On 21 September 2021 it was Prince’s Day (Prinsjesdag) again, and the demissionary cabinet presented its last budget. According to Bas Jacobs, Professor of Public Economics at Erasmus School of Economics, the government deserves praise for its corona policy. Nevertheless, the Dutch economy is struggling with structural problems, Jacobs writes in an article published by the NRC and Vrij Nederland.
Unexpected recovery
The economy has recovered unexpectedly well this year with a growth of 3.9%. After two years, the economy is back to its income level of 2019 and has only lost 1.5% structurally due to the crisis. Unemployment is also at an all-time low and the labour market continues to be tight. Public finances have also weathered the crisis well, even though the emergency packages were generous. The budget deficit is decreasing rapidly and the national debt remained below 60% of GDP. According to Jacobs, these figures show that austerity is unwise in a crisis.
Structural problems
However, all the good news cannot mask the structural problems in the Dutch economy, Jacobs writes. ‘After 2022, economic growth will drop to around 1.5% per year due to long-term stagnation and historically low productivity growth. Interest rates on virtually all government bonds are still below zero. The most important macro-economic adjustment mechanism is therefore broken,' says Jacobs.
‘Because of the extremely low interest rates, investors and the wealthy are chasing returns in the financial and housing markets. Share prices and house prices are being pushed up sharply. First-time buyers no longer have a chance in the housing market,' Jacobs writes. Moreover, income growth is lagging behind due to growing market power, a two-tier labour market and inadequate government investment. The market power of companies is increasing. A small group of large companies is becoming increasingly dominant. This monopoly formation would be harmful to the economy, according to Jacobs. Investments in education are also insufficient and there is no clear plan yet to solve the nitrogen problem.
Structural reforms
According to Jacobs, a combination of public investments and structural reforms is needed to anchor inflation, wages and interest rates at normal levels in the short term. ‘Only then can central banks abandon their unconventional policies and raise interest rates, thereby cooling housing and asset markets.’ Jacobs also believes the tax system should be reformed so that capital income and gains are taxed consistently and income inequality is reduced.