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The King’s Speech and the Dutch state budget

Economic Comment

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  • The Dutch caretaker government presented a budget light on new policies
  • Limited extra spending on political imperatives
  • Coalition agreement expected in October
  • Current budget gives new cabinet little space for extra spending

Today the Dutch cabinet presented the state budget and the King opened parliament with his annual speech. The traditional royal parade has always captured the public imagination more than the dry budget figures, but even for the policy wonks this year’s budget was uninteresting due to its lack of substantive changes. This was to be expected as it was prepared by a caretaker government that is supposed to avoid controversial policies. This situation is due to the unusually long process of forming a new governing coalition after the Dutch voted in a fractured parliament half a year ago.

While there was not much new policy, the strong economic recovery this year gave the government some extra space to address areas that were deemed politically urgent enough to require immediate funding. None of these were particularly surprising given the public discussions and leaks that preceded the budget. New spending in 2018 will add up to EUR 0.9 bn, which is only 0.1% of the government’s forecast for 2018 GDP. Despite this, the budget will remain on a relatively healthy footing in 2018, with an expected budget surplus of 0.8% of GDP. Nevertheless, adjusting for the economic cycle knocks off a full percent point (to -0.2%), and it is this measure that is relevant for future policy space.

The biggest new spending item was EUR 0.4 bn for geriatric care in 2018, rising to EUR 2.1 bn in 2027. This is a consequence of a new law that mandates certain standards of care. The required increase in spending will be phased in over the next ten years in part because it will take that long to find the necessary staff.

Another EUR 0.4 bn was designated to household income policy. Every year the Netherlands Bureau for Economic Policy Analysis (CPB) forecasts the likely path of the real disposable income[1] for different types of Dutch households (for example, a two-earner household with two children, a retired couple or a single person on welfare). This is then used to tweak tax and benefit policy in order to maintain a politically acceptable distribution of income. Over recent years this process has meant that government policy has been able to prevent rising inequality in primary (i.e. before redistribution policies) incomes from resulting in rising disposable income inequality. This year such income policy allowed the King in his speech to declare that the government has been able to at least maintain real incomes for all households in 2018, including those with a low income and the elderly.

EUR 0.3 bn was designated for raising teacher’s salaries. Smaller amounts were allocated to national security, food safety and the tax office.

After today’s budget The Hague will be able to fully dedicate its attention to (waiting for) the formation of a new government. Currently four parties are negotiating an agreement on the basis of which they will govern together. The consensus expectation in the Dutch political class is that the coalition agreement will be announced in mid-October. Few are expecting the negotiations to fail. The parties have been tight-lipped about potential policies. However, one implication from today’s budget is that there is little room for them to spend more money. Assuming the parties want to stick to EU guidelines, which is generally the case in the Netherlands, then there is little space for extra spending.

Footnote
[1] The Dutch budget uses the term ‘koopkracht’, which literally translates to ‘purchasing power’, but this term is not typically used the same way in English, so to avoid confusion we do not use it here.   

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Author(s)
Menno Middeldorp
Chief Economist, Director Knowledge Development Rabobank Rabobank KEO
+31 6 8389 9872
Nic Vrieselaar
RaboResearch Netherlands Rabobank KEO
+31 6 2216 2257

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