Belgium's budget imbalance is a product long in the making, but over the last ten years, a decline in tax revenues relative to the size of the economy has compounded the country's budget challenges.
Last year, Belgium's budget deficit was 5.2% of GDP – the worst in the eurozone. On Wednesday, updated figures by European statistics agency Eurostat showed Belgium's deficit had widened further to 5.3% in the second quarter of this year.
Over the last ten years, Belgium's annual budget deficit (before interest payments) grew by 3.3% of GDP, or €21 billion. Built up over time, this imbalance is not the result of one-off shocks, according to a new analysis by the National Bank of Belgium (NBB).
So, what happened in the last decade to cause this imbalance in revenues relative to what should be expected given the size of the economy?
Credit: Belga / Hatim Kaghat
The reasons come down to tax cuts and missing tax receipts, a shift in economic activity without a corresponding shift in what gets taxed, and low growth.
The primary cause of the widening gap is declining revenues that have not kept pace with the economy – explaining around €12 billion. The revenue decline sits alongside higher expenditure, which explains the other €9 billion.
Looking back to 2000, the challenge isn't revenue, but spending outrunning revenue while that revenue remains fairly stable.
Over the last decade, tax revenues fell as a share of GDP – widening the gap. This combination of historic high spending and declining revenues concentrated the problem.
The result is well known: the European Commission is now scrutinising Belgium's annual budgets as part of an Excessive Deficit Procedure, which started in 2024, with the target of reaching a deficit of 2.1% of GDP by 2029.
Philippe Ledent, an expert economist at ING Belgium, told The Brussels Times that the NBB report offered two key short-term takeaways.
"First, we need to boost economic growth, because the fact that there is less growth is impacting the revenues of the public sector," he said. "And second, if you need to urgently take some measures on the revenue side, this will probably lead to some measures to reduce the use of management companies when you just have self-employed activity."
Tax cuts and policy choices
Consumption taxes – both VAT and excise duties – grew €7.6 billion less than GDP growth implied at the federal level in the last decade, according to the NBB.
Belgium reduced VAT on gas and electricity from 21% to 6%, and applied a similar VAT shift to demolition and construction work.
While excise duties were introduced on gas and electricity consumption to offset some VAT changes, the overall net effect was negative for revenues. Some of the VAT decline is inexplicable, but will partly be linked to evasion and fraud.
Rather than a percentage, excise duties are a fixed charge per litre or pack. They don't automatically grow with prices unless governments choose to increase them to keep pace with inflation.
This is exactly what Belgian governments did, with the NBB noting substantial increases. Yet, these increases were not enough to offset inflation, so their contribution to revenues has fallen.
Meanwhile, taxes on labour income have also fallen as a share of GDP, reflecting deliberate policy choices.
Overall, changes in labour taxation grew €5.3 billion less than GDP growth would have implied at the federal level over the last decade.
From 2016 to 2020, deliberate efforts reduced the tax burden on employment, with employer social security rates falling to 25%, along with further cuts to social contributions and income tax for low earners.
About two-thirds of the decline in income tax receipts are linked to these changes. Rising incomes pushing more people into new tax brackets cushioned some of this, but the net effect was a decline.
A shift in economic activity
Belgians are consuming less alcohol and smoking less tobacco – representing a shift in the nature of the economy, and with it, a shift in the nature of excise duty receipts.
"There is no one to blame," said Ledent. "There is a sort of automatic change in the evolution of public finance, because of the evolution of the economy."
This shifting structure of the economy has also affected the revenues the government gets from hours worked.
Belgium has a falling share of wages available for taxation; this has played a small part in the fall in revenue relative to GDP.
According to the NBB, Belgium has seen rising labour productivity without a corresponding rise in hourly wages (after accounting for inflation). Several factors could explain this. For example, remuneration may have shifted from wages to profits.
Many, such as the Flemish socialist party Vooruit, point to the rapid rise in the number of management companies used by self-employed people to take advantage of lower tax rates.
"This may be part of the explanation," said Ledent. "But the reality is much more complex."
He noted that the economy's sectoral evolution could have driven the impact of a lower wage share and higher profit share. For example, the tax base may have shifted from labour-intensive to capital-intensive sectors, driving up corporate profits.
"Because we have a high labour cost, Belgium has a tendency to be more capital intensive. So if you have the development of capital intensive sectors, then of course it's normal that the share of profit in your total added value [GDP] is bigger," he said.
The NBB noted that corporate tax receipts rose €4.4 billion, relative to what could be expected given the size of the economy.
Another potential cause is Belgium's automatic wage indexation system. While this system gives employees salary increases to keep pace with inflation, a baked-in inflationary pay rise could mean fewer demands for above-inflation salary increases.
Recent figures show that employers are also switching to non-wage options to pay above-inflation salary increases, which attract a lower tax rate.
The NBB's report doesn't make it clear which factor has had the greatest effect, but one thing is clear: this is a Belgian problem.
The share of wages available for taxation has stayed relatively stable across the eurozone, while declining in Belgium.
Low growth
The NBB's report doesn't state this explicitly, but according to Ledent, low growth is the biggest underlying problem.
"The real problem is that 15 years ago, we were able to deliver 2% economic growth per year, whereas now we have the reverse of a 1% growth period," he said.
According to Ledent, this has consequences for government revenues. He noted that because taxation currently takes around half of Belgium's GDP as revenue, focusing on growth delivers the greatest impact, negating the need to readjust the tax base.
"If you have a clear increase in your income because of economic growth, the fact that you have some shift between the sectors, or between the wage share vs the profit share becomes just a little bit of noise," he said.
Not just a Federal problem
According to the NBB, both the federal government and communities and regions contributed to the creation of this gap; federal own-source revenue fell by €7.9 billion relative to GDP and regional own-source revenue by €1.9 billion.
The NBB ended their analysis by arguing for a binding national budgetary framework to meet the targets designed to put the debt ratio on a sustainable path.
In short, they do not think all of Belgium's governments are pulling in the same direction on the budget objectives of putting debt-to-GDP on a sustainable path.
This warning echoes what the European Commission said when it opened Belgium's Excessive Deficit Procedure in 2024. They warned that the effectiveness of Belgium's national budgetary framework "remains weak and the coordination across government levels is limited", with few rules governing federal and regional spending.
