© ANP
Public finance
The Netherlands is in good financial shape, but the budget deficit and public debt are expected to rise in the coming years. Especially in the longer term, public finances are expected to deteriorate due to rising ageing costs and interest expenditures.
European agreements
When the euro was introduced in 1999, participating Member States made agreements on keeping their public finances in order. For example, the budget deficit (the shortfall that occurs when the government spends more money than it takes in) should not exceed 3% of gross domestic product (GDP, the total value of all goods and services a country produces in a year). They also agreed that the public debt of participating Member States should not exceed 60% of GDP.
Things are currently going well...
Dutch public finances are in good shape. The robust economic recovery following the pandemic and subsequent high inflation were key contributors to this positive situation. The budget deficit stood at 0.3% of GDP in 2023, with public debt at 45.1% of GDP. This is low, both compared to the past and to other countries.
...but the budget deficit is ticking upwards
Twice a year, DNB publishes projections for the Dutch economy. The most recent edition, the 2024 Spring Projections, estimates a rise in the government deficit over the coming years to 3.7% of GDP by 2026. The increase is caused by public expenditure outstripping tax and social security contribution revenues. In particular, public spending on healthcare, social security, interest and defence is set to mount rapidly this government term.
Effects of government policy
In the Spring Projections, we also calculated the effects of the measures from the new government’s outline agreement. We expect these measures to cause the budget deficit to grow in the first two years of the government’s term. From 2027, the deficit will improve due to further cuts in areas such as development aid, subsidies and sustainability grants and asylum inflow costs.
In the final year of the government’s term, the budget deficit will be 0.6 percentage points lower than it would have been without these cutbacks. These figures do not include the measures from the 2025 Budget Memorandum. We will incorporate these measures in our Autumn Projections later this year.
Figure 1: Budget balance (left) and public debt (right)
© DNB
Debt to worsen, especially in the longer term
In the somewhat longer term, public debt will climb above 60% of GDP. According to our estimates, this will happen in 2032. This is partly due to an ageing population, which will mean higher healthcare costs and state pension benefit payments. Interest expenditures will also rise. Between 2023 and 2026, we expect interest expenditures to double from around €6.5 billion to almost €13 billion. Interest expenditures are expected to continue to climb due to rising government debt and the pass-through effect of higher interest rates (the average maturity of Dutch government debt is around nine years). The proposed spending cuts in the outline coalition agreement do not affect this outlook in the longer term.
Figure 2: Debt projections up to 2038 show debt mounting sharply
© DNB
Economic growth
These rising expenditures will be harder to sustain as economic growth is expected to slow. The rate of this slowdown will depend on how labour supply and labour productivity develop going forward.
Population ageing will act as a brake on growth in the Dutch working-age population in the next few decades. This slowdown will not be counterbalanced by labour productivity growth in the near term. Based on this fact, a recent DNB Analysis (Dutch) shows that it cannot be ruled out that annual economic growth in the Netherlands remains well below 1% for the next few decades.
Buffers for trend-based fiscal policies
As the economy is doing comparatively well, the government should seize the opportunity now to build up buffers. Doing so when the economy is strong and tapping into these reserves in times of economic malaise prevents the government from further fuelling an overheated economy with high spending, or from damaging a weak economy with austerity measures.
The Netherlands conducts such trend-based fiscal policies to stabilise the economy. This means that expenditures are fixed at the beginning of the government term and tax revenues are allowed to move with the economy. In a sluggish economy, the public sector deficit grows because of lower tax revenues in combination with a lack of austerity measures. And when the economy is doing well, the extra income is not immediately used for additional spending. As a result, the public sector deficit falls.
This is only possible if the country builds up sufficient reserves, which will ensure that the Netherlands remains below European deficit and debt thresholds even while pursuing this trend-based fiscal policy.
Cut spending or raise taxes?
To prevent public finances from deteriorating, the Study Group on Fiscal Space – of which DNB is a member – advises the current government to reduce the deficit to around 2% GDP and to stabilise debt below 60% of GDP in the longer term. This will put the Netherlands at a sufficient distance from the 3% threshold. The government will thus not be compelled to make immediate cuts in case of setbacks and pass on bills to future generations.
This means the government will have to slow down expenditure growth in the coming years or increase taxes. In a recent position paper, DNB identifies various options for doing so. This calls for tough political choices.
Why is DNB committed to sound public finances?
De Nederlandsche Bank is committed to a stable financial system. Fiscal policy can either support or undermine European Central Bank (ECB) measures to keep prices stable. In addition, high debt levels can lead to financial instability.