Dutch Budget 2021 and the implications for the borrowing requirement

by: Jolien van den Ende , Aline Schuiling

Euro Macro: The Netherlands’ 2021 budget dominated by Covid-19 and elections – The Dutch centre-right Rutte III government presented its 2021 budget today. The budget is dominated by the impact of the Covid-19 crisis, as well as by the government’s desire to cut taxes and raise expenditure in its final budget before the 2021 general election. In order to limit the economic damage from the pandemic, the government implemented discretionary policy stimulus measures equal to around 5.2% of GDP in 2020. On top of that, the automatic stabilisers (e.g. lower tax income and higher government spending on social security due to the cyclical deterioration) added around another 4% GDP of stimulus. The government has also allowed deferral of tax payments, which are equal to around 1.5% GDP. These tax deferrals are not included in the definition of the budget balance, but do have an impact on the borrowing requirement as they reduce government income.

Part of the 2020 stimulus is expected to be unwound in 2021, in particular the cyclical part (which will fall by 1.5pps). Still, the discretionary policy stimulus will remain largely intact, partly because the government has planned to raise spending on some non-pandemic related items (e.g. public safety, defence and education) and will lower taxes paid by households and SMEs. All in all, estimates by the CPB (the Netherlands Bureau for Economic Policy Analysis) suggest that the government’s budget balance will deteriorate from a surplus of 1.7% GDP in 2019, to a deficit of around 7.6% in 2020, which will improve to a deficit of 5.1% in 2021. Due to the combination of a soaring budget deficit and plummeting nominal GDP, the government debt to GDP ratio is expected to jump from 48.6% GDP in 2019 to almost 60% in 2020 and to continue to move higher to around 62% in 2021. This means that the debt ratio will return to levels above the EC’s 60%-ceiling for the first time since 2016. (Aline Schuiling)

Euro Rates Watch: Dutch State to break records with next year’s borrowing requirement – Based on the new estimates for the budget balance and government debt, we have updated the projections for the Dutch States’ borrowing requirement for 2020. As the budget deficit turned out somewhat lower than the government had estimated before, the projection for the borrowing need in 2020 decreases from EUR 139bn to EUR 112bn based on the Budget Memorandum of 2021. This is mainly driven by the decrease in the cash deficit from EUR 95bn to EUR 56bn. Working in the opposite direction are the deferred tax payments, which increase the borrowing requirement by EUR 12bn. The significant decrease in the budget deficit reflects the high uncertainty related to these unprecedented times. In general, the DSTA aims to absorb shocks in its funding need on the money market and therefore we still judge that the DSTA will issue at least EUR 40bn on the capital market.

Furthermore, we made our first estimate of the Dutch States’ borrowing requirement for 2021. We expect that the borrowing requirement will be the highest-ever, despite the lower cash deficit (EUR 45bn) as well as lower redemptions on the capital market (EUR 16.5bn) compared to this year. This is mainly driven by a higher forecasted money market use of EUR 70bn at the end of 2020. This is a quadrupling of the money market usage compared to 2019. As is standard practice by the DSTA, it uses the money market to absorb shocks in its borrowing requirement. Hence, it financed most of its additional borrowing requirement due to the outbreak of Covid-19 on the money market.

In addition, the Dutch sovereign wealth fund increases the borrowing requirement by EUR 1bn, whereas deferred tax payments of 2020 and the recovery fund decrease the borrowing requirement by EUR 6bn and EUR 2.3bn respectively. To conclude, it will lead to the highest-funding need ever of EUR 124bn as shown in the graph below. These are our preliminary figures and we will give an update after the DSTA has published its Q4 Issuance Calendar tomorrow morning. (Jolien van den Ende)