If the worst case scenario of the CPB becomes reality, purchasing power in 2022 could even be 3.4 percent lower than last year. The last time the Dutch fell by more than 2 percent was in 1983, when purchasing power fell by 2.3 percent. The Netherlands was then in a severe recession and inflation was above 6 percent in the early 1980s.
The fact that the average Dutch person will be hit so hard in the wallet this year is due to the exploding energy prices. The CPB now estimates the inflation rate for this year at 5.2 percent (and in the worst case 6 percent). In January, the planning bureau still assumed an average inflation of 3 percent for this and next year. The extra rise in energy prices comes on top of an already strong inflation, partly as a result of the economic shocks of the corona pandemic.
Large spread
The consequences for purchasing power will not be the same for every Dutch person, the CPB warns. There is a wide spread between people who are not bothered much by the increased energy prices because they have concluded a long-term contract with a fixed energy price. But for other households (low income, high consumption, variable energy contract), energy costs as a share of disposable income will rise much faster, the CPB writes.
This wide spread in the decline in purchasing power makes it extremely difficult for the government to absorb these consequences properly. ‘Given the spread behind the purchasing power effects, an attempt at broad compensation is soon very ineffective: it is not necessary for everyone, and for those who need it, it is just inadequate’, the planning office notes. ‘A generic tax reduction without an effective tax increase shifts charges to the future and is also contrary to the applicable budget rules. At the same time, the spread also means that specific groups will be confronted with significant, in some cases problematic, purchasing power effects. Targeted support for these households is desirable, but technically difficult to implement.’
The gloomy purchasing power forecast is part of the Central Economic Plan (CEP), the most important spring estimate of the CPB. The government was eagerly awaiting this new estimate. On the basis of these figures, the government wants to attempt a partial purchasing power repair. Prime Minister Rutte said in the House of Representatives on Tuesday that his cabinet wants to make proposals within a few weeks.
More positive image
The planning office has also made a new estimate of the economy and public finances. Despite the war in Europe, they show a much more positive picture. According to the CPB, the Dutch economy is not so dependent on Russia and the Netherlands is relatively unaffected by the economic sanctions against Putin. The economy will continue to grow this year, the CPB believes, and the labor market remains tight. The CPB does not (yet) see the recession that Rabobank saw coming on Tuesday.
Purchasing power may also be less than expected. In the most favorable scenario, energy prices will return to the level of mid-2019 this summer. In that case, inflation will fall to 3 percent and purchasing power will fall only 0.6 percent.