Wednesday 22 March 2023

Interest rates could add €9bn a year to government spending

Rising interest rates are expected to cost the Dutch government up to €9.2 bn a year, finance minister Sigrid Kaag has warned in her autumn statement.

The latest forecasts are based on a 10-year interest rate of between 2.6% and 4%, which would add at least €5.8 bn to the cost of government borrowing.

The coalition agreement that the new cabinet based its spending plans on at the start of the year predicted zero interest rates, at a time when the European Central Bank’s base rate was still below zero.

Kaag said at the weekend that the rising costs left little room for more measures to offset the effects of double-digit inflation, which has already forced the government to cut back its plans to invest in renewable energy and reform of the agriculture sector.

‘Even bigger support packages will have the unintended effect of driving inflation up even more,’ she told her D66 party’s autumn conference.

Recent Dutch governments brought down the national debt to less than 50% of GDP, but the latest budget estimates are that it reached 58.6% at the end of 2021. Kaag warned that without careful management it could quickly rise further.

‘We don’t want to pass on the bill to future generations,’ she said. ‘In the end we need to pay the bill collectively.’

There was some positive news in the statement as the projected cost of the energy price ceiling has been revised downwards from €20 bn to around €11.2 bn, now that wholesale gas and electricity prices have fallen during the autumn.

That has given Kaag enough room to allocate an extra €1.5 bn to relieving the cost for high-energy users in the public sector, such as schools and swimming pools, who will receive €400 mln and €200 mln respectively. The extra package was requested by parliament.

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