The economic context of Budget Day is different from previous years. After the pandemic, the energy crisis and high inflation, economic crises are largely behind us, which means that the government can once again focus on the longer term. The broad package of policy plans is mainly focused on and specific for the short term, while policy ambitions and choices are less specific for the long term. Due to the plans of the new cabinet, we expect economic growth to be slightly higher in 2025, although the effect of the policy package is limited. The current budget is expansive and allows the deficit to increase at the beginning of the period by spending more and then adjusts through cutbacks.
Today, the Schoof cabinet presented the budget for 2025. A few days earlier, the Coalition Agreement – a follow-up to the Main Outlines Agreement – was published. In this publication, we describe the macroeconomic context of Budget Day, the direction of the policy plans, the macroeconomic effects of the Budget Memorandum and the impact on government finances.
Individual points together form the pizza
After a long run-up, the four coalition parties (PVV, VVD, BBB and NSC) have succeeded in forming an extra-parliamentary cabinet under Prime Minister Schoof. Given the differences between the parties that jointly represent the interests, the budget reads as a sum of the wishes of the individual coalition partners: income tax will be reduced (wish of VVD), there will be cheap red diesel for farmers (BBB), money will be made available for combating poverty and the deductible in healthcare will be reduced (NSC & PVV). In other words, the budget is a pizza of which each party has a number of slices.
Growth potential is under pressure
The economic context of Budget Day is different from previous years. For example, we have seen a number of quarters of stagnation, which were interrupted by surprisingly strong growth in the second quarter. However, one swallow does not make a summer: high interest rates, weakness in industry, inflation and cautious consumers are limiting growth. The international situation is also precarious, partly due to geopolitical tensions. Next year, growth will continue to increase if inflation continues to fall, interest rates are lowered, world trade picks up and consumer demand increases.
After the pandemic, the energy crisis and high inflation, economic crises are largely behind us this year, which means that the government can once again focus on the longer term instead of the here and now. In the longer term, the growth potential of the Dutch economy is under pressure due to an ageing population, low productivity growth and climate change. For example, an ageing population (read more here) will probably lead to lower economic growth, because the number of new employees is decreasing and spending is shifting to labour-intensive care; which puts additional pressure on government spending. In order to still achieve economic growth, it is important to use the remaining production capacity as productively as possible and to organise economic dynamism.
Policy plans: short-term gain, long-term pain?
The cabinet has presented a broad package of policy plans. The plans are mainly focused on and concrete for the short term, while policy ambitions and choices are less concrete for the long term.
The government supports the purchasing power of households. The rent allowance and the child-related budget will be increased, the excise duty reduction on fuel will be extended again in 2025, and a new income tax bracket will be introduced. The deductible in healthcare will also be reduced. The purchasing power package is smaller than could have been expected from the Main Lines Agreement. After all, the government benefits from the catch-up in wages that already make the purchasing power figures look positive (see below).
Protecting the business climate is also on the agenda, by largely reversing the austerity measures in the expat scheme. This is an important scheme for specialist companies such as ASML. In addition, there are planned intensifications in both the police and defence, where the latter focuses on achieving the NATO standard. In order to get housing construction going, the government will spend one billion euros annually over the next five years to realise the construction targets of 100,000 new homes annually.
This will be offset by cuts in education, development cooperation and a VAT increase on hotels, books and sports. The government is also assuming lower contributions to the EU. Although it is still uncertain whether the government will succeed in this. The government plans to take a different course in terms of cooperation with the EU. It is also focusing on (asylum) migration and plans to implement ‘the strictest migration regime ever’.
With regard to climate ambitions, the new cabinet is taking a step back compared to the previous government (read more here). For example, both the plans for the reduction of greenhouse gas emissions (-55% in 2030 compared to 1990 instead of -58%) and the means to achieve the reduction have become less ambitious.
Despite purchasing power support, economic stimulus remains limited
Due to the plans of the new cabinet, we expect economic growth to be slightly higher in 2025, although the effect of the policy package is limited.
Households are supported in their purchasing power by inflation that continues to fall and high wage growth. The purchasing power package described above also helps. Together, this ensures that the purchasing power of the average household in the Netherlands will increase by 0.7% in 2025. However, the purchasing power measures are more spread out over the years than originally planned in the Main Lines Agreement. Mainly the lower income group and benefit recipients will benefit less than previously planned. Nevertheless, they do benefit from the postponement of the Rent Benefit Simplification Act.
In addition, the plans will provide a small boost to investments via housing construction. The government will spend one billion euros annually over the next five years to achieve the construction goals of 100,000 new homes annually. However, we estimate that these measures will not accelerate housing construction and that ambitions in this area will remain unfulfilled. A broad housing coalition calculated namely earlier this year that the government must release three to five billion euros annually to achieve the construction targets for 2030 and the tight labor market plays a role.
The labour market is expected to remain tight in the coming years, partly due to the ageing population and the trend of low productivity growth. The government does not yet seem to have a conclusive vision on this. On the contrary, the cuts in education and innovation – investments in the future – are rather counterproductive. The government does aim to increase labour participation by lowering taxes and shortening the unemployment benefit period. We believe that the effects of this will be limited, as labour participation is already at a record high. In general, there is little to be gained by attracting inactive people to the labour market. However, with a bit of goodwill, gains in labour participation can be achieved among the 60-plus group and people with a disability, but there are no concrete measures to achieve this.
Government Finances: First the Sweet, Then the Sour
The government finances are in good shape at the start of the cabinet. The budget deficit has been limited in the past two years and the debt ratio is also far from the European 60% of GDP norm, at around 40% of GDP. On the other hand, the direction of the government finances is one of further deterioration: with high budget deficits and a rising debt ratio. In 2025, the budget deficit is expected to be 2.5% below the 3% norm. This trend was already set under the previous cabinet and the new cabinet deviates only slightly from it. This while, according to the Budgetary Scope Study Group, the structural budget deficit must be reduced to 2%.
The current budget is expansive and allows the deficit to increase at the beginning of the period by spending more and then adjusts it by means of cutbacks. In other words, first the sweet, then the sour. Although the feasibility of the planned cutbacks (the sour) is also questionable. The question is whether the lower EU contributions will succeed and whether the cutbacks on civil servants and asylum reception will have the desired result.
The government has also imposed a strict straitjacket on itself. The Main Lines Agreement states that immediate cuts will be made if the deficit threatens to exceed 3%. Because the government is already close to that 3%, the chance that this rule will come into effect is high. In that case, procyclical policy threatens; cutting expenditure in the event of setbacks. From a macroeconomic perspective, it would be wiser to maintain a larger margin – and thus a smaller budget deficit.
