The August estimate of the Central Planning Bureau (CPB) will have arrived in the Trêveszaal like a sledgehammer last Friday. According to the country’s accountants, the economy will grow by 4.6 percent this year and government debt will fall to 48.8 percent of gross domestic product (GDP). Brilliant figures, were it not for the fact that, according to the same CPB, purchasing power will fall this year by an average of 6.8 percent. Independent Member of Parliament Pieter Omtzigt tweeted what everyone in the Trêveszaal thought: something is going horribly wrong here.
The CPB has also been helpful in adding an estimate of the development of poverty in the Netherlands. Due to high inflation, the proportion of people living in poverty will rise to more than 8 percent in 2023. That is almost one and a half million people. The children will live next year, if the cabinet does nothing, almost
10 percent in poverty. That is all the more poignant because in the coalition agreement this cabinet is aiming to halve poverty.
Strategy
In order to solve the purchasing power problem, according to Omtzigt, the cabinet must come up with a strategy to guarantee the affordability of energy and food, for example by pumping extra natural gas from the Dutch gas fields. That makes sense, because inflation is largely driven by rising energy and food prices, and food prices are largely driven by energy costs.
But the August estimate of the CPB also shows that the labor income ratio in 2023 will increase by more than
2 percentage points will fall and the share of corporate profits in GDP will increase by more than 2 percentage points. This means that to solve the purchasing power problem, we must not only look at the government – a typical Dutch practice – but also at the business community. Despite the glaring labor shortage, according to the CPB, no acceleration in wage growth can be observed.
Prime Minister Rutte and President of De Nederlandsche Bank Klaas Knot have been calling for years that wages in the Netherlands should be raised, without this having any effect. Only the top incomes have risen sharply, according to research by this newspaper, by no less than 32 percent in the past year. That was different during the oil crisis of the 1970s. Then there was also high inflation, but wages rose faster than corporate profits and the labor income ratio rose.
Speed up
To force a wage wave, the cabinet must, first of all, increase the minimum wage by
7.5 percent (after inflation) that has been agreed in the coalition agreement. The intention was to implement this increase in three steps, but the cabinet can also implement this wage increase as of 1 January 2023. All benefits linked to the minimum wage, such as the AOW and social assistance, will therefore increase.
An increase in the minimum wage will force employers in the lower segment of the labor market to increase wages, so that the increase will also benefit households with incomes up to
120 percent of the social minimum. The stress test of the CPB shows that a vast majority of this group has affordability problems at the current high energy prices.
But a quarter of households with an income between 120 percent of the social minimum and the average are also at risk of experiencing financial difficulties. Even households with an above-average income are likely to face a number of affordability problems if high energy prices persist long enough. The best way to accommodate these households is to increase wages across the board.
unorthodox
The government can offer employers the choice of raising wages or anticipating an increase in corporate tax. It would be unorthodox, but Finance Minister Kaag already said last Friday that she would not shy away from unorthodox measures.
The alternative is for the cabinet to announce a wage measure like the Den Uyl cabinet did during the oil crisis in the 1970s. At the time, wages rose so fast that the Den Uyl cabinet announced a wage measure in 1976 to curb the wage increase. Why not now a wage measure that leads to a one-off increase in wages?
Helen Mees is an economist. She writes an exchange column with Marcia Luyten every other week.