Dutch budget deficit is expected to increase in 2014

The Dutch economy this year is projected to fall by 1%. For next year, a slight recovery is projected, leading to a 1% increase in GDP. The budget deficit by 2014 is expected to be 3.7%. This is the second forecast made in 2013.

Household consumption in 2013 will decline, due to lower disposable income levels and decreasing house prices, while public spending also will continue to decline as a result of ongoing spending cuts. The slight recovery projected for 2014 is related to Dutch exports benefiting from recovering world trade. Domestic spending levels will hardly contribute to next year’s growth. This is concluded in the June projections, published today in the Dutch CPB Policy Brief 2013/06 ‘Juniraming 2013’ by CPB Netherlands Bureau for Economic Policy Analysis.

The situation on the labour market is bleak. Employment will drop this year by 1¼% and in 2014 by ½%. At the moment, unemployment levels are rapidly increasing. In 2012, the average unemployment level concerned 5.3% of the labour force. In 2013, this will grow to an average 6¾% and in 2014 to 7%. This weak labour market has a downward impact on wage levels. Contract-wage increases in the market sector are expected to lag behind inflation, for both these years. In the public sector, they will lag behind even further in 2013, as wage levels in this sector have been frozen.

The economic decline in 2013 will dampen tax revenues and increase unemployment benefit payments. However, as a result of sizeable spending cuts and tax increases, the government deficit is still projected to decrease, from 4.1% of GDP in 2012 to 3.5% this year. Further increases in unemployment benefits are projected for next year, which will contribute to the government deficit increasing to 3.7% of GDP in 2014.

Projections of economic growth have been slightly adjusted downwards for 2013, compared to the March projections, but remain unchanged for 2014. The downward revision of 2013 leads to lower tax revenues and higher unemployment benefits, which together lead to an upward revision of the government deficit in both years.

The CPB Policy Brief also addresses structural impacts (effects that will linger after 2017) related to the Social Agreement of last April. Because of the toning down of unemployment benefit (WW) measures, this agreement will halve the positive structural impact on employment that would have resulted from the Government Agreement. Compared to results from the earlier assessment of the Government Agreement, this slightly reduces the sustainability of public finances (by 0.1% of GDP).

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