Pay raises will drive sharp rise in Dutch purchasing power, but deficit issues looming

Wage increases will mean a sharp rise in purchasing power for Netherlands households this year. The Dutch economy is also recovering and back on a moderate growth trajectory, the Netherlands Bureau for Economic Policy Analysis (CPB) said in its latest projections. However, the government deficit will continue to rise in the coming years and, without intervention, will exceed the 3% of GDP limit set by the European Union by 2028.

“A wage catch-up and lower inflation mean households will have more to spend again,” CPB director Pieter Hasekamp said. The median purchasing power will increase sharply by 2.7 percent this year, and all income groups will see an improvement. However, the average household’s purchasing power will still be 0.5 percent below the 2021 level before the energy crisis.

Low-income groups will see a clear improvement in their purchasing power in the coming year, thanks to the increase in the minimum wage and associated welfare benefits and a higher rental allowance, labor tax credit, and child-related budget. “These policy measures will also reduce the number of people and children living in poverty in 2024,” the CPB said. Higher-income households will see their purchasing power decline somewhat, on average, because they benefit less from these policies.

The CPB anticipates wage increases will outpace inflation for the next two years. It predicted collectively bargained pay to grow by 6.0 percent in 2024, while per-hour wages in the private sector should grow by 6.3 percent. In 2025, those figures will be 3.9 percent and 4.2 percent, respectively.

The CPB expects inflation based on the consumer price index to reach 2.9 percent this year and 2.8 percent the following year. Unemployment could still rise to 3.7 percent this year and 3.9 percent in 2025, outpacing the slight growth of the labor force. Additionally, roughly 4.7 percent of the population will still be in poverty in 2024, a slight improvement, but that will grow to 4.9 percent a year later.

The analysis from the CPB accounted for GDP growth of 1.1 percent this year and 1.6 percent next year. At the same time, government spending was also likely to rise by 3.2 percent in 2024 and 0.9 percent in 2025.

The government’s gross debt will likely reach 46.8 percent of GDP this year and will rise higher to 48.1 percent if policies are left unchanged by the end of 2025. Government spending would rise from 43.5 percent in 2023 to 44.4 percent in 2024 and on to 44.6 percent the next year.

“With a view of the future, it is important that the government puts its finances on a sounder footing,” Hasekamp said. If nothing changes, the government deficit will rise significantly and top the 3 percent limit set by the European Union in the coming years. The CPB forecast a deficit of 3.3 percent of GDP in 2028 and 4.6 percent of GDP in 2032. Government expenditure is rising faster than taxes, and a course correction remains necessary.

The state of the treasury means the country’s politicians will have to make tough choices about how to deal with several serious social issues, the CPB said. This means possibly having to choose between stimulating the construction of more homes, contributing to the energy transition, spending more on health care, or investing in education.

“Not everything is possible, and certainly not at the same time,” the CPB stated.