The pressure on the cabinet to cut expenditure or increase the burden next year is increasing. Tuesday warned the European Commission Netherlands that the government wants to spend too much money in 2023. And on Monday, Minister of Finance Sigrid Kaag (D66) issued a “pre-warning” about rising costs, which still have to be covered.
According to the Commission, Dutch government support to citizens and entrepreneurs to compensate for the high energy costs is insufficiently aimed at the most vulnerable. Like other EU countries, the Netherlands opted for a broad price ceiling for energy. More targeted measures turned out to be technically difficult to implement and politically difficult to design. The result is that the Netherlands pursues an ‘expansive’ fiscal policy in times of inflation, Brussels notes. The Dutch budget deficit will increase from 0.9 percent in 2022 to 3 percent in 2023. If governments allow their budget deficits to increase, more government money will enter the economy on balance. This reinforces inflation. That is why Brussels, together with the council of ministers of the member states, had pushed for moderation in national spending next year.
Criticism of the budget from Brussels is sensitive in The Hague, where politicians often lecture other member states about budgetary discipline. However, it is unclear whether the energy cost support can still be adjusted in the short term.
Apart from the criticism from Brussels, things are starting to get financially tight in The Hague. In the Autumn note which Finance Minister Sigrid Kaag (D66) sent to the House of Representatives on Monday, she already prepared the coalition parties for more difficult financial times. The state is cost-burdened by generous energy support and by rising interest rates on government debt.
Interest costs for the state will rise to between 5.8 and 9.2 billion per year in 2028
It has been known for some time that the compensation of citizens and companies for the rapidly rising energy costs will cost many billions. The latest estimates of the cabinet: the energy price ceiling will cost 11.2 billion euros. The contribution to the energy costs for SMEs is estimated at 1.65 billion.
Interest hurts
Inflation is also starting to hurt the treasury financially in another way. The interest that the Dutch government pays on loans is rising. At the beginning of this year, the state borrowed for free – at zero percent – now investors are asking for 2.3 percent interest on a Dutch government loan with a term of ten years. Those capital market interest rates are being pushed up by the European Central Bank, which wants to reduce inflation. Higher borrowing costs discourage consumers, businesses and governments from spending. This should also curb price increases.
The officials of Kaag calculated what the rising interest rate will mean for The Hague. From 2023, interest costs for the government will increase every year. Next year it will still be a limited amount, of between 500 million and 1.1 billion. This increases every year thereafter to between 5.8 and 9.2 billion per year in 2028.
‘Coverage’ will be the key word in the difficult conversations that Kaag will have with her colleagues in the cabinet in the spring. That coverage of the rising expenses is not yet available – neither for the energy cost compensation nor for the increased interest costs.
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Gap at power controls
The gap in the energy regulations is estimated at 7.5 billion euros. This amount could increase further if energy prices continue to rise. Because the energy schemes are in principle temporary, windfalls or temporary levies can close the gap. The temporary levies that have been agreed so far are still insufficient. The ‘solidarity contribution’ on excess profits in the fossil sector in 2022 must yield 3.2 billion euros. The revenues from an additional levy for producers who generate electricity using solar, wind and nuclear technology are still unknown.
It is more difficult to close the gaps created by the higher interest costs, because they are structural in nature. That is, they come back every year, because the interest on multi-year loans has to be coughed up every year. This means that expenditure must be structurally reduced, or taxes increased.
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