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Wednesday, 7 November 2012

Five issues that a new cabinet should solve revisited: What does the new government agreement state about it? (Part III)

After a short intermezzo on tax avoidance via The Netherlands, I am back with my series on the new government agreement.


 I wrote earlier

The Dutch unemployment, although still among the lowest within the EU has soared since August 2011. In July, unemployment was a staggering 38% higher than in 2011M08 and this number wil further soar in the coming months, is my strong conviction.

This has everything to do with the European trust crisis and the stalling Dutch economy and can only be solved if these earlier topics are solved first. Fighting unemployment by creating (useless) temporary or semi-government jobs has almost never worked in the past, just as throwing Keynesian stimulus money around almost never worked. This will fight the symptoms, but will not cure the disease. It can hardly be enough emphasized that this crisis was a result of too much debt. Creating more debt can therefore never be the solution to this problem!

However, just as harmful as throwing money around is going through too much austerity. Something that the new Dutch cabinet should not do is to get the economy on its knees, by introducing harsh austerity measures in order to reach the 3% deficit level of the European Stability and Growth Pact. This would lead to a case of: operation succeeded, patient died!

The new government agreement states:

  • People that receive welfare have a labor and reintegration duty and the duty to work at one’s possibilities. No category of people receiving welfare is excluded from these duties, except for people that are 100% and permanently disabled.
  • When the job application duty is not followed, the welfare payments will stop for at least 3 months. Resumption will only take place at request of the receiver.
  • Chances of older workers for a new job are too low. Flex-workers need better protection. By reforming the laws for dismissal and the Unemployment Benefit, the road from work to work can be significantly shortened.
  • The duration of an Unemployment Benefit (UB) will be a maximum of 24 months: 12 months of payments related to the last earned salary and 12 months of payments related to the minimum wages. During the first ten working years, workers earn a right for 1 month of UB per working year. After this period workers earn ½ month of UB per working year.
  • By opening the lowest salary scales, flex-workers on the downside of the labor market, like cleaners and catering personnel, can receive a labor contract. The central government will lead by example, concerning these contracts.
  • To help small, starting entrepreneurs, the credit ceiling of micro-financing organization Qredits will be enlarged from €50,000 to €150,000.

My comments:

That’s all, folks! No grand master-plan to create new jobs. No industrial policy a la Germany for The Netherlands. Only some bleeding heart arrangements to lend more money to starting entrepreneurs, whose business plan was obviously not good enough to convince the banks in the first place.

Two days ago I wrote in the 2nd part of this article that I was disappointed about the sense of urgency of this government agreement towards the labor market and the creation of new jobs:

Non of the aforementioned lines carry a real sense of urgency on the Dutch economy, except for the fact that (to put it simply in my own words): ‘austerity is necessary to get the state budget in order.

Also disappointing is the fact that the word industry is only mentioned once (!) in the document. No “German” industrial policy whatsoever, not a single word on the manufacturing industry, heavy industry, metal processing, the automotive industry, the chemical industry or the assembly industry. The financial industry is almost solely mentioned in a negative context and not as an enormous driver for jobs. The ICT industry, very important in The Netherlands, is mentioned nowhere.

I’m not against the duty to find a job for people receiving welfare. I am also not opposed to sanctions for people that don’t try hard enough to find a job. In my opinion, people that have the ability to work, should try to find a job and work. The criterion that a job should fit to somebody’s education is not steady for eternity.

If somebody remains unsuccesful for a long time in finding a job that suits his education and working experience, then he should be forced to accept a job that is below his level of education and experience. Of course the economic situation should be taken into consideration. You cannot blame people for not finding a job if there are no jobs available.

Sometimes the market needs to be pushed forward; this is the duty of responsible governments. Not by throwing Keynesian helicopter drops of money at the economy, but by enabling a suitable infrastructure, regulations and subsidies for the creation of new business initiatives that can deliver new jobs. In my opinion, the government failed in enabling optimal circumstances for the creation of new jobs.

I might be mistaken, but I have doubts whether easing of dismissal laws and shortening the duration of Unemployment Benefit will really help to shorten the road from work to work (first red and bold text). A flexible labor market is not only dependent on how easy it is to fire people, but also how easy it is to hire (!) people. Here it is that the Dutch labor market could improve, for instance by reducing the difference between the gross and the net salary of workers and by skipping useless labor regulations.

The second red and bold text is worrisome for me. Initially, it sounds positive that flex-workers at the bottom of the labor market should get a steady contract easier. However, if ‘opening lower salary scales’ means that these scales come close to the current welfare payments, then this is a negative development, enabling the uprising of a class of workers that need two or three (official) jobs to receive a decent payment per month.

Crisis on the CRE and RRE markets and in the Building & Construction industry (B&C)

I wrote earlier:

There is a problem zone that needs fixing at the shortest possible notice: the Dutch Commercial and Residential Real Estate markets (CRE/RRE) and the Building and Construction industry that surrounds it. The bubbles on the RRE and CRE-markets that emerged during the last two decades, have skyrocketed housing prices and caused a building frenzy that did not stop until today.

The results of the failed policies on the Dutch CRE and RRE markets:

  • The Dutch people simply don’t believe anymore that the (failed) policy of the Mortgage Interest Deductability (MID) remains in place in the coming years and hold their horses. Politicians that state that the MID will remain intact receive scornful laughter and agriness from the Dutch citizens.
  • Consequence: the RRE market is increasingly getting in a deadlock since 2007, with stalling sales, dropping housing prices and half a million homeowners (more than 10%) being underwater already.
  • The CRE-market suffers currently from a 17% vacancy of office and business buildings in The Netherlands, of which at least 70% structural vacancy. Insiders fear that this number will rise to 25%.
  • As a consequence of the problems on the CRE and RRE markets, many B&C companies have already defaulted and many more will do so, at the costs of thousands of jobs, as the overcapacity in this industry is still enormous. 
  • Politics assumed the ostrich position and scared away from decisive measures, as it was very heavily influenced by the powerful lobby of the B&C industry.
The only thing that could help the cursed Building and Construction industry is a vigorous restructuring by the new cabinet, until 60% to 70% of the current jobs and companies remain. All other measures (Keynesian stimulus) will only take away the symptoms (for a while…). The people whose jobs this concerns should be retrained through extensive government programmes to help them find jobs in other industries.

The new government agreement states:
The housing market is locked. This is bad for the economy and very hampering for people that want to buy, rent or move. By setting annuitary redemption as a precondition for mortgage interest deductability (MID) with new mortgages and by reducing the conveyance duty structurally, the first important steps are made to rejuvenate the Dutch housing market.

The MID remains large intact, but will be adjusted as follows: for existing and new mortgages, the maximum reduction rate (fourth tier) will be reduced by half a percent per year until the level of the third tier is reached. The yields will be returned to the group that is hit by this measure.

The problems with residual debt are targeted. The interest paid on residual debt can be temporarily (5 years) deducted from the income tax and under certain conditions.

The favorable lending facility for starters from the Public Housing foundation (SVN) will be extended.

My comments:

The government did something about the Mortgage Interest Deductability. They reduced it by 0.5% (!) per year for the highest taxing tier. Applause! Of course, this is a ridiculous measure and it won’t help to set the housing market free. This measure seems there to protect the very rich homeowners, while ‘visibly doing something about the MID’. It is a dead hulk from the beginning, only credible for people that can’t add up one plus one.

What also doesn’t help is that way that the government handles the problem of residual debt. People can deduct it from their income taxes for five years. That is nice, but it doesn’t give people a handle about how to get rid of this residual debt.

I rather would have seen that the government would have enabled an arrangement in which the mortgage lenders and houseowners could split up the bill for the residual debt, especially when there is a clear situation of overcrediting by the mortgage lenders. Now the people still get stuck with a residual debt that stays with them for a long, long time.

Nothing less than a total disappointment is the fact that the new government doesn't want to establish a master-plan for the Building and Construction industry. The chance that this industry under jeopardy will go through a very hard time for the next 10-15 years is extremely large. 
This new government missed a big opportunity to restructure this industry and help people to find new jobs outside the B&C industry. Thus, the apparent overcapacity would be reduced and the remaining companies (50-60% of the current capacity) could earn a decent profit

The same is true for the Residential and Commercial Real Estate markets. Provinces and communities proved beyond reasonable doubt that the RRE/CRE business is 'too hard to handle' for local governments and gives too much opportunity for corruption and clientelism. The central government should steer much closer on this line of business, if they want to avoid a CRE/RRE disaster in the near future. By failing to do so, the central government makes itself partially responsible for the unpleasant things that are going to happen within this industry.

Problems caused by the aging process in The Netherlands

I wrote earlier:

One of the most inevitable processes in The Netherlands is the process of aging within the population, where less and less workers have to pay for more and more retirees, including the soaring healthcare costs that are a consequence of this aging process.

Pension funds are currently suffering from coverage ratios that are too low to meet their future obligations, spurred by the economic crisis and the larger demand for pension money.

Costs for healthcare are soaring at the moment: not only as a consequence of the increasing number of patients, but also due to the increased possibilities to enhance / improve life through very succesful, but often extremely expensive treatments and medical facilities.

The new cabinet should do a few things:

Increase the retirement age at a much higher speed to 67. It is hard to understand that it takes more than ten years to increase the retirement age by only two years.

If future pensions of the current workers (especially youngsters) need to be reduced to keep pensions affordable in the future, the current retirees should carry an equal share of this burden.

There should be a society-wide, ethical discussion on the boundaries of healthcare: should the Dutch citizens pay for every possible treatment at every price, or should we accept that certain diseases and medical conditions are incurable when the costs of state-of-the-art treatments are compared with generally accepted expense thresholds.

The new government agreement states:

The age at which the ‘general elderly law’ benefit (AOW) can be entered, is raised to 66 from 65 in 2018 and 67 in 2021. From that moment on it is connected with the increase of the life expectancy.

[ After this line, a number of new arrangements concerning the AOW and the pensions are mentioned in the government agreement that are too technical and specific to mention in this article. Interested readers could read the government agreement itself (see the first part of this article) or consult a fiscal consultant for additional information]

The quality of healthcare will be improved, by improving the quality indicators, reducing practice variety and avoiding useless medical treatments.

Healthcare cost increases will be reduced by controlling the amount of delivered healthcare, avoid excess treatment, introducing a stringent healthcare package management, reduce overcapacity and battle spillage.

Expensive, complex and acute healthcare will be concentrated, while less complex healthcare will be brought close to the people.

Financing of healthcare will be dependent on household income. The higher the income, the more premium people have to pay with a maximum premium amount that will be reached at an income threshold of about €70,000 per year [this is a simplification added by me in order to avoid the very complicated rules for calculating the income-dependent healthcare premium. Again, people that are interested should read the whole government agreement or consult a fiscal consultant]

With insurers a covenant is entered on disease-prevention and stimulation of a healthy life-style.

Expanding possibilities for treatments, a more self-confident citizen and definition of new diseases lead to new medical-ethical questions. In order to answer these questions cautiously, a wide public debate is necessary. Leading is the principal of self-determination, always combined with human dignity, good healthcare and the protect-worthiness of life.

My comments:

The Dutch national bank (DNB) already solved the coverage ratio problem of the pension funds.  It raised the calculation rate that the pension funds may use to calculate their coverage ratio. Presto, the coverage ratios have risen by 5 to 10% for most pension funds. It is like putting a blindfold on people, so they can’t see that the emperor isn’t wearing any clothes. A totally ridiculous and dangerous way of banking on the future workers in order to protect the pensions of the baby-boomers.

Concerning the raise of the retirement age to respectively 66 and 67: I applaud these measures, but regret that it takes another 6-9 years to raise the age. In my opinion this should happen much sooner.

Further, I’m quite enthusiastic on the healthcare paragraphs of this government agreement.

It is filled with quite complex and detailed arrangements, as this is a very complex matter. Unfortunately, this complexity is almost impossible to avoid: the national healthcare in The Netherlands costs a staggering amount of 87.1 bln per annum (2010, data courtesy of Central Bureau of Statistics) and this amount is still rising as a consequence of the aging process and the ever-increasing treatment possibilities.

I applaud that the government wants to look at factors like: prevention of diseases and medical problems, prevention of spillage and overtreatment, concentration of complex healthcare where it is possible and desirable, while bringing simple healthcare closer to the people.

I also applaud that the government indeed wants to start a wide public debate on the boundaries of healthcare. The question what treatments should and should not be paid in the future is too important to leave it out of the public debate. 

Almost all healthcare institutions and charities want to fight every disease and medical problem there is in the western world. Maybe people should accept that some diseases are deadly and there is nothing we can do about it for the next fifty years. People should also accept that some people are simply too old for a knee or hip operation. This is a harsh, but fair message when it is brought with compassion and understanding of the patient's situation.

The only thing that I am worried about, is that the desire to reduce healthcare costs will wipe out all good intentions concerning prevention of diseases and medical problems and avoidance of waste and spillage.

This was the last episode in my series on the new government agreement for The Netherlands. If you are interested in certain details that have not been disclosed by me, please feel free to ask through my email address. This can be found in the ‘about me’ section on my blogpage.

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