The ‘Miljoenennota’ (2): The Budget Memorandum of The Netherlands

The ‘Miljoenennota’ (Part II): The Budget Memorandum of The Netherlands

Today I write part II of my take on the Dutch Miljoenennota: the budget memorandum for 2012 in The Netherlands. Again the highlights of the budget memorandum are shown, when applicable accompanied by my comments.

The highlights:

·        Education: The cabinet strives for a better connection of education with the labor market and takes measures for yield-aimed working; more excellence, better teachers and a quicker reaction towards weak schools. Using performance-requirements on quality and usage of knowledge, Intermediate Vocational Training-schools, colleges and universities receive more stimulus to excell.

These sentences remind me of the proverb: the road to hell is paved with good intentions. A closer connection between schools and business always sounds very promising, but might lead to superficiality of school’s and universities’ curriculae and might dampen innovative power in the long run.

A school is not a jukebox for trade and industry, but must educate youngsters to use their minds, their knowledge and skills. The so called ‘performance-requirements’ might stimulate schools to tune-up student data and ‘to be easy on the exams’ for candidate-graduates. No performance means less money and that should be avoided at all costs.

·        Innovation: The cabinet invests €500 mln in a special tax-break for innovation (Research and Development), in order to make it easier for companies to spend money on R&D

This €500 mln might sound like a lot of money, but a company like Philips NV alone sometimes spent €1.5 bln to bring a new product to the market. IMO this amount is quite pathetic, especially as it is handed-out as a tax break; not a subsidy.

·        This cabinet strives to 10% administrative burden-reduction within 2012 and 5% for every year afterwards.

This is the ‘dummy teat’ of Dutch society: every cabinet since the 1980’s promised to achieve this, but every big incident in The Netherlands led to new law-making and extra civil servants. It didn’t happen in the past and it won’t happen now.

·        Healthcare: Lower government spending on healthcare might lead to increased private spending on it.

It is undoubtedly true that the costs of healthcare are soaring in The Netherlands, due to an aging population and the improved life expectancy for people. But moving the risk from the collective to individual people is not always fair.

People that don’t have health problems, profit from this intention: youngsters and healthy families without problems. For families that have members with healthcare problems and especially older people, this leads to much higher amounts to be paid on healthcare. This could push people under the poverty limits, like it often happens in the US.

·        The cabinet thinks that subsidiarity is crucial in the division of tasks between the EU and its member states. When there are clear spill-overs between the member states, it is important to arrange on a European level. What can best be arranged in the member states, should not be arranged in Europe.

·        The cabinet aims at a substantial decrease of the Dutch EU-payments

Both sentences point at the Dutch love/hate relation with Europe. The Netherlands and almost all other member states currently think they can solve most issues themselves, without the ‘annoying’ interference of Europe. Europe is solely there ‘when the shit hits the fan’ and countries are in trouble.

In reality, Europe has a quite efficient and effective government (The EU Commission and the EU Parliament) that could do so much more for the European countries than it currently does. But that doesn’t happen yet.

And one more thing: every member state wants to receive more money from Europe in subsidies than it want to pay to Europe.  This is impossible: somebody has to pay the bill for all subsidies. It is logical that these are the countries that profited most from Europe, by enhancing their exports of products and (financial) services: The Netherlands, Germany, the United Kingdom and France. But this is not a populary statement to make.

•    Budgetary core data

	2011	2012	2013	2014	2015
Actual EMU Balance	– 25,6	– 17,8	– 15,8	– 15,8	– 12,1
Actual EMU Balance  as percentage of GDP	– 4,2%	– 2,9%	– 2,5%	– 2,4%	– 1,8%
EMU debt	391,4	407	425,2	440,1	451,5
EMU debt (as percentage of GDP)	64,70%	65,30%	66,10%	66,40%	66,20%
Gross Domestic Product	604,9	623	643,6	662,7	682,4

The budgetary core data and especially the forecasted growth of GDP show signs of hopeless, unrealistic optimism. A GDP growth of 13% in four years under the current market circumstances doesn’t sound realistic.

The growth of EMU debt seems to be based on the economic ‘ceteris paribus’ clause: when all other factors remain unchanged. Well, the situation on the financial market changes from day to day and not for the better. Government income for next year is based on an average oil price of $110 per barrel. Looking at the current economic situation, this seems very optimistic too. Especially as a bad economic situation negatively influences sales and income taxes.

                                                                         

•  State guarantees

Since the financial crisis started in 2008, the government took over extra risk from the market, to maintain financial stability. Therefore the total outstanding guarantees soared. In 2008 – before the crisis – the total amounted €66.5 bln (12% GDP). This will be increased to €187 bln at the end of 2011 (31% GDP)

Chart 1 State guarantees.
Courtesy of: Miljoenennota

It’s so comforting to know that none of these guarantees will cost the Dutch citizens any money. At least, that is the message that the Dutch government is broadcasting. Personally, I don’t buy that for a dollar (or Euro).

•  In 2011, the tax and social security contribution receipts increase by €5.2 bln. This is the positive balance of government cutbacks and tax increases and growth of tax and contribution receipts, due to the economic development (endogenous growth).

•  In 2012, the tax and contribution receipts increase by €10.7 bln (of which €2.9bln as a result of cutbacks and tax increases)

Reading this, I wonder. What endogenous growth in 2011 and 2012 the government is talking about? In my opinion, this is wishful thinking, based on forecasted growth that never will be realized.

•  Greece: To solve the debt crisis in Greece, a program has been started that supplies €110 bln in loans to Greece. The Dutch share in the program is a maximum of €4.7 bln until 2014.

This is a maximum amount… until it isn’t.

•  The Dutch share in the EFSF (European Financial Stability Facility) is a total of €44 bln: net loans, first line guarantees plus additional guarantees and interest burdens. Currently, The Netherlands is also on the hook for €11bln in first line and additional guarantees on the aforementioned interest burdens. This makes a total of €55 bln.

•  The exact burden of the July 21 agreement cannot yet be calculated

Remember, the guarantees won’t cost the Dutch taxpayer a cent.

•  The private sector contributes to Greece via a debt swapt. Result is that during the moment of swapping, Greece is officially defaulting. During this default, the Euro-countries warrant for the ECB. This warranty is only valid during the default period; we expect it to be short-term, namely during the swapping period.

                                                                         

The part on Greece, the EFSF and the EFSM (European Financial Stability Mechanism) is so complicated that I hardly understand. I wonder if anybody in parliament understands this financial ratatouille. Where people don’t understand, people get screwed. I guess the taxpayer gets screwed here.

•  The ESM (European Stability Mechanism) is the 2013 follow-up of temporary emergency mechanisms EFSF and EFSM. ESM gets societal capital of €700 bln. €80 bln is issued capital, while €620 is immediately claimable capital. The Dutch share is 5.7%: this means €915mln per year and €35 bln claimable capital.

Of course, this claimable capital will again not cost us any money.

•  The ECB bought until now for €143 in sovereign bonds. The ECB runs a credit risk here. If the ECB suffers losses, these will be divided over the member states (via national banks). The risk is limited, as the ECB buys these sovereigns against market value.

So if one or more Euro-zone countries default, the ECB will only suffer tiny, tiny losses.

•  Social affairs: the family allowance will decrease by €100 mln per year in four consecutive years. In 2014 and 2015 an additional €100 mln per will be saved, by not indexating the family allowance.

•  In 2014 and 2015 an additional €300 mln will be saved, by decreasing the Health Insurance act.

•   Forecasted savings on healthcare by this cabinet (in €bln):

	2011	2012	2013	2014	2015
Hospitals	0	-0,3	-0,3	-0,3	-0,3
House Doctors	0	-0,1	-0,1	-0,1	-0,1
Mental Health	0	-0,4	-0,4	-0,4	-0,4
Insurance coverage	0	-0,3	-0,2	-0,2	0
Medication	0	0	-0,1	-0,1	-0,1
Personal health budgets	0	-0,1	-0,3	-0,8	-0,9
Chronically Ill persons act	0	0	-0,3	-0,3	-0,3
Other mutations	-0,1	-0,4	-0,7	-0,5	-0,7
Total	-0,1	-1,6	-2,4	-2,7	-2,8	-9,6

With the savings at the Ministry of Social Affairs, it can happen that families lose money in three or four ways: by getting less family allowance, while having higher costs for healthcare, especially if a family member is chronically ill and needs a personal health budget for supportive measures. This is called piling up financial countermeasures and feels for some middle class families, like ‘being shot with a financial shot cartridge’: they get hit several times.                                                                        

• Tax receipts by the government will be lower than forecasted in 2011 and 2013 (€-0.5bln and €-1.6bln) and higher than forecasted in 2012 and 2015 (€1.8bln and €0.4bln). Balanced out, the tax receipts over these years will be as planned.

• Low income-families and companies will be compensated for increased taxes by the extra tax revenues.

• The increase of taxes and social security from 2011 to 2015 will be a total amount of €8.2bln.

There is so much more to say about this Miljoenennota, but I don’t have the time to explain it all. People that can read Dutch, will be stunned by the financial wizardry and (sometimes) wishful thinking of this mammoth document, especially when combined with the official Macro-economic Outlook and the Tax plan.

As a typical representative of the middle-incomes and being a single wage-earner with on top of that three children, the cabinet plans will cost me a lot of extra money. This might exceed €1000 per year. Some extra costs will be repaired, but most won’t be. But that is the price I pay for living in a financially healthy country.

The two things that I really blame the current government for, is: 

a. the middle incomes get the main burden of tax increases and budget cuts. b. the Dutch government doesn't have the guts to do something about the Mortgage Interest Deduction. This costs about €10 bln per year.

Although I think the Dutch government is sometimes overly optimistic (especially on economic growth), The Netherlands will remain a financially stable country…, unless the debt crisis in the Euro-zone goes totally awry. In that case, there is a totally different ballgame anyway.

If you have any questions, please feel free to comment. When you leave your email address, I can write an answer.