Dutch Macro Perspectives - Budget Day light on policy, with focus on fighting poverty

This year’s ‘Prinsjesdag’ (The Netherlands’ Budget day) took place against a different backdrop. First and foremost because of the caretaker status of the government. On July 7th the Rutte IV government fell on the topic of migration. Traditionally, the caretaker status means that no new policies are enacted until a new coalition is formed. Indeed, Today’s budget contained few policy changes and only a small package of measures to prevent low-income household from dropping below the poverty line.

Secondly, the macro-economic environment has changed compared to recent years. The Dutch economy has entered a technical recession in the first half of 2023. And although the economy is resilient and growth is expected to pick up again in the coming quarters, multi-year growth prospects are positive but weaker amid aging and other structural challenges. Furthermore, interest rates have risen since the start of 2022, which will have consequences for the government’s debt servicing costs.

Budget is light on policy changes, in line with government’s caretaker status

As was already signalled by leaks to the press in recent weeks, few policy changes were presented today. No major policy overhauls were announced except for a small package to support household income. Indeed, the caretaker government decided to spend EUR 2bn (0.2% of GDP) to restore the purchasing power of low-income households and to prevent households from dropping below the poverty line. This package is partly financed by raising taxation on higher incomes and raising levies on alcohol and tobacco. With general elections to be held soon, coalition and opposition parties are expected to use the budget debates in parliament to sway voters this week. As a result, some extra policy changes cannot be ruled out.

Public finances set to deteriorate in the medium term

Compared to other eurozone countries, Dutch government finances are solid. In 2022, the budget balance was -0.1% of GDP and debt to GDP was 50.1%. In 2022, Rutte IV started with an ambitious investment agenda but it was faced with significant underspending due to the tight labour market and other bottlenecks. In 2023 and 2024, the budget balance, including today’s budget measures, is expected to deteriorate to -1.5% and -2.4%, respectively. In the short run, the debt ratio is expected to decline due to the expected sales of Tennet Germany (a state owned enterprise) and high nominal GDP growth (the so-called denominator effect), with inflation spurring nominal growth and reducing the debt to GDP ratio. But from 2024 onwards, successive budget deficits are expected to lift the government debt ratio.

The influential Dutch Budget Committee, which advises a new government about fiscal space, took aim at this longer term worsening trajectory of public finances. In the face of an aging population, the energy transition, higher debt servicing costs and climate adaptation costs, they advised the incoming cabinet to change course. It remains to be seen whether a new coalition will follow up on this course but worsening public finances is definitely on the agenda in The Hague.

2024 well underway before a new coalition is formed

New elections are scheduled to take place on November 22nd. With Prime Minister Mark Rutte not being up for re-election and new parties such as the Farmer-Citizen movement (BBB) and New Social Contract (NSC) scoring high in the polls, the outcome of the upcoming election is all but decided. Given the recent length of formation procedures following general elections, we expect 2024 to be well underway before a new government is installed.