RaboResearch - Economic Research

Dutch Political Update: Light at the end of the tunnel?

Economic Comment

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  • It has been over four months since the Dutch parliamentary elections
  • No government has been formed yet
  • At the same time, it appears that negotiators are making progress
  • The budget surplus may be smaller in 2018

Coalition negotiations drag on, but end in sight

One hundred and twenty-eight days have passed since the Dutch parliamentary elections (the ‘quarter finals in the fight against populism’, as Dutch prime minister Mark Rutte called it) and although coalition negotiations are still ongoing, there seems to be light at the end of the tunnel.

On Tuesday, Dutch media reported that the negotiating parties - VVD (Liberal Party), CDA (Christian Democrats), D66 (Liberal Democrats) and CU (ChristianUnion) - had almost reached an agreement on fiscal policy. Informateur Gerrit Zalm (the former finance minister and former CEO of ABN Amro guiding the negotiations) later denied these reports, but did concede that some progress had been made on several subthemes. The principal negotiators are now taking a break until August 9th, before coming back to continue. It has also been reported that informateur Zalm told CDA and D66 to reach an agreement on climate policy in the next few weeks, while VVD and CU have to hash out a compromise on migration. The idea here is that CDA and D66 are almost on opposite ends of the spectrum when it comes to climate policy, whereas VVD and CU are least likely to agree on migration. If these duos can find a compromise on these issues bilaterally, then the other two parties are likely to agree as well.

Figure 1: Dutch government runs a surplus
Figure 1: Dutch government runs a surplusNote: Budget balance for 2017 is a Rabobank projection
Source: Statistics Netherlands

As the details of the agreements between the four parties are unknown, we cannot say much about what the impact on Dutch government finances will be. It is unlikely, though, that any impact on the fiscal balance will kick in before 2018. It is also unlikely that the new coalition will present its new plans before Prinsjesdag, the third Tuesday in September, when the government budget for the new fiscal year is traditionally presented. We therefore stand by our current projections for the budget balance in 2017, namely a surplus of 0.3 percent of GDP (Figure 1)

Given the fiscal plans of the coalition partners, the new government may want to ease fiscal policy versus the baseline in 2018 and beyond, so that the budget surplus could be smaller than the 0.6 percent of GDP for 2018 that we predicted recently. At the same time, it would be unlikely that the budget balance shoots back into a deficit again, as the hawkish VVD and CDA would not agree to such a budget. Hence any fiscal worsening would be at most 0.6 percent of GDP in 2018.

Why did it take so long to get to this point?

Forming a government is taking much longer than the historical average of 74 days. The protracted nature of the negotiations has everything to do with the fragmented political landscape that resulted from the elections. The Liberal Party (VVD) did soundly defeat the Freedom Party (PVV) of Geert Wilders on March 15th, who came in second, but at the same time six parties received at least nine percent of the vote. This means that a minimum of four parties is required to form a coalition with a majority in both the lower and upper house.

After the elections, VVD, CDA and D66, collectively dubbed the ‘engine block’ because they are likely to be the core of any new coalition, and Groenlinks (Greens) spent the better part of April and May negotiating a coalition agreement, guided by informateur Edith Schippers. Migration proved to be an insurmountable obstacle. The Greens did not want to take part in a coalition that would support a Turkey-like migration deal with North African countries, as the other three parties had proposed.

After negotiations between the ‘engine block’ and the Greens, the lower house first appointed Herman Tjeenk Willink and then Gerrit Zalm as informateurs to explore new coalition options. Zalm is currently guiding representatives from VVD, CDA, D66 and CU, through negotiations.

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