Is the Dutch state living on credit too much?

Published on: 22 June 2023

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."

Wage-price spiral

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.”

The budget deficit and national debt do not have to be zero

To prevent a wage-price spiral, workers are being urged to moderate their wage demands and companies are being asked not to overstate their profits. “DNB is also now warning that the government is contributing to inflation through fiscal policy. I think that warning is justified, because fiscal policy is broad and thus fuels inflation. Compensation measures like the energy ceiling are very generic. They could be targeted much more. It is also factually impossible to compensate everyone. Expensive energy imports are a national welfare loss (after all, the money for energy flows abroad, ed.). We can share the pain, but as a country, we can’t get rid of it. Compensating everyone leads to unnecessarily high public debt and inflation.”

However, the budget deficit and national debt do not have to be zero either, Kalshoven stresses. “After all, a government can use debt to invest in projects that make the economy grow faster. For example, one euro of debt can generate more than one euro of gross domestic product (GDP). As a result, you bring down government debt as a percentage of national income. In addition, the debt can also be used for investments that do not necessarily lead to economic growth, but solve social problems. For example, eldercare or housing construction.”


There is also another less obvious reason not to bring government debt to zero. “In 2000, President Clinton had managed to turn the U.S. government deficit into a surplus. The expectation then was that the U.S. government debt would be paid off within 10 years. That led to a discussion about the fact that U.S. government bonds - treasuries - are actually indispensable as an anchor for the global financial system. And bonds, including those of the Dutch state, are indeed an attractive - because safe - investment. This makes them of added value in the diversified portfolio of (institutional) investors, in addition to equities and commodities, for example.”


A national debt below 60 percent and a budget deficit of less than 3 percent are thus not a cause for concern, Kalshoven summarizes. “But it does make sense to reduce the deficit in good economic times. Now government spending acts as fuel for inflation and a looming wage-price spiral. The government should aim for a limited structural deficit over the longer term, which can then breathe with the business cycle, stabilize the economy and thus keep the debt at a sustainable level.”