.6 ppt of GDP required to bring overall deficit below 3 percent of GDP and keep it there for ten years thereafter.
    - Gross public debt would decline to about 78 percent of GDP, 82 ppts of GDP lower than in the baseline.
    - Absent structural reforms to increase productivity, growth would be on average 0.5 ppt lower than in the baseline in 2025-31.

### Expenditure path and conservative assumptions
- Staff estimate for keeping deficit below 3 percent of GDP during 2031-41: average net primary expenditure growth through the adjustment period should not exceed 2 percent.
- This is lower than EC’s recommended 2.5 percent net primary expenditure average growth (EC uses higher revenue projection).
- Prudent assumption: limited short-term return on growth of reforms.

### Composition of adjustment and investment protection
- Core consolidation focus: rationalize social benefits and the public wage bill, aided by spending and tax expenditure reviews.
- Public investment should be preserved or increased to mitigate fiscal impact and support digitalization and the green transition.
- Accelerate implementation of investment and reform under the NGEU recovery and resilience plan.

### Sectoral efficiency opportunities (selected)
- Infrastructure: improve appraisal, selection, governance, and intergovernmental coordination.
- Healthcare: efficiency gains via preventive care, hospital organization reform, promoting generics to free resources for aging-related costs.
- Education:
  - Spending >6 percent of GDP, 1.5 percent of GDP higher than EU average and three large neighbors’ average.
  - Reforms could reduce spending by up to 1.4 ppts of GDP while achieving same outcomes or improve outcomes without higher spending.
  - Potential fiscal saving (ppt of GDP) if Belgium’s education efficiency matched peers:
    - France: 0.74
    - Germany: 1.38
    - Netherlands: 0.85
  - Potential increase in overall PISA score (percent) under those efficiencies:
    - France: 20
    - Germany: 45
    - Netherlands: 24

### Pension reform priorities
- Recommendations:
  - Raise effective retirement age in line with healthy-life expectancy via incentives and facilitation of longer employment.
  - Review eligibility criteria and controls for specific regimes (e.g., disability pensions).
  - Limit increases in pension benefits by reviewing automatic indexation and special provisions.
  - Regular reviews of pension policies.

### Tax policy guidance
- Objectives and observations:
  - Tax revenues high; recommend shifting part of tax burden from labor to capital with no revenue loss.
  - Belgium’s labor-tax wedge: 52.7 percent in 2023 for a single worker with no children earning the average wage (euro area average: 42 percent).
  - Capital treatment: capital gains largely tax exempt; recommendation to tax all income from capital similarly (interest, dividends, capital gains) ideally incorporating into taxable income subject to PIT.
  - Tax expenditures estimated at 6 percent of GDP in 2021 concentrated in VAT and PIT; reduction offers large simplification and efficiency gains.
  - Coordination of tax reform required across federal and federated entities.

### Fiscal institutions and accountability
- High Council of Finance (HCF) effectiveness challenged by fiscal federalism complexities.
- EGF provides opportunity for binding burden-sharing rules across entities via credible multi-year consolidation plan and strengthened accountability.
- Recommendations to strengthen HCF: enhanced staffing, direct reporting to parliaments, greater outreach.
- Authorities intend to pursue a 7-year adjustment under EGF broadly consistent with staff recommendations.

---

### Financial sector recommendations, labor market and productivity reforms, and green transition

### Financial sector (FSAP follow-up and priorities)
- Outstanding legislative actions and supervisory gaps:
  - Institutional framework for macroprudential policy unchanged; staff recommended enhancing NBB’s powers to activate/recalibrate capital requirements and set binding borrower-based measures independently of government.
  - Legislation drafted but delayed until new government formed.
  - Outstanding measures in insurance supervision, AML/CFT, and corporate governance require legislative action.
- Progress and implementation highlights:
  - NBB and FSMA signed formal agreement on investment funds data sharing in 2023; FSMA stress tests planned and first tests conducted in 2023.
  - DIS fund segregated from national budget; target level increased to 1.8 percent of covered deposits; operational readiness for 7 working days pay-outs tested.
  - Macroprudential buffers: CCyB activated (1 percent effective October 1, 2024); overall buffers rose to €3.6 billion on October 1, 2024.
  - Recommendations for NBB autonomy and transparency remain pending; NBB Board supports enhanced autonomy for capital-based measures but opposes extending powers over binding borrower-based measures.
  - Deposit Insurance and crisis management: national resolution handbook work underway; ELA cooperation and policies in development.

### Labor market reform priorities
- Key constraints:
  - Labor market fragmentation and rigidity, coexistence of high vacancy and high unemployment sectors/regions.
  - Employment gaps: low-skilled workers, older workers, women, individuals with immigration background, and persons with disabilities.
- Reform directions:
  - Increase labor force participation and incentives to (re-)enter the workforce.
  - Increase income gap between work and nonwork.
  - Reduce cost of hiring and dismissal; upskill the workforce.
  - Specific measures: reduce duration of unemployment benefits (government intends two-year limit), strengthen active labor market policies, reintegrate long-term sick employees, link social benefits to income levels rather than employment status.
- Wage-setting:
  - Current near-universal automatic indexation and the 1996 wage law create a wage corridor and have increased fiscal deficits and labor-costs relative to peers.
  - Recommendations: consider abolishing automatic indexation and the 1996 wage law or technically reform indexation (exclude volatile items, widen comparator set, use unit-labor costs, allow partial indexing).

### Productivity, firm dynamics, and product market reform
- Innovation and TFP:
  - Belgium among most innovative in Europe; innovation income deductions (since 2017) allow deduction up to 85 percent of net income from innovation, reducing effective corporate taxation to as low as 3.75 percent and boosting R&D spending.
  - Despite high innovation investment, TFP growth lags peers—indicating stalling diffusion and weak transmission from innovation to productivity.
- Firm dynamics constraints:
  - Low firm entry/exit rates; declining startup quality; share of one- to four-year-old firms in highest productivity decile falling.
  - Support measures may crowd out more productive firms.
- Product market and insolvency reforms:
  - Need to reduce regulatory/administrative barriers, improve insolvency regime (creditors cannot initiate restructuring; delays; court involvement).
  - Closing half the gap with top three European advanced economies could boost TFP by about 3½ percent long run.
- EU integration and capital markets:
  - Deepening the single market and capital market union would help access, competition, and finance for firms; develop venture capital within EU-wide capital market union push.

### Green transition: progress gaps and financing
- Emissions and renewables projections by 2030 (FPB May 2024):
  - Residential sector: 54 percent emissions reduction.
  - Services sector: 62 percent emissions reduction.
  - Transport sector: 11 percent emissions reduction.
  - FPB projects emissions decrease by 32 percent in 2030 vs 2005; falls short of draft NECP target 43 percent and EU Effort Sharing Regulation 47 percent.
  - FPB anticipates Belgium will derive 24 percent of energy from renewables by 2030 (European target 34 percent).
- Policy and financing recommendations:
  - Expand EU ETS participation, adjust VAT to favor green energy, timely implement carbon taxation, phase out fossil fuel subsidies with support for vulnerable populations.
  - Consolidate federal and regional climate efforts into a coherent national strategy; final NECP pending Flemish contribution.
  - Belgium may receive ETS2-derived financing via European Social Climate Fund conditional on Social Climate Plan by end-June 2025.

---

### Staff appraisal and final priorities
- Short-term: see disinflation through while preserving growth and financial stability.
- Longer-term: rebuild buffers, reduce vulnerabilities from high and rising public debt, address aging and green transition spending pressures, foster higher growth, and improve external position.
- Policy window: the new government’s agenda—significant structural reforms and fiscal consolidation—provides an opportunity; steady and timely implementation is key.

*Source: 1. Macroeconomic Developments (chapter) and IMF staff report excerpts from 1belea2025001-print-pdf*

### 1. Macroeconomic Developments  __________________________________________________________________ 32

### 1. Macroeconomic Developments

### Context and Recent Developments
- After two years of strong recovery from the pandemic and the energy crisis, growth has been slowing due to high inflation, rapidly tightening financial conditions, and waning business confidence.
- Growth outcomes:
  - Growth decelerated to 1.3 percent in 2023 and 1.2 percent (y/y) in 2024Q3.
  - Overall, growth in 2024 is expected at 1 percent.
- Growth drivers:
  - Declining private investment, a drawdown in inventories, and a recent negative contribution from net exports.

### Labor Market Developments
- Labor market strength with early signs of cooling:
  - Unemployment rate: 5.7 percent in 2024Q3.
  - Vacancy rates: declined from 5 percent in June 2022 to 4.2 percent in September 2024.
  - Employment rate: stabilized around 67 percent.
- Wages and productivity:
  - Nominal private sector wage growth moderated to 2.6 percent in September 2024 (from a high of 10.1 percent in March 2023).
  - Labor productivity growth remained sluggish.
  - Nominal unit labor costs rose more than the euro-area average.

### Inflation Developments and Price Expectations
- Headline inflation volatility:
  - Peak headline inflation: 13.1 percent y/y in October 2022.
  - Headline inflation remained at 4.4 percent y/y in January 2025.
- Core inflation and components:
  - Core inflation peak: 8.6 percent y/y in March 2023; stabilized around an elevated 3½ percent in 2024H2.
  - Core inflation dropped to 2.5 percent in January 2025 (helped by a decline in non-energy industrial goods prices).
  - Services price inflation: 4.1 percent in January 2025.
- Inflation expectations:
  - Expectations declined from their peak in 2022 but have been inching up again since 2024Q3.

### Financial Sector Developments and Soundness
- Bank and insurance sector metrics remain comfortable:
  - Non-performing loans: 2.1 percent of total gross loans at end-2024Q2.
  - System-wide liquidity buffers remained well above regulatory thresholds.
- Deposit and bond developments:
  - A one-year government bond that collected € 22 billion—largely from household savings accounts—expired in September 2024 and was only marginally rolled over, leading to deposit inflows.
- Profitability and capital:
  - Bank profitability and capital adequacy remained robust as net interest margins benefitted from faster repricing of assets than deposits during monetary policy tightening.
  - The insurance sector remains profitable and solvent.

### External Sector Developments
- External position 2024 (preliminary):
  - Assessed as weaker than implied by medium-term fundamentals and desirable policies (Annex I).
  - Current account (CA) deficit narrowed to 0.2 percent of GDP in 2024Q1-Q3, from 0.7 percent of GDP in 2023.
  - Both exports and imports declined in 2024, driven by chemicals, pharmaceuticals, and transport equipment, with a larger decline in imports against stable terms of trade.
- Outlook expectation:
  - In the medium term, the external CA is projected to return to small surpluses supported by improvements in the trade balance as energy prices ease and external demand increases.

### Fiscal Developments and Public Debt
- General government deficit and composition:
  - Overall deficit increased to 4.4 percent of GDP in 2024 from 4.2 percent in 2023.
  - Federal government overall deficit narrowed to 3.0 percent of GDP in 2024 from 3.3 percent in 2023.
  - Regions and communities’ aggregate deficit widened to 1.6 percent of GDP in 2024, driving the overall increase.
  - Key expenditure pressures: wage, social benefits, and interest expenses remained higher than pre-crises in percent of GDP, driven by indexation and discretionary increases in pension and healthcare spending.
- Public debt:
  - Public debt: 104 percent of GDP in 2024.
  - Aggregate debt of regional and community governments increased to 18 percent in 2024Q3 from 13 percent in 2019.
  - Average residual maturity of central government debt: 11.1 years in 2024.
  - Share of gross debt with residual maturity up to one year: 14 percent.
  - Belgium’s spreads: 61 bps as of 2/21/2025.
- Borrowing costs and management:
  - Public debt benefited from refinancing at low interest rates in 2017–21.
  - Spreads remain among the lowest in the euro area.

### Political Context and Reform Agenda
- Federal government formation:
  - Federal and regional elections on June 9, 2024; federal coalition government formed on February 3, 2025.
  - New government led by Prime Minister De Wever; coalition of five parties: New Flemish Alliance, Mouvement Réformateur, CD&V, Les Engagés, and Vooruit.
- Coalition agreement (selected planned reforms, 2025–29) — major reform directions:
  - Tax and social benefits:
    - Increase the size of the zero-rate first bracket of PIT while abolishing tax reductions for unemployment benefits.
    - Reduce social security contributions on low wages.
    - Reduce special contributions for social security introduced in 1994.
    - Link social benefits to income/status; limit total benefits per family relative to minimum wage earners.
    - Halve the marriage quotient for non-pensioners by 2029; phase out for pensioners.
    - Living wage and long-term unemployment benefits will not be indexed, except in case of exceptionally high inflation.
    - Introduce a central register of all social assistance and benefits.
  - Capital gains taxation:
    - 10 percent on future realized capital gains of financial assets with an exemption of the first €10,000 of profit (indexed annually).
  - Streamlining tax expenditures:
    - Abolish a number of small deductions/exemptions (e.g., tax reduction for legal aid, adoption costs; exemptions on donation reduced from 45 to 30 percent; interest deduction for non-owner-occupied homes).
  - Climate-related VAT changes:
    - Increase VAT on coal from 12 percent to 21 percent.
    - Reduce VAT for supply/installation of heat pump from 21 percent to 6 percent for the next 5 years.
    - Extend reduced VAT rate (6 percent) to demolition and reconstruction of dwellings.
    - Increase VAT for supply/installation of fossil fuel combustion boiler from 6 percent to 21 percent.
  - Pensions:
    - Pension bonus and malus: bonus increases pension by 2 percent (until 2030), 4 percent (until 2040), 5 percent (from 2041) per additional year of work after statutory retirement age for those with at least 35 years of career with higher effective work requirement.
    - Malus: pension reduced from 2026 by 2 percent (until 2030), 4 percent (until 2040), 5 percent (from 2041) per year of retirement before statutory age if career condition met but does not have 35 years of career with higher effective work requirement.
    - Raise retirement age for specific civil servant groups gradually from 2027 until they reach the legal retirement age of other employees.
    - Allow employees to retire at 60 with 42 years of work with sufficient actual work performance starting on January 1, 2027 (current requirement is 44 years).
    - Transition civil servant pension calculation from last ten years salary to career-wide salary; phase out preferential career calculation coefficients as specified; abolition of indexation of civil servant pensions to wage increases of active civil servants.
    - Pillar II: by 2035, all sectors must provide a supplementary pension with employer contribution at least 3 percent.
  - Labor market:
    - Limit unemployment benefits to a maximum of two years, except for individuals over 55 years old with at least 30 years of employment of at least 156 days per year.
    - Companies (except SMEs) to contribute 30 percent of sick pay for the second and third months of sickness period; sanctions for insufficient cooperation with reintegration.
    - Increase maximum annual income for flex-jobs to €18,000 from €12,000.
    - Introduce annualization of working hours legal framework before June 30, 2025.
    - Limit severance pay to 52 weeks for new hires.
    - Maintain automatic-wage indexation (AWI) principle but request social partners to provide reform options by end-2026.
  - Efficiency and institutional arrangements:
    - Abolish the Senate at next federal elections for operational/budgetary efficiency.
    - Create inter-federal frameworks in budget, energy, and climate for improved cooperation.
  - Healthcare reform:
    - Measures to increase efficiency: more preventive care, reduction in cost of medicines, less dependence on traditional hospital admissions.

### Outlook and Risks
- Growth and inflation projections under baseline:
  - Output growth expected to gradually return to 1.3 percent potential in 2027, supported by stronger credit growth from monetary policy easing and higher contribution from net exports.
  - Inflation projected to decline as wage growth moderates and projected drop in international energy prices passes through to retail prices.
  - Under unchanged policies, fiscal path:
    - Fiscal deficit would widen to 7.2 percent and public debt would continue rising to 123 percent of GDP in 2030.
- Risk assessment:
  - Baseline risks are sizeable, tilted down for growth and up for inflation (Annex III).
  - Downside growth risks: weaker external demand, deeper geoeconomic and trade fragmentation, further increases in tariff barriers.
  - Upside inflation risks: adverse energy price developments, persistently-high core inflation affecting expectations.
  - Fiscal sustainability risks: higher borrowing costs in a scenario of increased global risk aversion could require abrupt fiscal consolidation with negative consequences for growth and potentially financial stability.

### Authorities’ Views and Policy Discussion
- Authorities’ views:
  - Broad agreement with staff on baseline outlook and key risks.
  - Expect growth to increase to potential and inflation to return to target as wage growth moderates.
  - Concern that absent policy change, fiscal deficit and public debt would continue drifting up, driven by aging-related spending and higher interest payments.
  - Key risks seen as external (e.g., risk of escalating trade wars affecting Belgium and main EU trading partners, notably Germany).
  - Domestic risk: inflation stickiness due to automatic wage indexation; uncertainty on pace of monetary policy normalization affecting investment and real estate.
- Policy discussion focus:
  - Short-term: tight fiscal policy needed to support disinflation given upside risks and anticipated monetary policy loosening.
  - Longer-term priorities:
    - Rebuild fiscal buffers while protecting public investment.
    - Ambitious fiscal and structural reforms to increase labor force participation and productivity.
    - Progress in the green transition.
    - Efforts with EU partners to deepen the single market.
    - Continue implementing 2023 FSAP recommendations to preserve macrofinancial stability.

*Source: 1. Macroeconomic Developments (chapter), 1belea2025001-print-pdf*

### 13.      Slow disinflation and elevated and rising fiscal deficits and public debt call for

### 13.      Slow disinflation and elevated and rising fiscal deficits and public debt call for

### Fiscal outlook and need for sustained consolidation
- Pandemic and energy crisis increased deficits structurally through automatic indexation of wages and social benefits and higher healthcare spending.
- Fiscal consolidation is needed in the short term to ensure the monetary-fiscal policy mix supports further reducing inflation, given:
  - still-positive output gap,
  - rising unit-labor costs,
  - loosening of ECB’s monetary policy,
  - significant upside risks to inflation.
- Longer term objective: rebuild fiscal space to address future shocks, reduce vulnerability to changes in market sentiment, and preserve core of Belgium’s social model.

### Aging, defense, and green transition spending pressures
- Fiscal cost of aging projected to increase by 4.2 percentage points (ppt) of GDP during 2023–70 to reach 30 percent of GDP in 2070.
- Annual increase above 0.2 ppt GDP in 2025-30.
- Belgium committed to increasing defense spending.
- Implied cost of the green transition on public finances is more uncertain but likely significant; absent clarity on medium-term investment plans and other fiscal measures, it is not fully informing baseline projections.

### Deficit reduction under the new EU economic governance framework (EGF) and staff recommended adjustment
- Since July 2024, Belgium is subject to an EU excessive deficit procedure, mandating a minimum reduction of the structural fiscal balance of 0.5 percent of GDP per year until the overall deficit falls below 3 percent of GDP (2029 in staff’s projection).
- Belgium must submit a medium-term fiscal structural plan (MTFSP) with the 2025 budget; the MTFSP sets out the expenditure path, priority reforms, and investments for the next four or seven years.
- Staff recommendation: a seven-year adjustment accompanied by significant and credible growth-enhancing reforms and public investments is advisable.
- Under a seven-year adjustment scenario:
  - annual reduction of the structural primary balance of 0.6 ppt of GDP would be required for the overall deficit to reach below 3 percent of GDP by the end of the adjustment period and remain below 3 percent of GDP for ten years thereafter.
  - Gross public debt would decline to about 78 percent of GDP, 82 ppts of GDP lower than in the baseline.
  - Absent structural reforms to increase productivity, growth would be on average 0.5 ppt lower than in the baseline in 2025-31.
- Short-term fiscal policy note: for 2025H1, fiscal policy will rely on a provisional budget prepared by the caretaker government.

### Expenditure path and conservative assumptions to avoid slippage
- Compliance with EGF assessed by the EC solely through a (nominal) net primary expenditure path; assumptions should be conservative to lower risk of deviating from deficit targets.
- Staff estimate: to maintain the deficit below 3 percent of GDP during 2031-41, average net primary expenditure growth through the adjustment period should not exceed 2 percent.
- This is lower than the EC’s recommended net primary expenditure average growth of 2.5 percent, which is based largely on higher revenue projection by the EC.
- Prudent assumption: limited return on growth of reforms in the short term as structural reforms typically take time to bear fruit.

### Fiscal composition of adjustment: rationalize current spending, preserve/increase public investment
- Core consolidation focus: rationalizing social benefits and the public wage bill, aided by comprehensive spending and tax expenditure reviews.
- Public investment should be preserved or increased to:
  - mitigate fiscal impact of consolidation,
  - support digitalization and the green transition,
  - boost medium-term potential growth.
- Importance of accelerating implementation of investment and reform under the NGEU recovery and resilience plan, which has stalled.

### Sectoral efficiency opportunities and reform priorities
- Infrastructure:
  - Raise efficiency through clear infrastructure investment strategies, stronger project appraisals, selection and governance, and improved coordination across federal and federated entities.
- Healthcare:
  - Access and outcomes comparatively good but achieved at high cost.
  - Efficiency gains from greater emphasis on preventive care, reforming organization and role of hospitals, and further promoting generic drugs.
  - Efficiency gains would free resources to absorb part of projected increase in healthcare spending due to aging.
- Education:
  - Spending over 6 percent of GDP, 1.5 percent of GDP higher than EU average and three large neighbors’ average.
  - Reforms could help reduce spending by up to 1.4 ppts of GDP while achieving the same outcomes, or improve educational outcomes without increasing spending.
  - Potential fiscal saving (ppt of GDP) if Belgium’s education efficiency matched peers:
    - France: 0.74
    - Germany: 1.38
    - Netherlands: 0.85
  - Potential increase in overall PISA score (percent) under those efficiencies:
    - France: 20
    - Germany: 45
    - Netherlands: 24

### Pension reforms to limit aging pressures
- 2020 and 2022 reforms focused on pension adequacy (increasing minimum pension and pension bonus) and increased long-term costs.
- Sustainability reforms should aim to raise the effective retirement age in line with healthy-life expectancy by:
  - incentivizing (e.g., penalties for early retirement) and facilitating (e.g., life-long learning and upskilling) longer employment,
  - reviewing eligibility criteria and controls for specific regimes (e.g., disability pensions),
  - limiting increases in pension benefits, notably by reviewing automatic indexation,
  - reviewing special provisions (e.g., arduous jobs) to balance fairness and costs.
- Recommended approach: regular reviews of pension policies.

### Tax policy and revenue measures
- Tax revenues are high but tax reforms should support consolidation by shifting part of the tax burden from labor to capital, with no revenue loss.
- Belgium’s labor-tax wedge: 52.7 percent in 2023 for a single worker with no children earning the average wage (euro area average: 42 percent).
- Reduce labor taxation to increase employment rate.
- Current treatment of capital:
  - Capital gains of individuals largely tax exempt.
  - Room to reduce transaction-based taxes, which are more distortionary.
  - Recommendation: tax all income from capital (e.g., interests, dividends, and capital gains) the same way, ideally by incorporating these revenues into overall taxable income subject to PIT.
- Tax expenditures estimated at 6 percent of GDP in 2021, concentrated in VAT and PIT; reducing tax expenditures offers significant potential for simplification and efficiency gains.
- Tax reform coordination required between federal and federated entities for revenue and distributional impacts.

### Fiscal institutions and accountability under the EGF
- The High Council of Finance (HCF) serves as Belgium’s national fiscal council; effectiveness challenged by complexities of Belgian fiscal federalism (including lack of hierarchy among federal, regional, and community governments).
- EGF provides opportunity to introduce binding rules for burden sharing the fiscal adjustment within a credible multi-year consolidation plan and with strengthened accountability for all entities.
- Recommendations to strengthen HCF: enhanced staffing, direct reporting to parliaments, greater outreach.
- Authorities’ views:
  - Authorities concurred with staff on budgetary challenges and are committed to improving fiscal sustainability.
  - They intend to pursue a 7-year adjustment under the EGF with fiscal-structural reforms broadly consistent with staff recommendations.
  - On taxation: intend to rebalance from labor to capital but with an overall reduction of the tax burden, focused on lower income to incentivize work; intend to introduce taxation of capital gains and identified several tax expenditures to eliminate.
  - On pensions: planned reforms to incentivize working longer through penalties for early retirement and bonuses for retirement past statutory age.
  - On spending efficiency: intend to reform the healthcare system as recommended and strengthen collaboration among federal and regional entities through a national cooperation agreement consistent with European fiscal commitments and including penalties for deviations.

### Preserving macrofinancial stability
- 2023 FSAP identified systemic risks but found the financial sector resilient under severe shock scenarios.
- Main financial stability risks: large, concentrated, and interconnected banking sector, private sector indebtedness, exposure to interest rate risk and residential and commercial real-estate sectors.
- FSAP stress tests: banks and nonbank financial institutions resilient to severe macroeconomic shock scenarios, albeit with heterogeneity and some banks requiring liquidity reinforcement.
- Evolving risk profile:
  - Household and corporate vulnerabilities warrant monitoring.
    - Household indebtedness stabilized around 58 percent of GDP in 2024Q3 and has started declining in percent of disposable income.
  - Corporate indebtedness declining and moderate.
  - CRE risks increased: CRE capital values contracted by 9 percent in 2023, less than the 25 percent haircut FSAP assumption; CRE market activity dropped sharply in 2023 and 2024H1; vacancies up.
  - Residential prices: ECB estimates prices of existing dwellings approximately 6.3 percent over fundamentals in 2024Q2, down from 12.3 percent in December 2023.
  - Interest rate repricing risks have lessened as rates are now declining; pressure to raise deposit remuneration is abating, but net interest rate margins will decline as rates fall.
- Macroprudential policy and buffers:
  - Since October 2023, macroprudential policy tightened.
  - Overall buffers rose to €3.6 billion on October 1, 2024, from €2 billion in 2024Q1, with activation of the countercyclical capital buffer (CCyB) (1 percent effective October 1, 2024).
  - Sectoral systemic risk buffer (SSyRB) against residential mortgage risks lowered from 9 percent to 6 percent.
  - Share of new loans with loan-to-value (LTV) above 90 percent fell from 30 percent in 2019Q4 to 14 percent in 2024Q2.
- Macroprudential expectations for new residential mortgage loans (selected):
  - Loans to owner occupiers: LTV capped at 90 percent; first-time buyers: No more than 35 percent of loans with LTV> 90 percent, of which 5 percent may have LTV>100 percent; other owner occupiers: No more than 20 percent of mortgages with 90 percent<LTV< 100 percent.
  - Loans to investors (buy-to-let): LTV capped at 80 percent; No more than 10 percent of loans with 80 percent<LTV<90 percent; No more than 5 percent of mortgages with LTV>90 percent, and DSTI>50 percent or DTI>9 percent.
- FSAP implementation progress:
  - Enhanced coordination and cooperation within and among supervisory entities.
  - Integration of individual models within NBB’s stress testing framework underway.
  - Deposit insurance fund operational readiness tested for seven-working days pay-outs; institutions covering 99.95 percent of deposits deemed to have provided timely and sufficient information.
  - Deposit insurance fund segregated from the national budget; target level increased to 1.8 percent of covered deposits.
  - Increased resources for AML/CFT.

*Source: IMF staff chapter text.*

### 27.      However, key recommended actions remain outstanding, notably those requiring

### 27–42: Financial Sector, Labor Markets, Productivity, and Green Transition

### Financial sector risks, supervisory gaps, and legislative priorities
- Key recommended actions remain outstanding, notably those requiring legislative action.
- Institutional framework for macroprudential policy remains unchanged, despite staff’s recommendation to enhance the NBB’s powers to:
  - activate or recalibrate capital requirements independently of the government; and
  - set binding borrower-based measures independently of the government.
- Relevant legislation drafted but could not be submitted to parliament until a new government was formed.
- Outstanding supervisory and regulatory measures:
  - Insurance supervision and regulation:
    - (i) adoption of a new legal framework for a natural catastrophe public-private partnership to enhance predictability of natural disaster-related insurance cover;
    - (ii) introduction of regular complaints reporting by insurers.
  - AML/CFT:
    - making the NBB a member of the national committee on terrorism financing is pending.
  - Measures to strengthen banks’ corporate governance framework remain outstanding.
- Authorities’ views:
  - Share staff’s assessment of moderate financial sector risks and committed to further implementing FSAP recommendations.
  - Intensified monitoring of the CRE market; recent NBB granular analysis shows risks are contained but active monitoring remains needed.
  - Consider current macroprudential stance appropriate given systemic risks.
  - Committed to implement recommendations requiring legislative action now that the new government is in place.

### Strengthening labor markets — findings and reform priorities
- Key constraints:
  - Labor market fragmentation and rigidity are impeding growth potential.
  - Coexistence of sectors and provinces with high vacancy rates and high unemployment rates suggests market inefficiency.
  - Employment gaps remain large for low-skilled workers, older workers, women, and individuals with an immigration background or disabilities.
- Reforms and policy directions needed:
  - Increase labor force participation to adapt to an aging population and address fiscal pressures.
  - Increase incentives to (re-)enter the labor force and facilitate reallocation of labor.
  - Key reform objectives:
    - increase the income gap between work and nonwork;
    - reduce the cost of hiring and dismissal;
    - upskill the workforce.
  - Specific measures:
    - Reducing the duration of unemployment benefits, as intended by the government—Belgium is the only EU country with indefinite benefits without means testing.
    - Continue active labor market policies focusing on greater inclusion.
    - Enhance timely reintegration of employees on long-term sick leave to limit rising budgetary costs from sickness and disability benefits.
    - Link social benefits to income levels instead of employment status to better protect low-income workers from the unemployment trap.
- Wage-setting mechanism reform:
  - Current system:
    - near-universal automatic indexation to actual inflation excluding alcohol, tobacco, and petrol prices (establishes lower limit of wage increases and ensures quick pass-through of inflation);
    - 1996 wage law caps salary increases based on hourly wage growth in France, Germany, and the Netherlands with no reference to productivity differentials, creating a “wage corridor.”
  - Effects:
    - increased structural fiscal deficits;
    - labor-cost increases above major trading partners, weighing on competitiveness;
    - inhibits productivity-based real wage differentiation and adjustment to local labor market conditions—likely contributing to labor misallocation.
  - Recommendations:
    - Consider abolishing automatic indexation and the 1996 wage law.
    - At minimum, reforms could include:
      - adjusting the basis for indexation to exclude items with volatile prices (in addition to petrol);
      - widening the group of country comparators;
      - using unit-labor costs instead of wages as basis for comparison;
      - allowing firms to index wages only partially.
- Education and skills:
  - Education outcomes comparable to peers but achieved at higher cost and deteriorating.
  - Public wage bill for education exceeds 5 percent of GDP, 1.5-2 percent of GDP higher than in peers—reflecting lower student-teacher ratios and lower teaching time.
  - Belgium has the highest share of grade repetition in the EU.
  - Reforms should aim to:
    - achieve greater equality of educational outcomes irrespective of students’ economic or migrant backgrounds;
    - reduce skills mismatch;
    - revise curricula to align education with firms’ needs;
    - reorganize the educational system to better leverage teachers’ time and strengthen support for students in difficulty.
- Authorities’ views on labor market reform:
  - New government intends to pursue significant labor market reforms with a target employment rate of 80 percent by 2030.
  - Intends to ensure working individuals earn at least €500 net per month more than those who are unemployed.
  - Committed to limiting unemployment benefits to a maximum of two years, reducing the cost of firing, and measures to reintegrate long-term sick employees.
  - Will maintain automatic wage indexation while requesting social partners to propose options for reforming the wage-setting mechanism by the end of 2026.

### Boosting productivity — innovation, firm dynamics, and product market reform
- Innovation and TFP:
  - Belgium is among the most innovative countries in Europe.
  - Innovation income deductions introduced in 2017 allow firms to deduct up to 85 percent of their net income from innovation from the taxable base—reducing effective corporate taxation to as low as 3.75 percent—and boosted R&D spending (percent of GDP) well above neighbors.
  - Despite high innovation investment, total factor productivity (TFP) growth lags peers, indicating stalling technical diffusion and weaker transmission of innovation to productivity gains.
- Firm dynamics constraints:
  - Some of the EU’s lowest firm entry and exit rates.
  - Startup quality falling:
    - share of one- to four-year-old firms in the highest productivity decile declining;
    - share of startups in the lowest TFP decile increasing.
  - Employment growth rate of Belgian startups on par with EU average overall, but much lower for above-average TFP startups in Belgium.
  - Below-average TFP startups increased their share in industry output faster than higher-productivity startups, aided by relationships with state-owned enterprises, multinationals, and high-growth exporters.
  - Government support (including loan guarantees targeted to higher-risk borrowers) may crowd more productive firms out of capital and labor markets.
- Product market and insolvency reforms:
  - Needed reforms: reduce regulatory and administrative barriers to entry; improve insolvency regime to lower exit costs.
  - Specific issues: state-imposed price controls, complexity of regulatory procedures and regulatory capture, strict occupational restrictions.
  - Potential gains: closing half the gap with the top three European advanced economies could potentially boost TFP by about 3½ percent in the long run.
  - Insolvency regime improvements since 2010 noted, but barriers to restructuring remain:
    - creditors cannot initiate restructuring (only liquidation);
    - delays remain lengthy;
    - courts are still often involved.
- EU single market and capital market union:
  - Deepening the single market and advancing capital market union would help Belgian firms access a larger customer base, improve competition, and vitalize firm dynamics.
  - Belgian firms report financing needs that exceed available funding, particularly from bank loans and credit lines.
  - Early-stage growth firms have access to a more diverse funding range (private venture and angel investor capital).
  - Developing venture capital within an EU-wide push toward capital market union could help finance firms at later growth stages.
- Authorities’ views:
  - Agreed on continuing product market reforms, deepening the EU single market, and advancing capital market union.
  - Intend to implement reforms to reduce barriers to entry, particularly in professional services, and to streamline regulations.
  - Supportive but cautious on capital market union gains, stressing the need for harmonization of regulations, bankruptcy frameworks, and tax laws across the EU.

### Sustaining the green transition — progress, gaps, and coordination needs
- Progress and gaps:
  - Energy crisis propelled the green transition; extension of nuclear energy and additional renewable investment support energy security and lower carbon footprint.
  - Projected sectoral emissions reductions by 2030:
    - residential sector: 54 percent;
    - services sector: 62 percent;
    - transport sector: 11 percent (FPB May 2024).
  - FPB projects emissions will decrease by 32 percent in 2030 compared to 2005 levels, falling short of:
    - the 43 percent reduction target set in the draft NECP; and
    - the 47 percent under the EU Effort Sharing Regulation.
  - FPB anticipates Belgium will derive 24 percent of its energy from renewable sources by 2030, while the European target is 34 percent.
- Policy and financing needs:
  - Recommended complementarities:
    - expand EU emissions trading system participation;
    - adjust VAT rates to favor green energy;
    - timely implement carbon taxation;
    - phase out fossil fuel subsidies while ensuring support for vulnerable populations.
  - Federal and regional climate efforts should be consolidated into a coherent national strategy—Belgium had yet to submit the final version of its NECP, expected by the EC by June 2024.
  - Improved coordination and accountability across federal and regional governments will facilitate climate policy design, execution, and evaluation.
  - Adequate investments are necessary to meet climate goals and contribute to the European Green Deal.
- Authorities’ views:
  - Agreed on the need to enhance policy coordination to meet climate goals.
  - Finalization of Belgium's NECP contingent upon completion of the Flemish contribution.
  - Decisions regarding distribution of existing ETS1 revenues among federal and regional governments remain pending.
  - Belgium may receive financing from ETS2 revenues via the European Social Climate Fund based on its Social Climate Plan due by end-June 2025.
  - Strengthening federal and regional coordination could unlock financing to accelerate green investment and provide support for vulnerable populations.

### Staff appraisal — macro and fiscal priorities
- Short- and long-term challenges:
  - In the short term: need to see disinflation through while preserving growth and financial stability in an increasingly uncertain environment.
  - Longer term: rebuild buffers, reduce vulnerabilities associated with high and rising public debt, address spending pressures from aging and the green transition, foster higher growth, and improve the external position.
  - External position in 2024 was weaker than implied by medium-term fundamentals and desirable policies based on preliminary assessment.
- Policy window:
  - The new government’s agenda—significant structural reforms and fiscal consolidation—provides an opportunity to make headway.
  - Steady and timely implementation of intended reforms will be key.

*Source: IMF staff report excerpts (paragraphs 27–42).*

### 43.      Sustained and significant fiscal consolidation is needed. Considering the magnitude of

### 1belea2025001-print-pdf - 43.      Sustained and significant fiscal consolidation is needed. Considering the magnitude of

### Fiscal consolidation: scale and sequencing
- Sustained and significant fiscal consolidation is needed to bring the deficit durably below 3 percent of GDP and put debt on a downward path.
- Staff supports the government’s intention to pursue a seven-year adjustment under the EGF, accompanied by credible and front-loaded growth-enhancing reforms.
- Required pace: an annual reduction in the structural primary balance of about 0.6 ppt of GDP until 2031.
- The forthcoming MTFSP should be built on sufficiently conservative assumptions to lower the risk of deviating from the intended path of deficit reduction.

### Composition of adjustment: spending, investment, and efficiency
- The adjustment should:
  - Rationalize current spending.
  - Make room for more public investment.
  - Be supported by increased efficiency of spending.
- Key targets for rationalization:
  - Social benefits.
  - The public wage bill.
- Public investment should be preserved, or ideally, increased to bolster potential growth and support green transition.
- Improving the efficiency of spending is critical, notably regarding investment in infrastructure, healthcare, and education.

### Fiscal reforms and fiscal framework
- Tax and pension reforms:
  - Reduce the tax burden on labor.
  - Introduce capital gain taxation.
  - Reduce tax expenditure.
  - Ensure tax reforms do not result in lower revenue given the needed overall fiscal adjustment.
  - Raise the effective retirement age and review eligibility to specific pension regimes to preserve pension sustainability amid aging.
- Strengthening the fiscal framework:
  - Revitalize the fiscal council.
  - Increase accountability of the federal and all federated entities in sharing the burden of fiscal adjustment.

### Financial sector stability
- Overall systemic risks in the financial sector remain moderate.
- Current capital buffer requirements and prudential limits on mortgage loans should be maintained.
- Recent progress welcomed in:
  - Systemic risk assessment.
  - Supervision.
  - The macroprudential framework.
  - Crisis management and resolution preparedness.
- Pending measures that required legislative action should now proceed with the new government in place.

### Labor market and education reforms
- Labor market reforms should:
  - Widen the income gap between work and nonwork.
  - Limit the duration of unemployment benefits.
  - Reduce the cost of hiring and dismissal.
- Inclusion and skills:
  - Foster inclusion of low-skilled workers, older workers, women, individuals with an immigration background, and persons with disabilities.
  - Promote lifelong learning, reskilling, and active labor-market policies.
- Education reforms:
  - Align curricula with the skills companies need.
  - Better leverage teachers’ time.
  - Strengthen support to students in difficulty.

### Wage-setting and competitiveness
- Automatic wage and social benefit indexation protected household purchasing power during the inflation shock but increased fiscal deficits and undermined competitiveness.
- Consideration should be given to abolishing automatic indexation and the 1996 wage law, which together prevent an optimal allocation of labor and higher employment.
- At a minimum, technical reforms to the existing system would benefit the labor market.

### Product markets, EU integration, and capital markets
- Product market reforms should focus on:
  - Reducing regulatory and administrative barriers.
  - Improving the insolvency regime.
- EU-level actions:
  - Remove remaining barriers to trade within the EU and harmonize regulations and bankruptcy frameworks to give Belgian firms access to a larger customer base and improve competition.
  - Develop venture capital at the EU level to widen financing options for Belgian firms’ growth.
- These measures would provide buffers against risks from geo-fragmentation.

### Climate objectives
- Despite progress, much effort remains needed to achieve climate objectives.
- Recommended measures:
  - Complement the planned expansion of the EU ETS with carbon taxation.
  - Phase out fossil fuel subsidies while ensuring support for vulnerable populations.
  - Consolidate federal and regional climate efforts into a coherent and cohesive national strategy.

*Source: 1belea2025001-print-pdf*

### 51.      It is proposed that the next Article IV consultation take place on the standard 12-

### BELGIUM

### Macroeconomic Developments
- Growth slowed but remained above the EA average.
- Potential growth continues to slow.
- Labor share of income stabilized in 2024Q2–Q3.
- Corporate profit margins stagnated in 24H1 and rose in Q3 after 2 years of decline, as labor cost increases moderated.

### Financial Sector Developments
- Housing is more affordable and price-to-rent ratios lower than in other European countries.
- Household debt remains elevated, but a large share of financial assets is relatively liquid.
- Interest margins are declining, following ECB cuts, after 2 years of record income for Belgian banks.
- The slowdown in commercial real estate markets is an additional element of risk, increasing banking sector vulnerabilities from commercial real estate exposures; exposures remain broadly stable.
- Household Debt and Financial Assets (EUR billion) shown for Sep-14 through Sep-24 with components: Debt; Assets: currency and deposits; Assets: equity and investment funds; Assets: insurance and pension funds; Assets: other.

### External Sector Developments
- The current account remained in deficit in 2023.
- Lower exports and imports of goods largely due to the reversal in energy prices.
- Investment income inflow doubled, but was largely offset by a larger private current transfer outflow.
- Financial account broad stability masks noticeable changes in its composition.
- Net asset position continues to be sizable, largely driven by positive revaluations of net portfolio investment.
- Real effective rate appreciated strongly, reflecting labor market effects.
- Current Account (Percent of GDP): illustrated 2014–2023 with values shown graphically (trade balance, income balance, current transfers, current account balance).
- Exchange Rates (Index, 2010=100): NEER, ULC-based REER, CPI-based REER from 2014–2025 displayed.

### Fiscal Developments
- Fiscal response during the pandemic and the energy crisis eroded buffers.
- After some improvement in 2021–22, primary and structural deficits widened again in 2023–24.
- Direct tax revenues have recovered from the pandemic, but indirect tax revenues grew slower than GDP.
- High social spending continued to drive deficits.
- Public investment share of GDP remained broadly stable.
- Public debt remained among the highest in euro area.
- General Government Fiscal Positions: Overall balance, Primary balance, Revenue (RHS), Expenditure (RHS) shown 2008–2024.
- Change in SPB, Primary balance, Cyclically adjusted primary balance, Structural primary balance (SPB) and Gross debt (RHS) presented 2008–2024.
- Revenue and expenditure component breakdowns illustrated (imputed social contributions; corporate income tax; personal income tax; indirect taxes; social benefits; compensation of employees; capital expenditure).

### Regional Economic Performance
- Growth in the Flemish region has rebounded more strongly.
- Lower activity rates in Brussels and Wallonia compared to the national average.
- Fiscal deficit of the regions and communities widened again in 2023.
- Increasing debt burden will impact the sustainability of regional finances.
- High debt burden for the Walloon region and BCR compared to their GDP size and operating revenues.
- Flemish community accounted for a large share of total public investment, financed by the RRF grant.
- Labour Force Participation Rate: Regional gap with national average (Percent; difference in percentage point) plotted 2005–2023; note: 2024 is the average of Q1–Q3.
- Overall Fiscal Balance by Government Accounts (Percent of GDP) and Consolidated Gross Debt (Percent of GDP) shown with latest data as of 2024Q3.
- Debt Outstanding held by Communities and Regions (Percent of GDP) with specific values for communities and regions across years; note: German community stable at 0.1 percent of GDP and increased to 0.2 percent in 2023.
- Public Investment (Billions of euros) and Public Investment (% of GDP, RHS) by federal and subnational levels 2020–2024.

### Labor Market Fragmentation
- Belgium lags peers in activating labor; closing gender and regional gaps are requisite to further increase employment rates.
- Employment rates for male, lower educated, and the non-EU countries non-native lag the most euro area averages.
- Employment rates of the 55–64 age group across all profiles also lag peers.
- Unemployment rates persistently higher in Brussels and Wallonia.
- Labor shortage remains a challenge, especially in Flanders.
- Labour Force Participation Rate (Percent, 15-64 years, seasonally adjusted) reported: 75.4 (Belgium), 70.7, 65, 70, 75, 80, 85, 90 series for EA20 BEL FRA DEU NLD CHE USA across years 2010–2024.
- Employment Rate by Region and by Gender (Percent, 20–64 years) for 2022Q3, 2023Q3, 2024Q3 with regions Belgium, Flemish Region, Walloon Region, Brussels-Capital Region.
- Employment Rates (Percent of population, prime age 20–64, 2023) breakdowns by gender, education, country of birth.
- Unemployment Rates (Percent, 15–64 years) and Job Vacancy Rate (Percent) series 2017Q1–2024Q1 by region.

### Selected Economic Indicators (Table 2, Projections)
- Real GDP: 4.2 (2022), 1.3 (2023), 1.0 (2024), 1.1 (2025), 1.1 (2026), 1.3 (2027), 1.3 (2028), 1.3 (2029), 1.3 (2030)
- Domestic demand: 4.2; 1.8; 1.0; 1.4; 1.5; 1.5; 1.5; 1.4; 1.5 (2022–30)
- Private consumption: 3.6; 0.6; 1.8; 1.2; 1.2; 1.5; 1.3; 1.2; 1.1
- Public consumption: 3.3; 3.2; 3.2; 1.4; 1.9; 1.6; 1.7; 1.7; 1.7
- Gross fixed investment: 1.7; 3.5; 0.9; 0.6; 1.7; 1.5; 1.6; 1.7; 2.0
- Stockbuilding (contribution to GDP growth): 1.1; -0.1; -1.0; 0.3; 0.0; 0.0; 0.0; 0.0; 0.0
- Foreign balance (contribution): 0.1; -0.5; 0.1; -0.3; -0.4; -0.2; -0.2; -0.1; -0.1
- Exports, goods and services: 5.8; -7.1; -4.0; 0.0; 2.6; 3.2; 3.2; 3.1; 3.1
- Imports, goods and services: 5.8; -6.8; -4.2; 0.4; 3.3; 3.6; 3.5; 3.3; 3.3
- Household saving ratio: 12.7; 14.1; 13.6; 13.7; 13.7; 13.7; 13.8; 14.0; 14.3
- Potential output growth: 2.0; 1.8; 1.6; 1.4; 1.3; 1.3; 1.3; 1.3; 1.3
- Output gap (in percent): 1.6; 1.0; 0.5; 0.2; 0.0; 0.0; -0.1; 0.0; 0.0
- Unemployment rate (in percent): 5.6; 5.5; 5.8; 5.7; 5.7; 5.5; 5.6; 5.7; 5.8
- Employment growth: 1.9; 0.8; 0.3; 0.2; 0.3; 0.6; 0.3; 0.2; 0.4
- Consumer prices (HICP): 10.3; 2.3; 4.3; 3.5; 2.2; 2.0; 2.0; 1.9; 1.9
- Core CPI (HICP): 4.0; 6.0; 3.4; 3.0; 2.6; 2.2; 2.1; 1.9; 1.9
- GDP deflator: 6.8; 4.5; 2.7; 2.5; 1.7; 1.5; 1.7; 1.6; 1.6
- Revenue (percent of GDP): 48.6; 49.1; 49.6; 49.5; 49.5; 49.5; 49.5; 49.6; 49.7
- Expenditure (percent of GDP): 52.2; 53.3; 54.0; 54.3; 55.0; 55.3; 55.7; 56.3; 56.9
- General government balance (percent of GDP): -3.6; -4.2; -4.4; -4.8; -5.5; -5.8; -6.2; -6.7; -7.2
- Structural balance: -4.3; -4.4; -4.5; -4.8; -5.5; -5.8; -6.1; -6.8; -7.2
- Structural primary balance: -2.7; -2.4; -2.2; -2.5; -3.0; -3.0; -3.2; -3.5; -3.7
- Primary balance: -2.0; -2.2; -2.2; -2.4; -3.0; -3.0; -3.3; -3.4; -3.7
- General government debt (percent of GDP): 102.6; 103.1; 104.1; 105.4; 108.6; 111.9; 115.2; 118.9; 123.0
- Goods and services balance (percent of GDP): -1.5; -0.6; -0.1; 0.0; 0.0; 0.0; 0.3; 0.5; 0.7
- Current account (percent of GDP): -1.3; -0.7; -0.3; -0.3; -0.3; -0.3; -0.1; 0.1; 0.2
- Euro per U.S. dollar, period average: 0.9; 0.9; 0.9 (2022–24)
- NEER, ULC-styled (2005=100): 96.3; 97.6; 97.8 (2022–24)
- REER, ULC-based (2005=100): 99.7; 103.8; 105.5 (2022–24)
- Nominal GDP (in billions of euros): 563.5; 596.3; 618.6; 640.9; 658.7; 677.3; 697.8; 718.4; 739.8
- Population (in millions): 11.6; 11.7; 11.8; 11.8; 11.9; 11.9; 11.9; 12.0; 12.0
- Note: Real economy figures based on national accounts data available as of January 29, 2025. Stockbuilding and foreign balance are contributions to GDP growth.

### Balance of Payments (Table 3, Projections)
- Balance on current account (Percent of GDP): -1.3 (2022); -0.7 (2023); -0.3 (2024); -0.3 (2025); -0.3 (2026); -0.3 (2027); -0.1 (2028); 0.1 (2029); 0.2 (2030)
- Trade balance on goods and services: -1.5; -0.6; -0.1; 0.0; 0.0; 0.0; 0.3; 0.5; 0.7
- Trade balance on goods (f.o.b.): -0.2; 0.5; 0.8; 0.9; 0.9; 0.9; 1.1; 1.3; 1.4
- Exports of goods and services (Percent of GDP): 95.3; 84.2; 79.6; 81.2; 80.9; 81.7; 82.5; 83.4; 84.2
- Imports of goods and services (Percent of GDP): -96.7; -84.8; -79.7; -81.2; -80.9; -81.6; -82.2; -82.9; -83.5
- Income, net: 1.2; 1.3; 1.6; 1.5; 1.4; 1.4; 1.4; 1.3; 1.3
- Current transfers, net: -1.1; -1.4; -1.8; -1.8; -1.8; -1.8; -1.8; -1.8; -1.8
- Balance on financial account: -1.2; -0.3; -0.1; -0.1; -0.1; -0.1; 0.1; 0.3; 0.4
- Direct investment, net: 3.8; -1.7; 4.8; 1.7; 1.7; 1.8; 1.8; 1.9; 1.9
- Portfolio investment, net: 0.0; -3.2; -8.7; -5.6; -5.6; -5.7; -5.7; -5.6; -5.6
- Other investment, net: -4.9; 4.8; 3.8; 3.8; 3.9; 4.0; 4.0; 4.1; 4.1
- Reserve assets: 0.0; -0.3; -0.2; -0.2; -0.2; -0.2; -0.1; -0.1; -0.1
- Memorandum items (Net International Investment Position, percent of GDP): 57.0 (2022); 51.5 (2023)
- Direct investment (percent of GDP): 25.9 (2022); 16.4 (2023)
- Portfolio investment (percent of GDP): 35.4 (2022); 35.7 (2023)
- Other investment (percent of GDP): -11.7 (2022); -7.1 (2023)
- Reserve assets (percent of GDP): 6.9 (2022); 6.2 (2023)

### General Government Statement of Operations (Table 4, Projections)
- Revenue (percent of GDP): 48.6 (2022); 49.1 (2023); 49.6 (2024); 49.5 (2025); 49.5 (2026); 49.5 (2027); 49.5 (2028); 49.6 (2029); 49.7 (2030)
- Taxes (percent of GDP): 29.1; 29.0; 29.2; 29.2; 29.1; 29.0; 28.9; 28.9; 28.9
  - Personal income tax: 12.0; 11.9; 12.1; 12.4; 12.4; 12.4; 12.4; 12.4; 12.4
  - Corporate income tax: 3.9; 4.0; 4.2; 4.0; 4.0; 4.0; 4.0; 4.0; 4.0
  - VAT: 6.5; 6.3; 6.1; 6.1; 6.1; 6.1; 6.1; 6.1; 6.1
- Social contributions (percent of GDP): 14.8; 15.1; 15.3; 15.3; 15.4; 15.5; 15.6; 15.7; 15.7
  - Actual social contributions: 12.7; 12.9; 13.1; 13.1; 13.2; 13.3; 13.4; 13.5; 13.5
  - Imputed social contributions: 2.1; 2.2; 2.2; 2.2; 2.2; 2.2; 2.2; 2.2; 2.2
- Other revenue (incl. grants): 4.8; 5.0; 5.1; 5.0; 5.0; 5.0; 5.0; 5.0; 5.1
- Expenditure (percent of GDP): 52.2; 53.3; 54.0; 54.3; 55.0; 55.3; 55.7; 56.3; 56.9
  - Compensation of employees: 12.1; 12.4; 12.5; 12.5; 12.5; 12.5; 12.5; 12.5; 12.5
  - Interest: 1.6; 2.0; 2.2; 2.4; 2.6; 2.8; 2.9; 3.2; 3.5
  - Social benefits: 24.7; 25.1; 25.7; 25.9; 26.4; 26.6; 26.9; 27.3; 27.6
    - Pensions: 10.6; 11.0; 11.2; 11.2; 11.3; 11.5; 11.7; 11.9; 11.9
    - Health care: 6.4; 6.7; 7.0; 7.1; 7.1; 7.2; 7.3; 7.4; 7.5
  - Capital expenditure: 3.6; 3.8; 4.0; 3.7; 3.7; 3.6; 3.6; 3.5; 3.6
- Gross operating balance: 0.0; -0.4; -0.5; -1.0; -1.8; -2.2; -2.6; -3.2; -3.6
- Net lending/borrowing: -3.6; -4.2; -4.4; -4.8; -5.5; -5.8; -6.2; -6.7; -7.2
- Primary balance: -2.0; -2.2; -2.2; -2.4; -3.0; -3.0; -3.3; -3.4; -3.7
- Structural balance: -4.3; -4.4; -4.4; -4.8; -5.5; -5.8; -6.1; -6.8; -7.2
- Structural fiscal adjustment: 0.7; -0.1; 0.0; -0.4; -0.7; -0.3; -0.3; -0.6; -0.4
- Gross government debt (percent of GDP): 102.6; 103.1; 104.1; 105.4; 108.6; 111.9; 115.2; 118.9; 123.0
- Real growth of primary expenditure: -0.8; 2.4; 2.1; 1.4; 2.2; 1.4; 1.7; 1.9; 2.0

### General Government Consolidated Balance Sheet (Table 5)
- Net financial worth (Percent of GDP): -96.0 (2014); -93.6 (2015); -92.2 (2016); -87.3 (2017); -86.0 (2018); -86.2 (2019); -99.5 (2020); -90.7 (2021); -70.9 (2022); -74.7 (2023)
- Financial assets (Percent of GDP): 35.0 (2014); 34.1; 36.9; 35.7; 34.5; 36.0; 39.8; 38.3; 30.8; 30.0 (2014–23)
  - Currency and deposits, Securities other than shares, Loans, Shares and other equity, Financial derivatives, Other accounts receivable detailed by year.
- Liabilities (Percent of GDP): 131.0 (2014); 127.7; 129.1; 123.0; 120.5; 122.1; 139.3; 129.0; 101.7; 104.7 (2014–23)
  - Securities other than shares dominate liabilities (e.g., 104.6 in 2014; 84.1 in 2023).

### Financial Soundness Indicators for the Banking Sector (Table 6)
- Earnings and profitability:
  - Return on assets: 0.5 (2014); 0.6; 0.6; 0.6; 0.5; 0.6; 0.4; 0.7; 0.6; 0.8; 0.4; 0.7; 0.7 (2024Q3)
  - Return on equity: 7.7; 10.1; 9.1; 8.7; 8.0; 8.7; 5.9; 10.2; 9.9; 12.1; 15.6; 10.0; 11.4 (2024Q3)
  - Net interest income to total income and Interest margin series with interest margin at 1.6 (2014); 1.8; 1.8; 1.6; 1.6; 1.6; 1.5; 1.4; 1.5; 1.5; 1.4; 1.3; 1.2 (2024Q3)
- Structure assets:
  - Total assets (percent of GDP): 249.0 (2014); 236.5; 266.1; 227.3; 215.7; 220.0; 250.9; 227.4; 210.0; 197.8; 195.6; 192.6; 194.0 (2024Q3)
  - Loans to customers (percent of total assets): 54.1; 56.4; 55.4; 59.4; 62.3; 61.9; 57.2; 59.0; 62.9; 64.0; 64.4; 65.9; 63.1 (2024Q3)
  - Mortgage loans (in billions euros): 202.4 (2014); 216.1; 229.7; 227.4; 243.3; 261.4; 274.1; 289.0; 309.5; 317.3; 319.4; 322.8; 324.3 (2024Q3)
  - Consumer loans (in billions euros): 17.2; 19.7; 24.8; 26.2; 25.3; 28.0; 27.8; 26.7; 25.7; 28.9; 29.1; 29.9; 29.4 (2024Q3)
- Funding and liquidity (percent of total assets):
  - Customer deposits: 58.5 (2014); 61.0; 58.4; 62.2; 63.9; 64.6; 64.3; 65.9; 68.4; 68.2; 66.2; 68.0; 66.9 (2024Q3)
  - Liquid assets: 32.8; 32.2; 32.5; 31.7; 29.2; 26.8; 35.0; 35.4; 36.4; 34.8; 37.5; 37.3; 37.0 (2024Q3)
  - Liquidity coverage ratio: 144.5; 140.5; 181.6; 184.5; 157.7; 153.3; 142.6; 149.3; 149.3; 149.1 (selected years shown)
- Asset quality:
  - Households share of loans (percent of total assets): 25.5; 27.4; 27.5; 29.6; 29.9; 30.4; 29.1; 29.3; 30.8; 31.8; 32.0; 32.5; 31.8 (2024Q3)
  - Non-performing loans (NPL) as percent of gross loans: 2.7 (2014); 2.6; 2.4; 2.1; 1.9; 1.9; 2.1; 1.9; 1.8; 2.0; 2.1; 2.1; 2.1 (2024Q3)
  - Provisions and write-offs as percent of NPL: 57.1; 54.3; 55.7; 57.2; 61.6; 60.4; 60.6; 62.0; 59.6; 50.7; 49.0; 49.2; 48.1 (2024Q3)
- Capital adequacy:
  - Regulatory capital to risk-weighted assets: 17.3 (2014); 18.7; 18.8; 19.0; 18.8; 18.8; 20.3; 20.5; 20.1; 19.6; 19.2; 19.7; 18.4 (2024Q3)
  - Regulatory Tier 1 capital to risk-weighted assets: 15.1; 16.0; 16.2; 17.0; 16.5; 16.7; 18.2; 18.9; 18.5; 17.9; 17.1; 17.1; 15.9 (2024Q3)
  - Capital to assets: 6.6; 6.5; 7.1; 7.1; 7.2; 7.0; 7.0; 6.7; 6.5; 6.6; 6.5; 6.8; 6.7 (2024Q3)

*Source: IMF staff calculations and Belgian authorities as presented in the document.*

### Annex I.  External Sector Assessment

### Annex I.  External Sector Assessment

### Overall Assessment
- On a preliminary basis, the external position in 2024 was weaker than the level implied by medium-term fundamentals and desirable policies.
- In 2024, the current account (CA) is expected to have improved, with the deficit narrowing to -0.3 percent of GDP from -0.7 percent in 2023, mainly due to a decline in trade deficits.
- In the medium term, the CA is expected to return to a small surplus, driven by the reversal of the negative terms-of-trade shock.

### Potential Policy Responses
- Bring the external position closer in line with medium-term fundamentals and desirable policy settings through sustained fiscal adjustment via a credible, expenditure-led consolidation that also creates space to support green and digital transformation.
- Preserve or increase public investment to mitigate growth impacts of fiscal adjustments.
- Implement significant structural reforms, including of the wage-setting mechanism, pensions and social benefits, taxation, and labor and product markets, to enhance productivity and strengthen competitiveness.

### Foreign Asset and Liability Position and Trajectory
Background and recent developments:
- Belgium’s NIIP increased to 57.3 percent of GDP in 2024Q3 from 51.5 percent of GDP at end-2023.
- Improvement driven by an increase in gross foreign assets of 16.8 ppts of GDP from end-2023, surpassing an increase in gross foreign liabilities of 11.0 ppts of GDP.
- Net portfolio investment remained the main component of the positive NIIP, albeit decreased by 2.9 ppts of GDP from end-2023, at 32.8 percent of GDP in 2024Q3.
- Net foreign direct investment increased by 3.5 ppts of GDP to 19.9 percent of GDP in 2024Q3.
- Net other investment liabilities dropped to 1.9 percent of GDP at 2024Q3 from a high of 11.7 percent of GDP at end of 2022.
- The high level of interbank debt on the liabilities side is due to economic sanctions on Russia.

Assessment:
- The NIIP-to-GDP ratio is expected to decline slightly due to the projected CA deficit for 2024 and growth trajectories, but the NIIP remains significantly large and positive.
- Belgium's substantial gross international asset and liability positions are largely influenced by the presence of corporate treasury units, which do not appear to generate macro-relevant mismatches.

Key stock levels (2024Q3, % GDP):
- NIIP: 57.3
- Gross Assets: 423.9
- Debt Assets: 128.9
- Gross Liab.: 366.6
- Debt Liab.: 150.3

### Current Account
Background and recent developments:
- The CA balance averaged 0.3 percent of GDP from 2014 to 2023.
- CA recorded a deficit of 1.3 percent of GDP in 2022 due to the surge in energy prices.
- The CA deficit narrowed to 0.2 percent of GDP in 2024Q1–Q3, compared to 1.3 percent of GDP in 2023Q1–Q3 and 0.7 percent of GDP for the entire year 2023.
- Improvement driven by recovery in goods and services balance to -0.6 percent of GDP in 2024Q1–Q3, up from -1.3 percent of GDP in 2023Q1–Q3.
- The CA deficit is expected to narrow further to -0.3 percent of GDP in 2024.
- Trade balance projected to improve to a small deficit of -0.1 percent of GDP, attributable to a larger decline in imports compared to exports.
- Primary income balance expected to increase by 0.3 ppt of GDP to 1.6 percent of GDP in 2024.
- Current transfers decreased by 0.4 ppt of GDP to -1.8 percent of GDP.
- Volatility in trade and primary income balances influenced by multinationals' activities and significant data revisions.

Assessment (2024, % GDP):
- CA: -0.3
- Cycl. Adj. CA: 0.0
- EBA Norm: 3.3
- EBA Gap: -3.3
- Staff Adj.: 0
- Staff Gap: –3.3

- The EBA model estimates a CA norm of 3.3 percent of GDP, against a cyclically adjusted CA balance of 0.0 percent of GDP, implying a gap of -3.3 percent of GDP.
- IMF staff estimates a CA gap range between –3.7 and –2.9 percent of GDP (standard error of the CA norm estimated at ±0.4 percent of GDP).

### Real Exchange Rate
Background and recent developments:
- Both REER based on ULC and on CPI continued to appreciate strongly in 2024, by 1.6 percent and 1.2 percent respectively.
- Cumulative appreciation since February 2022: 18.0 percent for ULC-based REER and 4.6 percent for CPI-based REER.
- Stronger appreciation of the ULC-based REER driven by more rapid and higher wage increases due to automatic wage indexation in Belgium.

Assessment:
- IMF staff-assessed CA gap implies a REER overvaluation in the range of 4.3 to 5.4 percent, with a midpoint of 4.9 percent (applying an estimated elasticity of the CA balance to the REER of 0.68).
- EBA REER index model points to an overvaluation of 8.9 percent while the REER level model points to an overvaluation of 17.4 percent.

### Capital and Financial Accounts: Flows and Policy Measures
Background and recent developments (2024Q1–Q3, % GDP):
- Financial account balance: 1.7 percent of GDP.
- Direct investment balance: 4.3 percent of GDP (after turning negative at end-2023), driven by larger negative transactions on the liabilities side surpassing negative transactions on the assets side, largely due to repayment of outstanding loans.
- Portfolio investment balance: -6.3 percent of GDP, primarily due to purchases of Belgian government bonds by non-residents.
- Balance of other investment (including financial derivatives): 3.7 percent of GDP.

Assessment:
- Belgium remains exposed to financial market risks and vulnerabilities associated with high external public debt.
- These vulnerabilities are limited by the large, positive NIIP.

### FX Intervention and Reserves Level
Background:
- The euro has the status of a global reserve currency.

Assessment:
- Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating.

*Source: IMF staff; content extracted from Annex I. External Sector Assessment.*

### 2030. Increases in aging-related outlays of 0.3 ppt of GDP per year, along with wages and social-benefits

### 2030. Increases in aging-related outlays of 0.3 ppt of GDP per year, along with wages and social-benefits

### Fiscal outlook and drivers
- Aging-related outlays of 0.3 ppt of GDP annually from 2025 to 2030, together with wages and social-benefits indexation, rising defense spending and increasing interest costs, will keep the deficit elevated in the medium term.
- The projected primary balance remains negative and is about 4.6 ppts of GDP below its debt-stabilizing primary balance of 0.4 percent of GDP.
- The public debt-to-GDP ratio will continue to rise over the forecast horizon.

### Interest rates, effective rate, and gross financing needs (GFN)
- Benchmark 10-year bond yield projected to increase to 3.6percent (average) by 2030, a rise of 190 bps from 2022 (average).
- Effective interest rate expected to gradually rise to 3.2 percent in 2030, compared to the historical low of 1.5 percent in 2022.
- Interest cost rising to 3.5 percent of GDP in 2030, up from 1.6 percent of GDP in 2022.
- Gross financing needs expected to increase to an average 19.8 percent of GDP from 2025 to 2030.
- From the Baseline Scenario table:
  - Public debt: 2023 = 103.1; 2024 = 103.5; 2025 = 105.4; 2026 = 108.6; 2027 = 111.9; 2028 = 115.2; 2029 = 118.9; 2030 = 123.0; 2031 = 127.0; 2032 = 131.2; 2033 = 135.5 (Percent of GDP)
  - Change in public debt: 2024 = 0.4; 2025 = 1.9; 2026 = 3.2; 2027 = 3.3; 2028 = 3.3; 2029 = 3.7; 2030 = 4.1; 2031 = 4.0; 2032 = 4.2; 2033 = 4.3 (Percent of GDP)
  - Primary deficit: 2023 = 2.7; 2024 = 2.7; 2025 = 2.9; 2026 = 3.5; 2027 = 3.5; 2028 = 3.8; 2029 = 4.0; 2030 = 4.2; 2031 = 4.2; 2032 = 4.3; 2033 = 4.3 (Percent of GDP)
  - Gross financing needs: 2023 = 15.2; 2024 = 17.4; 2025 = 17.6; 2026 = 19.5; 2027 = 19.5; 2028 = 21.8; 2029 = 20.9; 2030 = 19.5; 2031 = 22.3; 2032 = 22.0; 2033 = 23.2 (Percent of GDP)
  - Debt service (of GFN): 2023 = 13.0; 2024 = 15.3; 2025 = 15.2; 2026 = 16.5; 2027 = 16.5; 2028 = 18.6; 2029 = 17.4; 2030 = 15.8; 2031 = 18.7; 2032 = 18.2; 2033 = 19.4 (Percent of GDP)
  - Effective interest rate (percent): 2023 = 2.1; 2024 = 2.2; 2025 = 2.3; 2026 = 2.5; 2027 = 2.6; 2028 = 2.7; 2029 = 2.9; 2030 = 3.0; 2031 = 3.1; 2032 = 3.2 (percent)

### Realism of baseline assumptions
- Past projections of debt drivers do not reveal any systematic biases.
- Forecast errors for the public debt-to-GDP ratio and primary deficit are well within norms.
- The projected change in public debt is similar to the past 5 years, with a slightly larger contribution from the primary deficit.

### Risk assessment and mitigating factors
- Overall risk of sovereign stress is assessed as moderate.
- Mitigating factors:
  - Favorable debt profile and strong institutional capacity.
  - Historical record: reduced debt by 52 ppts of GDP from 140 percent to 87 percent of GDP during 1993–2007, with an average primary surplus of 4.5 percent of GDP.
  - Public debt predominantly long-term, with an average residual maturity of 11 years in 2024.
  - Close to 45 percent of public debt is held by residents.
  - Share held by the central bank: peaked at 21.4 percent of outstanding debt in 2022, decreased to 19.5 percent of GDP in 2023 (also reported as peaking at 20.9 percent in another table and decreasing to 18.9 percent of GDP in 2023 in the public debt structure commentary).
  - Potential to absorb declining central bank share and financing needs through domestic and wider euro-area financial institutions.
  - One-time one-year state bond issuance in September 2023: gross 3.3 percent and net interest rate of 2.8 percent after deduction of a reduced withholding tax at 15 percent; amount €21.9 billion (3.7 percent of GDP), illustrating potential to tap private savers.

### Medium-term and long-term risk indicators
- Medium-term assessment: Moderate risk of sovereign stress; high probability of debt non-stabilization mitigated by debt management capacity and market absorption capacity.
- Long-term assessment: Moderate risk. Fiscal cost of aging projected to increase by 4.2 ppts of GDP during 2023-70, reaching 30 percent of GDP in 2070 (2024 Annual Report by the Aging Committee).
- Probabilistic indicators from Medium-Term Risk Assessment figure:
  - Fanchart width = 34.1 0.5 (percent of GDP)
  - Probability of debt non-stabilization = 97.8 0.8 (percent)
  - Terminal debt-to-GDP x = 31.7 0.7
  - Debt fanchart index (DFI) = 2.0 (Risk signal: Moderate)
  - Average baseline GFN = 19.5 6.6 (percent of GDP)
  - Initial Banks' claims on the gen. govt = 4.7 1.5 (pct bank assets)
  - Change in banks' claims in stress = 8.6 2.9 (pct banks' assets)
  - GFN financeability index (GFI) = 11.0 (Risk signal: Moderate)
  - Prob. of missed crisis, 2024-2029, if stress not predicted: 18.2 pct.
  - Prob. of false alarms, 2024-2029, if stress predicted: 21.6 pct.

### Long-term projections, demographics, and health spending
- Baseline long-run projections show elevated GFN-to-GDP and debt-to-GDP ratios driven by demographic trends.
- Baseline incorporates authorities’ projected cost of aging, including:
  - Increase in health care cost of 0.7 percent of GDP in 2024-30, and 1.6 percent of GDP in 2030-70.
- If excess cost growth (ECG) materialized at the standard 0.8 percent, the GFN and Debt-to-GDP ratio would be 9.6 ppts and 49.5 ppts higher, respectively, in the long term.
- Mechanical scenarios breach GFN thresholds in absence of fiscal consolidation, highlighting long-term risks.

### Debt structure and disclosures
- Consolidated gross debt of the federal government was 83 percent of total public debt or 85 percent of GDP as of end-2023.
- Public debt predominantly denominated in domestic currency, marketable, and governed by domestic law.
- Public debt predominantly long-term with average residual maturity of 11.1 years in 2024.

*Source: Fund staff.*

### 2. The NBB and the FSMA to establish a

### 2. The NBB and the FSMA to establish a formal agreement for sharing data on investment funds’ portfolio holdings and supervisory data. The FSMA to develop and adapt a stress test framework to assess structural vulnerabilities and risks in the investment funds sector, and to be integrated into the NBB’s systemic risk assessment.

### Investment funds data sharing and stress testing
- Recommendation / Action:
  - NBB and FSMA to sign a formal agreement to share data on investment funds’ portfolio holdings and supervisory data; FSMA to develop and adapt a stress test framework for the investment funds sector, to be integrated into the NBB’s systemic risk assessment.
- Status and developments:
  - A formal agreement between the NBB and the FSMA to share data on investment funds’ portfolio holdings and supervisory data was signed in 2023.
  - FSMA stress tests are now planned, and the first tests were conducted in 2023.
  - FSMA technical staff are working closely with NBB staff and coordinating inputs for the NBFI report.
  - The latest edition of the NBFI report was published in January 2025.

### Insurance sector resilience and liquidity
- Recommendation / Action:
  - Increase insurers’ resilience against macro-financial shocks by: i) engaging with industry to reduce dependence of insurers on lower tier capital; and ii) implementing liquidity stress tests and scenario analysis to identify potential sources of stress.
- Addressee and timing:
  - NBB; MT, NT.
- Status and developments:
  - i) Measures to reduce dependence on lower tier capital were informed by the NBB/EIOPA stress test for the top 5 insurers ranked by total assets with the lowest proportion of Tier 1 capital in function of the total Eligible Own Funds (smallest EoFT1/Total EoF) completed in November 2024.
  - ii) The NBB/EIOPA stress test includes a liquidity component and an NBB circular requires insurers to implement liquidity stress tests and scenario analysis to identify potential sources of stress.

### Macroprudential policy powers and accountability
- Recommendation / Action:
  - Medium-term: give NBB full discretion over activation and calibration of all capital- and borrower-based instruments without government approval, aligning powers with financial stability mandate.
  - Near-term: activation and calibration of capital-based measures under CRD/CRR should be at sole discretion of the NBB at the national level without government approval.
- Addressee and timing:
  - Government; MT, NT.
- Status and developments:
  - Action would require that a new government is in place.
  - NBB Board supports adapting the institutional framework to make the NBB’s autonomy as macroprudential authority more effective as regards capital-based measures, but opposes extending powers regarding legally-binding borrower-based measures.
- Recommendation / Action (transparency for government-intervening measures):
  - For activation, recalibration and extension of macroprudential policy instruments requiring government intervention, strengthen accountability by publishing the factors weighing on policy considerations and decisions.
- Addressee and timing:
  - NBB, Government; NT.
- Status and developments:
  - Article 36/40 of NBB’s Organic Law requires federal agencies that deviate from NBB recommendations to explain why. Macroprudential policy decisions requiring government intervention could be made public on that basis.

### Systemic risk assessment framework and data integration
- Recommendation / Action:
  - Strengthen the NBB’s systemic risk assessment framework for setting macroprudential policy by closing data gaps and ensuring stronger integration of data and quantitative tools with instrument design and selection.
- Addressee and timing:
  - NBB; MT.
- Status and developments:
  - The NBB carried out a review of the framework for its semi-annual risk assessment during 2024H1 and adopted a new framework that covers all identified systemic risks.
  - The new framework better links (tail-) risk quantification and macroprudential policy decisions and includes a risk assessment for NBFIs.

### Banking regulation and supervision — governance and processes
- Recommendation / Action:
  - Strengthen banks’ corporate governance framework and expectations, in particular the supervisory function of the board.
- Addressee and timing:
  - NBB; NT.
- Status and developments:
  - NBB has identified measures and is working to ensure consistency with the insurance sector’s governance framework.
  - Some measures require modification of banking and insurance law alongside transposition of CRD6 and Solvency II.
  - Subsequent modification of the NBB’s governance and “fit-and-proper” manuals and the relevant Insurance Circular is planned.
- Recommendation / Action:
  - Harmonize, taking into account best practices, and ensure risk sensitivity of internal supervisory decision-making processes across departments.
- Addressee and timing:
  - NBB; NT.
- Status and developments:
  - Follow-up on on-site inspection findings (including timing of banks’ remedial actions) is being aligned across supervisory departments.
  - Relevant information regarding changes to Pillar 2 requirements and implications are now reflected in internal decision-making documentation.
- Recommendation / Action:
  - Maintain adequate prudential supervisory staffing for LSI supervision, structurally collect consumer protection and conduct information to feed into the SREP and monitor banks’ own capital targets systematically.
- Addressee and timing:
  - NBB; NT.
- Status and developments:
  - The NBB has committed to maintaining adequate staffing in the LSI teams.
  - The NBB and the FSMA have made an inventory of relevant consumer protection and conduct information to be shared by the FSMA at various time frequencies with NBB to allow incorporation into the SREP.
  - The inventory covers all banks, stockbroking firms and insurance undertakings under the NBB’s supervision.

### Insurance regulation — legal framework and valuation guidance
- Recommendation / Action:
  - Finalize legal framework of the natural catastrophe public-private partnership to enhance predictability of natural disaster related insurance cover.
- Addressee and timing:
  - MoF; NT.
- Status and developments:
  - The NBB provided technical advice to the federal government on reinforcing the legal framework.
  - The proposal is expected to be finalized and submitted to Parliament after the new government is sworn in.
- Recommendation / Action:
  - Provide guidance for the consistent valuation of mortgage loans.
- Addressee and timing:
  - NBB; MT.
- Status and developments:
  - General and specific residential real estate data collection guidelines including valuation guidance were updated in February 2024.

### Cross-border supervisory cooperation and complaints reporting
- Recommendation / Action:
  - Contact third country supervisors to assess the basis for sharing and collecting information.
- Addressee and timing:
  - NBB; NT.
- Status and developments:
  - No contact initiated yet. The legal basis for information sharing with third country supervisors is currently insufficient (third countries do not always have sufficiently robust confidentiality frameworks).
- Recommendation / Action:
  - Engage the government to obtain legal powers to introduce regular complaints reporting by insurers.
- Addressee and timing:
  - Government/FSMA; I.
- Status and developments:
  - Introduction of regular complaints reporting by insurers requires a change in the legal framework by Royal Decree.
  - The FSMA has prepared the draft decree, which it will discuss with the new Minister of Economy.
  - The FSMA is also preparing accompanying regulation to further detail the content and process for insurers to submit their report.

### Euroclear Bank (EB) — IT, transparency, and continuity
- Recommendation / Action:
  - EB should substantially improve comprehensiveness and sufficiency of IT and information security risk management, including cyber security, and define risk management at Board level as a top priority.
- Addressee and timing:
  - EB; NT.
- Status and developments:
  - Substantive improvements to EB’s IT and information security risk management framework were made.
  - Security controls implementation and asset management were notably improved.
- Recommendation / Action:
  - EB should develop capacity to increase transparency regarding the business of its direct participants’ clients beyond relying on direct participant disclosure.
- Addressee and timing:
  - EB; NT.
- Status and developments:
  - Increasing transparency requires altering contractual relationships with direct participants while accommodating competition law restrictions.
  - EB has made enhancements to information gathering processes within the current legal data collection framework and will consider further enhancements to due diligence and monitoring.
- Recommendation / Action:
  - EB should put in place more robust testing of business continuity and participant default procedures, including simulation exercises.
- Addressee and timing:
  - EB; NT.
- Status and developments:
  - An October 2024 exercise incorporated more robust simulation techniques.

### Crisis management, ELA, and resolution
- Recommendation / Action:
  - Finalize Rules of Procedure of the NBB Resolution Board and finalize the national resolution handbook covering resolution tools and powers.
- Addressee and timing:
  - NBB; I.
- Status and developments:
  - NBB expects the national handbook to be a living document; initial priority given to tools for resolution and operational steps for bail-in and sale-of-business.
  - Work on sections on additional powers and tools has begun.
- Recommendation / Action:
  - Strengthen NBB’s internal coordination for crisis management by establishing an interdepartmental cooperation mechanism and prepare bilateral cooperation agreements between the Resolution Unit and Financial Stability and Supervisory Departments.
- Addressee and timing:
  - NBB; I.
- Status and developments:
  - Internal coordination substructure established (risk team on recovery and crisis management).
  - Cooperation agreements will be prepared after expected interactions between units have been clearly identified.
- Recommendation / Action:
  - Enhance the ELA framework by: i) seeking cooperation arrangements with other National Central Banks for cross-border groups; ii) developing policies to assess prospective solvency and document lines of action/responsibility for ELA in resolution, subject to a credible resolution strategy; iii) preparing internal planning and documenting how the NBB would consider ELA to NBFIs.
- Addressee and timing:
  - NBB; NT, I, NT.
- Status and developments:
  - i) NBB started technical discussions and adverse financial market event simulation exercises to serve as blueprint for cooperation arrangements for ELA involving a cross-border banking group.
  - ii) Policies to assess prospective solvency and document lines of action/responsibility for ELA in resolution are being developed and will follow Eurosystem procedures.
  - iii) Results of broader reflection on ELA to NBFIs are awaited.

### Deposit Insurance System enhancements
- Recommendation / Action:
  - Enhance the Deposit Insurance System by: i) ensuring operational readiness to meet the target of 7 working days for pay-outs; ii) segregating the DIS fund from the national budget, increasing its target level and operationalizing the public backstop; and iii) start working on operationalization of the paybox plus mandate.
- Addressee and timing:
  - Guarantee Fund; I, I, NT.
- Status and developments:
  - i) Operational readiness to meet the target of 7 working days for pay-outs was tested in 2024. Institutions covering 99.95 percent of deposits were deemed to have provided timely and sufficient information.
  - ii) The DIS fund is now segregated from the national budget, and its target level was increased to 1.8 percent of covered deposits with adoption of new law in November 2023, but operationalization of the public backstop and development of an investment policy for the DIS fund are still pending.
  - iii) Work on the operationalization of the paybox plus mandate will continue throughout 2025.

### Financial integrity and AML/CFT supervision
- Recommendation / Action:
  - Amend regulatory framework to make the NBB a member of the national committee on terrorist financing.
- Addressee and timing:
  - Relevant ministers; I.
- Status and developments:
  - A legislative proposal for a new broader national committee on money laundering, terrorism financing and proliferation financing, with all relevant stakeholders including the NBB, was prepared by Treasury with support from the NBB and the national committee on terrorism financing.
  - Submission of the proposal to the Council of Ministers is pending a new government.
- Recommendation / Action:
  - NBB to increase resources for AML/CFT supervision, enhance the sanctions framework and its implementation, and continue enhanced supervision over the payment institutions sector.
- Addressee and timing:
  - NBB; I.
- Status and developments:
  - AML off-site team resources were increased by 2 FTEs in 2024 and one additional off-site FTE has been approved for 2025.
  - On-site AML team resources were increased by 1 FTE in 2024.
  - Several administrative sanctioning proceedings are in the pipeline within the existing sanctions framework.

### Data adequacy and surveillance priorities
- Staff assessment and rationale:
  - Staff assess the overall data quality as adequate for surveillance purposes.
  - The NBB regularly publishes a full range of economic and financial data and provides calendar dates of main statistical releases.
  - Current account data are subject to significant data revisions primarily due to volatility in the trade and primary income balances influenced by substantial activities of multinationals.
  - Quarterly BOP data is released with a 3-month lag; revision of annual data has a 9-month lag.
  - Consistency between net exports in national accounts and BOP statistics should be improved.
  - Efforts to incorporate new data sources and methodological improvements should continue.
- Recent changes:
  - Five-yearly benchmark and data revisions to improve national accounts accuracy covering 2009-23 were released in October 2024.
  - General and specific residential real estate data collection guidelines including valuation guidance were updated in February 2024.
- Other data gaps noted:
  - Publishing insurance sector market conduct data, including measures of insurance underwriting risks, and further expanding statistics and data sources for surveillance of risks to the financial sector from commercial real estate would be useful.

*Prepared by IMF staff based on inputs from the authorities.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1belea2025001-print-pdf.pdf_