Government must repay entrepreneurs and households

The annual report of De Nederlandsche Bank (DNB) was published on Thursday 30 March. In it, the bank notes that the Dutch economy is showing good growth and that the crisis is 'largely over' for our country. That says bank president Klaas Knot.

According to Knot, the Netherlands should use that economic recovery to further reform. Knot believes that the reforms in the areas of sustainability, the housing market, the pension system, the tax system, the labor market and the financial market are the most urgent. 

Let's not forget the Dutchman
Indeed, these are all reforms that are needed. However, let's not forget the Dutchman. It has, since the beginning, had to bleed heavily for a crisis that has been caused and originated in the financial sector. That sector was rescued without anyone from the sector being held accountable or convicted for the dealings of the crisis. 

The Dutch citizen saw his taxes and other charges or levies climb considerably. Companies saw this too. One of the few sectors, perhaps the only sector, to have just arrived from the crisis is the public sector. Now that the economy is finally growing structurally, the new government must first repay those who have coughed up the costs of the crisis. Then I am talking about entrepreneurs and households. 

Good years for the Netherlands
From an economic point of view, 2015 and 2016 were good years for the Netherlands. In 2012 and 2013, our economy shrank by approximately 1 percent per year. In 2015 and 2016 there was a plus of 2 percent. 

It is no coincidence that domestic consumption also fell during those bad years. However important foreign trade is for a trading nation such as the Netherlands, it is domestic consumption that is ultimately the most important for our economy. If that engine is not running, the Dutch economy will be in a coma. 

Rising purchasing power is fuel
That engine is kept afloat by increasing purchasing power. It declined through the beginning of 2015. Wages did not rise sharply, but inflation did. However, in the course of 2015, that changed. Wage increases exceeded inflation in the polder. In 2016, on the eve of the elections in 2017, there were also some tax cuts.

While incomes rose, prices did not rise and taxes actually fell. Yes, that does wonders for the purchasing power of individual Dutch people. In its wake, this of course also boosted consumption. 

How do we keep purchasing power high?
If the new government is to sustain economic growth, it must ensure that purchasing power continues to rise. What is needed for that?

Our purchasing power increases when wages rise faster than inflation. Taxes should also be lowered. Wages appear to be rising somewhat faster this year and next, but inflation has also bounced back sharply. The latter ensures that the 'real' wage increase, when we remove the currency depreciation, is not very much.

In time, this means that the choices regarding taxes and other levies will become crucial. Those choices will determine whether the purchasing power of the Dutch continues to increase or whether that purchasing power will decrease again.

In other words, what the new governments will do with the taxes will determine whether the economic recovery in the Netherlands will continue or whether our economy will cool down. 

Taxes are important in The Hague
In The Hague, they should certainly not raise taxes, directly or indirectly. As the rise and rise in inflation seems to be completely neutralizing the gains from higher wage increases, tax cuts would be very welcome. I am thinking of three things myself. 

The first is the VAT rate of 21 percent. At the end of 2012, the government raised the VAT rate from 19 to 21 percent. That was a crisis management measure. Now that the crisis is over, that increase can be reversed. As a result, purchasing power will increase. 

Secondly, there is the income tax. The rate, for the very important first bracket, stood at 2007 percent in 33,65. In 2017, that increased to 36,55 percent. For the sake of convenience, I forget all kinds of indirect tax increases, such as the increased deductible in healthcare and the energy tax. Why is that first drive so important?

Well, because almost everyone falls into that and research shows that relatively low-income people consume most of it. In The Hague, they would do well to significantly lower that rate, but without raising other rates sharply at the same time. In a period when everyone was forced to lose weight, the government has gained a lot of weight. That can now be reversed.

The third measure concerns employer contributions. They could also be lowered a bit, so that it becomes more attractive for employers to hire people. 

Combination of these will help economy
The combination of lower taxes and more jobs will negate the negative effect of higher inflation on wages. This will give the Dutch economy a welcome, strong tailwind.

In The Hague they have to get rid of the condition 'that the measures must also be budget neutral'. In politics The Hague this is short for 'the government should not lose weight'. When that saying is off the table, it clears the way for this economic trinity. 

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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