The recently formed five-party coalition government in Belgium, led by the conservative New Flemish Alliance, presents a potential opportunity to address the country’s challenging fiscal outlook. Without policy adjustments, Belgium is projected to face a significant budget deficit of around 5% of GDP in 2025, following an estimated 4.5% deficit in 2024. This precarious fiscal situation was a key factor in Scope Ratings’ affirmation of Belgium’s AA- sovereign credit rating with a Negative Outlook on January 24th. The new government’s success in implementing meaningful fiscal reforms will be crucial in determining the country’s economic and credit trajectory.
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Alt: The Belgian Parliament Building in Brussels, symbolizing the country’s political landscape.
Coalition Agreement: A Balancing Act
Delayed by protracted government formation negotiations, the “Arizona coalition” has finally agreed on a series of reforms. These include strengthening unemployment benefits and pension systems, alongside targeted tax adjustments. The plan involves reducing taxes on labor while increasing capital gains tax. Furthermore, the coalition has prioritized enhancing competitiveness and promoting investment in key sectors like manufacturing and nuclear energy.
The specifics of how these proposals will translate into the 2025 budget and the medium-term fiscal plan, due to be submitted to the European Commission by April, remain unclear. However, initial indications suggest a likely emphasis on spending cuts at both federal and regional levels. The ambition and credibility of this plan will be critical for stabilizing Belgium’s public finances and influencing its credit rating.
Political Stability: A Window for Reform?
The current political landscape in Belgium, characterized by a coalition government enjoying broad representation across both French and Dutch-speaking communities, could offer a period of relative stability. This stability, extending potentially until the next general elections in 2029, creates a favorable environment for implementing much-needed budgetary and economic reforms.
Alt: A chart illustrating the Arizona coalition’s seat distribution in Belgian federal and regional parliaments, highlighting their majority.
The Arizona coalition holds a majority in both the federal parliament and most regional parliaments. However, the slim margin of this majority empowers each coalition member, potentially complicating the reform process and necessitating compromises that could dilute the impact of proposed measures.
Fiscal Consolidation: The Path to Debt Stabilization
Exiting the EU’s Excessive Deficit Procedure within the next four years necessitates a substantial improvement in Belgium’s structural primary budget balance. This requires an annual adjustment of approximately 0.7% of GDP through 2028 – a demanding target considering historical budgetary trends.
Crucially, achieving this objective hinges on politically sensitive reforms to the welfare system, which currently consumes over half of government expenditure. Addressing the rising costs associated with an aging population – projected to increase from 20% of GDP in 2000 to 30% by 2050 – is paramount. Similar to challenges faced by other European countries, reforming social protection in Belgium is likely to encounter resistance, as evidenced by recent protests. Potential compromises within the coalition could slow the pace of these crucial reforms.
Economic Growth and Debt Profile: Supportive Factors
Despite the fiscal challenges, Belgium benefits from relatively robust economic momentum, with real GDP growth projected at 1.2% in 2025. The coalition’s proposed EUR 1.5 billion tax relief package aims to further stimulate economic activity.
Moreover, Belgium’s favorable debt profile, characterized by a long average maturity of 10.4 years (compared to the euro area average of 8.5 years) and stable net interest payments (projected to remain around 2% of GDP by 2029), provides a buffer against potential delays in fiscal consolidation and the impact of rising interest rates.
Conclusion: A Cautious Outlook
The new coalition government in Belgium has a significant opportunity to address the country’s pressing fiscal challenges. The success of their ambitious reform agenda will depend on their ability to navigate political complexities and implement meaningful, sustainable measures. While economic growth and a favorable debt profile offer some support, the ultimate trajectory of Belgium’s fiscal health hinges on the government’s commitment to and effectiveness in implementing comprehensive and credible fiscal consolidation. The coming months will be critical in assessing the government’s progress and determining whether Belgium can achieve lasting fiscal stability.
