Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Charles Kalshoven, macroeconomist and expert strategist at APG, on whether the budget deficit and debt of the Dutch state are too big.
According to the Dutch Central Bank (DNB), the budget deficit will be just under 3 percent this year, while the national debt is well below 60 percent. That deficit “is actually on the high side,” Olaf Sleijpen, DNB’s director of monetary affairs and financial stability, told BNR. Is the Netherlands currently living on credit too much?
“You actually want the budget to breathe with the economy. In good times like now, with low unemployment, you would prefer to be close to a balanced budget. That gives room for the budget to rise to, say, 3 percent in a recession,” Kalshoven said. “When the economy gets worse, as a government you spend more on benefits, among other things, and your tax revenues go down. This increases the budget deficit, but in good times that can go down again. Economists call this ‘automatic stabilizers’ - it happens automatically and dampens economic waves a bit. But then you do need to have the fiscal space to breathe with it. Otherwise, you have to make cuts at the wrong time, and you only make the recession worse. It is therefore advisable for fiscal policy in the longer term to aim for a limited deficit, so that you have some room for lean years.”
Because monetary policy is currently set in Frankfurt for the entire euro zone, fiscal policy has become more important for inhibiting or stimulating the Dutch economy. “The effectiveness of a stimulative fiscal policy is especially great in a downturn (period of slower economic growth, ed.). And especially when interest rates are already so low that the European Central Bank is having trouble stimulating the economy. But currently both interest rates and inflation are high and the economy will have to be slowed down rather than stimulated. So a government stimulus is not desirable right now."
A structural budget deficit need not be a disaster, as long as it is contained, Kalshoven continued. “Say the Dutch economy grows at roughly 3.5 percent in nominal terms, consisting of 2 percent inflation and 1.5 percent growth. If the government then has a structural deficit of 2 percent, the public debt stabilizes slightly below 60 percent in the longer term. That rate is generally considered safe. With high debt levels, a country can run into trouble when interest rates rise. In that case, interest payments on the debt increase sharply, pushing the debt up further and creating a vicious circle. From exactly what debt level those problems arise is hard to say, but with the current debt level in the Netherlands we are really in good shape.”