Do lower taxes lead to higher savings interest?

A tax reduction in the Netherlands and neighboring countries may have all kinds of favorable consequences. For example, the interest on savings can go up a bit and it will become cheaper to go on holiday outside Europe.

It's always nice when more money comes in than you spend. That also applies to the government. Just before the turn of the year, CBS calculated that the Dutch surplus in the first three quarters of last year amounted to € 14 billion. Thanks to that positive differential, government debt has fallen to less than 2008% of Gross Domestic Product (GDP) for the first time since 50.

As the best-behaved boy in the class, the Netherlands now more than meets the European target (maximum 60%). By way of comparison: in Germany it is slightly more than 60%, in France over 90% and in Belgium even 100%. And if money has to be borrowed anyway, the government gets money through the negative interest rate. Isn't it time to lower taxes so that the population benefits from the good times?

Maintain price stability
Christine Lagarde asked the above question in September last year, a month before she took office as ECB president. Her appeal is not prompted by the fact that she grants the Dutch and residents of other Northern European countries something extra. A tax cut makes her job a lot easier.

The primary objective of the ECB is to maintain price stability, ie inflation at just under 2%. Currently it is only slightly more than 1%. Lagarde himself can take few measures to ensure this, because former ECB president Mario Draghi has already pulled out all the stops. The official interest rate stands at -0,5% and the bank buys €20 billion in European government bonds every month.

Savings interest up
When the tax burden decreases, people have more money to spend. Higher consumer spending often leads to rising inflation, Lagarde believes. Then the ECB will get some air to possibly stop the buying program. Or to slowly raise interest rates.

And that is also beneficial for the Dutch population. If banks will soon receive a positive interest rate again on funds that they store at the ECB, they will no longer have to offer customers a savings interest of a minimal 0,01%. A looser ECB policy is also having an impact on the currency world.

Cheaper when traveling outside the EU
The level of the interest partly determines the strength of a currency. And rising interest rates make it more attractive to hold a particular currency, although that also depends on interest rate movements in other countries. A stronger currency weakens the international competitiveness of a country or region.

On the other hand, it is becoming a bit cheaper to go on holiday outside Europe. For the time being, however, higher savings rates and cheap holidays are still a long way off. The rate of the lowest tax bracket will fall from 37,35% to 37,10% next year. That small step does not do much for Lagarde and for Dutch taxpayers.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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