Economic update the Netherlands: Ambitious new government, but lack of funds

The new cabinet presented its first annual budget on Prinsjesdag (Budget Day) on September 17. Four days earlier Prime Minister Dick Schoof also presented the government program. This is a more concrete version of the outline agreement that the four coalition parties agreed on in May. The program and budget include numerous documents with various, sometimes incompatible, goals.

The government plans to boost household purchasing power in the short term, primarily by cutting income tax rates. Purchasing power is expected to increase by 0.7% next year (see figure 1), especially for low-to-middle-income households (+1.1%). However, the expected increase is mainly driven by wage growth outpacing inflation, not by government policies.

The government program provides a more coherent narrative for the new government’s plans. While it has ambitious plans to address immediate economic and social issues, the lack of concrete measures and the absence of a long-term focus raises concerns about the sustainability and effectiveness of these policies. In fact, the emphasis on short-term gains over long-term investments could undermine future prosperity and much-needed reforms.

The government aims to enhance the earning capacity of the Dutch economy. Yet, the budget focuses heavily on immediate concerns, such as tax cuts instead of investments for the future. For example, the government will cut the budgets for education and innovation, which are crucial for long-term economic growth.

The government also plans to increase housing supply rather than limit demand. It proposes measures to stimulate construction, including financial incentives for building affordable homes, as well as measures to better utilize existing housing stock. However, the feasibility of these plans is questionable due to limited financial resources. The government also announced plans for a new spatial planning policy to address long-term land use, balancing economic development, recreation, accessibility, water management, and green spaces.

Although the government is restrictive on migration in general, it acknowledges the importance of targeted labor migration to mitigate current labor shortages. The government aims to reform the tax, child care, and social security systems to make work more rewarding and reduce marginal tax rates. These reforms are complex and will take more than one governing term. They will require significant political and social support. The government remains committed to international climate goals but has rolled back several measures from the previous administration, risking the achievement of these targets. Budget cuts in energy subsidies and CO2 taxes, along with a shift toward nuclear energy, are notable changes.

The government projects the budget deficit will increase, approaching the European 3% norm (see figure 2), posing risks of procyclical fiscal policy if economic headwinds force the government to cut spending. On top of that, the government is planning significant but uncertain cuts in public sector employment, asylum expenditures, and development aid. These cuts may not be fully realized, necessitating further cuts elsewhere. On the other hand, the government has struggled to spend all available funds in recent years, potentially mitigating the deficit. In the first half of the year, the government even ran a budget surplus (see figure 3).

Statistics Netherlands (CBS) recently published its second estimate of Q2 2024 GDP growth. Growth remained unchanged at 1.0% QOQ. Reported growth in previous quarters was also similar to the estimates in the previous release. However, the CBS did make some adjustments in its estimate of the underlying components. The most notable changes were: even more import and export growth than previously estimated, higher housing investments, greater government consumption growth, and a larger decline in non-housing investments.

This implies that net trade was still the largest contributor to GDP growth in Q2 (see figure 4), while private consumption performed the worst (-1.0% QOQ). Because the CBS revisions were minor, we have not changed our GDP outlook for the remainder of 2024 and 2025 (see table 1).

We did lower our inflation forecast for 2025 from 2.8% to 2.5% (see table 1) as oil prices have come down more than expected. Core inflation stays high this and next year because of wage growth and food inflation stays high until June 2025 because of tax increases on tobacco.