Rabobank: the next cabinet must make visionary investments in the economic structure

The fact that the Dutch economy will perform so well both in 2017 and 2018 does not mean that the next cabinet can lean back and relax. Economic growth is expected to drop back after 2018. That is why the next cabinet must invest in strengthening the Netherlands’ economic structure, for example in order to maintain purchasing power. It would also be unwise to reverse economically smart reforms that have already been implemented, such as the increase in the retirement age. This is the message from Rabobank economists in their Economic Quarterly Report published today.

The Dutch economy recorded its highest rate of growth last year since the crisis; this year, growth will speed up even more, with the economy expected to expand by 2.3 per cent. In 2018, economic growth in the Netherlands will drop slightly to 2.0 per cent due to less buoyant growth in consumption. Unemployment will fall further, causing the unemployment rate to decrease to as little as 4.6 per cent in 2018. Rabobank economist Martijn Badir: “Despite this good economic performance, we see no reason for the next cabinet to lean back and relax. That is because in the longer term, economic growth in the Netherlands will be significantly lower due to pressure on both the supply of labour and productivity growth. Indeed, the current high growth figures should be seen as catch-up growth, making up for the economic lost ground since the crisis.”

“Make hay while the sun shines”
According to the economist, additional measures are needed to structurally bolster the economy. Badir: “The mantra is and remains: let’s make hay while the sun shines. Which is now. The next cabinet should make visionary investments in R&D, innovation and human capital in order to increase structural labour productivity. It is extremely important for serious action to be taken in investing in the long-term employability of workers. Human capital must be pushed much higher up the policy agenda, especially now that the labour market is becoming ever more flexible and technological developments are causing knowledge and skills to quickly become outdated.”

At the same time, the cabinet should beware of reversing economically sensible reforms. For example, a reduction in the state pension (AOW) retirement age would not only hit government finances, it would also damage the economy. Badir: “Under the current policy, the AOW retirement age will rise in tandem with life expectancy. If the next cabinet reduces the AOW retirement age to 65 again, that will not only mean less sustainable government finances, it will also result in fewer people offering their services in the labour market. In that case, the Dutch economy’s potential growth rate will fall further at a time when it is already under pressure, due in part to the ageing population.”

Rabobank economists are also advocating thorough reform of the tax system. Badir: “A new tax system must put an end to the economically distorting jumble of allowances and tax-deductible items. The current tax system is so complex mainly because allowances and new taxes have been added year in, year out, principally for short-term political ends. A lot of money is leaking out as a result, which is at the expense of our prosperity. Given the fragmented political landscape, it is to be hoped that the next cabinet will adopt ‘simplicity’ as a necessary precondition for a properly functioning tax system.”

Now that the economy is performing better and the government is expected to have a budget surplus in 2017, there is a danger of losing a sense of urgency about the need to keep health costs under control. Badir: “The debate about abolishing the insurance deductible is one example of this. However if healthcare costs spiral out of control again, households’ disposable income will probably barely rise in the next ten years, as taxes and premiums will need to increase to cover the costs."

The Dutch economy suffers more than its neighbours when there is a headwind but also experiences more of an upturn when there is a tailwind. “This vulnerability is undesirable, if only because it leads to uncertainty and undermines confidence,” says Badir. “The next cabinet can tackle this economic vulnerability by dismantling the barriers that currently exist, for example between pensions and the housing market. In this way, households would be able to use part of the money they have saved for their pension to reduce their debt on their own home, especially if they are paying off the mortgage in regular instalments anyway. They should also be able to use the capital tied up in their pensions or own home to finance education.”

Trump’s policy is having a negative effect on growth in world trade
The Rabobank economists are once again expecting moderate global economic growth in 2017 and 2018 of around 3 per cent. Rabobank economist Maartje Wijffelaars: “Our forecasts are subject to uncertainty, mainly due to political developments, including elections in a number of key eurozone member states. It is also difficult to assess the effects of the Brexit negotiations. In our forecasts, we are assuming that the protectionist measures President Trump is expected to take will have a negative effect on the growth in world trade. Even if no concrete measures materialise, the threat of such measures could still have a negative impact.

The Economic Quartlery Report is available at: www.rabobank.com/economics.

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