Dutch Budget 2015
The Dutch 2015 Budget offered only limited new policy measures. With the improvement of the economic outlook, an additional austerity package was not needed. Even so, although some modest reductions in planned tax hikes were announced, 2015 is still a year of austerity. Both the economic outlook and the European rules do not provide much room for the government to improve short term economic growth in a meaningful way. As such, even though the Netherlands has been dismissed from the Excessive Deficit Procedure and has a relatively favourable set of debt and deficit metrics, the country is clearly not well placed to heed Mr Draghi's plea for core countries to help boost broader euro area demand via looser fiscal policies. On the other hand, the Netherlands has already implemented substantial structural reforms, which is the other major demand that the central bank has for the member states in asking them to play their part in furthering the economic recovery. The continuation of the reform drive of the current government will partl depend on the March 2015 provincial elections.
Falling deficit, stabilising debt ratio
The Dutch government budget deficit (EMU-balance) and gross debt are developing in line with earlier expectations. The budget deficit is expected to fall to 2.2% of GDP in 2015 (figure 1). The 2014 deficit is forecasted at 2.9%-GDP by the government’s Budget Memorandum 2015 and at 2.6%-GDP by the Netherlands Bureau for Economic Policy Analysis (CPB). While we try to figure out the reason for this discrepancy, we follow the CPB forecasts in figure 1 and 2. Gross government debt is expected to rise to 70.2% next year from 69.7% in 2014 (figure 2). As such, after years of a steady rise, the debt ratio will almost stabilise in 2015.
The economic forecasts of the CPB on which the government plans are based are largely in line with our own expectations, although we are somewhat more optimistic with regard to the outlook for exports and investment in 2015 (table 1). Although there are clear downside risks to the economic outlook, we think that the 2015 budget is based on reasonable economic assumptions.
Austerity still ongoing, but getting less harsh
The continued decline in of the government deficit is the result of continued austerity measures. In 2015, about EUR 6bn worth of measures are being implemented. This is much smaller than the measures worth EUR 14 and EUR 12bn euro implemented in 2013 and 2014. The 2015 budget largely consists of the implementation of previous budget agreements (figure 3). In contrast to the previous two years, no additional austerity measures were needed to keep the deficit reduction on track. On the contrary, planned tax hikes were moderated by EUR 1bn to ensure a rise in household’s purchasing power and planned budged cuts for defence and intelligence and security services have been scaled down. More than 80% of the planned austerity for the period 2011-2017 will have been completed in 2015.
Deficit reduction is taking place despite a marked drop in the expected revenue from natural gas production (figure 4). The relatively warm weather in 14Q1 and extraction ceilings put in place after earthquakes in Groningen (where the main gas field is located) will markedly reduce gas revenue compared to 2012 and 2013. On the other hand, the low level of government bond yields has resulted in a marked decrease of interest expenditure over the past years. This positive effect on the government deficit is expected to remain relevant both this year and next.
Little room to provide more support to the economy
Concerning the European budgetary rules, with a structural budget deficit of 0.7% in both 2014 and 2015, the Netherlands has not yet achieved the 0.5%-GDP medium term objective and is also not getting closer to it in either year. The government debt ratio is not declining at the desired pace of 1/20th part of the value over 60%. As such, the budgetary outcomes do not conform to a strict interpretation of the European rules. But with a number of other countries still not even able to abide by the 3% rule, we would be surprised if the European Commission would push the Netherlands towards implementing additional austerity measures.
Although the government has used some of the room provided by relatively positive budgetary outcomes, it has clearly chosen to remain cautious. Given the constraints of the Stability and Growth Pact, this is both a necessary and a wise choice. There are clear downside risks to the economic outlook. Keeping the planned deficit at a clear distance from 3%-GDP reduces the risk of having to announce yet another round of austerity next year.
Further steps in structural reform
More than just a continuation of budget cuts, 2015 will be a year of significant structural reform, with the main areas affected being health care and the labour market.
Long term health care (mainly for the elderly and disabled) will be restricted to those most in need for 24 hour medical support. A large part of less urgent care is decentralised to the municipalities or shifted to the mandatory health insurance system and available budgets are scaled down. This should result in structural savings of EUR 2½bn. Other savings are being made through agreements with general practitioners, hospitals and the health insurance sector. Overall, although some budget savings are still uncertain we expect these reforms to contribute to the sustainability of Dutch government finances.
In the labour market, dismissal law is simplified and dismissal costs are reduced markedly. The maximum duration of unemployment benefits is reduced from 3 to 2 years and unemployed people are expected to accept all available employment opportunities after 6 months instead of 12. The maximum period in which employers are allowed to keep staff on temporary contracts is being reduced from 3 to 2 years. Additional measures allow for more training opportunities while receiving unemployment benefits. A flurry of measures over the past years has resulted in a marked increase in labour supply. The phasing out of early retirement has already pushed up the average retirement age (figure 5) and the rise of the statutory retirement age will prevent a fall in the potential labour force for years to come (figure 6). A number of other measures reduce disincentives to labour participation that resulted from tax breaks and credits. While this is rather painful in the short term since the increase in the labour force is currently not absorbed by a rise in employment, these measures are clearly positive for the long-term productive capacity of the Dutch economy.
With the bulk of austerity and reform being implemented in 2015, the political discussion has shifted to reform of the tax system, which is very complex and imposes relatively high taxes on labour income. There is broad political agreement that income taxes have to be lowered. But the governing parties (centre right VVD and centre left PvdA) have rather different opinions on how to compensate for the revenue loss that is associated with lowering income taxes. It is clear upfront that any reform of the tax system will be accompanied by significant income distribution effects. To smoothen out these income effects, the government intends to reserve 3-5bn in the coming years.
March 2015 provincial elections likely to alter political dynamics
The next elections for the lower chamber of parliament are scheduled for March 2017. As such, that offers the government quite some time to push for further reform and see the economy recover more significantly before facing voters. But the government has been dependent on support of opposition parties in the Senate, where it lacks a majority. Up to now, the two governments headed by Prime Minister Rutte have been able to push through very sizeable austerity and reform with the help of different coalitions of opposition parties. The current government has mainly worked with liberal party D66 and two small Christian parties (CU and SGP), which have become known as the constructive or favourite opposition.
In March 2015, elections for provincial parliaments will result in a new composition of the Senate. One risk to the current way of governing is that the governing coalition and their favourite opposition lose their majority. A recent opinion poll shows that this would currently not be the case (figure 7). But this same poll shows a marked loss for governing party PvdA and a large gain for constructive opposition party D66. So, even if the current group of parties supporting the government keeps a majority in the Senate, such an election outcome will clearly change the political dynamics within this group. This may well make life harder for the current government.
Having said all that, the current situation of both the business cycle and the structural setup of government finances and the economy are markedly different from spring 2012, when the first Rutte government fell. Any political dynamics and questions over the longevity of the government are therefore less likely to lead to major concerns about the Dutch economy and public finances.