© ANP
Public finance
The Dutch government is in good financial shape, but the budget deficit and public debt will rise from 2025, leaving too little room to absorb economic shocks. In the longer term, public finances are expected to deteriorate even further due to rising ageing costs and interest expenditures.
European agreements
When the euro was introduced in 1999, participating Member States made agreements on keeping their public finances in order. For example, the budget deficit (the shortfall that occurs when the government spends more money than it takes in) should not exceed 3% of gross domestic product (GDP, the total value of all goods and services a country produces in a year). It was also agreed that public debt should not exceed 60% of GDP. It is notable that more than half of EU member states fail to meet these agreements (see Financial Stability Report, October 2024).
Things are currently going well...
The Dutch government's budget deficit for 2024 is projected to be lower than expected at the beginning of the year. This is due to higher economic growth and some planned expenditure not taking place. The projected budget deficit for 2024 is 0.7% of GDP, with public debt at 43.7% of GDP. This is low, both compared to the past and to other countries.
...but the budget deficit is ticking upwards
Twice a year, DNB publishes projections for the Dutch economy. The most recent, the 2024 Autumn Projections, anticipate a rise in the government deficit to 2.1% of GDP in 2025 and 3.1% in 2026. The increase will be caused by public expenditure outstripping tax and social security contribution revenues. In particular, public spending on healthcare, social security, interest and defence is set to mount rapidly in the current government term. On top of this, the economic outlook has become more uncertain, partly due to international tensions. This could also pose additional risks to public finances.
Figure 1: Budget balance (left) and public debt (right)
© DNB
Public debt to worsen, especially in the longer term
In the somewhat longer term, public debt will climb above 60% of GDP (Figure 2). According to our estimates, this will be the case around 2034. This is partly due to an ageing population, which will mean higher healthcare costs and state pension benefit payments. Interest expenditures will also rise. We expect interest expenditures to double from the 2023 figure of around €6.5 billion to almost €13 billion in 2026. Interest expenditures are expected to continue to climb due to rising government debt and the pass-through effect of higher interest rates (the average maturity of Dutch government debt is around nine years).
Figure 2: Debt projections up to 2038 show debt mounting sharply
© DNB
Lower economic growth in the long run
These rising expenditures will be harder to sustain as economic growth is expected to slow in the coming decades. This is linked to the projected growth in labour supply and labour productivity. Labour supply growth will be essentially flat due to the ageing of the labour force, and this lack of growth will not be offset by higher labour productivity growth for the time being. Based on this fact, a recent DNB Analysis (Dutch) shows that it cannot be ruled out that annual economic growth in the Netherlands will remain well below 1% for the next few decades.
Buffers for trend-based fiscal policies
As the economy is now doing comparatively well, the government should seize the opportunity to build up buffers. Doing so when the economy is strong and tapping into these reserves in times of economic malaise prevents the government from further fuelling an overheated economy with high spending, or from damaging a weak economy with austerity measures.
The Netherlands conducts such trend-based fiscal policies to stabilise the economy. This means that expenditures are fixed at the beginning of the government term and tax revenues are allowed to move with the economy. In a sluggish economy, the public sector deficit grows because of lower tax revenues in combination with a lack of austerity measures. And when the economy is doing well, the extra income is not immediately used for additional spending. As a result, the public sector deficit falls.
This is only possible if the country builds up sufficient reserves, which will ensure that the Netherlands remains below European deficit and debt thresholds even while pursuing this trend-based fiscal policy. This is all the more important in today’s uncertain economic environment.
Cut spending or raise taxes?
To prevent public finances from deteriorating, the Study Group on Fiscal Space – of which DNB is a member – advises the current government to reduce the deficit to around 2% of GDP and to stabilise debt below 60% of GDP in the longer term. This will put the Netherlands at a sufficient distance from the 3% threshold. The government will thus not be compelled to make immediate cuts in case of setbacks and pass on bills to future generations.
This means the government will have to slow down expenditure growth in the coming years or increase taxes. In a recent position paper, DNB identifies various options for doing so. This calls for tough political choices.
Why is DNB committed to sound public finances?
Sound public finances and good buffers allow the government to absorb economic shocks. And this in turn promotes sustainable prosperity. High government debts can lead to financial instability. In addition, the government’s fiscal policy can either support or undermine European Central Bank (ECB) measures to keep prices stable.