A new Dutch coalition: what are the policy plans? - Assessing the economic impact

Written with assistance of Stefan Groot, Eli Elderkamp, Sanne de Boer and Leontine Treur

After months of negotiations, the coalition parties PVV (Party for Freedom), VVD (Liberal Party), NSC (New Social Contract, centre party) and BBB (Farmer’s Party) published their so-called outline agreement (‘Hoofdlijnenakkoord’) on 16 May. This document serves as the foundation for a new Dutch cabinet. Top civil servant Dick Schoof is the intended new prime minister and other cabinet members will be selected shortly. Once in place, the new government will embark on translating the outline agreement into more concrete plans and a new budget.

The negotiations between the four political parties in the period leading up to the agreement can be characterized as very difficult, given the substantial differences between the parties and considering that three out of the four coalition partners have never taken part in a government before. Whereas newcomers in the parliamentary elections (i.e. Farmers’ Party and New Social Contract) benefit from supporting circles of influential people, this is much less the case for election winner PVV, despite its leader Geert Wilders’ long tenure in Parliament.

In its policy direction, the new coalition places emphasis on: 1) restrictive measures on migration, 2) improving livelihood security (‘bestaanszekerheid’) for all, by building more houses and improving household purchasing power, and 3) increased flexibility for farmers to meet agricultural transition goals.

The new coalition reduces spending on funds originally earmarked for enhancing productivity growth (e.g. the National Growth Fund), promoting research and science, addressing nitrogen-related issues, and financing climate measures. Instead, that money will be primarily allocated to purchasing power for households, infrastructure development, housing, the agricultural sector, and nuclear energy. This reallocation may negatively impact future productivity and, consequently, GDP growth. Structural reforms on the labor market and in the tax system are absent.

Below we will assess the plans in more detail and discuss the CPB’s economic assessment.

Restrictive policies on migration

The new coalition aims to reform the asylum and migration system, with the aim to significantly reduce the inflow of migrants. Some specific measures on labor and study migration are:

These measures capture the spirit of a majority of voters’ concerns on migration. Nevertheless, especially highly-skilled workers are much needed in many Dutch industries, given shortages in the labor market and less potential to replace such labor by technology than is the case for lower-skilled migrants. Our assessment is that measures which complicate attracting and maintaining high-skilled foreign workers will ultimately negatively impact the Dutch economy.

Firms and households

As mentioned, improving livelihood security is one of the key pillars of the agreement. The coalition primarily focuses on tax relief for households with low to moderate incomes. Income tax is therefore reduced in the plans, and housing allowances and child allowances (‘kindgebonden budget’) are increased. Additionally, the deductible excess in healthcare (cure) will be halved. Finally, social security benefits will increase slightly. These measures are due to result in higher purchasing power for households, lower unemployment and less poverty (see also section: Analysis of the CPB).

The new coalition considers the Dutch business climate a key focal point. This is evident in the plans for various tax reliefs for firms. The taxation of share buybacks is being reversed, as well as the previously planned reduction of the SME profit exemption (‘MKB-winstvrijstelling’), the increase in energy tax, and an increase in the tax rate in Box 2 (substantial interests) of personal income tax. Additionally, the coalition raises the interest deduction limits in the corporate income tax (‘Vennootschapsbelasting’) to 25% (currently 20%). However, there are some tax increases in return, with the largest being a levy on plastic. Overall, according to the CPB, the total tax burden for businesses remains unchanged compared to current policies.

As said, the coalition plans to abolish the National Growth Fund (NGF), introduced by the previous cabinet. The NGF is a subsidy scheme to stimulate productivity-enhancing innovations. Abolishing the fund will certainly take its toll on innovative investment by firms going forward.

Housing market

The Dutch housing market suffers from a long-standing and worsening housing shortage, which puts pressure on prices and makes it very hard for first-time buyers to enter the market. The new coalition will allocate EUR 1.5bn per year for housing construction, EUR 1.0bn of which is for developing new housing locations and EUR 0.5bn is for the necessary infrastructure for housing construction.

More specifically, the coalition aims to designate new locations for large-scale housing construction in addition to the existing NOVEX areas. While this focus on more housing locations can contribute significantly to increased construction in the long term, it is unlikely to alleviate stress on the housing market in the short term. Large-scale housing projects often have lengthy lead times, so the additional NOVEX-designated locations are expected to yield completed homes only after 2030.

In addition, the coalition aims to introduce a tax on undeveloped land with residential zoning. It is questionable whether this will result in faster construction lead times. We are mildly positive on the coalition’s aim to explore a so-called “planbatenheffing” (planning gains tax). The revenues from this tax will benefit municipalities, potentially encouraging them to facilitate new construction.

The coalition also continues to hold on to the requirement for two-thirds of new construction to be affordable housing. We are critical as to whether this will actually lead to more opportunities for people that want to enter the housing market (see this report in Dutch), as it diminishes the business case for many construction projects.

Finally, the fiscal treatment of owner-occupied homes remains unchanged and the coalition plans to raise the limit on interest expense deductions in the corporate income tax (Vpb) from 20% to 25%, which will benefit housing corporations.

Climate policy and energy transition

Regarding climate policy and energy transition, the new coalition does not change the existing goals (this is also not possible given the European agreements). Still, the commitment to achieve these goals seems to be lower: few measures are proposed, while the challenges in energy transition are still abundant, and emission reduction goals are only barely within reach under current policies. The budget for of the Climate Fund is cut by 1.2bn, but will remain largely intact.

Some specific measures:

The CPB Netherlands Bureau for Economic Policy Analysis, i.e. the Dutch equivalent of the US Congressional Budget Office (CBO), published a report on 21 May in which they assess the economic and budgetary effects of the outline agreement.

Their analysis shows that over the period 2025-2028, the policy package of the new coalition would result in additional economic growth of 0.1 percent per year and a 0.3 percentage point reduction in unemployment by 2028.

Moreover, median purchasing power improves by an average of 0.2 percent per year and every household type is expected to benefit, with the highest impact on the lowest income brackets. Poverty (as a percentage of the total population) decreases by 0.7% in 2028.

Government finance

Although the policy package worsens the EMU deficit by 0.7 percentage point in 2025 (-2.8% of GDP), the budget deficit in 2028 is actually 0.6 percentage point lower than the baseline (latest government budget) due to significant cost-cutting measures in later years. The EMU debt in 2028 is also 0.4 percentage point lower than the baseline (51.8% instead of 52.4%), see figure 1.

Not all budget cuts from the outline agreement were directly accepted by the CPB in their assessment. For example, the new coalition aims to reduce EU contributions by 1.6bn in 2028, but these are only accounted for by the CPB for as much as EUR 500m, as the Dutch government can’t decide this unilaterally. In a similar fashion, the planned 22% reduction in the amount of civil servants is slashing government expenses by only EUR 400m in 2028 instead of the EUR 1bn factored in by the coalition. Overall, the CPB expects EUR 2.6bn less in budget cuts than the coalition has pencilled in, which corresponds to a deterioration of the EMU deficit of 0.3ppts.

However, despite this, the projected EMU deficit in 2028 remains within the self-imposed limit of -2.8% (of GDP), as defined in the outline agreement. Two factors contribute to this:

While the CPB analysis shows mildly favorable economic and budgetary figures, it masks underlying vulnerabilities. The CPB’s assumptions on certain items, such as the EUR 700m lower costs due to asylum-flow-restricting measures, may be overly optimistic.

Moreover, the government’s target of an EMU deficit of -2.8% leaves no room for any financial setbacks, including unforeseen costs related to, e.g., the compensation of victims of the ongoing childcare allowance scandal, geopolitical turbulence, or less favorable economic conditions. On this front: the CPB’s assumption of average economic growth of 1.4% per year from 2025 to 2028 may be overly optimistic as well, given that we think potential growth of the Dutch economy will be lower (around 1.0%).

It is very questionable whether increased spending in specific areas, such as healthcare, police, and defence, is feasible due to labor shortages in the Dutch economy. To illustrate: the CPB already anticipates that the current government has been unable to allocate approximately EUR 15bn of planned expenditures due to labor bottlenecks. Further intensifying public expenditure may exacerbate this issue and potentially contribute to inflation.

Also worrying is that the outline agreement contains major cuts on structural economic growth pillars, particularly in education and innovation, with a total cut of EUR 6.2bn between 2025 and 2028 and EUR 12.6bn by 2031. The CPB does not address the negative long-term effects of these budget cuts. We feel it is not economically prudent to heavily cut expenses aimed to strengthen the Dutch economy in the future, in favor of short-term purchasing power gains, tax relief, and short-term fiscal sustainability. It erodes potential growth of the Dutch economy, with the impact of an ageing population increasingly taking its toll in combination with sluggish productivity growth. Productivity growth already dropped from 1.0% annually between 2000-2010, to a meagre 0.5% annually between 2010-2019.