Dutch delivering on Draghi's demands?

(MENAFN- ING) Disapproval toward Frankfurt's policies

During last week's Governing Council press conference,Mario Draghi left the ECB with a big monetary bang . In the Netherlands, this was received as controversial. In anticipation of this big bang, the majority of the Dutch House of Representatives signaled its disapproval of further monetary stimulus, and even went as far to send a formal letter to the ECB. Fearing the negative effect of an even lower interest rate on the coverage ratio of Dutch pension funds, it especially shared its concerns about the tiering of the deposit rates: providing comfort to banks without equally comforting funded pensions didn't seem right to the Dutch parliamentarians.

Additionally, the Dutch member on the Governing Council of the European Central Bank, Klaas Knot,commented that '[t]his broad package of measures, in particular restarting the APP, is disproportionate to the present economic conditions . Knot also voiced concerns about the effectiveness of the measures. The ECB president nevertheless went all guns blazing andresponded that it is a good time for the Dutch government to active a supposed 50 billion euro investment programme . So the question appeared whether - despite domestic annoyance towards further expansionary monetary policy - the Dutch government would deliver upon Draghi's wishes in its 2020 budget? 

The Dutch government presented its budget for 2020 on 17 September and King Willem-Alexander delivered his thrones speech. While the thrones speech emphasised the 
EU as a cornerstone of Dutch foreign policy, the Dutch did not give Draghi a mind-blowing farewell present. The budget contained no concrete proposal for an investment fund and certainly no EUR50 billion (which would have been the equivalent of 6% of Dutch GDP) boost to investment.

What did the new budget bring nevertheless? A small present, in the shape of a mildly more expansionary fiscal stance. The medium-term coalition agreement already had expansionary intentions. The previous forecasts had foreseen fiscal stimulus of 0.3% GDP, but with yesterday's new policy initiatives the Dutch will be delivering even more in 2020. With the structural budget balance deteriorating from a positive 0.3% GDP in 2019 to -0.4% GDP in 2020, the fiscal discretionary fiscal expansion amounts to 0.7% GDP (EUR6 billion).

Highlights from the 2017 Dutch coalition agreement

Most of the fiscal expansion is due to the reduction in labour income taxation, aimed at boosting the purchasing power of households. This was already part of the medium-term plans for the year 2021, which the government is now carrying forward to 2020. Apart from the deterioration of the government budget balance, this will mainly be financed by higher energy taxes for businesses and a delay in the lowering of corporate tax rates. Where the government initially intended to lower total taxes on households by EUR1.5 billion in 2020 and by EUR1.9 billion for businesses, the new budget entails EUR4.4 billion of tax relief for households and only EUR0.2 billion relief for businesses.

Upset by the deemed 'low wage growth delivered by businesses so far, the government deliberately shifted some money from businesses to households and itself added a relief to households on top of that as well. This is in line with the more critical attitude towards businesses of late. This, however, does not mean a serious deterioration of the business and investment climate of the Netherlands: corporate tax rate cuts which were initially announced in the coalition agreement for 2020, will be still be delivered in 2021.

Dutch Economy Chart Book, with graphs on Dutch public finances

Furthermore, Draghi's hopes for an investment fund were not entirely in vain. The budget memorandum promised to deliver a report to Parliament at the start of 2020 about the possibilities of such a fund, while Minister of Finance Wopke Hoekstra emphasised that the fund is not a matter of 'yes or no but rather of 'how and when. The government referred to the low-interest rate and low productivity growth as reasons for a fund aimed at strengthening the growth potential of the Dutch economy in twenty to thirty years. Unclear however is what the size of the investment fund would be. For now, the Minister of Finance is signaling that the fund could be of 'several tens of billions, not necessarily reaching the level of EUR50 billion as mentioned earlier. And the Minister stressed that the funds wouldn't get the money in one go, but rather gradually when a flow of viable projects have been identifying.

While we have to wait for the details of the fund, in the meantime the Minister of Economic Affairs & Climate will deliver a letter to parliament with a more general 'agenda for growth by the end of 2019, with options for policies (both financial and non-financial) that may boost potential growth, including options for boosting public as well as private investment. This shows that the intentions to boost the growth potential are real and ideas for concrete investment projects may already be in the making.

What does this all mean? The worsening of the structural budget balance next year and the announcement of intentions for a humble investment fund may seem like a small step to many, but it's a giant leap for Dutch mankind. Why so? In order to provide the additional tax relief, the Dutch government had to violate its own long-standing national fiscal rules that dictate medium-term spending limits. Such violations are very uncommon. This comes on top of the fact that the current government had already started its reign with looser fiscal rules than its numerous austerity-minded predecessors, by excluding a number of cyclical components outside it medium-term spending ceiling that allows for more Keynesian automatic stabilisation. All in all, we believe it is fair to say that the Netherlands is doing more and more what Draghi and others alike would like it to do. A well-designed investment fund would enhance prospects for the business climate in the Netherlands, which might be a reasonable attempt to combat low productivity growth that can be observed OECD-wide. And so it appears that the Netherlands remains an important European partner in the quest for economic growth.

MENAFN1809201902220000ID1099021211

Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.