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Thursday, 31 May 2012

Dutch Finance Minister De Jager listens to the European Council’s recommendations for The Netherlands… and hears something totally different than the objective listener.

Today was the day of the Recommendations from the European Council towards the state budget and economic situation of all 27 countries in the European Union. Also The Netherlands received advice from the European Council, i.e. Olli Rehn, concerning the EC’s assessment of the Dutch stability programme that had been delivered on April 27, 2012.

This stability programme that had been delivered by an unexpected coalition of five parties ("the Spring Coalition") ranging from right to left, had been applauded at the time as a successful last-minute attempt to stick to the demands in the Stability and Growth Pact (SGP) for 2013: the 3% budget deficit threshold and the fiscal budget of no more than 0.75% of Dutch GDP.

Although I considered it a fine achievement of Finance Minister under resignation Jan Kees de Jager and the political leaders of the Spring Coalition to finish the stability programme in time, the measures in the programme itself were very disappointing.

Here are the main snips of the article behind the aforemention hyperlink :

However, it remains questionable whether The Netherlands will reach the 3% budget deficit in 2013 or not:
  • The increased VAT-rate of 21% will further diminish the consumer confidence and spending desire in The Netherlands.
  • The zero wage increase-policy for Civil Servants will have the same effect of reduced consumption
  • Lower consumption will inevitably mean less tax income and fewer jobs and economic growth.
  • The €400 personal liability on healthcare might initially reduce healthcare costs, but this could change eventually as people that initially wait with visiting a doctor, might be confronted with much higher healthcare bills, due to more expensive treatment.
All these measures make it quite uncertain that the demands of the SGP will be met in 2013.

However, what makes things worse is that there is neither a solution for the hopelessly locked-up Dutch housing and Commercial Real Estate (CRE) market, nor for the bad financial situation of many pension funds.
  • The reduced MID-measure is only for new mortgage-loans; the current redemption-free jumbo loans will enjoy MID until eternity. This means that it becomes even more unfavorable to enter the housing market now.
  • The current mortgage-owners stay put when they can, while starters on the housing market don’t have a level playing field at all. The consequences will keep the housing market locked. How is that for kicking the can down the road?!
  • The CRE building frenzy in has hardly stopped in The Netherlands and until this day billions and billions of Euro’s are locked in useless real estate that might be vacant for years to come.
  • The government still increases the retirement age at a very low speed, instead of using the crisis to increase the pension age to 67 at once, cold turkey. This would be harsh for the current prospective retirees, but much fairer to the youngsters that have to work until 67 or older anyway.
The conclusions and recommendations of the European Council on the Dutch stability programme  were crystal clear. Although it was not a very negative advice towards The Netherlands, there certainly isn’t time to lean back yet.

Here are the most important conclusions and recommendations from the European Council, combined with my comments:

Conclusions of the European Council’s  assessment of the Dutch stability programme:

 Based on the assessment of the 2012 [Dutch] stability  programme, the Council is of the opinion that the macroeconomic scenario underpinning the budgetary projections in the programme is optimistic. For 2013, the stability programme projects economic growth of 1¼% without taking into account the negative impact of the additional consolidation measures on growth, whilst, on the basis of the same no-policy change scenario, the Commission's forecast a lower growth rate of 0.7%.

The budgetary projections over the programme period are subject to implementation risks. These are not solely restricted to the newly announced consolidation measures, but also to the implementation of some of the measures agreed upon earlier by the outgoing government. Moreover, the additional measures proposed by the government in April 2012 and their budgetary impact are not sufficiently specified and quantified. Budgetary adjustment has so far relied mostly on expenditure cuts, which also affect growth-enhancing expenditure.

This is Europeanish for: we consider it the chance of ‘a snowball in hell’ that The Netherlands will reach an economic growth of 1.25% in 2013. Our 0.7% prognosis will be much closer to the truth and might even be too optimistic.

Fiscal disincentives for second-income earners have been reduced but not yet sufficiently. Removing remaining disincentives would further contribute to raising labour supply and make human capital allocation more efficient. The labour market integration of vulnerable groups should be improved.

Translated: the Dutch government and companies still make it too hard for women and people from minority groups to work in The Netherlands. The government of PM under resignation Mark Rutte did ‘go through the motions’, but didn’t achieve enough change.

In the field of  enterprise policy, the top sector agendas have  been endorsed  and sectoral ‘innovation contracts’ have been signed between the government and industry representatives. Support to private research is being increased through the introduction of the RDA+ tax deduction scheme as part of the incentives to further promote innovation, private R&D and closer science-business links. However, the focus on ‘top sectors’ should not come at the cost of fundamental research nor exclude innovative firms that do not belong to one of the ‘top sectors’.

Translated: the top sector approach in The Netherlands isn’t bad and could deliver some results, but bears the risk for a government having blinders on towards very successful Dutch companies in lines of industry that are in general not so successfully. Fundamental research might be neglected too by this policy.

Over the last four decades, structural distortions have built up in the Dutch housing market. In the property market, fundamental supply restrictions and tax incentives for home ownership (notably mortgage interest deductibility favouring higher-income households) have led to an inefficient allocation of capital. In the rental market, with its very large social housing segment, social policies and caps on rent levels and on rent  increases have led to a very inelastic supply of rental housing. Modifying the favourable tax treatment of home ownership would contribute to reducing the structural distortions on the Dutch housing market.

Ernst’s translation: The Dutch housing market is a mess, where the rich have been pampered extra at the expense of the not-so-wealthy. On top of that, the Mortgage Interest Deductability (MID) policy created a bubble of impressive proportion. “Holland, please get rid of your beloved MID”

The rental market is extremely inefficient and – as a consequence – very much locked-up too. People are ‘imprisoned’ in their affordable houses, without having the chance for a better or larger one at a reasonable price, due to a complex of too much rules and rental fee-caps and too little houses in the non-social rental sector.

Recommendations of the EU

The Netherlands should take action within the period 2012-2013 to:

1. Ensure progress towards the timely and durable correction of the excessive deficit.To this end, fully implement the budgetary strategy for 2012 as envisaged. Specify the measures necessary to ensure implementation of the 2013 budget with a view to ensuring the structural adjustment effort specified in the Council recommendations under the Excessive Deficit Procedure.

Thereafter, ensure an adequate structural adjustment effort to make sufficient progress towards the medium-term  budgetary objective (MTO), including meeting the expenditure benchmark, and ensure sufficient progress towards compliance with the debt reduction benchmark whilst protecting expenditure in areas directly relevant for growth such as research and innovation, education and training.  To this end, after the formation of a new government, submit an update of the 2012 stability programme with substantiated targets and measures for the period beyond 2013.

Translation: The Netherlands must get rid of the current budget deficit of 4.5% and it must come up with structural measures to keep the budget deficit at a structural 0.75%. Don’t cut away budgets from growth stimulants, like research, innovation, education and training. Warning: a new Dutch government after the September, 2012 elections must stick to the program!

2. Take measures to increase the statutory retirement age, including linking it to life expectancy, and underpin these with labour market measures, whilst improving the long-term sustainability of public finances. Adjust the second pension pillar to mirror the increase in the statutory retirement age, while ensuring an appropriate intra- and inter-generational division of costs and risks. Implement the planned reform in longterm care and complement it with further measures, in view of an ageing population.

My translation: Reform the retirement age more quickly. Do something about the pension funds and don’t pamper the current and coming retirees at the expense of the youngsters. Do something about the soaring healthcare costs as a consequence of the ageing process in The Netherlands.

3. Enhance participation in the labour market, particularly of older people, women, and people with disabilities and migrants, including by further reducing tax disincentives for second-income earners, fostering labour market transitions, and  addressing rigidities.

Translation: older workers, disabled people, women and people from minority groups have a hard time finding an appropriate job. Especially women get in fact a tax-reward when they stay at home and take care of the children, while child care is extremely expensive in The Netherlands. Dutch government, do something about it!

4. Promote innovation, private R&D investment and closer science-business links, as well as foster industrial renewal by providing suitable incentives in the context of the enterprise policy, while safeguarding accessibility beyond the strict definition of top sectors and preserving fundamental research.

Translation: don’t focus exclusively on the top sectors. Don’t focus exclusively on profitable research, while neglecting fundamental research.
5. Take steps to gradually reform the housing market, including by: (i) modifying the favourable tax treatment of home ownership, including by  phasing out mortgage interest deductibility and/or through the system of imputed rents, (ii) providing for a more market-oriented pricing mechanism in the rental market, and (iii)  for social housing, aligning rents with household income.

Translation: stop pampering rich homeowners with the Mortgage Interest Deductabiity (MID). Stop subscribing to the social renting industry how much rent should be asked for a rental house in the social sector. Make sure that people don’t pay too little or too much rent.

In spite of the ample usage of ‘Europeanish’, that strange English of European government officials, making it very hard to understand for normal people, this was a very clear report with conclusions that should not be neglected.

I do not agree with all conclusions: if you liberate the rents in a social renting market with a structural shortage of suitable housing, rents will soar. This would make it effectively impossible for poor people to pay the rent of their house or appartment, unless the government helps them with billions in subsidies. Therefore it is my opinion that the government should have a decisive voice in the social renting market, until there is ample housing supply to host all social tenants in The Netherlands.
Most other conclusions from this report I endorse fully.

While you could say that the Dutch government got a clear dressing-down, in spite of the faint language, this was not the opinion of Dutch Finance Minister under resignation Jan Kees de Jager, when asked by a reporter of my favorite radio station Business News Radio ( The following snip is a summary of this interview in Dutch:

In spite of the fact that the European Council criticized the austerity measures in the Spring Agreement, The Netherlands receives ‘an A- figure’, according to Finance Minister Jan Kees de Jager.

‘The EC put all signals to green for the execution of the budget agreement. We don’t have to do more, but certainly not less. The Netherlands fully meets the budgetary goals. The Council states: what you are doing is good. Read the recommendations: they say that we took adequate measures’. At all terrains wherein recommendations have been received from Brussels, measures have already been taken: the housing market, the labor market and healthcare. This was emphasized by De Jager.

I truly doubt if De Jager read the same recommendations that I have read; mine were certainly from the European Council. I didn’t read anything about The Netherlands getting an A- figure. Although the measures that The Netherlands took seemed about sufficient for reaching the 3% threshold of the SGP, ‘the macroeconomic scenario underpinning the budgetary projections in the programme is optimistic’.

This means that the whole budget concept of the Dutch stability programme is founded on very thin ice and thus very likely to fail next year, as economic growth will almost certainly lag with the predicted 1.25%.

Besides that, as an independent blogger, I can state fullheartedly that the measures that have been taken by the Dutch government until now, are nowhere near the recommendations as desired by the EC. Not in a million miles…

To put it even stronger: the biggest government party VVD stated today, through MP Mark Harbers at BNR news radio, that “reducing the MID for starters on the housing market, as agreed to in the Spring Agreement, is about everything that can be expected from the VVD. The VVD is absolutely not willing to fully abolish the MID in The Netherlands and when the elections in September 2012 run favorably for the VVD, the policy of maintaining the MID will be sustained”.

The European Council will not be amused after hearing this statement. I truly wonder if the VVD:
  • Does not have the courage to understand the desperate situation at the Dutch housing market, or
  • Does not have the brains to understand the desperate situation at the Dutch housing market;
In either case, continuing the MID policy is a disaster for the Dutch housing market that will keep prices artificially high, due to extremely low interest rates that are a consequence of it.

Most other reforms that are planned by the Spring Coalition don't really solve anything within a reasonable amount of time. Most measures are postponing the difficult reforms until a distant future (2020 and beyond), leaving only extra taxes as concrete measures. Courage is hard to find in this agreement.

And concerning the 1.25% growth in 2013? That is a mirage! Just like The Netherlands meeting the 3% budget deficit threshold next year! You can have my word on that.

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