Netherlands Politics September 2018

Netherlands

Netherlands: Expansionary 2019 budget to maintain fiscal surplus

September 26, 2018

Against the background of a booming economy, the government presented a slightly expansionary 2019 budget on the third Tuesday of September. Despite its procyclical nature, short- and longer-term public finances should remain sound given that the budget projects a fiscal surplus of 1.0% of GDP and a further decline of the public debt to below 50.0% of GDP. Although the government expects to spend EUR 295 billion with an emphasis on education, defense, security and health care, next year’s budget was more notable for its revenue-generating plans—set to reach USD 305 billion and in part driven by a hike in the value added tax from 6.0% to 9.0%

Although a revision to the tax system will have a net negative effect on households, the government’s complete set of policies is expected to be a net positive as it lays out greater spending on allowances. How large the net positive effect on households will be remains uncertain “when also taking into account rising healthcare insurance premiums and measurers taken by previous governments, the total policy-related increase of purchasing power is near zero”, according to Frank van Es, economist at Rabobank. The increase in purchasing power “is almost entirely due to an expected nominal wage growth”, however, there are doubts that wages will rise as high as expected by the CPB. This presents “a large downward risk because (…) the CPB assumes the VAT-increase partly leads to higher wages, which is questionable because it’s not that employers suddenly have more money to spend”, Frank van Es commented. Taking a more optimistic view, however, Marcel Klok, an economist at ING, commented that “the overall picture for purchasing power is [expected to be] much more positive in 2019 than in 2018”.

Meanwhile, the government is eager to abolish the dividend tax to attract multinationals to the Netherlands post-Brexit. To finance the forgone revenue from dividend taxation, the tax burden on businesses is set to increase in 2019. This is due to a slower-than-expected reduction in the higher corporate tax rate, as abolishing the dividend tax turned out to be costlier than previously estimated. “The net effect is that revenues from corporate taxes in 2019 will in fact rise”, as Philip Bokeloh and Nice Klene, economists at ABN AMRO noted.

Netherlands GDP Forecast


All told, next year’s budget should amount to a modest boost to growth while ensuring the continued health of the public finances. However, although next year’s budget should help keep the economy growing above potential, little has been done to address potential growth or productivity. Moreover, FocusEconomics panelists do not expect the government to reach its projected fiscal surplus of 1.0% of GDP; instead, they forecast a smaller surplus of 0.8% of GDP. Our Consensus Forecast panelists are less optimistic in their outlook for next year, seeing growth at 2.1% whereas the Bureau for Economic Policy Analysis (CPB) pegs it at 2.6%.


Author:, Economist

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