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Tuesday, 6 March 2012

Almost €11 bln of unemployment money is wasted within three years, due to disastrous government policy. Unemployment is gaining momentum, but the money is already gone!

Today the news was published that within a period of three years, €10.9 bln in Unemployment Benefit money had magically disappeared.

The Dutch newspaper Trouw ( wrote a shocking story on the political idiocy that surrounded the ‘magical disappearance’ of the vast Dutch unemployment benefit budget. Here are the pertinent snips of this story:

In only a few years, the billions of Euro’s in reserves in the public fund for unemployment benefits (UB) have been consumed in entirety. While there was still €9 bln stored in the UB-fund at the end of 2008, there is now a negative balance of €1.9 bln. This was disclosed by data from the UWV, the official Dutch office for unemployment benefits.

In the recent past the UB-funds were replenished with premiums from both employers and employees. In 2009, when the funds were still very well funded, the premium for employees was abolished by the cabinet Balkenende-IV.  This led to an immediate improvement of purchasing power.

But the withdrawn premium-revenues, added to the rising expenses as a consequence of the crisis, have led to a substantial deficit in the meantime. This deficit is now mitigated by the Dutch government; this has no immediate effect on the height of the unemployment benefit.

What these data do make clear, however, is that there are no cash reserves left for the imminent inflow of new unemployed people in the coming years, that has been predicted by the Dutch Central Planning Bureau (CPB) last week. Without additional measures, the Dutch government must reserve billions of Euro’s for this inflow.

The cabinet could also decide to increase the premium for employers, which means an increased tax burden for trade and industry, or to reinstate the premium for employees, which has direct results for Dutch purchasing power. Another possibility is to moderate the unemployment benefit.

I blame former Prime-Minister Jan Peter Balkenende and his henchmen for this totally derailed policy. I will explain why I do so.

Since Q4 2008, The Netherlands didn’t go through the heaviest unemployment increase in Europe. Not by a mile. To the contrary, The Netherlands enjoyed almost the lowest increase in unemployment of all European countries, trailing only Austria as country with the lowest unemployment. See the following chart (data courtesy of the Dutch Central Bureau of Statistics;

Dutch unemployment development 2008-2011
Data courtesy of
Click to enlarge
From the trough in 2008 to the peak in 2010, the Dutch unemployment rose by less than 2.5%, only to drop again after 2010Q1. According to Eurostat standards, the increase has been even less.

So if the waste of €10.9 bln was not caused by soaring unemployment, like the PIIGS-countries experienced, what did cause this?

The first cause was already mentioned in the article: the abolishment of premiums paid by the employee. In 2008, this premium was 3.5% from a maximum amount of €3,850 salary per month. This amounts to a maximum of €134 per month.

However, even if the average amount of premium paid per month was only €45 for all 7.8 million workers, this led to an additional unemployment benefit budget of €4.21 billion per year. That money was gone in 2009, due to Balkenendes X-mas present.

The second present to the workers and employers in 2009 was the Part-time Unemployment Benefit. On July 13th I wrote on this Dutch crisis policy:

Especially the last category [i.e. manufacturing industry – EL] will (in my opinion) suffer from the fact that the part-time unemployment benefit, which was established in 2009, prevented companies from reducing overcapacity in numbers of jobs and production facilities. As a consequence of this special government subsidy, companies kept people under contract that otherwise would have been dismissed. How noble that may seem initially, it makes companies less competitive. Especially now a new crisis is looming, due to the continuing problems in the Euro zone.

Instead of a lasting positive effect on the employment situation, the parttime UB (PUB) did only have a shifting effect: postponing the inevitable loss-of-jobs to a few years later. This effect may be reinforced by the current effects of the deteriorating economy in Europe: a double-whammy.

I have been definitely right in July 2011, as this is exactly what the unemployment benefit did: not reducing unemployment entirely, but shifting it to a later date. And this later date seems to be about now. The inevitable result of this policy was that it wasted valuable UB money that is very much in need in these days of (rapidly) rising unemployment.

You could argue, of course, that the people that received PUB in 2009, would otherwise have become unemployed and thus would have received a higher aggregated unemployment benefit amount. 

However, I seriously doubt whether all people that received unemployment benefit would have been fired at all. Besides that, I'm convinced that when the overcapacity of the Dutch manufacturing industry would already have been reduced in 2009, there would not have been a double dip in 2011. The Dutch economy might have been in the build-up fase already, just like the US economy seems to be now. This is a bold statement of course, but it would have made sense in my opinion.

Now this seems to be one more example of government policy that aims for the best, but causes the worst as an unintended consequence. The key question is: could the Balkenende cabinet have known these unintended consequences? My answer is a confident yes.

There is a big chance that the current and rapidly growing group of unemployed people must pay dearly for this mindless politics from 2009, especially as the Rutte cabinet is looking for €16 bln in additional austerity measures. The Unemployment Benefit seems an easy target for further austerity. And that is hard to explain to these people that have paid for years and years before 2008.

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