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Friday, 2 March 2012

Dutch government is losing its fight against a budget deficit of 4.5% and must go to confession at the EU. Will Jan-Kees de Jager now practice what he preached to the Greeks?


It was a tense day in The Netherlands. Today, the Dutch Central Planning Bureau (www.cpb.nl) presented its long awaited financial and economic forecast on 2013 to the Dutch government. Prime-Minister Mark Rutte and Finance Minister Jan-Kees de Jager must have had sleepless nights over this forecast during the last weeks.

The reason is that the European Stability and Growth Pact (SGP) forces the countries of the EU and especially the Euro-zone to present a budget deficit that is maximally 3% of GDP or less.

Euro-zone countries have the possibility to infringe this SGP threshold for a limited amount of time, as long as they take sufficient countermeasures to bring back the deficit as soon as possible.

Today, however, the CPB showed that The Netherlands will get a budget deficit in 2013, which will be for the fifth year in a row: 2009-2013. And to make things worse, also for 2014 and 2015 the CPB forecasted a budget deficit.

Here are the key-data of this forecast and also the pertinent snips of the CPB press release. As a matter of fact, I left some key data out, as these were outside my scope. Behind the link all key data can be acquired in an English PDF file:

General government data - Courtesy of cpb.nl
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Demand and foreign trade - Courtesy of cpb.nl
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Labor market data - Courtesy of cpb.nl 
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Prices, wages and purchasing power - Courtesy of cpb.nl
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CPB Netherlands Bureau for Economic Policy Analysis (CPB) expects that the Dutch budget deficit will be 4.5%, or 28 billion euros, in 2013. From that year onwards, the Dutch economy is expected to recover slowly, with a gross domestic product (GDP) growth of 1.25 percent in 2013.

In 2012, the economy develops worse than expected in the December 2011 forecast. This is mainly due to the unfavourable economic developments in the fourth quarter of 2011. In addition, there has been a decrease of consumer spending levels, most likely due to lower consumer confidence levels, deteriorated (pension fund) wealth and decreasing housing prices. In 2012, the inflation rate will be 2.25 percent and the median purchasing power will decrease by 1.75 percent.

The forecasted budget deficit in 2013 is 4.5%. This means that the EMU-ceiling of 3% budget deficit will be passed by 9 billion euros. Should public policies remain unchanged the deficit will be 4.1% in 2014 and 3.3% in 2015. Unemployment increases to 6% in 2013, which amounts to 545.000 persons.

For the full cabinet period (2011-2015), average GDP growth is expected to be 1%, while 1.25 percent was accounted at the start of the Rutte-government in late 2010. The difference is mainly caused by the economic recession of late 2011 and early 2012. The decrease in growth will not be fully recovered in later years. Therefore, the budget deficit in 2015 will be 16 billion euros higher than expected in 2010. The public debt will increase to 76% of GDP in 2015.


In the Dutch newspaper Het Financieele Dagblad (www.fd.nl), the Executive Director of the Central Planning Bureau Coen Teulings - today called the Dutch Doctor Doom -  had an unpleasant message for the government. 
Here are the main paragraphs of this story:

  
 The cabinet of PM Mark Rutte needs to find an additional €16 bln in austerity measures and government reforms in the state budget to reduce the budget deficit to 3% of GDP (Gross Domestic Product) in 2013. This is the standard that has been set by the renewed Stability and Growth Pact (SGP).

This is stated in an additional notification by the CPB on the forecast data that has been published earlier today. This number is significantly higher than the €9 bln euro’s that had been mentioned earlier in the press release. This is the result of the so-called ‘yield-reducing spendings-effect’:

The data shows that the budget deficit in 2013 will exceed the 3% threshold by €9.4 bln, according to the current insights. Daily practice showed, however, that in reality extra austerity measures and government reforms lead to reduced growth of government spendings, less income and spending of citizens and thus lower tax revenues for the state. Therefore a part of the effect of the austerity measures ‘leaks’ away, as austerity itself forces the budget deficit to grow slightly.This phenomena is called the ‘yield-reducing spendings effect’

[The rate of this yield-reducing spendings-effect is set by the CPB to an additional 70% of the amount that needs to be saved. If the government wants to save €9.4 billion, it needs to deploy €16 bln in austerity measures - EL]

The European Commission (EC) stated earlier today ‘to trust that The Netherlands will meet the SGP requirements’. A spokesman of the European Union pointed at the fact that the Dutch were one of the biggest advocats of very strict budget rules. The EU expects that The Netherlands will enforce these rules on itself, according to a spokesmen of Olli Rehn of Economic Affairs.

Dutch Finance Minister Jan-Kees de Jager will find himself in the same catch-22 situation as the Greeks are now at the moment: the more he cuts the government budget, the fewer income the Dutch citizens will earn and the fewer taxes they pay. I called this my economic death spiral in a few earlier blogs.
Economic Death Spiral

And the worst thing of today was that the Dutch government seemed to be ‘caught by surprise’ by the CPB data and acted as if they were totally clueless. De Jager and Rutte hoped ‘that the EU would understand that the 3% threshold of the SGP was very hard to meet for the Dutch economy at the moment’. In other words that they would receive mercy from the EU and were able to buy some time; maybe through the deployment of some additional measures to reform the Dutch economy.

At a distance, I can hear the scornful laughter of the Greek Finance Minister Evangelos Venizelos: ‘What goes around, comes around. You played your tricks upon us, but be sure that we will play the same tricks on you now. Don’t ask for mercy, as you didn’t give us any.’

And of course Venizelos is right when he thinks and says this. De Jager was the classroom bully of the Euro-zone and forced, together with especially German Finance Minister Schäuble and Euro-commisioner for Economic Affairs Rehn, the ruthless austerity measures on the Greek economy with a lot of pomp and circumstance on ‘Greece leaving the Euro-zone eventually’.   

As a Dutch citizen, but also a true European, I now have the same scornful feelings as the Greeks will have. On the other hand I know that €16 bln is a lot of money to spare in austerity, especially within one year (2.65% of Dutch GDP).

What makes matters worse for De Jager, is that the data of the CPB seems to be full of misplaced optimism on the Dutch economy for the coming years. Just like it has been in the years before 2012. 

This led to substantial negative revisions of growth data in the past. Even today’s data contains already a substantial revision of the CPB’s  September 2011 data, which has been put together by the CPB only six  months ago.

If we look at some data, it looks hopelessly optimistic:


Hopelessly optimistic CPB assumptions - Courtesy of cpb.nl
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My questions:
  • Why would purchasing power ‘rise’ to 0% in 2013, while it only dropped over the last few years?
  • Why would private consumption suddenly rise in 2013 after the government deployed €16 bln in additional austerity measures?
  • Why would the GDP of The Netherlands and exports of goods suddenly rise in 2013, while the PIIGS – our best customers – are in very deep trouble and China is too?
  • Why would the Dutch unemployment rate only rise by a modest 1.35% in 2012 (y-o-y) and why by only 0.5% in 2013 while the economy is in a recession that might last? I think that my prediction of 8% in December 2012 will prove more reliable

My take is that the Dutch government with their big mouth in the past will put The Netherlands in the economic death spiral, after they did the same with the PIIGS countries in the recent past.

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