Can Belgium stop rising borrowing costs from becoming a debt trap?

Belgium’s ten-year borrowing rate climbed above 3.8% on Wednesday, 19 August, reaching its highest level since 2012 and increasing the pressure on Prime Minister Bart De Wever’s federal coalition before its autumn budget negotiations. VRT NWS reported that economists Willem Sas of Hasselt University and Selien De Schryder, Associate Professor of Empirical Macroeconomics at Ghent University, now see Belgium moving closer to a fiscal danger zone in which investors, rather than elected governments, begin imposing the terms of adjustment through higher financing costs.

The immediate change is not a funding crisis. Belgium continues to borrow on the capital markets, and the interest rate paid across its entire debt stock remains well below the yield on newly issued ten-year bonds. The Federal Debt Agency reported that the average interest rate on federal debt was 2.22% at the end of July, while its average remaining maturity was 10.25 years. That long maturity provides a valuable buffer: more expensive market rates feed into the budget gradually as existing bonds mature and are refinanced.

Yet the direction is uncomfortable. Federal gross debt reached €574.99 billion at the end of July, according to the Debt Agency, an increase of €7.37 billion from June. The agency’s 2026 financing plan puts gross federal financing needs at €59.55 billion, including €28 billion of debt falling due this year. A higher yield therefore does not reprice the whole debt mountain overnight, but each new issue locks in a larger interest bill for years.

This is where the market movement meets the political calendar. De Wever’s Arizona coalition — N-VA, MR, Les Engagés, Vooruit and CD&V — intends to find roughly €10 billion in its coming multi-year budget exercise. Federal Budget Minister Vincent Van Peteghem told the Chamber’s Finance and Budget Committee in July that the government must examine both social expenditure and falling revenue, while declining to announce measures before coalition negotiations. The draft budgetary plan is normally due to the European Commission by 15 October, and the federal budget bills must ordinarily reach parliament by the end of that month.

The underlying figures explain the urgency. In its May forecast, the European Commission expected Belgium’s general-government deficit to remain at 5.2% of GDP in 2026 and widen to 5.4% in 2027. It projected debt across the federal, regional, community and local authorities to rise from 107.9% of GDP in 2025 to 112.8% in 2027. This general-government measure should not be confused with federal debt alone: the federal government controls its budget and debt issuance, while Flanders, Wallonia, Brussels and the communities are separately responsible for their own finances. EU surveillance nevertheless assesses Belgium as a whole.

Interest costs are already taking a growing share of the federal budget. In the July parliamentary hearing, Van Peteghem said that, without additional measures, interest expenditure could reach 3% of GDP by 2030, exceed half of the budget deficit and rise to €23.67 billion. “That money cannot be used for essential government tasks,” he told MPs. He also accepted that the Monitoring Committee’s figures showed a real risk of a debt-interest snowball if policy remained unchanged.

A snowball effect begins when the effective interest rate on public debt persistently exceeds the economy’s nominal growth rate while the government continues to run a primary deficit — a deficit before interest payments. Belgium is not unambiguously at that point today. The Federal Planning Bureau’s February outlook said the average debt rate should remain below nominal growth until 2030. But it projected public debt at 122% of GDP by 2031 and warned that the relationship could reverse in that year, allowing debt and interest costs to reinforce one another.

The distinction matters because a bond yield above 3.8% is a warning signal, not a mechanical trigger. Rates also reflect euro-area inflation expectations, European Central Bank policy, energy prices and international risk appetite. De Schryder told VRT NWS that investors have become more attentive to public debt and deficits than they were several years ago. Belgium’s weak fiscal starting position means a general European rise in yields can hurt it more than countries with smaller deficits or falling debt ratios.

There are sharply different political readings of the same warning. Van Peteghem argues that the coalition has already begun structural consolidation through pension, unemployment and labour-market reforms and that sound finances are needed to retain investor confidence rather than merely satisfy rating agencies. He has also cautioned that ratings reflect institutions, economic performance and the investment climate as well as headline debt figures.

Opposition parties say the government’s announced effort is not yet credible. Anders MP and former federal budget secretary Alexia Bertrand told the parliamentary committee that previous headline savings had been diluted or delayed and demanded guarantees that the new €10 billion exercise would produce lasting improvement. Vlaams Belang finance spokesman Wouter Vermeersch placed greater emphasis on spending restraint, arguing that persistent deficits rather than international rates alone explain Belgium’s vulnerability. DéFI MP François De Smet, speaking from the Francophone opposition, focused on the shrinking room for policing, justice and other core services as interest absorbs more revenue.

Those arguments foreshadow the coalition’s central choice: how much adjustment should come from restraining social and other expenditure, raising revenue, or revising the timing of investments. The European Commission has placed Belgium under an excessive-deficit procedure and expects it to end that situation by 2029. Its framework limits the growth of net expenditure but permits specific flexibility for qualifying defence commitments; it does not determine which Belgian taxes, benefits or departmental budgets must change.

For households, the fiscal effect will be indirect but tangible. A rising interest bill leaves less room for public services, investment or tax relief, while the same market conditions can keep mortgages and business credit expensive. Abrupt consolidation could itself weaken demand, especially as the Commission expects economic growth of only 0.7% in 2026. The budget debate is therefore not simply about whether Belgium must act, but how to improve the primary balance without damaging the growth needed to stabilise the debt ratio.

The next test is the autumn conclave led by De Wever and the budget plan submitted to the Commission. Investors will watch whether the coalition agrees measures that are specific, legally deliverable and durable rather than relying on optimistic returns or temporary savings. The precise package remains unknown, as does the path of European yields. Belgium still has time because of its long debt maturity, but every refinancing round at today’s rates makes delay more expensive.