On Tuesday, negotiations will start between VVD, D66, CDA and ChristenUnie about the Spring Memorandum, the interim review of the national budget. It is the first major stress test for the still young coalition, because the parties have to put together a difficult puzzle. The accumulation of billions of setbacks on the expenditure side cannot be absorbed by the coalition without breaking open the coalition agreement, says someone close to the negotiations.
One of the issues that the coalition must agree on is this: to what extent are the governing parties willing to meet the expensive demands of the Senate? The opposition has a majority in the senate and is thus putting pressure on the coalition. For example, the Senate wants the state pension to increase with the increase in the minimum wage, which costs 2.4 billion euros per year. In addition, the opposition demands that the cutbacks in nursing homes and youth care (at a raison of a total of 900 million euros) should be abandoned. The Senate threatens to torpedo the cabinet plans otherwise. The coalition parties must now decide whether they want to take that risk.
If they give in to political pressure, the coalition factions increase the other problem they have to tackle: the rapidly increasing billion-dollar deficit in the national budget. The sum of the series of financial setbacks is already almost 21 billion euros.
Biggest setbacks
The biggest blow is the judgment of the Supreme Court on the capital yield tax. State Secretary Van Rij (Taxes) will probably compensate millions of wealthy savers for overpaid Box 3 tax for the years 2017-2022. This can be done in various ways, but the government’s preferred variant is said to cost about 7 billion euros.
The additional increase in the defense budget forced by the House of Representatives causes a budget deficit of approximately 5 billion euros. The government also did not fully cover the recent purchasing power repair package of 2.8 billion euros. The coalition still has to find financing for half a billion euros.
The European Union will cost the government more than expected. The Dutch contribution of 1.1 billion euros to the Social Climate Fund has not yet been included in the budget. Poland’s veto last week against the introduction of a European minimum corporate tax rate is causing the latest setback. The Polish blockade will save the treasury about 800 million euros in revenues already booked.
An announced loss of 1.3 billion euros is likely to be higher. Initially, the Netherlands counted on a subsidy of 6 billion euros from the European corona recovery fund. Minister Kaag (Finance) wrote to the House of Representatives in January that this will be 4.7 billion euros. The Netherlands has withstood the corona pandemic in 2020 and 2021 much better than previously estimated. The subsidy for EU countries is related to the economic pain suffered by a Member State during the virus outbreak.
Kaag’s most recent estimate is based on an economic contraction of 3.8 percent in 2020 and 4 percent economic growth in 2021. Statistics Netherlands recently announced that the Dutch economy shrank ‘only’ 2.9 percent in 2020. In 2021, the growth was not 4 percent, but 6.5 percent. The Netherlands will therefore probably receive less than 4.7 billion euros from the Brussels money pot.
Refugees and coal-fired power stations
Other substantial setbacks are the costs of hosting Ukrainian refugees (estimated at 1 billion euros for the next six months) and the rising interest costs of the Dutch government debt (about 1 billion per year at current interest rates).
Minister Jetten (Climate) is faced with an undisclosed setback of approximately 1.5 billion euros, because he has to pay the four Dutch coal-fired power stations much higher compensation than estimated. Since this year, the coal-fired power stations have been subject to a legal production limitation, because the government wants to reduce greenhouse gas emissions quickly. The owners of the coal-fired power stations are entitled to financial compensation for lost income. The amount is linked to the extremely high gas price.
The coalition is now faced with the choice of whether to eliminate the budget deficit with austerity measures or tax increases (such as an increase in the tax on the wealthy). The negotiating parties can also opt for the ‘easy’ way: letting the national debt rise instead of taking unpopular measures. The latter is perhaps even more tempting, because the national debt – thanks to the better-than-expected economic growth – is actually lower than forecast. According to Statistics Netherlands, that debt at the end of 2021 was 52.1 percent of gross domestic product, well below the European standard of 60 percent.