## INCREASING PUBLIC INVESTMENT, FOSTERING DIGITALIZATION, AND SUPPORTING THE GREEN TRANSITION: A DIFFICULT CHALLENGE UNDER FISCAL CONSOLIDATION

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### A. Fiscal outlook and strategic priority
- Belgium faces sustained fiscal consolidation needs driven by wage and social benefit indexation, interest expenses, defense spending, and aging costs projected to persist into the medium term.
- If current policies remain unchanged:
  - the fiscal deficit is expected to widen by 3 percentage points (ppts) of GDP to about 7.0 percent of GDP by 2030 compared to 2023 levels.
  - public debt is expected to increase by close to 20 ppts of GDP to 125 percent of GDP by 2030 compared to 2023 levels.
- Policy priority:
  - rationalize public consumption as the core of fiscal adjustment while preserving or increasing public investment in infrastructure and human capital to mitigate demand impacts of consolidation and boost potential growth.
- Strategic rationale for higher public investment:
  - support digitalization to enable more efficient business and public services and foster innovation and productivity growth.
  - accelerate the green transition to develop and use clean technologies, reduce reliance on fossil fuels, and lower climate risks and long-run losses.

### B. Macro-economic impact of rebalancing spending toward investment
- GIMF simulation finding:
  - an expenditure-neutral shift from current spending towards public investment peaking at 2 percent of GDP after five years could yield a cumulative GDP increase of about 6 percent in the long run, driven by improved productivity, lower prices, and increased exports.
- Empirical multiplier evidence (Box 1):
  - Ciaffi et al. (2024) for OECD countries: public investment multipliers range between 1.36 and 2.30 over a five-year period; public consumption multipliers 0.77-1.78.
  - NBB (2017) estimate for Belgium: public investment multiplier of about 1.5 over 1-2 years and about 1.8 over 10 years.
  - Debt-financed public investment tends to have a higher short-term GDP impact than tax-financed investment (NBB 2017).
- Efficiency caveat:
  - investments that effectively enhance productive capacity generate larger multipliers.

### C. Current state and composition of public investment
- Aggregate and headline indicators:
  - Total GFCF at 23.6 percent of GDP in 2023, below the pre-pandemic peak of 24 percent of GDP in 2019.
  - Public GFCF has remained below 3 percent of GDP since the 1990s, accounting for about one-tenth of total GFCF, and was 2.7 percent of GDP in 2023.
- Broader public investment (including capital transfers):
  - capital transfers (investment grants) ≈ 0.7 percent of GDP in 2023.
  - public investment (public GFCF + capital transfers) = 3.4 percent of GDP in 2023.
- Government targets and prospects:
  - 2020 coalition target: raise public investment to 4 percent of GDP by 2030 (initially financed with Next Generation EU grants) — currently unlikely due to stalled NGEU-financed public investment.
  - February 2025 government coalition aims for an annual investment of 3 percent of GDP over the next four years (marginally above EC requirement to exceed 2.8 percent of GDP).
- Sectoral composition (2022):
  - Transport: 31 percent of total public GFCF or 0.8 percent of GDP.
  - Basic research (primarily within universities): 22 percent of total public GFCF or 0.6 percent of GDP.
  - Notable shifts 2020–22: share for economic affairs increased to one third; defense share doubled to 5 percent of total.

### D. Decentralization and territorial allocation
- Sixth state reform (2011) transferred competencies to regions/communities; regions handle territorial matters, communities handle individual/family policies.
- Public GFCF implemented by regions and communities rose to 52 percent of the total in 2022, from 45 percent in 1995.
- Regional/community shares by function in 2022:
  - Education: 75 percent.
  - Economic affairs: 63 percent.
  - General public services: 56 percent.
- Federal role and defense:
  - Federal government’s share of public GFCF has increased due to rising defense investment.
  - Public investment in defense is projected to double to 0.6 percent of GDP in 2026 compared to 2023, aligning with commitment to increase defense budget to 2 percent of GDP.

### E. Infrastructure quality, digitalization, and energy transition needs
- Infrastructure and ICT:
  - Existing infrastructure not operating at the efficiency frontier relative to some peers (Spain, the UK, Germany) at comparable per-capita accumulated public investment.
  - Belgium’s adoption of ICT is below the midpoint among European countries.
- Digital infrastructure (as of 2024):
  - 30 percent of households had access to at least one 5G coverage (ranking second to last in the EU).
  - 25 percent of households covered by fiber optic to the premises (FTTP), placing Belgium lowest among EU countries.
  - Over 60 percent of companies adopted AI, cloud computing, or data analytics in 2024.
  - EC Digital Decade Country Report target: public investment increase of €892 million or 0.2 percent of GDP by 2030.
- Green transition investment needs:
  - EU aggregate: increase investment to 7.7 percent of GDP in 2021–30 from 5.8 percent in 2011–20; public sector share of additional investments expected between 0.5 to 1 percent of GDP in 2021–30.
  - Belgium estimates:
    - NBB projects investment need of 2.5 percent to 3.5 percent of GDP annually through 2050.
    - EIB estimates 1.4 percent of GDP annually until 2050.
  - NGFS scenario: under current policies, physical risk losses projected to reach 6 percent of GDP in 2030 and continue increasing thereafter.
  - Average estimated cost of implementing stringent mitigation policy ≈ €6 billion, or 1 percent of GDP in 2025.
- Recent climate-related losses:
  - Flood losses July 2021: €1.86 billion (0.4 percent of GDP); Walloonia pledged €1.03 billion for full recovery.
  - Less than 15 percent of affected population insured against natural disaster other than fire.
- NECP plans and private investment needs:
  - NECP: public sector plans to invest about 0.7–0.8 percent of GDP annually in the mobility and energy sectors through 2030.
  - Within that, 0.6 percent of GDP directed to smart solutions and infrastructure for digitalization and decarbonization.
  - NECP estimates private investment needs of about €17 billion to expand transmission and distribution networks and support smart grids.
- Fossil fuel subsidies and pricing:
  - Current spending on fossil fuel subsidies estimated to exceed 1.7 percent of GDP.
  - Close to 60 percent of government energy spending directed at mitigating high energy prices.
  - Natural gas for residential use receives the highest explicit and implicit subsidies in Belgium; residential electricity price remains higher than cost of supply plus VAT.
- Renewable integration:
  - Wind and solar represent 85 percent of total renewable energy sources in Belgium.
  - Growth of net electricity generation from wind and solar in 2017–23 trailed capacity growth, suggesting integration inefficiencies.

### F. Public investment management, governance, and project performance
- Longstanding low public capital stock:
  - Public component of capital stock below three percent of GDP since the 1990s.
- Efficiency gap and PIM weaknesses:
  - IMF research: on average, countries could close two thirds of the efficiency gap by improving public investment management (PIM) practices to the level of the most efficient comparator.
  - Identified governance weaknesses:
    - absence of clear national infrastructure strategies;
    - weak project preparation (appraisal, selection, approval);
    - fragmented governance and lack of coordination across entities;
    - no gatekeeping role of the Ministry of Finance across federated entities.
- Project appraisal and cost overruns:
  - Standard economic and financial appraisal is not consistently required across federal, regional, and BCR levels.
  - Documented cost overrun cases:
    - Oosterweel ring road: from €3 billion (2010 estimate) to over €10 billion projected.
    - Brussels Metro 3 line: from €950 million (2009) to €4.7 billion by 2024.
    - Mons Railway Station: estimate €60 million → final outturn €480 million; nine years delay.
    - Regional Express Network: €1.5 billion → over €3 billion by 2016.
    - Flemish missing links road portfolio: 24/27 projects estimated €1.4 billion (2001) → estimated €11 billion to complete full 27 by 2019.
  - Evidence suggests investments since 2008 have higher average cost overrun than those in the preceding decade.
  - Causes: optimism bias in early estimates, commitment prior to design completion, weak front-end planning, inadequate risk assessment, contracting weaknesses, coordination failures, weak stakeholder management.
- Decision-gate structures and international thresholds:
  - Belgium lacks standard decision-gate procedures used in comparators; examples of comparator thresholds:
    - Norway: proposals estimated ≥ NOK750m subject to State Projects Model QA1 and QA2.
    - Denmark: road/rail projects > DKK250m subject to external assurance at two Decision Levels.
    - UK: projects > £1billion subject to enhanced scrutiny and inclusion in Government Major Project Portfolio.
    - Ireland: projects > €200m subject to external assurance and review.
- Subnational good practices:
  - Aquafin (Flanders wastewater): structured priority ranking, P50/P80 cost estimates, risk contingencies, and new governance process yielding ~80 percent of projects on budget at P80 level over two years.
  - Vivaqua (BCR sewer network): risk-based maintenance prioritization for a 500km network, covering 99 percent of population served, using a rolling 15-year plan.

### G. Institutional roles, gatekeeping, and coordination challenges
- Budget/finance gatekeeping:
  - The Budget Ministry does not play an active gatekeeper role in public investment management in any Belgian entity; atypical compared to advanced economies where Ministries of Finance exercise significant oversight.
- Coordination weaknesses:
  - Fragmentation across entities; absence of administrative structures to align infrastructure planning among sectors and regions.
  - No process to coordinate federal and regional investments (example: rail planned nationally, roads planned regionally).
- Specific institutional rigidity:
  - Infrabel’s regional investment key: investment volume split 60 percent Flemish / 40 percent Wallonia for most resources (excluding BCR railway infrastructure and rolling stock), embedding annual and cumulative targets in MIP and SMIP; risks include artificial ceilings/floors on region-specific investment and maintenance implications.
- Reform initiatives underway:
  - Flanders: new public investment cell within Department of Mobility and Public Works.
  - Brussels-Capital Region: legislation to establish a new PIM unit.
  - Study Committee on Public Investment (SCPI), established February 2023 under High Council of Finance, tasked to inventory public investment, identify needs (initial report on climate transition underway), identify implementation obstacles and methodological tools, and support technical dialogue.

### H. Recommendations to raise public investment efficiency and mobilize resources
- Improve PIM and governance:
  - Lay out clear infrastructure investment strategies and national medium- to long-term public investment objectives to anchor expectations and guide private-sector strategies.
  - Strengthen project appraisal, selection, and governance; introduce standardized economic and financial appraisal requirements with thresholds; require expert assurance for megaprojects; publish and independently assure appraisals.
  - Establish decision-gate structures and portfolio monitoring across lifecycle stages.
  - Strengthen role of finance/budget functions as gatekeepers in each entity.
  - Mandate and resource the Federal Planning Bureau—or similar body—to periodically assess infrastructure capacity and condition and recommend national investment focus.
  - Publish a rolling combined national pipeline of construction tenders, updated every six months.
- Improve coordination and burden sharing:
  - Adopt pragmatic coordination among federal, regional, and community governments to achieve fiscal targets and national investment strategies (including energy-climate goals).
  - Reduce duplication and enhance economies of scale.
  - Empower SCPI to develop research and analytical tools for better PIM.
- Mobilize additional financing and repurpose fiscal support:
  - Reallocate funds from fossil fuel subsidies (estimated to exceed 1.7 percent of GDP) toward green investment and targeted affordability measures for vulnerable households.
  - Effectively utilize proceeds from carbon pricing under EU ETS2 (expected to start in 2027) and decide revenue distribution between federal and federated entities to augment fiscal resources for public investment.
  - Explore PPPs and blended finance with safeguards to mitigate fiscal risks; PPP investment declined to < 0.1 percent of GDP in 2019 from 0.2 percent in 2014; total PPP capital stock = 1.1 percent of GDP.
  - Leverage EU and multilateral finance: EIB Group committed ~€2.4 billion for Belgium in 2023 (including €230.5 million through EIF); ~80 percent allocated to climate projects.
  - Prioritize EU-backed investments to alleviate budget constraints and align with European Green Deal objectives; maximize use of remaining RRF/RRP/RePowerEU instruments where feasible.
- Raise efficiency to "do more with less":
  - Prioritize high-return, productivity-enhancing investments (digitalization, grid upgrades, transport bottlenecks).
  - Ensure public investment signals mobilize private investment (example: electricity grid investment to crowd in private generation and storage).

### I. Cross-cutting implication: digitalization and green transition as investment priorities
- Digital infrastructure targets and shortfalls:
  - EC target: increase public investment by €892 million or 0.2 percent of GDP by 2030 to align with EU 2030 ambitions.
  - Belgium trails in 5G (30 percent households coverage) and FTTP (25 percent households).
- Green transition:
  - Public and private investment needs estimated across sources (NBB, EIB, NECP) with ranges from 0.6 percent of GDP (smart solutions) to 2.5–3.5 percent of GDP (NBB projection) annually through 2050.
  - Fully recycling carbon tax revenue through public investments could yield higher GDP outcomes than recycling via tax cuts, transfers, or debt reimbursement.

### J. Education and human capital as complementary fiscal and investment challenge
- Education spending and efficiency:
  - Public spending on education = 6.3 percent of GDP in 2022 (second highest in Europe).
  - Education share of general government expenditure = 11.8 percent in 2022.
  - Belgium could achieve potential fiscal savings of 0.75 to 1.4 percent of GDP if as efficient as EU best performers; estimated increases in PISA scores from 20 to 45 percent depending on comparator.
  - Compensation of education employees accounts for over 5 percent of GDP and 81 percent of education spending; compensation in education accounts for 41.5 percent of general government total wage bill.
- Outcome-performance mismatch:
  - Belgium’s PISA, TIMSS, PIRLS outcomes are comparable or worse than peers despite higher spending; performance has deteriorated over the last decade.
- Reform priorities in education to free fiscal space and boost outcomes:
  - Address wage-bill drivers: employment levels, statutory teaching and working time, schemes allowing reduced working time or early retirement.
  - Increase teacher allocation efficiency, reduce grade repetition (Belgium has highest rate of grade repetition in the EU), and better target support to disadvantaged students.
  - Promote early childhood enrollment among disadvantaged groups (current enrolment gap: 33 percent poorest tertile vs 72 percent richest tertile).
  - Align curricula with labor market needs, promote STEM (tertiary STEM share ages 20-29 = 16.4 percent in 2022 vs EU 23.0 percent), and strengthen vocational and work-based learning.
  - Expected outcomes: higher employment rates (notably for those with only secondary education), reduced firms’ training burden, higher productivity and innovation, and improved fiscal sustainability.

### K. Firm dynamics, financing, and productivity constraints (contextual for investment impact)
- TFP and firm dynamics:
  - TFP growth slowed: from 1 percent (1990–94) to -0.1 percent (2015–19); lower average TFP growth over 1999–2022 than the euro area.
  - R&D spending rose to 3.4 percent of GDP in 2022 (post-2017 innovation-income deductions).
- Startup finance and scaling constraints:
  - VC investment = 0.04 percent of GDP in 2023 (twice lower than Netherlands; ten times lower than UK).
  - Young, high-growth firms employ 0.25 percent of those in firms with 10+ employees (Belgium) vs 0.8 percent euro average.
  - Startups are under-leveraged; firms face higher financing costs; bank-based system limits startup scaling.
- Policy levers to complement public investment:
  - Revisit tax treatment of equity vs debt (NID abolished in 2023 had previously raised equity ratios by ≈ three percentage points).
  - Product-market reforms to reduce regulatory barriers and state-imposed price controls; potential long-run TFP gains (closing half the gap could boost TFP ~3½ percent).
  - Deepen capital market union and EU-level measures to mobilize risk capital and reduce intra-EU trade barriers.

*Source: IMF staff compilation from the chapter "INCREASING PUBLIC INVESTMENT, FOSTERING DIGITALIZATION, AND SUPPORTING THE GREEN TRANSITION: A DIFFICULT CHALLENGE UNDER FISCAL CONSOLIDATION" (March 3, 2025).*

### References ________________________________________________________________________________ 17

### INCREASING PUBLIC INVESTMENT, FOSTERING DIGITALIZATION, AND SUPPORTING THE GREEN TRANSITION: A DIFFICULT CHALLENGE UNDER FISCAL CONSOLIDATION

### A. Introduction and Overview
- Belgium needs sustained fiscal consolidation due to ongoing pressures from wage and social benefit indexation, interest expenses, defense spending, and aging costs projected to persist into the medium term.
- If current policies remain unchanged:
  - the fiscal deficit is expected to widen by 3 percentage points (ppts) of GDP to about 7.0 percent of GDP by 2030 compared to 2023 levels.
  - public debt is expected to increase by close to 20 ppts of GDP to 125 percent of GDP by 2030 compared to 2023 levels.
- Policy priority: rationalize public consumption as the core of fiscal adjustment while preserving or increasing public investment in infrastructure and human capital to mitigate demand impacts of consolidation and boost potential growth.
- Strategic rationale for higher public investment:
  - support digitalization to enable more efficient business and public services and foster innovation and productivity growth.
  - accelerate the green transition to develop and use clean technologies, reduce reliance on fossil fuels, and lower climate risks and long-run losses.
- Historical context:
  - Belgium has had relatively low levels of public gross fixed capital formation (GFCF).
  - Capital spending did not decline significantly during fiscal consolidation episodes (1996–2007) nor increase in post-crisis periods (e.g., after the pandemic).
  - A relatively large increase in capital spending in 2011–12 (by 0.9 and 0.4 ppt of GDP) was primarily due to changes in other capital expenditures.
- Analytical finding (policy simulation using IMF’s GIMF):
  - a gradual expenditure-neutral shift from current spending towards public investment peaking at 2 percent of GDP after five years could yield a cumulative GDP increase of about 6 percent in the long run, driven by improved productivity, lower prices, and increased exports.
- Paper structure:
  - Section B: overview of current state of public investment in Belgium.
  - Section C: need for public investment to support digitalization and the green transition.
  - Section D: policy options to raise public investment amid fiscal adjustment, including improving spending efficiency, coordination, incentivizing private investment, and using EU funding.
  - Section E: conclusion.

### Box 1. Public Investment: A Catalyst for Demand and Growth Potential
- Empirical evidence on multipliers:
  - Ciaffi et al. (2024) for OECD countries: public investment multipliers range between 1.36 and 2.30 over a five-year period; public consumption multipliers 0.77-1.78.
  - NBB (2017) estimate for Belgium: public investment multiplier of about 1.5 over 1-2 years and about 1.8 over 10 years.
  - Debt-financed public investment tends to have a higher short-term GDP impact than tax-financed investment (NBB 2017).
- Efficiency matters: investments that effectively enhance productive capacity generate larger multipliers.
- GIMF simulation result reiterated: expenditure-neutral shift peaking at 2 percent of GDP after five years → cumulative GDP increase of about 6 percent in the long run.
- Note: general government fixed assets have been considerably lower as a share of GDP compared to peer countries since the 1980s.

### B. Current State of Public Investment
- Aggregate trends:
  - Total GFCF increased marginally over the last three decades; at 23.6 percent of GDP in 2023, it remains below the pre-pandemic peak of 24 percent of GDP in 2019.
  - Public GFCF has remained below 3 percent of GDP since the 1990s, accounting for about one-tenth of total GFCF, and was 2.7 percent of GDP in 2023.
  - Comparison with peers:
    - France and the Netherlands: public GFCF hovered in the 3.5-4 percent of GDP range.
    - Germany: comparable to Belgium.
  - Growth of total net capital stock slowed in Belgium during 2009–19, with slight recovery in 2020–23; Belgium’s growth in total capital stock has consistently ranked slightly below the euro area average.
- Medium-term expectations and targets:
  - The coalition government agreement in 2020 set a target to raise public investment to 4 percent of GDP by 2030, initially financed with Next Generation EU grants.
  - NGEU-financed public investment under the Resilience and Recovery Fund quickly stalled, making achieving the 4 percent target unlikely.
  - The coalition agreement of the new government formed in February 2025 aims for an annual investment of 3 percent of GDP over the next four years, marginally above the EC’s economic governance rules requirement to exceed 2.8 percent of GDP.
- Measurement and broader definition of public investment (Box 2):
  - Capital transfers in the form of investment grants to other sectors contribute to public investment; size of investment grants is typically around 1 percent of GDP in Belgium.
  - As of 2023:
    - public GFCF = 2.7 percent of GDP.
    - capital transfers = 0.7 percent of GDP.
    - public investment (public GFCF + capital transfers) = 3.4 percent of GDP.
  - Under this broader definition (2005–22), Belgium’s total public investment is similar to Germany and slightly lower than France and the Netherlands (FPB 2024).
  - Note: large reductions in investment grants are attributed to the reclassification of Infrabel from the private sector to the public sector (as "direct" investment) in 2014, and a change in the financing method for hospital infrastructure following the state reform in 2016 (FPB 2024).
- Sectoral composition (2022):
  - Half of total public GFCF under the general government account is concentrated in transport and basic research.
  - Transport sector:
    - accounts for 31 percent of total public GFCF or 0.8 percent of GDP in 2022.
    - explanation: dense transport network and classification of railway infrastructure companies in the government sector (FPB 2024b).
  - Basic research (primarily within universities):
    - accounts for 22 percent of total public GFCF or 0.6 percent of GDP in 2022.
  - Notable shifts in 2020-22:
    - share of public GFCF allocated for economic affairs increased to one third from about 30 percent of total.
    - share for defense doubled to 5 percent of total.
    - corresponding share reductions in social protection and education.

*Source: IMF staff compilation from the chapter "INCREASING PUBLIC INVESTMENT, FOSTERING DIGITALIZATION, AND SUPPORTING THE GREEN TRANSITION: A DIFFICULT CHALLENGE UNDER FISCAL CONSOLIDATION" (March 3, 2025).*

### 8.      Over half of total public GFCF is made by regional and community governments,

### 8. Over half of total public GFCF is made by regional and community governments

### Decentralization and composition of public GFCF
- The sixth state reform in 2011 transferred additional competencies from the federal to the regional and community governments.
- Regions are responsible for territorial matters, including economic development, infrastructure (excluding railway), environment, housing, and employment.
- Communities oversee language issues and policies related to individual and family such as culture, education, and family allowances.
- Public GFCF implemented by regions and communities increased to 52 percent of the total in 2022, from 45 percent in 1995.
- Regional and community shares of public investment by function in 2022:
  - Education: 75 percent of total public investment in education.
  - Economic affairs: 63 percent.
  - General public services: 56 percent.
- The federal government’s share of public GFCF has increased in recent years due to rising defense-related investment.
  - Public investment in defense is projected to double to 0.6 percent of GDP in 2026 compared to 2023.
  - This is broadly in line with Belgium’s commitment to progressively increase the defense budget to 2 percent of GDP in line with NATO obligations.
- The territorial allocation of competences (environment, energy policy, transport, public works) to regions adds complexities to planning, selection, and implementation of public investment projects.

### Infrastructure quality and efficiency
- Existing public infrastructure in Belgium is not operating at the efficiency frontier relative to some European peers (Spain, the UK, Germany) at comparable per-capita accumulated public investment.
- Transport infrastructure competitiveness lags neighboring countries, particularly in road, railroad, and air transport sectors.
- Belgium’s adoption of information and communication technologies (ICT) is below the midpoint among European countries.

### Digital infrastructure needs and indicators (Digitalization)
- As of 2024:
  - 30 percent of households in Belgium had access to at least one 5G coverage (ranking second to last in the EU).
  - 25 percent of Belgian households were covered by fiber optic to the premises (FTTP), placing Belgium the lowest among EU countries.
- Over 60 percent of companies in Belgium adopted artificial intelligence (AI), cloud computing, or data analytics in 2024.
- The European Commission’s Digital Decade Country Report identifies a public investment increase target for Belgium of €892 million or 0.2 percent of GDP by 2030 to align with EU 2030 ambitions.

### Energy infrastructure, green transition, and investment needs
- Projections of green investment needs vary; examples provided:
  - EU as a whole must increase investment to 7.7 percent of GDP in 2021–30, from 5.8 percent of GDP in 2011–20, to meet EU 2030 climate targets.
  - Public sector share of additional investments is expected to range between 0.5 to 1 percent of GDP in 2021–30.
  - For Belgium:
    - National Bank of Belgium projects an investment need of 2.5 percent to 3.5 percent of GDP annually through 2050.
    - European Investment Bank estimates investment needed for the green transition at 1.4 percent of GDP annually until 2050.
- NGFS scenario estimates:
  - Under current policies (‘hot house world scenario’), physical risks losses are projected to reach 6 percent of GDP in 2030 and continue to increase thereafter.
  - The average estimated cost of implementing stringent mitigation policy is approximately €6 billion, or 1 percent of GDP in 2025.
  - Fully recycling carbon tax revenue through public investments could lead to higher GDP than recycling through tax cuts, transfers to households, or reimbursement of public debt.
- Climate impacts and damages:
  - Belgium incurred €1.86 billion (0.4 percent of GDP) losses from floods in July 2021.
  - Walloonia pledged €1.03 billion for full recovery following the floods.
  - Less than 15 percent of the affected population were insured against natural disaster other than fire.
- National Energy and Climate Policy (NECP) plans:
  - Public sector plans to invest about 0.7–0.8 percent of GDP annually in the mobility and energy sectors through 2030.
  - Within this, 0.6 percent of GDP will be directed to smart solutions and infrastructure for advancing digitalization and decarbonization.
- Fossil fuel subsidies and pricing distortions:
  - Current spending on fossil fuel subsidies is estimated to exceed 1.7 percent of GDP.
  - Close to 60 percent of government energy spending is directed at mitigating high energy prices.
  - In Belgium, natural gas for residential use receives the highest amount of explicit and implicit subsidies, while residential electricity price remains higher than the cost of supply plus value-added tax.
- Electrification and grid constraints:
  - EVs account for 8.2 percent of total vehicles in use in 2023 (driven in part by tax incentives).
  - Rising and volatile electricity prices over the past four years may discourage adoption of EVs and other fossil-fuel alternatives.
  - The NECP estimates private investment needs of about €17 billion to expand transmission and distribution networks and support the transition to smart grids.
  - Wind and solar represent 85 percent of total renewable energy sources in Belgium; growth of net electricity generation from wind and solar in 2017–23 trailed capacity growth, suggesting inefficiencies in integrating new renewable capacity.

### Policy recommendations
- Raise the efficiency of public investment to achieve more with less spending, securing fiscal space for additional investments required for the green transition and digitalization.
  - Actions should include: laying out clear infrastructure investment strategies; strengthening project appraisal, selection, and governance; and improving coordination within and among the federal and regional governments.
- Improve coordination and burden sharing of fiscal consolidation and public investment among federal and federated entities.
  - Adopt a pragmatic approach to foster coordination among federal and regional and community governments to achieve fiscal targets and national investment strategies, including energy-climate goals.
  - Reduce duplication of investment and resource waste while enhancing economies of scale.
  - The Study Committee on Public Investment (SCPI), established under the High Council of Finance in February 2023, is tasked to:
    - provide an inventory of public investment;
    - identify public investment needs (initial report on climate transition underway);
    - identify implementation obstacles, methodological tools and procedures;
    - support technical dialogue among entities.
- Establish clear and communicated national medium- to long-term public investment objectives to anchor firms’ expectations and guide private-sector strategies and investments in line with sustainability objectives.
  - Public investment can play a strategic role in signaling policy objectives and mobilizing private-sector investment (example: enhancing prospects for private investments in electricity power grid).

*Source: 1belea2025002-print-pdf - 8.      Over half of total public GFCF is made by regional and community governments, https://www.imf.org/-/media/files/publications/cr/2025/english/1belea2025002-print-pdf.pdf*

### 18.      Fostering higher public investment in the green transition requires harmonizing

### 18.      Fostering higher public investment in the green transition requires harmonizing energy policies, delivering clear market signals, and phasing out or repurposing fossil fuel subsidies

### Harmonizing energy policies, market signals, and subsidies
- Repurposing subsidies currently allocated to petroleum, gas and coal should be a key part of the strategy to:
  - incentivize renewable energy adoption,
  - reduce overall energy consumption,
  - address funding shortages.
- Belgium should redirect fiscal resources currently providing general price subsidies, which likely hinder or delay the transition, to renewable energy.
- Affordability measures should directly target the most vulnerable segment of the population.
- Effectively utilizing proceeds from carbon pricing under the new EU ETS2 will be important; the EU ETS2:
  - is expected to start in 2027,
  - will cover transport, buildings, and most small businesses.
- Key fiscal design questions include determining the revenue distribution between federal and federal entities to augment fiscal resources for public investment.
- Increasing carbon pricing could further augment the fiscal envelope (Vernon 2022).

### Public-private partnerships (PPP) and blended finance
- PPP investment across all sectors declined to less than 0.1 percent of GDP in 2019 from 0.2 percent GDP in 2014.
- Total PPP capital stock of Belgium is 1.1 percent of GDP (IMF ICSD database).
- Increasing strategic public investment through private sector participation, with appropriate safeguards to mitigate fiscal risks, could be further explored to support large scale infrastructure projects.
- Blended finance — leveraging public funds to attract private investments for green transition objectives — could help maximize the impact of limited fiscal resources.

### Leveraging EU funding and multilateral finance
- The EIB Group committed in 2023 about €2.4 billion for projects in Belgium, of which €230.5 million was committed through the European Investment Fund.
- Close to 80 percent of EIB Group financing for Belgium in 2023 was allocated to climate projects (EIB 2024).
- The Recovery and Resilience Facility (RRF) framework:
  - is set to expire in 2026,
  - provided substantial financing for digitalization and climate resilience projects,
  - has been largely untapped as progress in achieving related milestones stalled.
- The Medium Term Fiscal Structural Plan (MTFSP) under the EGF requires reforms and investments responding to country specific requirements (CSRs).
- Among CSRs, investments to reduce reliance on fossil fuels and accelerate deployment of renewable energies and related grid infrastructure have been recommended to Belgium, including through implementation of the RRP and RePowerEU.
- Leveraging EU funds and prioritizing EU-backed investments can:
  - alleviate budgetary constraints,
  - ensure alignment with the European Green Deal objectives.

### Strategic priorities and policy recommendations (from conclusions)
- Secure a shift towards growth-enhancing public investment despite fiscal consolidation to:
  - boost potential growth,
  - address long-term investment needs, notably for digitalization and the green transition.
- Improve the efficiency of public investment to deliver high-quality infrastructure within a constrained fiscal environment.
- Improve coordination across federal, regional, and community governments to reduce fragmentation.
- Improve transparency in public investment policy and establish clear, long-term objectives to mobilize private sector investment and address the existing investment gap.
- Increase public investment through:
  - public-private partnerships (with safeguards to mitigate fiscal risks),
  - actively pursuing EU funding opportunities to accelerate the green transition and support alignment with European sustainability goals.
- Reallocate funds from existing subsidies for fossil fuels to green investment and measures that support renewable energy adoption and technological innovation.

### Context on public investment efficiency and governance (selected findings)
- Belgium’s public component of capital stock has been below three percent of GDP since the 1990s.
- Comparators (e.g., the UK and Spain) achieve higher infrastructure quality for comparable capital stock levels; components of transport infrastructure competitiveness in Belgium fall behind neighboring countries in road, railroad, and air transport sectors and in ICT adaptation.
- IMF research indicates that, on average, countries could close two thirds of the efficiency gap by improving public investment management (PIM) practices to the level of the most efficient comparator.
- Key governance weaknesses identified include:
  - absence of clear infrastructure strategies at the national level,
  - weak practices for project preparation (including project appraisal, selection and approval processes),
  - fragmented governance and lack of coordination within and between entities,
  - absence of a gatekeeping role of the Ministry of Finance across federated entities.
- Examples of good practices exist in individual agencies and promising reform initiatives are underway.
- Recommended institutional reforms include:
  - taking a strategic and coordinated approach to investment planning,
  - establishing standardized project preparation practices,
  - enhancing coordination between federated entities and with the federal entity,
  - strengthening the role of departments of finance/budget in the public investment process.

*Source: IMF country report chapter excerpt (Belgium).*

### 12.      BCR does not have an integrated public investment plan or strategy. While certain

### 12. BCR does not have an integrated public investment plan or strategy. While certain

### Integrated public investment planning — findings
- BCR does not have an integrated public investment plan or strategy; multi-annual investment plans exist in certain sectors but are not consistently developed or presented and are fragmented.
- Example: The BCR Ministry of Mobility has three separate plans: bridges and viaducts, public transport, and tunnels — investment plans for individual asset classes rather than an integrated plan for mobility.
- Transport planning is a key enabler of other public investment sectors and there is no mechanism for strategic alignment across policy spheres.
- The absence of a strategic investment plan and the lack of alignment between public investment and territorial development undermines effectiveness of policy in both spheres.

### Spatial planning framework — findings
- BCR has a well-developed spatial planning framework that is not explicitly aligned to public investment policy.
- A Regional Designated Land Use Plan was adopted by the Brussels Government in 2001.
- Special Use Plans give effect to the regional plan at the municipal level.
- BCR has adopted a Regional Plan for Sustainable Development that sets sectoral and territorial development objectives through 2040.
- The Plan articulates objectives around four main themes:
  - Developing new neighborhoods;
  - Improving the living environment;
  - Developing the urban economy; and,
  - Promoting multi-modal travel.
- Complementary public infrastructure is critical to achieving the objectives of regional and urban planning; densification is fundamental to maximizing the efficiency of investment projects.

### Project preparation and appraisal — findings
- Rigorous and objective project appraisals (consistent economic, financial and technical appraisal) are fundamental to sound public investment management and to identifying and selecting highest impact projects.
- Good project appraisal involves comparing all available options and should follow standard methodologies across ministries to facilitate comparison of competing demands for scarce resources.
- Belgium has significant weaknesses in project appraisal across each entity of government, contributing to cost overrun on major projects.
- Project appraisals should make adequate provision for the impact of risk and uncertainty; shortcomings contribute to cost overrun, schedule delay and underachievement of planned benefits.
- Examples of weaknesses by government level:
  - Federal Government: No standard arrangements for project appraisal at the federal level. Energy investments are by private sector or within a regulated asset-base regime. No requirements for economic appraisal in public buildings. In rail, Infrabel undertakes economic and financial appraisal on large network investment projects but these are not published nor independently scrutinized prior to investment decisions. PPP contracts have been entered into without appraisal (example: DBFM prison investment program).
  - Flanders: Public investment projects do not require appraisal prior to approval. Feasibility studies exist for some projects but are not to a common standard and are not routinely published. Absence of cost-benefit analysis (CBA) on road projects has contributed to cost overrun, schedule delay and budgetary pressures. The current government agreement mentions the role of CBA as a guideline for political consideration of investment.
  - Wallonia: No standard arrangements for project appraisal. Sectors have autonomy to prioritize projects without the need for financial, technical or economic analysis. Absence of appraisal and quality assurance exacerbates risk of cost overrun and schedule delay.
  - Brussels Capital Region (BCR): Public investment projects are not subject to standard economic and financial appraisal. Environmental impact assessment practice exists but is EU-mandated and does not constitute project appraisal. Some major projects in mobility and large public housing developments receive technical and financial appraisal but not economic analysis. Appraisals are not published or independently assured as standard. Investment decisions are generally taken at ministerial or governmental discretion with no standard requirements for project-level analysis.

### Cost overrun — documented examples and causes (Box 1)
- Causes of cost overrun include optimism in early cost and schedule estimates, commitment to projects prior to conclusion of design, failures in front-end planning, inadequate risk assessment and mitigation plans, and weaknesses in the contracting process.
- High-profile examples:
  - Oosterweel ring road (Antwerp): From a 2010 estimate of €3 billion, the projected total scheme cost now stands at over €10 billion.
  - Brussels Metro 3 line: Increased from an initial estimate of €950 million in 2009 to €4.7 billion by 2024; procurement process breakdown in 2024 and sponsors plan to retender after a cooling-off period.
  - Modernization of the Mons Railway Station: Completed in December 2024, nine years later than original schedule; initial cost estimate €60 million, final outturn cost €480 million. Factors included persistent scope and design changes and weak forecasting practices.
  - Regional Express Network rail project: By 2016, estimated cost increased from €1.5 billion to over €3 billion.
  - Flemish missing links road portfolio: In 2001, 24 of 27 projects were estimated at €1.4 billion; by 2019, just nine projects completed and estimated cost to completion of full 27 stood at €11 billion.
- Additional observations:
  - Cost increases on smaller projects have been more modest.
  - Evidence suggests project performance has worsened in Belgium in recent years: investments since 2008 have a higher average cost overrun than those undertaken in the preceding decade.
  - Failures of coordination and weak stakeholder management are more pronounced causes of cost overrun in Belgium than in other jurisdictions.

### Project selection and governance — findings
- Strong arrangements for project preparation and governance (decision-gate structures) can improve public investment efficiency by prioritizing highest impact projects, identifying and managing risks, and supporting delivery on budget, on time and to required benefits.
- Many European countries use decision-gate structures (examples given): Norway, Denmark, United Kingdom, Ireland, Sweden (see Box 2 for detailed thresholds and processes).
- Belgium does not use standard processes for selection and governance of new investment project proposals, though there are pockets of good practice.
- Neither the federal government nor any region has instituted standard procedures to oversee project preparation, scoping, risk management, and approvals across the project lifecycle. However, some sectors apply stronger practices.

### Subnational practices and examples of good practice
- Flanders:
  - No mandatory standard procedures for project selection/governance; an optional process for complex projects was instituted in 2014 but is optional and not widely applied.
  - The optional model includes standard project phases, document requirements, supporting guidance and formal decision points; some sponsors found the process made project preparation more transparent and solution-driven but mixed evidence on expedited delivery.
- Aquafin (Flanders wastewater infrastructure) — structured good practice:
  - Uses a structured approach to identify priorities and select investments for a multi-annual investment plan updated annually.
  - Candidate projects are ranked on environmental criteria (from EU Water Framework Directive), time criticality reflecting regional priorities, and a measure of wider opportunities and risks.
  - Performance against criteria is assessed through a cost-effectiveness framework.
  - Priority projects are prepared using a new project management process with formal decision gates.
  - Risks are identified as part of project costing and P50 and P80 project costs are estimated.
  - Risk contingencies up to the P80 estimate are available and can be released where specified risks materialize.
  - Aquafin reports that in the two years since the new governance process was introduced, about 80 percent of projects are on budget at the P80 level.
- Wallonia:
  - No standard approach to project governance and selection; project selection is largely political.
  - No regulations on project preparation, approval or risk management. A reporting requirement via dedicated software exists but functions as reporting rather than governance.
- Brussels Capital Region:
  - No standard processes for project selection or investment governance; selection of new investment projects is political.
  - No common steps for development and approval of projects across sectors. Departments of Housing and Mobility do not have standard criteria to prioritize competing investments.
  - Project costs are not explicitly set out as part of the Region’s budget.

### Key numeric thresholds and examples from comparative box (Box 2)
- Norway: All investment proposals with an estimated cost of NOK750m or above are subject to the State Projects Model with QA1 and QA2 stages.
- Denmark: Road and rail projects with a value over DKK250m are subject to external assurance at two Decision Levels.
- United Kingdom: Projects with an estimated cost greater than £1billion are subject to enhanced scrutiny and inclusion in the Government Major Project Portfolio.
- Ireland: Major projects with an estimated cost over €200m are subject to external assurance and review processes.

*Source: Excerpt from the provided IMF content (Belgium).*

### 28.      There is some evidence of better approaches to prioritizing maintenance spending. For

### 1belea2025002-print-pdf - 28.      There is some evidence of better approaches to prioritizing maintenance spending. For

### Maintenance prioritization: evidence and practice
- Vivaqua uses a sophisticated risk-based approach to prioritize capital and operational maintenance interventions for the sewer network in BCR.
- Key factual details:
  - Vivaqua manages the 500km sewer network in BCR.
  - 99 percent of the population is already served by the sewer system.
  - The approach prioritizes maintenance and renewal over new infrastructure and uses evidence on asset condition, assessment of consequences of infrastructure failure and financial information to prioritize a rolling 15-year investment program.

### Coordination challenges in public investment
- Effective coordination defined:
  - Align priorities across different parts of government.
  - Ensure budget funding (particularly to entities like local governments) is transparent and predictable.
  - Ensure risks from major investment projects are well understood and managed consistently.
- Current weaknesses:
  - Fragmentation in public investment management and weak coordination among entities.
  - Absence of administrative structures to align infrastructure planning and development among sectors and across regions.
  - No process to coordinate investments that are within the competence of the federal government and within the competence of the regions.
  - Example: rail investment is planned and managed nationally, while road investment is planned and managed by the regions; interaction between modes risks loss of efficiency absent coordination.
- Supporting references and diagnostics:
  - A gap analysis was undertaken (EU Commission (2023). D6. Gap analysis for the Brussels - Capital Region Enhancing public investment management at federal and regional (Brussels) level).
  - A set of recommendations was developed (EU Commission (2024). D10. Enhancing public investment management at federal and regional (Brussels) level).

### Box: Infrabel’s Regional Investment Key — institutional rigidities and risks
- Infrabel mandate and network:
  - Design, construct, renew, maintain and manage railway infrastructure on a national basis.
  - Maintains a network of over 6,500km of track, 11,600 bridges and tunnels on which 4,400 trains run daily.
- Investment frameworks:
  - Multiannual Investment Plan, 2023–32 (MIP).
  - Strategic Multiannual Investment Plan, 2018–31 (SMIP).
- Regional “key”:
  - Investment volume must be split in a ratio of 60 percent for the Flemish Region and 40 percent for the Wallonia Region (the “key”).
  - The key applies to available resources for investment with the exception of funding for railway infrastructure in BCR and expenditure on rolling stock.
  - Articles 132 and 133 of Infrabel’s performance contract enshrine the key in the MIP and SMIP.
  - The key applies to both new projects and maintenance of existing assets.
  - The shares of spending must be achieved annually for the MIP and on a cumulative basis over the duration of the SMIP.
- Risks of the regional investment key:
  - Could act as an artificial ceiling on investment in one region, leading to missed opportunities for projects with robust financial cases or above average socio-economic returns.
  - Could act as a floor on investment in one region, leading to too high a level of spending on low value projects.
  - Because the key applies to maintenance spending, it could lead to a lower level of maintenance in Wallonia, risking degradation of network assets over time.
  - Context note: Flanders accounts for 58 percent of Belgium’s population, while Wallonia accounts for approximately 31 percent.

### International examples and federated systems
- Federated government systems can coordinate public investment; example:
  - Germany prepares 10–15 year strategies for transport spending.
  - Germany’s current plan: the 2030 Federal Transport Infrastructure Plan, addressing maintenance and new investments in road, rail and waterways, developed with broad stakeholder input.

### Institutional roles and weaknesses
- Role of budget/finance functions:
  - The Budget Ministry does not have an active gatekeeper role in public investment management in any of Belgium’s entities.
  - Belgium is an outlier; in most advanced economies the Ministry of Finance has significant oversight of capital spending.
- Reform initiatives underway:
  - Flanders established a new public investment cell within the Department of Mobility and Public Works to oversee public investment planning and project selection in its sectors.
  - The Brussels-Capital Region enacted legislation to establish a new PIM unit to oversee project appraisal, selection and budgeting.
  - These units should be adequately empowered to improve investment governance.

### Gatekeeping functions (typical Ministry of Finance roles in advanced economies)
- Typical responsibilities span the investment lifecycle and may include:
  - Setting overall national investment policy.
  - Determining a binding medium-term expenditure framework for public investment, consistent with a sustainable and realistic fiscal position.
  - Providing ministries with annual and multi-annual capital spending ceilings.
  - Establishing rules for project appraisal and providing guidance and training.
  - Quality assurance of project appraisals, establishing processes for project governance, and approval and approving or rejecting proposals at various points in the lifecycle.
  - Monitoring and managing fiscal risks from infrastructure, including through PPPs.
  - Oversight of the aggregate portfolio of public investment projects.
  - Monitoring during execution including approval of substantial change in budget.

### Recommendations — Investment Planning
- To address weakness in strategic planning and increase public investment efficiency:
  - Mandate and resource the Federal Planning Bureau – or a similarly competent body - to undertake periodic assessments of the existing capacity and condition of public infrastructure in Belgium and make recommendations on the optimum focus of public investment on a national basis.
  - Introduce requirements in each entity to publish periodic public investment strategies, constrained by a realistic assessment of available resources, linked to spatial policy objectives and incorporating all budget-funded investment sectors.

### Recommendations — Project Preparation and Governance
- To improve investment efficiency and mitigate risk of major cost overrun:
  - Introduce a requirement for economic and financial appraisal for all public investment projects, with larger and more complex investments requiring more detailed analysis:
    - Develop a common standard and accompanying guidelines for project appraisal.
    - Determine thresholds that set the required form of appraisal for projects of different sizes.
  - Establish a standard governance process for public investment projects and programs, incorporating explicit decision gates and approval processes.
  - For megaprojects, clearly set out the required level of project maturity and supporting information required at each point in the process including:
    - Economic and financial appraisal;
    - Project governance and organization structure;
    - Design and technical brief;
    - Risk assessment, mitigations and management plan;
    - Commercial and procurement plan;
    - Cost management plan; and,
    - Benefits realization plan.
  - For megaprojects, introduce a requirement for expert assurance of project documentation prior to progression at each decision gate.

### Recommendations — Coordination and Institutions for Public Investment
- To tackle inefficiencies from weak coordination and fragmentation:
  - Establish a structure to bring together federal and regional policy makers in public investment to enhance coordination, examine common challenges, and identify opportunities for efficiency improvements.
  - Publish a rolling combined national pipeline of construction tenders, updated every six months, to foster construction industry confidence and prepare the supply side of the market.
  - Introduce new regulations to empower the finance and budget functions in each entity to play a defined gatekeeper role in project appraisal, selection budgeting, and implementation (drawing on the potential functions set out in Box 4).
  - Build on the nascent public investment units in each region to drive a step-change in the quality of public investment policy, project appraisal and governance, risk management, portfolio monitoring and ex-post review.
  - Resource and mandate the Study Committee on Public Investment to develop new research and analytical tools for better public investment management.
- Expected outcome:
  - These steps can improve infrastructure governance and support enhanced investment efficiency, supporting Belgium in meeting its investment needs in the context of a constrained fiscal position.

*Source: Excerpt from the provided content unit.*

### 2.      This paper focuses on education spending, where potential efficiency gains are large

### 2.      This paper focuses on education spending, where potential efficiency gains are large

### Overview
- The paper examines education spending in Belgium, highlighting potential efficiency gains large enough to reverse the decline in educational achievements while also reducing spending.
- Efficiency gains could yield fiscal savings in the medium term as organizational reforms materialize, support fiscal consolidation, better align skills with labor market demands, reduce achievement gaps, increase employment rates, reduce firms’ training needs, boost productivity and innovation, and foster social mobility—thereby contributing to higher potential growth and enhanced fiscal sustainability.
- The paper is organized to (i) show that public education spending is significantly higher in Belgium than in peers and that long-term demographic changes provide comparatively little savings; (ii) highlight that despite higher spending, educational achievements are not better than in peers; (iii) quantify potential efficiency gains; and (iv) analyze allocation and organization to identify reforms.

### A. Belgium Spends More on Education Than Peers
- Public spending on education as a share of GDP: 6.3 percent of GDP in 2022 (second highest in Europe).
  - This ratio is 34 percent larger than EU average (1.6 percentage point of GDP higher).
  - 40 percent larger than in Germany (1.8 percentage point higher).
  - 34 percent larger than in France (1.0 percentage point higher).
  - 13 percent larger than in The Netherlands (0.7 percentage point higher).
- Education as a share of public spending: 11.8 percent of total general government expenditure in 2022.
  - This share is 30 percent larger than in France or Germany.
  - 25 percent larger than EU average.
  - 2 percent larger than in The Netherlands.
- Spending per student:
  - Spending per student remains larger in Belgium than in most peers whether measured in nominal terms or as a share of GDP per capita (2021, primary to tertiary).
  - Strong focus on basic education: spending per student is higher than any comparator at primary and lower secondary levels; at upper secondary level, Belgium’s spending per student is lower than comparators; at tertiary level, Belgium is in an intermediate position.
- Public vs. private financing:
  - Private financing is smaller than in other European countries partly because, except for a small number of schools not recognized by the government, private schools receive public financing.
- Demographic outlook and fiscal implications:
  - Student population expected to decline by 8½ percent between 2022 and 2070 (2024 Aging Report).
    - This decline is much less than for the EU as a whole and for France and The Netherlands (which will experience declines of 14½–16½ percent).
  - Demographic developments expected to reduce spending on education by 0.8 percent of GDP between 2022 and 2070.
  - Education spending projected to decline by barely 0.2 percent of GDP by the end of the decade, while pension and healthcare spending pressures mount rapidly.

### B. Education Outcomes are Comparable to Peers and Deteriorating
- Assessment results:
  - PIRLS: reading score of fourth graders in the Flemish and French communities is the lowest among EU countries participating in PIRLS.
  - TIMSS: Belgian scores are among the lowest in the EU for science and mathematics.
  - PISA: performance of 15-year-old students in Belgium is broadly similar to peers across reading, mathematics, and science, though peers spend less on education in all three domains.
- Trends over time:
  - Belgian average scores have declined over the last decade; share of low performers is higher in 2022 than in 2012 in both French and Flemish Communities.
  - Fourth graders’ reading low achievers in 2021: 38 percent in the French Community and 29 percent in the Flemish community.
  - The share of low performers in all three PISA domains is the fifth lowest in the EU, despite deterioration.
- Distributional concerns:
  - Significant disparities across communities (Flemish, French, German-speaking).

### C. Potential Efficiency Gains are Large
- Belgium achieves mean overall PISA score similar to many EU countries but at a significantly higher fiscal cost.
- If Belgium’s education spending were as efficient as EU best performers:
  - Potential fiscal saving ranges from 0.75 to 1.4 percent of GDP.
  - Increases in PISA scores range from 20 to 45 percent.
- Table of estimated potential gains (Pre-Primary, primary, and secondary education spending, 2022):
  - If Belgium's education system was as efficient as France:
    - Fiscal saving (ppt of GDP): 0.74
    - Increase in overall PISA score (percent): 20
  - If as efficient as Germany:
    - Fiscal saving (ppt of GDP): 1.38
    - Increase in overall PISA score (percent): 45
  - If as efficient as the Netherlands:
    - Fiscal saving (ppt of GDP): 0.85
    - Increase in overall PISA score (percent): 24
- Methodological note:
  - Pre-primary to secondary spending is used to estimate potential efficiency gains because education is cumulative.
  - Estimates are presented as ranges and interpreted as “potential” given structural differences across systems.

### D. Drivers of High Spending and Efficiency-Increasing Reforms
- Main driver: wage bill
  - Compensation of employees of the education system accounts for over 5 percent of GDP.
  - This was 1.4 to 2.6 percent of GDP higher than European peers in 2022 and more than explains the difference in total public spending on education (1.0 to 1.8 percent higher).
  - The wage bill represents a growing share of total government wage bill; it now accounts for 81 percent of education spending.
  - By comparison, compensation of employees as a share of education spending ranges from 56 percent in Germany to 71 percent in France.
  - Compensation of employees in education accounts for 41.5 percent of general government total wage bill—10 percentage points or more than in France, Germany or the EU and 6 points more than in the Netherlands.
- Salaries:
  - Teachers’ actual salaries in French and Flemish communities are in an intermediate position among comparators (2022).
  - Since 2015, actual and statutory salaries of teachers declined in real terms in both communities.
  - Teachers’ salaries are relatively more attractive than in EU peers when compared to wages of similarly educated workers.
- Employment levels and student-to-teacher ratios:
  - From primary to secondary, number of students per teacher is much lower than in any comparator.
  - Between 2016 and 2022, the number of students from early childhood to tertiary declined by 4 percent while the number of teachers increased by 7 percent.
  - The increase in teachers was driven mostly by early childhood, primary and (upper) secondary levels.
  - These developments contribute to significantly higher spending per student on basic education.
- Teaching and working time:
  - Teachers’ statutory teaching time in both communities is significantly lower than in any comparator.
  - Statutory working time data (primary education in the French Community) is only 54 to 60 percent the statutory working time of teachers in comparators, while for statutory teaching time the gap is 72 to 98 percent.
  - The share of teachers working part-time is higher than in France or EU27 at all levels, lower than in the Netherlands, and higher than in Germany at secondary level but lower at primary level.
- Reforms identified:
  - Structural reforms of the education system to increase spending efficiency, supporting fiscal consolidation and/or improved educational achievements.
  - Cost-reducing reforms should address employment levels, statutory teaching and working time, and wage-bill composition and growth.
  - Reforms should also aim to better align skills with labor market demands and reduce achievement gaps linked to students’ diverse backgrounds.

*Prepared by Jean-Jacques Hallaert (EUR); IMF staff calculations and sources as cited in the chapter.*

### 16.      A review of schemes that allow education employees to reduce their working time

### 16.      A review of schemes that allow education employees to reduce their working time

### Schemes to reduce working time and fiscal implications
- Under certain circumstances, teachers and education employees appointed on a permanent basis and aged 55 and over can reduce their working time; at 58, they can stop working while receiving a reduced salary.
- In the French community:
  - 23.4 percent of the employees over 55 percent benefited from Départ Préalable à la Pension de Retraite, up from 18.7 percent in 2019.
  - The reduction accounted for 13.2 percent of full-time equivalent of employee 55 and over, up from 9.5 percent in 2019 (Fédération Wallonie-Bruxelles, 2024).
- Policy implication: reviewing and possibly reforming such schemes could lower the wage bill without affecting outcomes.

### Teacher allocation, class size, and teaching time
- Evidence and findings:
  - “While lower student-teacher ratios allow teachers to focus more on the needs of the individual, they require higher overall spending on teacher salaries and have to be weighed against alternative spending priorities” (OECD, 2024c).
  - Belgium has the highest rate of grade repetition in the EU, contributing to excessive spending in primary and secondary education.
  - Lower student-to-teacher ratios do not appear to be associated with comparatively higher educational outcomes in Belgium (Figures 12 and 13).
  - Hattie (2005) finds reducing class-size has only a “tiny” positive effect because teachers often do not change teaching methods for smaller classes.
- Quantitative notes:
  - The share of students repeating a grade at least once (All students, 2022, percent) is reported in Figure 12 (source: OECD).
- Policy options:
  - Consider increasing teaching time (possibly by reducing administrative and non-teaching tasks) and combining this with proper incentives to dedicate more time to students in difficulty.
  - Better leverage teachers’ time to reduce grade repetition and improve outcomes for socio-economically-disadvantaged students.

### Staffing issues, recruitment, and teacher attractiveness
- Problems identified:
  - Belgium experiences comparatively high shares of teachers leaving the profession prematurely, high absenteeism rates, and a declining share of students enrolling in initial teacher education, contributing to severe and rapidly increasing teacher shortages (Figure 14).
  - Schools often rely on replacement teachers who may not have adequate qualifications and have low job security; new teachers often wait several years to be permanently appointed.
- Quantitative examples:
  - In the French Community: 33.7 percent of teachers that started teaching in academic year 2017–18 had stopped doing so within five years (Fédération Wallonie-Bruxelles, 2024).
  - In Dutch-speaking Brussels: over 84 percent of teachers under 30 in academic 2014–15 were employed on a temporary basis; five years later, 17.3 percent of these teachers had left the profession; the share reached 19.5 percent for those employed on a temporary basis and 5.0 percent for those employed on a fixed basis.
- Recent policy measures:
  - All communities have introduced changes to provide job security for new teachers and increase the number of permanent contracts (EC, 2023; OECD, 2024c and d).
  - Flemish Community measures: reduced length of time before a teacher is made permanent; eased recruitment rules for teachers who worked in the private sector, including allowing retention of part of their seniority.

### Allocation of resources across education levels and system fragmentation
- Finding:
  - There may be scope to reallocate resources from secondary education to primary education to support policy shifts in both the Flemish and the French communities.
- Implementation needs:
  - Greater nimbleness in teacher assignments, increased teacher mobility, and tackling fragmentation of the educational system (between educational networks) to avoid duplication of small-size schools.

### Outcome-increasing reforms: skills, STEM, and labor market links
- Objectives:
  - Reforms should aim not only to reverse declining test scores but also to increase equality of opportunities and better align school-acquired skills with firms’ needs.
- Skills mismatch:
  - Though the skills mismatch has declined over time in Belgium, it remains the highest in the EU (Figure 15).
  - More than peers, Belgium suffers from a shortage of people with high skills; high-skilled occupations account for a relatively high share of job vacancies (OECD, 2024e).
  - The share of the working-age population with low skills exceeds low-skill employment more than in peers.
  - Employment rate of people with only secondary education was about 65 percent in 2023 and is significantly lower than in comparators and at the EU level; it has not increased since 2022 unlike in all comparators.
- Employment and mismatch consequences:
  - National employment rate: 75½ percent in 2023, lower than comparators.
  - Employment rate of population aged 25 to 64 with a tertiary level was 88.2 percent, 12.7 percentage points higher than the overall employment rate.
  - Skills mismatch raises firms’ costs and affects productivity and competitiveness; firms resort more to training than most EU countries (Figure 18).
- STEM enrollment:
  - The share of younger working-age population (20-29) with a tertiary degree in STEM was 16.4 percent in 2022, below EU level of 23.0 percent, Germany (24.3 percent) and France (35.3 percent).
  - Female enrollment in STEM is particularly low; policy makers should promote STEM studies, notably among women.
- Policy recommendations:
  - Strengthen incentives and guidance to align secondary curriculum with labor market needs.
  - Reform and promote vocational training, increase work-based learning and dual learning, and address stigma attached to vocational education.
  - Promote STEM studies to address shortages in high-skilled individuals.

### Reducing inequalities and improving early childhood participation
- Findings on inequality:
  - Students’ background determines educational achievement in Belgium more than in peers; socio-economic status explains more variance in PISA performance in Belgium than in peers, especially in the French community (Figure 19).
  - Belgium has a higher share of students with immigrant background than most EU countries; the 57-point gap in both mathematics and reading between immigrant and non-immigrant students is among the largest in the EU.
- Early childhood education disparities:
  - Enrollment of younger children is limited among disadvantaged students: 33 percent of children from the poorest income tertile are enrolled compared to 72 percent of children of the richer income tertile — a 39-points difference, more than twice the OECD average of 19 percentage points (OECD, 2024d).
- Expected economic and social benefits:
  - Reducing the impact of disadvantaged socio-economic and migrant backgrounds would increase skills of disadvantaged students, their employment rates, potential growth, income prospects, and social mobility.
  - Literature indicates that equal access to education lifts pre-redistribution incomes for those at the bottom, reducing income inequality and the need for fiscal redistribution.

*Source: IMF staff summary of chapter 16 of the provided document.*

### 27.      This would, again, require organizational reforms. Promoting the enrollment of

### 1belea2025002-print-pdf - 27

### Early childhood, disadvantaged students, and teacher incentives
- Promoting the enrollment of disadvantaged students in early childhood (through lower cost, increased availability, or simplified enrollment procedures) would increase their educational achievements and has been associated with higher labor force participation of their mothers (Hallaert and others, 2023).
- Childcare costs erode more low earners parents’ work incentives in Belgium than on average in the EU, notably for single parents (OECD, 2020).
- For some household types (e.g. single parent with two children earning average wage, couples with two children earning minimum wage), the cost of childcare after tax and benefits represents a higher share of the household income than on average in the EU (OECD Net Childcare Cost).
- Allowing and incentivizing teachers to provide support to students who face difficulties would:
  - foster skills acquisition;
  - help reduce grade repetition that is more frequent for disadvantaged students and students with immigrant background.

### Educational outcomes, spending efficiency, and organizational reforms
- A higher spending on education than in peers does not result in better educational outcomes, suggesting large scope for increasing spending efficiency.
- This paper estimates that Belgium could achieve the same educational outcome at a fiscal cost lower by up to 1.4 percent of GDP.
- Alternatively, Belgium could achieve better educational outcomes at unchanged current spending, reversing the recent decline in test scores and provide students with skills that are more aligned with labor market demands.
- The magnitude of potential efficiency gains suggests reforms could lead to both an increase in educational outcomes and a lower fiscal cost; benefits would be achieved in the medium term as structural reforms take time to design, implement, and bear fruit.
- Main drivers of higher spending in Belgium relative to European peers:
  - high wage bill due to higher level of employment combined with relatively shorter teaching time and lower students-to-teacher ratio;
  - teacher shortages and the highest share of grade repetition in the EU (a source of inefficiency and fiscal cost).
- Recommended reform priorities:
  - reorganization of the educational system to better allocate teachers and better leverage their time;
  - streamline schemes allowing for reduced working time or early retirement with reduced salary;
  - ensure the curriculum better aligns education with firms’ needs;
  - reorganize the system to allow teachers to spend more time supporting students who face difficulties.
- Expected broader impacts of aligning skills with firms’ needs and increasing achievement of disadvantaged students:
  - increase employment rate (notably of the population with only secondary education);
  - reduce the need for firms to provide training to offset inadequate skills (which increases labor cost and weighs on firms’ competitiveness);
  - boost productivity and increase diffusion and creation of innovation;
  - reduce the need for fiscal spending including the need for fiscal redistribution.

### Key statistics and empirical findings on education (preserved as in source)
- Potential fiscal cost reduction for same educational outcome: up to 1.4 percent of GDP.
- Belgium experiences teacher shortages and the highest share of grade repetition in the EU.
- Childcare costs context: OECD (2020) findings described in-source (no numeric childcare share provided beyond qualitative comparisons).

### Firm dynamics and TFP in Belgium — context and stylized facts
- Belgium’s total factor productivity (TFP) growth slowdown since the late 1990s has been worse than peers’.
- 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—appear to have boosted R&D spending (in percent of GDP) to 3.4 percent of GDP in 2022, well above neighbors.
- Belgium’s TFP growth fell from 1 percent on average over 1990-94 to -0.1 percent in 2015-19.
- Belgium’s TFP growth was lower on average over 1999–2022 than the euro area’s (EA).
- Belgium has lower shares of accommodation and food service activities than the EU on average:
  - employment: 4.9 percent (Belgium) vs 7 percent (EU);
  - value added: 1.7 percent (Belgium) vs 2.7 percent (EU).

### Firm entry, exit, and size structure
- Belgium has some of the EU’s lowest firm entry and exit rates.
- Firm entry rate: 9 percent (Belgium) vs 10.5 percent (EU and euro area average).
- Exit rate: 5.2 percent (Belgium) vs 8.7 percent (EU average).
- Firm size distribution:
  - 96 percent of firms employ fewer than ten employees (Belgium) compared to 94 percent in the EU.
  - Belgian micro firms (with ten employees or fewer) make up 32 percent of total employment, compared to 30 percent on average in Europe.
  - Firms with fewer than 50 employees employ 45 percent of Belgian employees, compared to 49 percent in the EU.
- Young, high-growth firms:
  - employ 0.25 percent of those employed in firms with 10+ employees (Belgium) against a euro average of 0.8 percent.
  - Young Belgian high-growth firms have an average of 48 employees, 10 employees fewer than the EU average.

### Startups, scale-up, and startup quality
- Too few young firms scale up: an average mature firm (above 25 years old) typically has about 12 employees in Belgium; this is about three times the workers of a firm below age three, versus over ten times in the United States.
- While employment growth rate of Belgian startups is on par with the EU average, it is much lower for above-average TFP startups in Belgium.
- Start-up quality trends:
  - share of one- to four-year-old firms in the highest productivity decile declined from 14 percent in 2002 to 10 percent in 2021;
  - share of startups in the lowest TFP decile increased from 27 percent in 2002 to 33 percent in 2021.
- Possible drivers: increase in federal and regional government-funded loan guarantees and additional angel investor and seed funding to startups during the pandemic.

### Channels linking firms and productivity
- Firms benefit from relationships with high-growth exporting firms and multinationals: forming relationships with multinationals or “superstar firms” can boost a firm’s TFP by 8 percent in three years (NBB, 2023).
- However, below-average TFP startups increased their share in output and employment faster than others, possibly gaining from relationships with state-owned enterprises and political connections; firms with lower profitability and productivity that purchase inputs from state-owned suppliers have higher leverage and employment, more so if politicians are on their boards (NBB, 2024).

### Contributions of firm dynamics to sectoral productivity growth
- Within-firm TFP growth contributes the most to aggregate sectoral productivity growth; impact of entries and exits is unclear.
- Contribution of within-firm productivity growth is highest in sectors with higher investment intensity, such as pharmaceuticals.
- Impact of within-industry market-share reallocation varies; strongly negative for the telecom sector.
- Entry contributes positively to productivity in some sectors (e.g., motor vehicle manufacturing).
- Negative contributions from exits suggest exits are not predominantly from the lowest productivity firms.

### Financing constraints and firm financing
- Belgium firms report financing needs that exceed available funding, particularly from bank loans and credit lines.
- Early-stage startups have access to a more diverse range of funding options than other European firms, including private venture and angel investor capital, but funding remains scarce at later stages of growth.

*Source: Excerpt from IMF country report chapter on Belgium (education and firm dynamics).*

### 11.      Belgian startups are particularly under-leveraged.

### 11.      Belgian startups are particularly under-leveraged.

### Startup leverage and access to finance
- In the United States and many other European countries, startups are significantly more leveraged than larger firms; Belgian young firms are not benefiting from higher leverage.
- Belgian startups cite challenges accessing capital to scale as a major constraint to their growth in surveys on access to finance.
- Startups typically face higher interest rates than more mature firms, reflecting their higher failure rate; the cost of financing remains a major obstacle to access to funding for corporates in Belgium, more so for startups, particularly those with higher intangible investments, who face higher borrowing costs.
- Belgium’s (and Europe’s) bank-based financial system is ill-fitted for startup funding:
  - Banks’ risk models and debt-service and loan-maturity requirements do not allow funding of fast growing but initially unprofitable firms.
  - Regulatory and supervisory guidelines do not favor risky exposures.
  - Loan approval processes are typically lengthy.
  - Bank funding is more abundant for established than emerging industries, and bank financial product offers remain standardized and limited.

### Private equity and venture capital (VC)
- VC investment in Belgium was 0.04 percent of GDP in 2023.
- This was:
  - twice as low as in Netherlands (as a share of GDP) in 2023, and
  - ten times lower than in the United Kingdom (as a share of GDP) in 2023.
- Most deals are early stage:
  - In 2023, 57 percent of funding went to seed or early-stage deals, up from 45 percent in 2013 but down from a peak of 71 percent in 2018.
  - On average over 2007–23, 40 percent of VC investment in Belgium were at late stage compared to 45 percent in Germany and 60 percent in France.
- VC and equity financing remain limited, keeping firm growth and productivity lower; firms with significant VC funding grow faster, create more jobs, and contribute more to aggregate TFP and growth.
- Home bias in asset allocations and regulatory, legal, and tax issues limit cross-border activity, reduce private risk sharing, and impede formation of deeper pools of capital and more liquid markets at EU level needed to support VC.

### Tax treatment of equity vs. debt
- The notional interest deduction (NID) introduced in 2006 helped reduce the corporate debt finance bias and was abolished in 2023.
  - The NID allowed firms to reduce taxable income based on their amount of equity capital.
  - It helped increase equity ratios of Belgian firms by approximately three percentage points above the pre-NID mean equity-to-asset ratio of 39 percent (Meki, 2023).
- The NID was considered too fiscally costly and too beneficial to multinationals that shifted profits and displaced capital across countries; it was abolished in 2023 as part of a broader effort to simplify and increase the transparency of corporate taxation.
- Similar allowances in Austria, Croatia and Italy were also subsequently eliminated; Denmark, Germany, and Sweden’s allowances remain in force. New Zealand exempts capital gains for certain equity holdings.

### Labor and capital misallocation
- Labor and capital allocation are deteriorating, suffering from a growing share of lower quality startups with abundant government support, including loan guarantees targeted to higher-risk borrowers, that crowded more productive firms out of labor and capital markets.
- The misallocation of capital, measured by the standard deviations of the marginal revenue product of capital, has increased in Belgium over the past two decades and has remained more pronounced among younger firms in recent years.
- The misallocation of labor also increased over the past two decades and was typically more pronounced in larger firms, suggesting labor hoarding.
- Reforming the wage-setting mechanism would help increase labor market efficiency:
  - Belgium’s wage-setting process is governed by automatic indexation, which establishes the lower limit of wage increases based on projected inflation in Belgium, and a 1996 wage law that restricts salary increases for the coming two years within an upper limit based on hourly wage growth in France, Germany, and the Netherlands with no reference to productivity differentials.
  - Wages are indexed to actual inflation excluding alcohol, tobacco, and petrol prices, and indexation applies nearly universally, ensuring a quick pass-through of inflation.
  - This “wage corridor” prevents productivity-based real wage differentiation across industries and firms or adjustment of wages to local labor market conditions, thus likely contributing to labor misallocation.
  - Possible reforms include excluding items with volatile prices from the basis for indexation, widening the group of country comparators, using unit-labor costs instead of wage growth as basis for comparison, and leaving room for firms at risk to index wages only partially.

### Product markets and insolvency framework
- Belgium’s product market regulation is more restrictive than those of other European advanced economies, constraining TFP growth.
  - Economy-wide product-market regulations are only marginally less restrictive than the three most-constraining regulations in European advanced economies, except on administrative burdens on firms.
  - More competition-friendly product-market regulation could spur firm entry, particularly in professional services and retail (where restrictions are the highest, except for civil engineers).
  - Closing half the gap with the top three European advanced economies could potentially boost TFP by about 3½ percent in the long run, offsetting losses since the global financial crisis.
- State-imposed retail price controls and regulatory capture require progress:
  - Price controls are more widespread in Belgium than in the average European advanced economy; nearly half of services prices are either regulated by the government or indexed to inflation.
  - Interactions between public officials and interest groups are not sufficiently regulated: registration of lobbyists in the dedicated public registry remains voluntary; public officials are not required to disclose interest groups consulted during regulatory processes; and cooling-off periods after leaving positions are not mandatory.
- Insolvency regime improvements since 2010 have reduced personal costs to owners of failed companies and revamped early warning, pre-insolvency, and SME-specific procedures, but barriers to restructuring remain strong:
  - Creditors cannot initiate restructuring (only liquidation).
  - Delays remain lengthy and courts are still too often involved.

### Intra-EU trade barriers and firm productivity
- Significant barriers to intra-EU trade remain despite progress toward the single market:
  - Non-tariff barriers—different treatment of foreign suppliers, licensing, registration, classification, labeling, and packaging import requirements—are still substantial.
  - Barriers to foreign direct investment are still significant.
  - Remaining barriers are as high as a tariff equivalent of about 44 percent on average for goods trade—three times higher than trade barriers between US states.
  - For services, barriers are equivalent to a 110 percent tariff.
- Belgium’s trade integration within the single market is among the highest in the EU, supported by strategic location, the port of Antwerp, high-quality infrastructure, and a well-developed logistics network.
- Professional services (where national competition is limited and entry requirements are rigid) stand to benefit most from EU-level harmonization and expanded firm reach.
- Policy steps to reduce intra-EU barriers include investing in cross-border infrastructure, liberalizing protected sectors, pursuing meaningful intra-EU trade liberalization, and harmonizing regulations across member states.

### Conclusions and policy options
- Further product market reforms to reduce regulatory and administrative barriers to entry and improve the insolvency regime to lower exit costs are needed to raise TFP; opportunities include reducing state-imposed price controls, simplifying regulatory procedures, addressing regulatory capture, and loosening strict occupational restrictions.
- Deepening the European single market and advancing the capital market union would contribute to higher productivity by allowing firms to scale and attract financing at a larger scale; removing remaining barriers to trade within the EU and harmonizing regulations and bankruptcy frameworks would expand the customer base, improve competition, and vitalize firm dynamics.
- Increasing the availability of long-term risk capital and developing venture capital within an EU-wide push toward capital market union could help VC play a more prominent role in firm financing.
- New policies to reduce the tax debt-bias should be explored; the authorities could consider reinstating the NID or introducing a similar measure to foster more equity financing while limiting interest deductions on debt.
- Wage-setting mechanism reforms should aim to better align wage growth with productivity and improve labor allocation; suggested first steps include excluding volatile items from indexation, widening comparator countries, using unit-labor costs for comparison, and allowing partial indexation for at-risk firms.

*Source: 1belea2025002-print-pdf - 11.      Belgian startups are particularly under-leveraged.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1belea2025002-print-pdf.pdf_