The Netherlands: Government Presents Budget
On Tuesday, September 27, the Dutch government presented its budget for the coming year. At the time of presenting these plans, the Dutch economy is heading toward a tipping point. We expect that it will enter a recession in the final quarter of this year, after seeing strong quarter-over-quarter growth, specifically the second quarter of 2022. The expected recession is mainly caused by high inflation which, in turn, is mainly caused by high energy prices (Figure 1). In September, we saw consumer prices rise 17.1% YOY and we expect that number to be 12.4% this year on average and 4% next year. Consumer purchasing power is taking a large hit, as we do not expect wage growth to fully compensate for these price increases. According to the Netherlands Bureau for Economic Policy Analysis (CPB), the median purchasing power of consumers will decline by almost 7% this year.
It is therefore no surprise that high energy prices and purchasing power were the main focus of the budget presentation for 2023. Hence, the EUR 17bn plan to repair purchasing power was one of the most anticipated presentations.
Plans to repair consumers’ purchasing power excessive?
The highly anticipated purchasing power repair plan is necessary, but in our opinion the government might have overdone it for various reasons.
The first reason is that the inflation figure is currently overestimated by Statistics Netherlands (CBS), so might also be the impact of inflation on consumption. CBS incorporates energy prices for households into its estimates as if these households need to renew their energy contract each month. In reality, a lot of households have fixed energy contracts, sometimes lasting for a couple of years. Our research shows that even though more than half of Dutch households saw their energy bill increase in July, only 12% of them saw an increase greater than EUR 100. Although households are spending more on their energy bills than before, this increase is not yet alarming. That also explains why we have not yet seen a big impact on household consumption. Consumption increased by 6.2% YOY in July (Figure 2). However, that does not mean that private consumption will not be impacted in the foreseeable future. Eventually more households will have to renew their energy contract and not all companies have completely passed on their higher input prices to their consumers yet.
As inflation eventually get its grip on consumption and the pent-up demand after the Covid-19 lockdowns at the beginning of this year diminishes, we expect that for the final quarter of this year and the first quarter of next year consumption will decline by 1% QOQ in both quarters. This estimate already includes the EUR 17bn plan.
However, we are still afraid that consumption is being stimulated too much. First, because not all measures are specifically targeted to vulnerable households. Some measures benefit all households, not just lower-income households. Another issue is that supply remains constrained because of the very tight labor market and global supply chain issues (Figure 3). Currently, the number of vacancies is higher than the number of people unemployed, which is a very unusual situation. Unfortunately, the plans announced on Budget Day are not sufficient to solve the tight labor market. Since demand is being stimulated but supply cannot increase by as much, the risk of raising inflation further increases. This, in turn, further deteriorates purchasing power.
Strong government finances create space for spending
The purchasing power repair plan appeared to be made in a hurry. The government was still working on finalizing the measures the night before Budget Day. But also, the government’s finances were strong, and will remain strong, giving them some spending space.
The presented plans are expected to lead to a fiscal deficit of 2.5% of GDP in 2023. Given the large compensation package, the very modest increase compared with the March forecast (2.3%) is remarkable. Mainly due to labor shortages, other planned expenses were not realized or cannot be realized in the near future. And with higher gas prices, the amount of Dutch gas that still is getting sold is producing higher profits, which largely flow to the Dutch government. Also, higher inflation leads to higher tax income.
This higher inflation also has a positive effect on governmental debt, expressed as percentage of GDP, as it increases Dutch GDP. Hence, debt as a percentage of GDP is expected to decline to 48.8% by the end of 2023 (according to the CPB), which is well below the EMU upper limit (Figure 4).
 In our inflation forecast we did incorporate the effects of the recently announced price cap on the energy bill.