The Netherlands: Fiscal stimulus on the horizon - ING

Analysts at ING explained that in the run-up to the 15 March general elections the CPB has mapped out the economic effects of the various political party programmes.

Key Quotes:

"The six most important parties expected to form the next coalition government aim for an average net budgetary stimulus of just over 1% of GDP by 2021. A small budget surplus, a low debt to GDP ratio and low unemployment may make the Netherlands top of the Eurozone class by 2021.

The Netherlands Bureau for Policy Analysis (CPB) has studied the effects of the proposed political party programmes for the 15 March general elections and has presented the outcomes. For the six most important parties expected to form the next coalition (VVD, D66, CDA, GroenLinks, SP and PvdA - totalling about 65% of votes in the polls*), we see the Netherlands heading for budgetary stimulus. The average net budgetary stimulus is calculated to be just above 1% of GDP by 2021. And while the exact beneficiaries will only be known after the coalition has been formed, the direction is clear: lower tax burdens for households, more government spending and higher tax burdens for corporations.

A budgetary stimulus is what the European Commission and ECB have asked for repeatedly. And although these institutions might have hoped for a bit more, they will look at the mix: a small budget surplus, a low debt to GDP ratio and low unemployment. It may make the Netherlands top of the Eurozone class by 2021.

The intended budgetary stimulus is positive for growth and marks a departure from the historical fiscal stance. All parties still strive for very sound government finances – with debt to GDP projected to be in the range of 51.4% to 54.0% by 2021, a sharp decline from 62.7% in 2016 and in adherence to the stability- and growth pact target of below 60%.

On average, these six parties propose an increase in government spending of almost €9bn by 2021, equating to just over 1% of GDP. Spending is most often directed to health, education, environment, security and defence (in that order).

On average, parties propose lowering the tax burden for households by €8bn by 2021, equating to around 1% of GDP. 

The corporate tax burden, however, will be increased by all of the six biggest parties except for the Christian Democrats. The average increase is €6bn by 2021, so just below 1% of GDP, but some compensation may come from subsidies and transfers to corporations (part of the additional €9bn of government expenditure), which would be an average of €1bn higher.

The net stimulus ranges from €8bn (VVD) to €12bn (PvdA), averaging €10bn in 2021. This is just above 1% of GDP.

The traditional left/right wing axis can be seen: Centreright-wing parties (VVD, CDA and D66) plan to lower taxation, most of it for households. Left-wing parties (GroenLinks, PvdA and SP) plan to increase government expenditure more, while lowering household taxes (on average by the same magnitude as right-wing parties). Corporations, on the other hand, face higher tax proposals from all parties.

The effect on growth and employment of these measures is, as expected, positive: the growth stimulus is calculated to be 0.3% additional GDP growth per year on average. As a consequence, employment would be somewhat higher also, and unemployment lower. From the current (already low) 5.5%, unemployment is projected to reach 4.5% on average by 2021.

This implies growth above potential for several years, resulting in a closing of the output gap, but no serious overheating is envisaged.

Five out of six parties expect to achieve a government surplus by 2021 while the PvdA exactly balances the budget, leading to a surplus of 0.3% of GDP on average.

The debt to GDP ratio is projected to be 52.3% in 2021, if policy remains unchanged. The budgetary stimulus leads to a slight deterioration for four out of six parties. However, all parties end up comfortably below the 60% threshold, ranging from 51.4% to 54.0% of debt to GDP.

While forming a coalition may take some time, the direction for the Dutch economy seems clear: decent growth, low unemployment and solid government finances."