Belgium: Coalition Agreement Could Pave the Way for Gradual Reduction in Budget Deficit

The five-party government coalition led by the conservative New Flemish Alliance could support Belgium’s fiscal outlook, which, without policy adjustments, is set to record a large budget deficit of around 5% of GDP in 2025, after an estimated 4.5% in 2024. Scope Ratings (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, and relieve taxes on labour while raising capital gains tax. Priorities also include enhancing competitiveness and investment in manufacturing and the nuclear industry.

It is not yet clear 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 the federal and regional levels. The ambition and credibility of the medium-term fiscal plan is critical for Belgium’s economic and credit rating trajectory.

Relative Political Stability Offers Opportunity for Comprehensive Reforms

Scope believes 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 for 2029.

The new coalition can count on the support of the French and Dutch-speaking communities, alongside the regional parliaments in which the new Arizona coalition controls most of the seats (Figure 1). 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.

Figure 1. Arizona coalition within federal and regional parliaments

Number of seats

Stabilising Government Debt Contingent on Sustained Fiscal Consolidation Efforts

To exit the EU Excessive Deficit Procedure over the next four years would require the government to improve the structural primary budget balance by around 0.7pp of GDP each year through 2028, which is relatively demanding judging by the example of 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 costs related to the ageing population, projected to rise from 20% of GDP in 2000 to 30% by 2050.

Like similarly-rated European sovereigns such as France (rated by Scope AA- with a Stable Outlook), 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 over 2025-29, resulting in an increase in debt to GDP to around 114% by the end of that 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 of the Credit Rating

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 maturity for the sovereign’s debt of 10.4 years, compared with an average of 8.5 years for euro area sovereigns, 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 the effects of higher interest rates.

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Thomas Gillet is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Brian Marly, Senior Analyst at Scope, contributed to writing this article.