IHS Global Insight Perspective | |
Significance | The 2011 Dutch budget announced to the Parliament on 21 September represents a shift in the fiscal policy from expansionary in the recent years, to a tightening gear as the budget deficit is estimated to soar to 5.8% of GDP in 2010—well above the EU limit of 3.0% of GDP. |
Implications | Budget cuts in 2011 are proposed in EU-related spending, immigration and a range of social benefits, while GDP growth is projected at a modest 1.5%. |
Outlook | IHS Global Insight expects the Dutch economy to grow a modest 1.3% in 2011, moderating from 1.7% in 2010, as fiscal stimulus measures are gradually withdrawn. |
Budget Deficit Set to Narrow in 2011 As Government Spending Declines
The Dutch caretaker government unveiled the 2011 budget on 21 September. The budget calls for 3.2 billion euro in spending cuts in 2011 alone, followed by even bigger cuts expected during the next two years. Among the key spending measures in the 2011 budget are 100 million euro in cuts to integration programmes for immigrants and 120 million euro in cuts for work retraining programmes. In total, the government expects revenues of 235 billion euro and has projected its spending at 254.7 billion euro. As a result, the budget deficit is forecast to narrow to 3.9% of GDP in 2011, from an estimated deficit of 5.8% of GDP in 2010 and compared to a deficit of 5.3% of GDP posted in 2009. The new estimate for 2010 is a lower than originally projected deficit of 6.3% of GDP, as forecast by the Finance Ministry back in 2009. Even so, the 2010 budget deficit will clearly be way above the 3.0% of GDP ceiling stipulated by the European Union's Stability and Growth Pact, and it also represents the second consecutive year of a sizeable gap in public finances. The budget is based on GDP growth projections of 1.5% in 2011, slowing from 1.75% in 2010, while the unemployment rate is forecast at 5.5% in both 2010 and in 2011. In the meantime, gross public debt is seen rising to 66.2% of GDP in 2011 from 64.5% of GDP in 2010.
The caretaker government has had to deal with the 2011 budget amid fears of a policy vacuum following several months of attempts to form a new government. The Liberals, the Christian Democrats and the anti-Islamic Freedom Party have been in on-and-off coalition talks for more than a month, and there are hopes they could reach a deal by mid-October on a minority Liberal-Christian Democrat cabinet with the Freedom Party's parliamentary support. They, in turn, have been targeting budget cuts of 18 billion euro over their potential four-year term in order to balance the budget by 2015.
Outlook and Implications
IHS Global Insight has projected Dutch GDP to grow a modest 1.3% in 2011, moderating from an estimated increase of 1.7% in 2010. In our projections, real GDP will not reach its 2008 (or pre-crisis) level until in late 2012, after it shrank 3.9% in 2009. Following respectable growth in the first half of 2010, leading indicators points to a fragile and indeed, easing pace of recovery. For example, the purchasing managers index (PMI) points to expanding manufacturing activity in the Netherlands in August, but at its lowest rate in the past eight months. It is clear that as government has become more worry of a soaring deficit, and as calls for fiscal discipline have become louder, it has had no choice but to tighten its belts following two years of ballooning spending as part of its aim to help the economy exit its biggest recession since the Second World War. Opinion polls have also shown broad public support for the cuts, although there is a division within the coalition whether to increase the retirement age from its current 65 years to 66 or 67. Women's and leftist groups have also criticised plans to cut childcare subsidies, which they say could force some women out of the workforce. Although the Dutch budget is expected to remain into deficit over the next three years, the government measures to maintain fiscal discipline and a steadily narrowing deficit, will be reassuring for bond investors and help keep the Netherlands' cost of borrowing among the lowest in the Eurozone.