By Thomas Gillet and Brian Marly, Sovereign and Public Sector

The five-party government coalition led by the conservative New Flemish Alliance could support Belgium’s fiscal outlook, which, absent policy adjustments, is set to record a large budget deficit of around 5.0% of GDP in 2025, after an estimated 4.5% in 2024. Scope affirmed Belgium’s ratings at AA- with Negative Outlooks on 24 January given the persistent fiscal and governance challenges.

Budgetary and economic reforms were delayed by negotiations to form a federal government, but the so-called Arizona coalition has now agreed to strengthen unemployment benefit and pension systems, relieve taxes on labour, while raising those on capital gains. Priorities also include enhancing competitiveness and investment in manufacturing and the nuclear industry.

It is yet unclear exactly how the coalition agreement will determine the 2025 budget as well as the medium-term fiscal plan to be presented to the European Commission by April. Adjustments will likely be skewed towards spending cuts at federal and regional levels. The ambition and credibility of the medium-term fiscal plan is critical for Belgium’s credit rating trajectory.

Relative political stability offers opportunity for comprehensive reforms

We believe Belgium’s governance at the federal and regional levels could offer a period of relative political continuity favourable to budgetary and economic reforms until the next general elections currently scheduled in 2029.

The new government coalition can count on the support of French- and Dutch-speaking communities, alongside regional parliaments in which the new Arizona coalition controls most of the seats. The absolute majority in the federal parliament is also supportive. Even so, a thin majority gives every coalition member leverage within the government as it prepares reforms.

Stabilising government debt contingent on sustained fiscal consolidation efforts

Exiting the EU European Excessive Deficit Procedure over the next four years would require the government to improve the structural primary balance by around 0.7pp of GDP each year by 2028, which is relatively demanding judging by federal budgets in the past.

As outlined by the government coalition, the necessary adjustment requires politically sensitive reforms of the welfare system, which accounts for more than half of government expenditure, to address ageing costs, projected to rise from 20% of GDP in 2000 to 30% in 2050.

Like similarly rated European sovereigns including France (AA-/Stable), reforming social protection is contentious, as reflected in recent protests, so likely compromises within the coalition and in parliament could slow the pace of reform.

Assuming moderate fiscal reduction, Belgium’s budget deficit will average around 4.8% of GDP in 2025-29, resulting in an increase in debt to GDP to around 114% at the end of the period from 104.7% at end-2024 – one of the largest projected increases in the euro area.

Economic growth and favourable debt profile remain supportive

At the same time, Belgium has relatively robust economic momentum with real GDP growth projected at 1.2% in 2025. The government coalition plans tax relief of EUR 1.5bn to bolster economic activity.

Finally, a long average debt maturity of 10.4 years, compared with 8.5 years in the euro area average, and stable net interest payments, projected to remain around 2% of GDP by 2029 – significantly below those of France which are likely to rise to more than 3% of GDP – cushion public finances against potential delays in budgetary consolidation and higher interest rates.
Scope’s next calendar review date is on 4 July.