With tens of billions of euros in planned expenditure, the new Rutte IV cabinet runs the risk of contributing to ‘overheating’ of the economy. The budget stimulus from the new cabinet could also further boost high inflation in the Netherlands. This said Olaf Sleijpen of De Nederlandsche Bank (DNB) board member on Monday when the central bank’s semi-annual economic estimates were published.
If everything goes according to plan, the next cabinet will spend almost 28 billion euros more in its last year of government, 2025. In itself, DNB welcomes the ‘ambitious’ plans in areas such as climate policy and housing construction. “It is partly understandable that an ambitious budget is part of this,” said Sleijpen in an online press conference. But from a macro-economic point of view, ‘a fiscal boost is not what the Dutch economy needs’.
The coalition’s plans have not yet been incorporated into DNB’s estimate, but the central bank has already calculated the effects of the strict lockdown that took effect on Sunday. According to DNB’s estimate, gross domestic product will increase by 4.5 percent this year, after the sharp contraction in 2020 of 3.8 percent. This means that the economy is already bigger than before the start of the pandemic. Next year growth is expected to reach 3.6 percent – but the lockdown is throwing a spanner in the works. If the restrictive measures last all through the first quarter, growth will fall to 2.2 percent in 2022, according to a preliminary calculation by DNB.
Inflation (5.9 percent in November on an annual basis according to the EU definition) will be 2.7 percent for the full year 2021 and will remain high for the next two years, at 3 and 2.9 percent respectively.
Substantial budget boost
DNB has therefore not yet calculated the plans of the cabinet. “But you can assume that such a strong budget impulse will cause inflation to rise,” said Sleijpen. Climate measures that make fossil energy more expensive – which DNB wholeheartedly supports in itself – also contribute to inflation, said Sleijpen. The risk of overheating and additional inflation is reduced because Rutte IV’s expenditure is not all expected to be made in the short term, Sleijpen said.
Public finances will “undeniably” deteriorate as a result of the cabinet plans, according to the DNB board member. According to a government estimate, the government debt will rise from 57.5 percent of GDP to 60.4 percent in 2025. This is just above the European maximum of 60 percent. DNB is looking at this with concern. “You have to keep coloring within the lines of the budget rules,” warned Sleijpen.
Also read this column: How economical is the Rutteklaas?
DNB had another message for politicians on Monday: from now on, give less broad support to entrepreneurs during lockdowns. The Netherlands must “learn to live with corona”, Sleijpen said, because waves of contamination may return regularly in the future. That requires a ‘medium-term strategy’.
The new cabinet must invest in more ‘resilient’ care and must stop ‘generic’ helping entrepreneurs with restrictive measures, no matter how ‘heavy’ the blow of the last lockdown, according to Sleijpen. The support operations that The Hague has carried out so far “make a significant burden on public finances and in the long run disrupt healthy economic dynamics”, according to DNB. At the start of the pandemic, the emphasis in corona support was understandably on speed, Sleijpen said, but the new cabinet must provide “much more targeted” support to hard-hit sectors. The aid can no longer simply serve as ‘insurance’.
Shortage on the labor market
On Monday, DNB expressed its concern about the increasing tightness in the labor market. After unemployment rose to 4.6 percent of the labor force in 2020, it declined steadily to 2.7 percent in November 2021. Wages, DNB believes, will rise more in 2022 and 2023, by 2.9 percent, against wage growth of 2.3 percent this year.
“The increasingly pressing scarcity of suitable personnel requires a wide range of measures,” says DNB. More labor migration, Sleijpen said, could be “one of the solutions.” VNO-NCW chairman Ingrid Thijssen pleaded in TV program on Sunday Buitenhof for this measure. Making childcare almost free by the new cabinet can also help, says Sleijpen.
In times of inflation and scarcity on the labor market, according to economic theory, a ‘wage-price spiral’ can arise. Wages then go up to compensate for the increased prices, making production more expensive, causing inflation to rise further. According to DNB, such a wage-price spiral does not yet exist, but the regulator does warn: wages should not automatically rise with prices, as does happen in neighboring countries such as Belgium.
DNB calculated what would happen if inflation continues worldwide, due to higher commodity prices and further disruptions in the supply of products. This will lead to a stronger wage-price spiral in the Netherlands. In that scenario, Dutch inflation would grow to around 4 percent in 2022 and 2023, partly due to higher wage demands.
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