The spread of the coronavirus remains a source of uncertainty, which determines the pace of recovery. Under a scenario in which a new lockdown is necessary, GDP growth would be about 2 percentage points cumulatively lower in 2021 and 2022. Partly because government support is assumed to be provided again under such a scenario, the rise in unemployment would be limited, up to 3.6% in 2022.

The economic growth figures in CPB’s baseline projections are slightly higher than those in the draft projections published in August. The difference is due to the decisions in the Budget Memorandum, including the additional spending on health care and security, which have been incorporated into the current projections. As a result, the government deficit in 2022 will be approximately EUR 4 billion higher, at -2.3% of GDP.

CPB’s Director, Pieter Hasekamp: ‘A year and a half has passed since the coronavirus pandemic started, and now it is clear that the worst-case economic scenarios did not come to pass. The Dutch economy proved to be very resilient. The financial support policy has played a major role in how well the labour market has weathered the crisis. Although a few sectors will continue to suffer the negative consequences of the coronavirus for a longer period, the labour shortages that existed before the outbreak of the crisis have already returned in many sectors.’

Government debt below EU limit value

Government finances have absorbed a large part of the economic blow. And they could; despite the high budget deficits of 2020 and 2021, the government debt has remained below the European limit value of 60% of GDP. Because of the strong economic recovery, next year, the debt level expressed as a percentage of GDP, will decrease again, according to the baseline projections. Under the scenario of a new lockdown, the debt ratio will continue to increase slightly in 2022 — but even under this scenario, spending cuts will not be necessary. This does not alter the fact that it would be wise to return to the budgetary rules that were abandoned during the crisis. Budgetary rules ensure that policy objectives are considered in an integral manner and tax revenues are spent efficiently.

The MEV also includes an update of CPB’s medium-term outlook (MLT) which CPB will use for possibly analysing the next Coalition Agreement. The MLT shows that, under unchanged policy, the budget deficit will gradually decrease to around -1% of GDP, over the period through to 2025. The debt ratio will decrease to close on 54% of GDP.

Attention for long-term challenges

Because of the strong economic recovery, there is no need for extensive recovery policy. The government can, however, promote economic development by offering more security for a number of urgent long-term challenges, such as climate and energy, physical environment, inequality regarding education and on the labour market, and the affordability and organisation of health care. Additional public investments are often advocated, but other policy instruments, such as changes in regulation and taxation, are also important. In the short term, given the shortages on the labour market, large-scale investments are difficult to realise and would possibly have a price-increasing effect.

In the analysis that is published together with to this MEV, CPB states that the recent surge in consumer price inflation in Europe and the United States is probably temporary. However, the longer term trend of rising prices of owner-occupied housing and other capital assets is a cause for concern, as it leads to growing wealth inequality and puts financial stability at risk. The increase is partly the result of monetary policy, but there are also domestic policy options in the way of spatial planning and taxation to counteract problematic house price increases.

Questions and answers

Why is unemployment rising slightly again in 2022, despite the strong economic recovery?
Unemployment is expected to increase, slightly, due to a strong increase in labour supply as well as to workers starting to work more hours. The latter is partly due to the end of the package of support measures. It may also cause some companies to run into difficulties.