Budgetary discipline difficult for minority cabinet

I don't usually comment on domestic political affairs here. This time, I will. The Jetten government has taken office. It's a new experiment, as it's a minority government that must seek support in parliament for every policy measure from the opposition, whether on the left or the right.

Yesterday, a friend said he has confidence in it. The main reason for this is that our country is now led by "decent people." I won't say the members of the government are indecent, but I reminded him that the information phase had gotten off to a shady start because one of the intended informateurs had allegedly made rather indecent comments about the VVD party leader, and that a prospective state secretary had lied about her resume—also rather indecent, in my opinion. Anyway, those two aren't in the government...

We'll see whether a minority government has much chance of success. I suspect it won't be easy. Firstly, because the proposed policy is downright unfriendly to citizens. According to the CPB (Netherlands Bureau for Economic Policy Analysis), our economy will grow by an average of 1,2% in the coming years, but purchasing power will barely increase. Tax increases and the deterioration of services will prevent citizens from experiencing much of the economic growth. However, ample funds will be allocated to defense, nitrogen emissions, climate, and asylum.

All this spending is open to question, and it's questionable whether the majority of the population wants the policy the new team has envisioned. I'm in favor of a strong defense, but the increase in our defense spending forced upon us by Trump seems excessive to me. The proposed nitrogen policy is based on a model and a way of thinking that more and more people are seriously questioning. And I'm putting this cautiously and diplomatically. Climate policy is being pursued relentlessly, focused on a leading role, while in many other countries, it's being scaled back a few notches. Finally, regarding asylum policy, the government hopes that European measures will limit the influx, but that's highly questionable. I might be a cynic, but my impression is that citizens will pay dearly for policies they don't want at all. Perhaps I'm mistaken, and the majority of people are very enthusiastic about the proposed policy. Otherwise, the electorate would have voted differently...

Another problem, I think, is how public finances will fare under such a minority government. In the usual majority government, coalition parties are bound by the coalition agreement, which includes agreements on public finances. Now, support from the opposition must be sought every time. This will mean that support will have to be "bought" from parties that have not committed to any agreements on public finances and likely don't feel responsible for them either. Anyway, we'll see.

Contradictory signals
Recently, the European economy appears to be recovering somewhat. This is in line with global trade. Developments surrounding AI are playing a particularly important role in this. Furthermore, expansionary fiscal policy, particularly in Germany, will provide further impetus. The German Ifo index, which measures business confidence, improved in February to 88,6, compared to 87,6 in January. Both the expectations component and the index for assessing the current situation improved. The latter sub-index even rose for the fourth consecutive month, although this increase is excruciatingly slow.

Belgian business confidence weakened considerably in February. The National Bank of Belgium reported that the business confidence index across all sectors fell from -8,8 in January to -13,7 in February. Industrial entrepreneurs, in particular, were more pessimistic in February than in January: -17,1 in February after -11.0 in January. Belgian industrial entrepreneurs complained primarily about a decline in orders received. It is argued that Belgium's industrial structure is "early cyclical," meaning that the development of Belgian business confidence indicates the direction the rest of Europe will take. Whether that is also the case this time remains to be seen.

In our country, too, business confidence in industry fell. From +0,8 in January to -1,1 in February, according to the Statistics Netherlands (CBS) index. This brought the index roughly in line with the long-term average. However, the decline in the index was less pronounced than in Belgium.

The broad Economic Sentiment Index for the eurozone, as compiled by the European Commission, fell from 99,3 in January to 98,3 in February. The index for Germany also fell slightly: from 93,2 in January to 93,0 in February. While not a significant drop, it is a decline nonetheless, while the Ifo index actually rose. So, the picture is currently ambiguous.

Inflation figures coming
Next Tuesday, Statistics Netherlands (CBS) will publish its "rapid estimate" of our February inflation rate. The January figure was better than expected: 2,4%. That was the lowest percentage in more than two years and a sharp drop from December's 2,9%. Whether the decline will continue is, of course, uncertain. Belgium already published inflation figures for February yesterday. There, inflation rose from 1,10% to 1,45%. Statisticians in Belgium reported that the increase was mainly due to airfare, electricity, natural gas, motor fuels, package holidays, hotel rooms, and meat. Our inflation is certainly not exactly in line with Belgium's. But motor fuel prices also rose in February, and if airfares become more expensive in Belgium, I suspect the situation will not be much different. For now, I'll just assume that our inflation probably didn't fall further in February. Later in the year, I believe inflation should resume its downward trend.

Closing
I have modest expectations for the newly installed Jetten cabinet, but I'm open to being pleasantly surprised. My main concerns are whether there will be sufficient public support for the proposed policy and whether budgetary discipline will be maintained in such a minority government.

The European economy is sending mixed signals. We remain hopeful that economic growth will continue to pick up throughout the year.

Belgian inflation figures and rising prices at the pump suggest that the remarkable drop in inflation in January will not be repeated in February. I am, however, hopeful that inflation will decline later in the year.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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