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Sunday, 9 February 2014

The difference between ‘being rich’ and ‘feeling rich’ at one glance: the mediocre position of The Netherlands on the European map for purchasing power!

These days, Twitter is the equivalent of the water pump in a small village, where all the people in the nineteenth century gathered to discuss their whereabouts.  

Via Twitter, news and interesting graphs are spread with the speed of sound. Such graphs often lead to fruitful and insightful discussions.

Today was again such a day: someone started to circulate a very interesting and tell-tale map of the purchase power within Europe:

GfK Purchasing Power Map of Europe
Data courtesy of: GfK and
Click to enlarge
At this map, most countries took with their purchase power the position that you would more or less expect from them: financial giant Luxemburg and oil behemoth Norway on the top-positions and the East-European countries and Turkey still in the bottom half.

However, there was one significant outlier in this map: The Netherlands!

While The Netherlands is among the wealthiest countries in Europe (at the sixth position), when it comes to GDP per capita (see the following chart by Wikipedia), this is not at all reflected in the purchase power of the Dutch.

European ranking of countries with the
highest GDP per capita
Data courtesy of:
Click to enlarge
There a numerous reasons for this strange phenomena, but perhaps the most important reasons are: 
  • A policy of (relative) wage restraint that has been continued for almost thirty years: it has been excellent for exports, but killing for domestic consumption in The Netherlands;
  • The garguantous mortgage debt and other forms of private debt in The Netherlands, which are still slowly, but surely choking Dutch families;
  • The fact that the rents for social rental and free-sector rental housing increased by (much) more than the annual inflation rates for a number of years, which took a very large chunk out of the income of lower and lower-middle class citizens;
  • The considerable pressure from direct and indirect taxes and other community costs on the purchase power, like parking costs, traffic penalties and the costs for issues like child care;
  • The unpleasant Dutch habit to deploy income policy and equalization – which are by itself very defensible indeed– through a forest of taxing rules, special levies and surcharges, which nobody comprehends anymore. 
Wage restraint

The concept wage restraint has been a regular ‘visitor’ of these lines (see also this article), because of the devastating effects that is has on consumption.

You could safely state that since the eighties – with an exception for the period between 1996 and 2002 – The Netherlands has been in a situation of constant wage restraint. During this stretched period the wages and salaries always grew with very moderate numbers of 1% - 3% per year max, except (of course) for the highest incomes. Please look at the following tell-tale chart:

Income development of the four income categories
between 2000 and 2013
Chart created by: Ernst's Economy for You
Data courtesy of:
Click to enlarge
This development has been excellent for the exporting Dutch companies: the exporting small and medium enterprises (SME), as well as the large, multinational companies, who saw their market share increase as a result of the wage restraint and the very efficient production techniques in The Netherlands.

This prolonged wage restraint caused that the lower and middle class incomes had to use an ever increasing share of their monthly income for housing expenses and basic comsumption goods, leaving less and less money for fun-shopping and durable consumption. 

This, in combination with the considerable unwinding of private debt, caused the ubiquitous consumer strike that struck The Netherlands in 2008/2009.

Mortgage debt

Since 2006 / 2007 [yes, that was indeed well before the official credit crisis started in The Netherlands – EL ], the Dutch have declared that ‘enough was enough’ for the ever rising housing prices in The Netherlands. It started with ubiquitously dropping housing sales, to be followed a few years later by dropping housing prices (please have a good look at the charts that come with this article).

This was really a housing crisis in disguise, as for all other consumption in The Netherlands, the sky still seemed the limit: probably financed with borrowed money from term loans and revolving credit lines. Only after the real credit crisis took off, the normal consumption started to drop.

The effect of this housing crisis was that people, whose houses and mortgages went underwater, got stuck with a financial millstone hanging around their necks. Their houses became litterally unsaleable, when the people didn’t want to end with a substantial residual debt, due to the dropping housing prices.

This did not only lead to a totally stalled housing market, but also to Dutch people who got stuck with a mortgage that they almost could not afford, but also could not get rid off.

This effect, however, has fortunately been dampened by the still really low interest rates in The Netherlands. When you look at it this way, these interest rates and the Mortgage Interest Deductability have saved the day for a lot of Dutch families, during the last five years.

Nevertheless, the excess mortgages definitely had a negative effect on consumption.

The price development of rental houses

A third important factor for loss of consumption in The Netherlands is the price development of social rental and free-sector rental houses. The price development for these rental houses is especially important, as these houses are often inhabited by people from the lower and lower-middle classes, for whom every euro counts. These people are not wealthy enough to buy an owner-occupied house and have no choice, but living in rental houses.

Although the price development of rental houses differs per city and location, the average price development for rental houses has exceeded the official, annual inflation rate no less than 17 times, during the last 23 years!

Development of rent versus inflation
between 1990 and 2013
Chart created by: Ernst's Economy for You
Data courtesy of:
Click to enlarge
Since the eighties and nineties, the subsequent Dutch cabinets have been on ‘war’ with the tenants of social rental housing and free sector rental houses, by allowing rent increases to be well above the inflation rates in most of the cases.

While these price-increases were supposed to be in synch with the vast price increases in the owner-occupied housing market, it led to rental houses that were generally much too expensive. 

These excess prices for rental houses led to stagnation in the Dutch rental market, especially as some price increases would only be deployed upon the next inhabitant of a rental house and not on the current inhabitant. This meant in practice: staying in your current rental house is cheap, while moving to a new rental house is expensive.

Of course the mortgages went also skyhigh as a consequence of the price increases on the owner-occupied housing market. However, the redemption-free jumbo-mortgages and the extremely low interest rates for mortgages, led to the monthly interest payments still being quite affordable.

The effects of these circumstances  have led to the following strange situation: for instance my own house costs less than €500 per month as an owner-occupied house, while it would cost at least €850 - €900 per month as a free sector rental house. Besides that, this would be exclusive additional costs for gas and electricity. 

And you should take the following into consideration: in the former situation I even own the house, while the latter means that I only use it as inhabitant, without ever owning it.

Summarizing, the people who live in rental houses spend a large (and growing) part of their income on housing and don’t have much money left for consumption of luxury and durable goods.

Central government, cities and municipalities taxing and cashing the ‘living daylights’ out of the people.

You can't say that the income taxes are very high in The Netherlands. In countries like France, some of the taxes are much higher.

However, with 21% the VAT (i.e. value added tax), as well as the levies on cars, gasoline, tobacco and alcohol are extremely high. You could rightly state that the Dutch central government is taxing the living daylights out of the Dutch people

Besides that, many cities and municipalities have been seriously strapped for cash during the last years. This situation worsened for the cities, since their building ground  and commercial real estate trades went awry and since the Dutch government decided to outsource a large share of the national tasks to the local governments, with respect to social security and healthcare .

The snag was that the local governments only received about 80% of the total budget [unfortunately, I don't have the exact data - EL], which the central government used for the execution of these tasks. 

This left the local governments with the obligation to save as much expenses as possible and with the need to hoard cash, in order to pay the remaining 15%-20% of the bills. And these local governments know who to turn to, when they need cash: the law-obiding, tax-paying citizen:
  • Parking fees, as well as the number of locations were parking fees should be paid, both have soared in The Netherlands. Parking fees of €1 per hour or less have turned into an exception, while parking fees exceeding €4 per hour are no exception anymore, alas;
  • The local property taxes (calculated as a percentage of the estimated property price) have (considerably) risen since 2008, while the housing prices only have dropped.
    • In the case that the yields of the property taxes would have been too low, using the original tax rates against the new, lower housing value, the municipalities just raised the tax rates again: heads, we win and tails, you lose;
  • The costs for all kinds of permits and community services (passports, driver's licenses, municipal registration forms etc.) have also soared in many cases. Many communities deliver the same or less service at much higher expenses.

And the central government added a spoon or two from the same recipe, by increasing the height of traffic penalties to such levels, that: 
  • The Netherlands has become the most expensive country in Europe with respect to traffic penalties;
  • These traffic penalties act as an enormous cash cow for the central and local governments. Traffic penalties are not used in order to make the traffic saver and more environmentally friendly, but just to cash in ;

The results of all these extra, often unavoidable expenses have been perfectly clear: less consumption.

The unparalleled Dutch ways of equalizing the income

Many political parties and special interest groups in The Netherlands strive for the noble goal, to let the differences in income not grow too big. This is something that I am fully in favour of. A wise government would achieve this goal by maintaining a few simple rules for taxes and subsidies, which everybody can easily understand and apply.

The Dutch government, however, chooses for the creation of an impenetrable forest of special taxes, subsidies, healthcare charges (f.i. first claim-charges), surcharges for rent and healthcare and pace lists for income-dependent healthcare costs. 

Over the last decade, this 'forest' of regulations has become much too complicated for normal people to understand and it sometimes only attracts cunning con men, who are successfully finding the loopholes in these outrageous tax and subsidy laws. This means: money down the drain!

The Dutch Internal Revenue Service is constantly fighting a losing battle with new tax regulations, countless internal reorganizations and (on top of that) the new surcharges for lower class families. 

These surcharges are necessary for these families, in order to pay for their rising rent and healthcare expenses and for the rising costs of living, but they are a genuine pain in the neck for the IRS. 

And probably the worst enemy of the Dutch IRS is the bolted, ADHD-suffering law-making machine in The Hague, which is spitting out one bad plan after another, without ever thinking about the negative implications.

Many citizens don’t get subsidies and surcharges that they are entitled to and other citizens get subsidies and surcharges that they are not entitled to, without having bad intentions in advance. 

Except for a few taxing and income experts and con men, nobody in The Netherlands really grasps the system.

All this would almost be funny, if it would not have such bad consequences for many retailers and small and medium enterprises in The Netherlands, as a result of the nearly ubiquitous consumer-strike.

So many retailers and SME companies are currently clinging onto life by the skin of their teeth, while living from one month to the next in their struggle for survival.

Many more already perished in this struggle: not only single-store retailers, but also important store chains with dozens or even hundreds of stores:
  • Siebel (jewellers);
  • Polare (giant book stores);
  • Harense Smid (small electronics and household appliances stores);
  • Free Record Shops (record stores);
to name a few.  And their are many, many more store chains on this default list.

Although you could safely state that these particular store chains all had some (fatal) flaws in their business plans, the dropping consumption in The Netherlands has sped up the process of defaulting enormously.

When will the Dutch government and Dutch employers understand that you cannot neglect the Dutch consumers, if you want to have stable, economic growth in The Netherlands?! 

It is just impossible that this stable growth will emerge without them!

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