Macro Weekly – Budget Day in the Netherlands

by: Philip Bokeloh

The Rutte III government presented its first budget this week. The centre-right government, which took office in October 2017, introduces a wide number of changes to the tax system in its 2019 Budget. Most importantly, income taxes will be lowered, the low VAT-rate (on food, water and medicine) will be raised, corporate taxes will be reduced, the tax on dividend payments will be abolished and environmental taxes will be raised. The total package of tax measures should lift government revenue marginally in 2019 (by around 200 million). Besides the changes to the tax system, the government plans to increase spending on education, defence, infrastructure and public safety. Total expenditure should rise by around EUR 8bn.

The total package of changes to the tax system and rises in government spending, on balance, is expansionary. Indeed, the government’s structural budget balance (corrected for the impact of the business cycle and one-off income and expenditure) is expected to deteriorate to around -0.4% GDP in 2019, down from close to balance in 2018 (0.2% GDP) and following a surplus of around 0.8% GDP in 2017. Still, the high level of economic growth (around 2.6% in 2019) will keep the change in the headline budget balance limited, with the budget surplus expected to rise to around 1% in 2019, up from around 0.8% in 2018. The government debt ratio currently is the lowest of all eleven big eurozone countries. It peaked at 68% in 2014 and has been falling since. It is expected to decline further in 2018 and 2019, reaching a level just below 50% in 2019, which is far below the Maastricht criteria of 60%.

The economy will continue to show above average growth in 2019. While the outlook is favourable downside risks are predominantly external given Brexit and increased trade tensions. GDP-growth is set to fall from 2.8% this year to 2.6% in 2019. This year, exports will rise considerably less fast than last year, owing to the slowdown in growth in world trade. Consumer spending may rise in response to favourable labour market developments and the tax cuts scheduled for 2019. Notwithstanding high capacity utilisation rates, the positive outlook, high profits and low costs of capital business confidence levels among manufacturers have been falling. Therefore corporate investment is expected to slow down in 2019. Residential investment will also continue rising strongly, albeit less than last years since catch-up growth will be less significant and the tight labour market is also holding back construction. Unemployment will continue falling in 2019, to 3.5%. As the labour market is tightening wages and salaries are expected to rise faster. Next year HICP-inflation will rise sharply to 2,5% , primarily because of the increase of VAT.

 

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