New Dutch coalition: growth-friendly policies, but modest fiscal deterioration
- Dutch coalition partners announce their plans
- Changes to the tax system should encourage labor supply and increase potential output
- Tax cuts and spending increases result in deterioration in fiscal balance …
- … but the fiscal outlook remains healthy
- In part thanks to commitment to structural fiscal framework
Today the new governing parties in the Netherlands released their coalition agreement to the public. It describes the policies that, after months of negotiations, the parties plan to implement during their term. Consequently, it is one of the most important documents in the areas of Dutch politics, government policy and economics.
The agreement proposes a number of reforms, most notably of the tax system. The tax burden will be shifted from personal income and wealth, and company profits to consumption. The tax deductibility of mortgage interest rates will also be phased out at an accelerated pace. Other economic reforms include steps to make the labour market more flexible and notable measures to improve environmental policy. Significant additional spending is planned on education, defense and domestic security.
Together the plans should modestly improve the potential output of the Dutch economy. The plans do have a negative impact on the government fiscal surplus, but without dipping the expected balance into the red and without sacrificing the downward trajectory of the debt-to-GDP ratio. According to the Bureau for Economic Policy Analysis (CPB) the package of measures proposed in the coalition agreement will increase annual economic growth by 0.2% between 2018 and 2021. However, the forecasted fiscal balance in 2021 will deteriorate from 1.6% to 0.5% (and the cyclically adjusted balance from 1.6% to 0.2%). Nevertheless, that still leaves a balanced budget and, thanks in part to higher GDP, the debt-to-GDP ratio will continue to decline from 53.6% 2018 to 45.8% in 2021.
Apart from the actual economic and budget impact of the plans it also notable the new coalition announced its framework for fiscal policy. The parties plan to conduct a so-called ‘structural budgetary policy’, which means that they will focus on the cyclically adjusted fiscal balance in fiscal planning. That means separating revenues and expenditures into structural and cyclical components and directing budget policy towards the structural parts. In our minds this is a healthy approach to managing the budget that allows automatic stabilisers to do their work in blunting the peaks and troughs in the economic cycle, without jeopardizing the long-term fiscal outlook. Furthermore, explicitly stating a commitment to this approach helps to cement reputation that the Netherlands has for fiscal prudence. This is particularly wise because the coalition parties plan to use entirely the fiscal space they have allotted themselves, so are essentially conducting a one-off fiscal stimulus that, given the strong cyclical recovery in the Netherlands is quite pro-cyclical. Placing this fiscal easing in the context of a wide fiscal framework reduces the (admittedly limited risk) that this will have an adverse impact on perceptions of the credit worthiness of the Netherlands.
Appendix – political background explained
The Dutch elections in March elected a fractured lower house of parliament, with the largest party getting less than a quarter of the vote and the next four parties about an eighth. The incumbent VVD (liberals) joined forces with the CDA (Christian democrats) and D66 (progressive liberals) to form a government with a fourth party. The anti-immigrant PVV (nationalists), led by Geert Wilders, were quickly excluded, in part because they had proved an unreliable partner in 2012 when they backed out of an agreement to support the VVD-CDA minority government. The PvdA (labour) and SP (socialists) refused to join a coalition, leaving the only practical options GroenLinks (greens) and CU (social Christians). Negotiations started with GroenLinks, but they collapsed during the summer. That left forming a coalition with CU as the only option, an unattractive one because it would leave the coalition with only a one seat majority. The ideological differences between the four parties, particularly D66 and CU, led to prolonged negotiations. As is customary in Dutch politics, the coalition partners hammered out a detailed written agreement that describes the policies that they plan to implement. This document was approved by the members of parliament of the new governing parties yesterday and presented to the public today.