The Dutch economy: The old and the new normal

Economist Mathijs Bouman says the 2% growth rate predicted for 2015 by the number crunchers at the CPB hides a rising structural deficit.

It’s taken a while but the optimism virus has now definitely spread to the economists of the CPB.

Over the last year, the government forecasters have become more cheery-faced with every new projection although they hardly went overboard. Last year the CPB would not go further than a 1.25% economic growth rate for 2015.

The euro nose-dived, as did oil prices, the housing market started to show signs of life and internal demand rose. But the forecast by the number crunchers in The Hague only made it 2% tops in June.

There has been much bad news since. The cabinet has been scaling down gas production in Groningen, the Chinese economy is cooling down, the Brazilian and Russian economies are in recession and world trade is stagnating. But in spite of all this the CPB forecast remains at 2% for the whole of 2015.

And next year it says it will be 2.4%. Should this really come about the growth rate will be higher than the average pre-crisis rate. Forget the ‘new normal’ of 1%, the Netherlands is growing again at a pace we thought was normal before the crisis.

Unfortunately the ‘old normal’ is surfacing in other CPB figures: the budget deficit is going down at a slower pace than predicted. With revenues from gas down and a €5bn tax reduction, the budget deficit for next year will be 1.5% of gdp. In June the SPB prediction hovered around the 0.8% mark.

Granted, 1.5% is still well under the maximum deficit of 3% allowed under the European stability and growth pact. Nevertheless, the cabinet is starting to go back to its old spendthrift ways.

This is especially clear from the so-called structural deficit, or the budget deficit corrected by conjunctural ups and downs. Next year the structural deficit will go up to 1.1% of gdp. According to the budgetary rules of the European Union this figure should be around 0.5%.

A hike in the structural deficit during a conjunctural up is understandable politically but not very wise from an economic point of view. Economists call it procyclical budgetary policy and they never pronounce these words without a moue of distaste. I would like to know if all the Keynsian economists in this country who booed the policy of cutbacks of this government in the last few years will be equally outraged about the rising structural deficit.

Mathijs Bouman is a macro-economist.

This article appeared earlier in the Financieele Dagblad