DNB to new cabinet: watch expenditure, cherish Europe

The Dutch budget deficit will increase rapidly in the coming years and will rise towards the ceiling of 3 percent of gross domestic product agreed in the European Union. To prevent state finances from spiraling further out of balance, a new cabinet must keep a close eye on expenditure, De Nederlandsche Bank (DNB) warned this Monday.

This year the budget deficit will remain limited to just under 1 percent, according to estimates presented by DNB. That picture will deteriorate in the coming years. This is because the government is more expensive on the financial markets due to the increased interest rates. Economic growth is also slowing down, causing the state to have less tax revenue.

The DNB forecast puts the government deficit at 2.6 percent next year and 2.9 percent in 2024, based on current government policy. Previously, the Budget Space Study Group, an official working group, said it expected a deficit of 3.6 percent at the end of the coming cabinet period. The Dutch national debt is still well below the EU maximum of 60 percent: 46.8 percent in 2023, rising to 47.5 percent in 2025.

‘worrisome’

DNB board member Olaf Sleijpen called the increase in the budget deficit “worrying”, especially because public finances will come under further pressure in the longer term due to the rising costs of an aging population, healthcare and climate change.

Sleijpen stated that the government must build buffers for possible future shocks, such as the recent shocks of the pandemic and the energy crisis. In both cases, The Hague stepped up in a big way to help citizens and companies. “That was possible at the time because the government finances were in order. You have to keep enough leeway.” The DNB report states that the government must therefore ‘make choices in the budget; Not everything can be done at the same time.” Sleijpen did not want to comment on these choices.

The Dutch economy is barely growing, according to the forecast by DNB economists. After exuberant GDP growth in 2022 (4.4 percent on an annual basis), a minimal growth figure will follow in 2023: 0.1 percent. This will be followed by GDP growth of 0.3 percent in 2024 and 1 percent in 2025. The causes of the growth slowdown: the global economy is faltering, partly due to rising interest rates, which slow down consumption and investments. Export country the Netherlands suffers from this. Furthermore, the consumption of Dutch households, which have been hit hard by inflation, is barely increasing.

According to DNB, the decline in inflation that started this year is continuing. Inflation will be 4.1 percent this year, 2.9 percent next year and 2.2 percent in 2025. The European Central Bank aims for inflation of 2 percent.

In an alternative, unfavorable scenario, the Netherlands falls into recession: next year the economy will shrink by 0.4 percent. This scenario could play out as wars in Ukraine and the Middle East increase economic uncertainty and as protectionism increases globally. Inflation is therefore higher.

Importance of Europe

To be prepared for such a scenario, DNB calls on politicians to increase the “resilience” and “resilience” of the Dutch economy. In addition to the plea for budget discipline, which is often heard from DNB, the central bank also sent another message in this area: develop international cooperation, “especially within the EU”.

Sleijpen evoked the image of a Dutch economy as a boat on “turbulent waters”. “The good news is that the EU, of which we are a member, offers us protection.” In the recent House of Representatives elections, a party that wants to leave the EU – the PVV – clearly became the largest. When asked about this, Sleijpen said: “We are an open economy, we earn our money by trading, especially trade with European countries. Given what the EU has given us, leaving is a very, very bad idea.”

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