Booming economy, more money in your pocket

Edition 30 October 2019, by Johannes Visser

The economy is booming, unemployment is down and the Dutch public will get to spend on average 1,5 percent more next year than they do this year. Rising economic tides are lifting all boats, even if the gains in purchasing power are leveled out by rising prices and stagnant wages.

For 2019, economic growth is expected to be at 2,6 percent, making it the sixth consecutive growth year, although somewhat lower than last year and this year. Our buying power, meaning how many goods and services we can buy with the money in our pockets, will improve for 96 percent of the population, according to the Dutch government. This increase has been divided up equally among all different population groups: those making more than 23.700 euros a year will see a 1,6 to 1,7 percent rise, the elderly will get to spend 1,5 percent more and those on welfare about 0,9 percent.

These and other happy messages were announced on Prinsjesdag last September, when the government presented its budget for the next year. As usual, the most important economic figures were leaked a few days before King Willem-Alexander gave his yearly speech. Minister of Finance Wopke Hoekstra said that the Rutte III government wants the citizens to feel in their wallets that the economy is going strong. Yet he made a point of warning against economic headwinds next year, as Britain is expected to leave the EU and American president Donald Trump keeps creating all kinds of trade conflicts around the globe. Rather than be overly optimistic about the economy, Hoekstra said the government, as well as business and citizens, need to be cautious about the future, by reducing public as well as private debt as much as possible. For now the numbers are looking good, however. Unemployment is set to fall from 355 to 320 thousand, 50% of the 2014 nadir of 700,000 unemployed people. Also, next year government debt will dip under half of gross national product for the first time since 2007 (in 2014 debt reached two thirds of GNP), though it’s still a whopping 400 billion euro. It’s the fourth year in a row that the government comes up with a budget surplus, this time about one percent or about 10 billion euros. Still, if economic growth were not considered, the government would be spending 0,4 percent more money than it takes in (known as the structural EMU balance).

Rosy numbers, thorny sides

These figures are all good and well, but the one thing that matters most to the average Dutchman and -woman is what 1,5 percent really feels like in their wallets. On average, every Dutch citizen gets to spend 35 euro extra a month. Still, the 1,5 percent number does not say much about the true income trend of individual households, which depends on things that cannot be predicted, e.g. whether someone gets a promotion, finds a job or gets fired. Other life developments that are not included in calculating purchasing power are moving house, finding a partner, having children or getting divorced. Furthermore, the percentage is influenced by the rise or fall in energy prices, health premiums, surcharges and btw (vat). In addition, it turns out that the economic and purchasing power predictions never actually match actual economic developments. Over the past ten years, not once did the government’s Bureau for Economic Policy Analysis (CPB) correctly predict the average Dutch family’s purchasing power; its predictions were five times too high and five times too low during that period. Three factors make it impossible to calculate purchasing power correctly: the way that prices will rise (inflation), by how much incomes will rise or not, depending on negotiations with employee and employer unions; and government policy changes in response to external crises.

Going up or down?

The 1,5 percent growth in purchasing power could have been even higher, if not for the fact that because of the economic growth, people spend more and so pay more btw, which has a negative effect on buying power. Part of this has to do with the rise in btw this January. So, although the good numbers keep rising, so does the cost of paying for just about everything else, canceling out much of people’s extra buying power. General taxation and premiums for citizens and especially companies will rise from 38,7 percent this year to 39,1 percent in 2019. For the average Dutchman, health premiums and the cost of water, electricity and gas will also go up next year. Although that is bad news, the government has taken measures that will put more money back in people’s pockets. As it happens, the Netherlands has seen consistent economic growth for the past thirty years, but this has not resulted in equal paycheck rises, due to increased employee competition on three fronts: a more flexible labor market, digitalization and globalization. The decline in permanent contracts and trade union memberships, combined with a rise in freelance and temp jobs, has hollowed out bargaining power for employees and freelancers. Automation of production has also taken away much of the formerly well-paid factory work. And due to growing international trade, Dutch workers don’t just compete with each other, but also with people who work for less money in developing countries.

As a result, the Netherlands as a country has become richer, but the population on average has not. The increased wealth has accumulated in two places. Dutch companies have raked in higher profits, paying more dividends to private shareholders and pension funds, while also paying more taxes to the government. And so, the average Dutch person has indirectly become better off over the past decades, because companies provide jobs, while the government has more money to spend on education, infrastructure, (social) security and healthcare. And as the number of jobs in the Netherlands keeps growing and employers are desperate to find workers to fill in the many vacancies, it should only be a matter of time before wages will finally catch up. So while the latest 1,5 percent rise in personal buying power might not seem all that much to some of us and might be evened out by rising prices, it is true for the Netherlands on the whole that rising tides raise all boats.