The Netherlands: Government presents budget for the coming year

The Dutch economy is recovering stronger than previously expected. And even though the government paved the way for economic recovery by support packages, the on Budget Day presented plans lack strategy and vision on housing shortages and climate change.

On the 21st of September the outgoing government of the Netherlands presented its’ budget for the next year. Now that an increasing vaccination rate lead to more grip on (the spread of) the coronavirus and the Dutch economy is almost recovered from the corona crisis, there is room to focus on other major challenges like housing shortages and climate change.

Although the Dutch (outgoing) government paved the way for economic recovery by well instated support packages, it did not present any deal breakers on both challenges. Though, the government did make some additional money available for the housing market -€1 billion for the coming 10 years- and energy transition and climate change -extra reservations of €6.8 billion-.

But what is really necessary to face these challenges is a vision and well-defined policy. And for that a new government coalition needs to be formed. Since the general elections in March, Dutch political parties have not yet formed a new governing coalition. Starting with trust issues among the parties they have now reached a political impasse while societal tension about affordable housing increases and the climate change does not wait. Hence raising formation urgency.

Money is currently not an issue for the Dutch government. In the second quarter this year we saw Dutch government debt slightly decrease to 54.2% of GDP. The on Budget Day presented plans show that government debt in the coming years will not rise above 60% of GDP, the upper level bound agreed upon within the EU (figure 1). Also the interest burden remains low. Although this is not a free pass for the Dutch government to spent aimlessly. Spend money needs to yield a positive contribution to society and add to a broader vision to keep debt sustainable also in the long run.

In the second quarter this year we saw the Dutch economy bounce back faster than we previously expected. According to Statistics Netherlands GDP increased with 3.8% q/q. This is an upward revision since the first estimate, leading to a slightly upward revision of our forecast to 4.3% y/y in 2021. The growth rate in 2022 is down to 3.5% y/y, assuming the same cumulative growth in 2021 and 2022.

The swift bounce back of the Dutch economy is also reflected in household consumption which continued to increase with 4.8% y/y in July. Also the labour market continues its strong performance. Although the unemployment rate increased a bit in August to 3.2%, the working population increased (figure 2). The unemployment rate remains at a very low level, but when support packages will fade out as of the first of October we expect it to increase slightly.

On the production side, the Dutch manufacturing industry was already fully recovered of the corona crises and increased its production again in July with 1.3% m/m despite supply chain issues (figure 3). This great performance of the Dutch manufacturing sector can probably be explained by the existence of certain manufacturing champions in for example the chip-industry.

Now that the Dutch economy is picking up other challenges arise. The global higher demand that corresponds with economic recovery leads to shortages of both people and materials. Of course material shortages intensified due to global supply chain disruptions.

The low unemployment rate (figure 2) already reflected this labour market tightness. But also the vacancy rate, the number of vacancies per 1000 jobs, reached the highest level in the second quarter this year since Statistics Netherlands reports it.

Although we expect that labour market tightness and material shortages are mostly short term challenges, both will temporary exert an upward pressure on inflation (figure 4). But, we do not yet see these inflationary pressures being effective since the high inflation in August of 2.7% y/y can be largely explained by base-effects.

Our forecast on a temporarily higher inflation as depicted in figure 4 is subject to various upward risks when both the labour market tightness and the global supply chain issues are less temporarily than we currently expect.