Keynesian Policy by Default: How Political Gridlock Leads the Dutch Government to Pay Off its Debts

Makineia, a.d. VII Id. Jul. MMDCCLXX A.U.B.,

As per the 19th of July, more than four months after the parliamentary elections, Dutch political parties have not yet formed a new government, leaving the ‘demissionary’ second Rutte cabinet as a caretaker government. Seeing the close relation between executive and legislature in the Dutch parliamentary system – governments usually depend on a majority coalition in parliament, and propose legislation which parliament passes, amends or rejects – legislation has essentially ground to a standstill. While the lack of legislative production may sound worrisome, in this particular case there is one major unexpected advantage to this inertia. The complete inability to change the status quo in combination with an unexpected budget surplus has led the Dutch government to do what it otherwise hardly ever does: pay off public debt. While the Dutch government may see its debt as a percentage of GDP decrease in times of economic growth, it hardly ever pays off its debt during the boom. Right now, however, the Dutch government is reducing its debt burden, which means that when a new economic recession hits, borrowing money will be less costly and problematic for the Dutch government. The current status quo is essentially Keynesian policy by default.

The graph presented below gives a short overview of recent budgetary developments in the Netherlands. After some small budget surpluses in the late 2000s, Dutch public debt exploded after the economic crisis of 2008 arrived in the Netherlands. The Great Recession ended in 2014, when GDP started growing again. Beyond the budget deficits caused by falling tax revenue and increased expenditure on social benefits (especially unemployment benefits), the Dutch government also spent some €90billion on bailing out banks (not included in this graph). So public debt ballooned from a very respectable €262billion (42.7% of GDP) in 2007 to €451billion (68%) in 2014. Since 2014 public debt has been falling mainly because of irregular financial transactions, such as banks repaying their debts to the Dutch government and the sale of the nationalized ABN Amro bank, in spite of deficits on the regular balance.

Surpluses

However, until very recently there was no prospect of paying off public debt due to a budget surplus based on higher regular revenue than regular expenditure. As late as September 2016, when the Dutch government presented its budget for 2017 and a quarterly report on the 2016 revenue and expenditure, the Dutch government forecasted a deficit of €8billion over 2016 and of €3billion over 2017. Surprisingly, in February 2017 the Ministry of Finance announced that instead of an €8billion deficit over 2016 there actually was a €200million surplus. In March 2017 it announced that the surplus was actually €2.9billion. Similarly, the forecasted deficit of €3billion over 2017 has been changed to a forecasted surplus of €1.4billion.

However, while deficits have turned into surpluses, Dutch political parties have not been able to use the surpluses to increase expenditure or decrease the tax burden. To start, when the budget for 2017 was proposed in September 2016, the government did not expect a surplus. Moreover, as the parliamentary elections were quite soon, in March 2017, the Rutte II government essentially proposed to parliament to maintain the status quo in its 2017 budget, leaving new measures to the next government which would have a fresh mandate. This essentially made 2017 a status quo year with regards to budget intentions. Had a government quickly been formed, it would have been imaginable that it would already have increased expenditure to some degree in 2017. However, now the negotiations to form a new government draw on, the surpluses of 2017 will also be used to pay off public debt. Furthermore, if the negotiations last until very shortly to the third Tuesday of September (Prinsjesdag, the day on which the Dutch government presents its budget), the budget of 2018 will also be prepared by the demissionary Rutte II government. This would mean yet another status quo budget, which entails that a large share of the 2018 surpluses will also be used to pay off public debt.

While gridlock can be lethal to democratic systems (see for instance Chapter 11 of Wintrobe’s The Political Economy of Dictatorship, with the prime example of the rise of the Nazis in Germany), in this case gridlock is not much to be worried about. The status quo in the Netherlands is largely safe and sound. Although I believe there are very important changes to be made (preventing another housing bubble, investments in defense, wage increases), the economy is growing and the country is stable. This means that paying off public debt is perfectly sound anti-cyclical Keynesian policy. By repaying public debt the Dutch government prevents overheating of the economy – although this is not a main concern with economic growth around 2% – and, more importantly, paying off debts creates space to borrow money when the next economic crisis hits. Although €6billion of repaid debt is nothing compared to the tens of billions spent during the Great Recession, there is no reason to spend it for the sake of spending either. Making the tax system more efficient and limiting overregulation in healthcare are other ways to increase revenue and decrease expenditure, creating budget space to reduce public debt and increase expenditure on whatever the next government finds important.


Bottom Line: Entirely by accident the Dutch government is repaying its debts. Given the gigantic debt burden caused by the Great Recession and given the largely satisfying state of the country, this is sound Keynesian policy (if by default).

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