Budget plan: Short term spending increase covered by shaky cuts

• PVV, VVD, NSC and BBB came to a coalition agreement, the next step is to fill cabinet positions

• The plans focus on curtailing migration, lower taxation, business climate, the agricultural sector and housing construction

• Given the ambitious plans with large deficits, the risk of underspending remains high, just as in previous years

• Spending is shifted away from longer term investments and goals (such as climate), towards more short-term goals

• Parties commit to a maximum deficit of -2.8% of GDP and to hold debt below 60% of GDP

• Budget deficits in 2025 and 2026 are higher than current projections, deficits in 2027 and 2028 are lower

• We argue that spending cuts in 27 and 28 are unlikely to succeed meaning upward pressure on deficits in those years.

• Adjustments to the new pension law are not part of the agreement, transition can continue under current legislation

• The fiscal stance is at odds with the macro situation and contrasts the trend visible in the Euro Area

Yes… to a shotgun marriage

Since our last note in March, where we signalled increased probability of a right-wing coalition, talks between election winner PVV (far-right), outgoing prime minister Rutte’s VVD (liberal centre-right) and newcomers the Farmer Citizen Movement (BBB, right) and New Social Contract (NSC, centre-right) have progressed with ups and downs. Given the shift to the right in the elections last November, this coalition was the most likely outcome. The parties were expected to form a coalition together, despite significant differences in policy ambitions. The agreement should reduce policy uncertainty, which was elevated for a period of 6 months since the November elections.

Who will be the Prime Minister?

The current formation process differs in many ways from what has been common practice to date. For example, the four coalition parties have agreed that the party leaders will not take positions in the cabinet but will remain in Parliament. The reason is that both the VVD and the NSC do not want Geert Wilders as prime minister. Since the PVV is the largest party, it will have to propose who fill the role of new prime minister. The only name buzzing around is that of Ronald Plasterk, a member of the opposition Labour Party and informer in the early stages of negotiations for the upcoming cabinet. However, it remains uncertain whether Plasterk will be PM as Pieter Omtzigt (NSC) is rumoured to be against his nomination.

The next step is to form a ministerial team, which will happen in the coming weeks. The four parties will propose candidates for the ministerial posts. These candidates may come from within the parties as usual but may also be experts from outside the parties. If no new setbacks occur, the new cabinet could be installed by mid-June.

Coalition has no majority in the Senate

The political situation in the Senate remains of importance as the new coalition has no majority there. This means that policies must also gain support from other parties. It is expected that coalition parties will mainly look for support to other, smaller, right-wing parties for this support.

Agreement is pro-business, lower taxes, less ambitious on climate policy and agricultural friendly

The agreement is titled ‘Hope, Courage and Pride’. It features an ambitious set of policy goals in different areas. Starting with households, purchasing power is supported in the short run by a small tax relief for households (EUR 2 bn.) and from 2027 onwards by halving mandatory healthcare contributions (EUR 4/5 bn.).

Businesses, especially in the agricultural sector, welcome the accord. Some planned tax increases such as the energy tax increase (EUR 0.5 bn.) and a tax on share buy-backs (EUR 0.8 bn.) are reversed. Especially the later came under scrutiny in a broader discussion about deteriorating business climate in the Netherlands. The new agreements indicates that restoring business climate is a policy goal of the incoming government. Unlike reported earlier it is not fully clear what will happen to favourable tax rates for expats in the Netherlands.

Other policy ambitions are reducing migration and incentivising housing construction. Two central themes during the election. Climate goals – which stem from European legislation - will be upheld, however some accents in climate policy are adjusted.

Finally, the coalition agreement contains several plans to support the agricultural sector. For instance, there will be no forced expropriation of farms close to nature reserves, no further shrinkage of the livestock population and there will be an exemption on diesel excise duty for farmers. Furthermore, new measures to solve the manure problem are announced. Dutch farmers are currently spreading too much manure on land than is allowed under European rules. Incidentally, critics immediately indicated that implementation of this point would be problematic as it would require renegotiating an exemption position with the European Commission. This has not succeeded after several attempts to date. It is unclear at this stage what these measures mean for nitrogen emittance, a constraining factor for instance for housing construction.

Funding: short term gain, long term pain

How are these polices funded? In general, the new government intends to shift spending away from longer term goals, such as investments in education and potential growth as well as climate policy towards more short-term goals (discussed above). Indeed, cuts are planned in the Dutch ‘growth fund’ as well as in education. Other cuts are done in foreign aid spending (EUR 2.5 bn.), limiting public wage growth, the civil servant base (EUR 1 bn.), migration costs (EUR 1 bn.) and payments to the EU (EUR 1.6 bn.). Especially the cuts to the civil servant base, migration costs and payments to the EU, for a total of EUR 3.6 bn. which are in the budget from 2026 onwards are expected to be very uncertain and possibly unsuccessful. Earlier governments have unsuccessfully tried to cut civil servants and negotiations with the EU about contributions are always uncertain. This leads to upward risks to deficits in 2027 and 2028.

When it comes to the negotiations, it seems clear that the PVV has given up a lot of their plans. The PVV’s party programme was Eurosceptic, advocated deficits of more than 4% of GDP, was anti-climate and opposed support for Ukraine. Instead, the coalition agreement keeps climate policy largely intact, solidifies support for Ukraine, and is less Eurosceptic than expected. Moreover fiscal prudence is clearly committed to (read more below). The VVD, the NSC and the BBB all gained parts important to their voter base.

Prudent parties have won the finances debate

Costly plans and lacking independent analysis of party programmes, especially of the PVV and the BBB, meant a lot was uncertain about the course of the government finances. The agreement shows clearly that the more fiscal prudent parties have won the negotiations. Parties commit to curtail EMU-deficits to a maximum of -2.8% of GDP while they commit to stay below a 60% debt share of GDP. Given the uncertainty of budget forecasts it is important to note what the new coalition intends to do in case of under- or overspending. Also here fiscal prudence seems to have prevailed. In case of a higher expected deficit than 3%, the coalition clearly agrees to abide by the limits set by the Stability and Growth pact and cut spending. This ‘spending brake’ contradicts conventional Dutch budget rules which advocate for a separation between spending and revenue, also in the case of financial setbacks.

Labour market tightness risks underspending

On long-discussed structural labour market reforms the coalition agreement lacks an integral view. The labour market is essential to complete the policy ambitions. Otherwise, just as previous governments, the risk of underspending remains high due to lack of personnel. On balance, the agreement faces the risk of only adding to labour demand in an already tight labour market while constraining labour supply.

More specifically, on the one hand, the agreement discusses measures that try to ease tightness in the labour market by shortening the unemployment benefit period to 18 months (from 24 months) and cutting the number of civil servants (although the feasibility is questionable). On the other hand, the agreement adds to tightness as the expansive fiscal stance adds to (public) labour demand and increases demand in constrained sectors such as healthcare by cutting mandatory healthcare contributions and construction. While at the same time labour supply is being constrained by stronger rules on labour market migration.

Large deficits stand at odds with macro-economic circumstances

The projected budget deficits happen against the backdrop of an economy that performs close to capacity limits with a historical tight labour market. This has important implications. Similar to the last few years the risk of underspending due to the tight labour market remains high. Especially in labour intensive areas such as police and defence spending. The higher than anticipated deficit is expected to marginally lift growth in 2025 and 2026 but overall the macro impact of the budget is limited. Moreover, looking at fiscal policy in the euro area, where deficits are shrinking in the coming years, we see the Netherlands moving in the opposite direction.

Adjustments on pension reforms not part of deal, transition will continue as it is

In the agreement of the four coalition parties there is no mention of adjusting the new pension law that came into force last year. Three of the four coalition parties have indicated that they want to modify or even reverse the upcoming pension reform, which will see the Dutch pension sector change from a Defined Benefit to a Defined Contribution framework. Only the VVD is in favour of the current law.

Based on the comments of the party leaders of the four parties, this issue was intensively discussed during the negotiations but the current pension law will not be amended for the time being. For instance, Dilan Yesilgöz of the VVD has indicated that there will be no adjustments while Pieter Omtzigt (NSC) said that adjustments are possible in the future, but as far as he is concerned, this will not happen immediately. As such, this means that the Dutch pension sector can proceed with the transition according to current legislation.

Finally, the agreement also says nothing about reducing the retirement age from the current 68 to 65. This was a prominent promise in the PVV's election programme, but it did not make it into the final agreement.