Why does the Netherlands conduct trend-based fiscal policy?
-
Loading... - Abrasha Volkov
- 21 Oct 2024
- 78 Views
- 0 Like
- 0 Comment
Since 1994, the Netherlands has implemented a trend-based fiscal policy aimed at stabilizing the economy while effectively managing public finances. This approach is enshrined in the Sustainable Public Finances Act (Wet Houdbare overheidsfinanciën – HOF), which mandates the Minister of Finance to adhere to this policy framework in compliance with European budgetary rules. The rationale behind this policy is multifaceted, focusing on control of public finances, macroeconomic stabilization, and efficient allocation of public resources.
Key Features of Trend-Based Fiscal Policy
Fixed Expenditure and Revenue Framework: At the beginning of each government term, a fixed expenditure framework is established, setting an annual ceiling for real government spending that cannot be exceeded. Simultaneously, a revenue framework is agreed upon, detailing the taxes and contributions the government will collect each year. This structured approach ensures that any changes in policy regarding revenue and expenditure must be offset within these frameworks, promoting fiscal discipline. For instance, revenue windfalls cannot be used to increase government spending, and vice versa, which helps maintain control over public spending and the overall tax burden.
Macroeconomic Stabilization: One of the primary goals of trend-based fiscal policy is to allow tax revenues and unemployment spending to fluctuate with the economic cycle. During economic downturns, tax revenues typically decline while unemployment-related expenditures rise. By permitting the government deficit to increase in such times, the policy cushions the adverse effects of economic contractions, providing stability for households and businesses. This approach also aids in maintaining inflation at target levels, as it avoids the need for immediate budget cuts that could exacerbate economic downturns. Conversely, during periods of economic growth, improved government balances and reduced debt create a buffer for future economic challenges.
Efficient Allocation of Resources: The trend-based fiscal policy includes a structured decision-making process, with a primary decision-making moment each spring when the cabinet determines spending for the upcoming year. Additionally, in August, the cabinet decides on taxes and social insurance contributions for the following year. This fixed schedule allows for a balanced decision-making process, enabling an integrated assessment of various policy preferences and contributing to policy stability. As a result, public funds can be allocated more efficiently, ensuring that every euro spent is utilized effectively.
The Netherlands operates within the framework of European budgetary rules, particularly the Stability and Growth Pact (SGP), which sets limits on budget deficits and public debt. Specifically, the budget deficit should not exceed 3% of gross domestic product (GDP), and public debt should remain below 60% of GDP. Adhering to these rules serves as a safety net for trend-based fiscal policy; if the budget deficit surpasses the 3% threshold, the government loses the flexibility to allow the budget to move with the business cycle, necessitating additional budgetary measures that could lead to procyclical policies—an undesirable outcome that could worsen economic downturns.
Currently, the Dutch government is operating close to the 3% deficit limit, which constrains its ability to absorb economic setbacks. This situation increases the risk of having to implement procyclical policies, which could lead to administrative challenges and economic instability. To mitigate these risks, the Working Group on Fiscal Space, which includes members from the Dutch Central Bank (DNB), has recommended a fiscal course correction. This would involve targeting a structural budget deficit of around -2% of GDP and implementing budget cuts of approximately €17 billion starting in 2028. Such measures are deemed necessary to sustain trend-based fiscal policy in the long term and to prevent the government from having to impose immediate budget cuts during economic downturns, thereby avoiding the burden of passing on financial liabilities to future generations.
Trend-based fiscal policy in the Netherlands is a strategic approach designed to stabilize the economy while ensuring responsible management of public finances. By establishing fixed expenditure and revenue frameworks, allowing for macroeconomic stabilization, and promoting efficient allocation of resources, this policy framework aims to create a resilient economic environment. However, maintaining sufficient fiscal space is crucial to avoid the pitfalls of procyclical policies and to ensure that the government can respond effectively to future economic challenges. As the Netherlands navigates its fiscal landscape, the emphasis on predictability and stability in budgeting and decision-making will remain vital for the sustainability of its economic policies.
