Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question. This edition: macro-economist and senior strategist Charles Kalshoven on the question whether a loss in spending power can be compensated without ending up in a wage-price spiral.
The Netherlands Bureau for Economic Policy Analysis published some tragic figures last week. The inflation is expected to rise to 9.9 percent this year. The significantly increased price level and the lacking wage increase result in a loss of spending power of 6.8 percent. The government calls upon employers to increase the wages. The subsequent risk would be that employers will pass on those higher wages in their prices. Because of those increased prices, employees ask for higher wages again to maintain their spending power: the infamous wage-price spiral.
The current inflation mainly results from the significantly increased energy prices and it is difficult to compensate this increase, Kalshoven believes. “Wide-ranging government support is counterproductive in these economic circumstances, as that stimulates the economy with the risk that the inflation rises even further. Inflation arises because the supply - of energy, among other things - is far below demand. This results in an increase of the prices, in order to bring supply and demand more closely in line with each other. If the government decides to compensate citizens for their loss of spending power at a large-scale, this actually adds fuel to the fire: the demand side is stimulated without any margin left on the supply side. You should remember that we became poorer collectively. We have to pay (a lot) more for foreign energy. The pain of that bill can be distributed differently or moved towards the future but cannot be eliminated.”
Kalshoven: “On the other hand, it is completely understandable that the government does not want their citizens to be cold this next winter and wants to compensate them for the high energy prices. But it is impossible to compensate everyone, as we are all ‘the government’, and this is also extremely expensive. It would be more logical to provide targeted support to people with the lowest incomes who often have the highest energy bills relatively speaking. However, that also comes with a ‘but’ because it is of course possible to lower the taxes and the VAT, but the positive thing about expensive energy is that it is an incentive to use energy economically.” That makes the Netherlands less dependent on Russian gas and it benefits the fight against climate change.