Rising energy prices and the Russian invasion of Ukraine will cause the average purchasing power of the Dutch to fall by 2.7 percent this year. That would be the biggest drop in purchasing power in 40 years.
This is apparent from calculations by the Central Planning Bureau. These form the basis for the cabinet to go to the drawing board, where it will see whether there is anything that can be done to reduce the purchasing power of the Dutch.
Inflation has been rising for some time, largely due to the rising price of energy. On top of that came the war in Ukraine, which is also causing financial turmoil.
Yesterday Prime Minister Mark Rutte said that the cabinet cannot ‘guarantee’ that purchasing power repair is feasible for all Dutch people. It doesn’t do much more than ‘dampen’ the downturn. And that mainly focuses on ‘lower and middle incomes’, he said.
thump
According to the CPB, the impact could rise to a 3.4 percent decrease, while in the best case scenario it could be limited to 0.6 percent. Some Dutch people will feel it more than others if the cabinet does not intervene.
CPB director Pieter Hasekamp mainly sees the effects of the higher energy bill: “We assume that sooner or later everyone will feel the higher energy bill in his or her wallet. But whether it’s a knock or a thump depends on the share of energy costs in disposable income. I am really concerned about people with lower incomes, especially if they live in a poorly insulated house. Such effects are not visible in the standard purchasing power charts.”
According to the CPB, the Russian invasion of Ukraine carries a lot of financial uncertainty. Higher energy prices are paramount, but ‘other possible effects on trade, financial markets and (via confidence effects) on investment and consumption are currently limited’.
The CPB estimates inflation for 2022 at 5.2 percent. “To illustrate the sensitivity, it has also been calculated what the consequences will be if energy prices remain high for a longer period of time, and also if they return to the level of 2019 this summer. Inflation in 2022 in these variants is 6.0 percent and 3 percent respectively. 0 percent,” according to the CPB.
The CPB also predicts that domestic production will continue to increase. The economy will grow by 3.6 percent this year and by 1.7 percent in 2023, the calculators think. “Consumption and exports are the biggest contributors.” Growth will also be further ‘driven’ in the coming years by the extra spending from the coalition agreement, according to the CPB. The labor market remains tight, with unemployment rising only slightly to 4.3 percent in 2023.
raid
The effect of the invasion of Russian troops in Ukraine can still be partially guessed, says the CPB. Higher energy prices are currently the biggest effect. “The threat of a gas shortage can also (short-term) lead to very high gas prices.”
Should the gas supply from Russia be restricted, ‘it will have major economic consequences’. The Netherlands is about 15 percent dependent on Russia for gas. “For now, this supply seems to continue. But if Russia decides to turn off the gas, or the EU to get less gas from Russia, both households and companies could face serious problems.” The gas reserves for 2022 are ‘relatively limited’, says the CPB. “If stocks are not replenished sufficiently in the coming summer, prices will rise further. This will particularly affect low- and middle-income households.”
The sanctions imposed against Russia have less effect for our country, according to the CPB. “As yet, there is no indication that the financial system as a whole cannot absorb this shock. The Dutch financial sector does not seem to be in the danger zone for the time being.”
Debt
Government debt will rise sharply after this cabinet term, the CPB estimates. The budget deficit will increase after 2025 to 3.5 percent of GDP in 2030. “That is because a number of policy intentions (including expenditure related to climate and nitrogen) will only reach full maturity then.”
In addition, expenditure related to ageing, such as long-term care and the state pension, is increasing. Due to the high budget deficit and lower GDP growth, the debt ratio will steadily rise to 61 percent in 2030. This is higher than the European standards allow, although several countries in the EU are already well above that.
intervene
The call for intervention by the cabinet is already ringing in the House of Representatives. PvdA Member of Parliament Henk Nijboer wants an ’emergency package’ to come. “Such a decline in purchasing power has not occurred in decades! 5.2 percent inflation, with the lowest incomes getting the most choice. Government must stop lingering. The PvdA wants an emergency package of purchasing power to prevent people from ending up even deeper in financial misery.”
ChristenUnie MP Pieter Grinwis says that people with low incomes now need help. “They can no longer pay the energy bill and people with middle incomes hardly dare to fill the tank of their car, while they have to go to work every day.”
Grinwis: ,,I don’t expect miracles from the cabinet, but deeds. The honest story is that it is impossible to make good on this purchasing power boom, but the cabinet must now act in the short term. We should also help the people who feel the pain the most. This is possible, among other things, through extra support for the poorest families to pay their energy bills and temporary reductions in excise duties.”
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