An influential group of officials is advising a coming administration to cut 7 billion euros to keep public finances healthy. In doing so, they are deliberately shifting part of the problem of aging to the future. Is that wise?
Over the next week and a half, the financial experts of political parties have to work hard. On Wednesday, July 23, they must submit their financial plans to the Central Planning Bureau, which will do the calculations.
Financial experts have been inundated over the past week with official advice on what to do. On Thursday, the Central Planning Bureau presented its economic estimates ahead of time so that political parties can use them to calculate their programs. On Friday, a committee of wise men called the Study Group on Fiscal Space (Studiegroep Begrotingsruimte) came up with the advice to cut 7 billion euros in the coming cabinet period, or raise taxes. Later that day, another official report was thrown over the fence, containing concrete austerity proposals, the euphemistically named "retrenchment list.
Fewer cuts needed
So plenty of ingredients to puzzle over the coming week. Each party will make its own mix of austerity proposals and tax increases. This time, moreover, it will be a lot easier than two years ago, when the Study Group recommended cuts of no less than 17 billion euros. The difference, explained Bas van den Dungen (the highest ranking finance official and chairman of the Study Group) Friday at a press conference, is half due to cuts made by the Schoof administration (on education and development cooperation, among other things) and roughly the other half due to better than expected economic growth.
But something else is at play. The Study Group advises political parties to use two "anchors" for fiscal policy. The first anchor is steering for a stable national debt (now 45% of GDP), so that no bills are passed on to the future. And the second anchor is to ensure that the budget deficit remains around 2%, so that there is room distance to the European maximum standard of 3%. This prevents the need for immediate cuts at the slightest setback.
That sounds sensible. And it should be, since the study group includes the boss of the Central Planning Bureau (Pieter Hasekamp) and the director of De Nederlandsche Bank (recently Olaf Sleijpen) and top officials from Finance and other ministries. But the Study Group is still making a choice.
'Society must cope'
It sees that the costs of aging are beginning to spiral out of control. If nothing is done, government spending will rise from 40% of the economy now, to 50% in 2060, the Planning Bureau calculated. That's still a long way off, but even in 2030 the costs of AOW, health insurance and elder care are already rising substantially.
However, the Study Group advises a coming cabinet not to solve that problem all at once, but to solve only "its" fair share. Part of the interventions should be left to future cabinets. The reason, Chairman Van den Dungen said at the press meeting in response to questions from Hollands Welvaren, is that "society must be able to cope. Excessive cuts in old-age provision and health care would cause great unrest.
Study group has become more flexible
That's quite a twist. Normally, the Central Planning Bureau and De Nederlandsche Bank are the agencies that exhort politicians to be frugal and take painful but necessary measures. During the euro crisis, the Study Group's motto was: get rid of the budget deficit, even if that means cutting spending by 20 billion euros. So now their directors, as members of a civil service commission, advise: take it easy, so the line doesn't break.
To illustrate how "easy" 7 billion euros of cuts are: Those who merely roll back the promised halving of the deductible in health care - i.e., simply let the current situation continue - already save 4.7 billion euros and thus have already pocketed almost two-thirds of the needed cuts. (However, whoever wants to keep neatly to the new NATO standard of 3.5 percent must also find another 7 billion euros for defense.)
Uncertainty lingers
It sounds logical not to let a coming administration solve all the problems. Yet it is not. After all, it then remains obvious to citizens that the costs of aging are still not covered and more cuts are likely to follow. What those look like, however, is not known. Will you have to pay more co-payments for care? Will AOW benefits be cut back? Will there be a higher inheritance tax? Will your AOW start later in life?
A reform cabinet could end all that uncertainty in one fell swoop.
This makes it impossible to do good financial life planning. This is especially important for older people, because they are at the end of their careers, or are already retired, and thus find it difficult to increase their income. Also, younger people will continue to feel for longer that the old generation is being pampered, while they will be the ones footing the bill.
A reform cabinet could end all this uncertainty at a stroke. Based on measures in the retrenchment list, for example, 15 billion euros could be cut in the long term as follows. Slowly downsize the state pension to the level of welfare, link the state pension age back 1-to-1 with increasing life expectancy, and keep the deductible what it is. There is still EUR 2 billion to be gained if, for example, people start paying more themselves for aids, medicines and home care. Of course these are not nice measures, but the own contributions to care are relatively low in the Netherlands: in many other Western countries it is more common to pay more yourself.
Whoever thus cuts 17 billion euros from the cost of aging in one fell swoop also radiates: with this, the citizen gets security. Whoever cuts "only" 7 billion now also knows that more will follow. Because of course the Netherlands is not only struggling with aging.
- So a coming administration "must" invest an additional 7 billion euros in defense, but by 2035 another 13 billion euros per year will be needed. That money, too, will have to be found somewhere.
- The 35 billion euro climate fund established by Rutte 4 will expire around 2030, while CO2 emissions still need to be reduced further. That most likely means several billion euros per year will still be needed.
State pension and health care costs to rise by 50 billion euros until 2030
CPB also always publishes a dataset of all kinds of figures with its estimates. Based on this, it can be calculated that the costs for AOW, elder care and health insurance will rise from 154 billion euros this year, to 204 billion euros in 2030. Next to this 50 billion euro increase, the 7 billion euro cut (or tax increase) proposed by officials pales in comparison.
For politicians, handing out "sweet" is more appealing than "sour. And now even the strict accounting masters of yesteryear are saying that a 2% budget deficit is fine, while the cost of aging increases and unfunded expenses for defense and climate are still coming. Under these circumstances, how many political parties are actually going to cobble together enough unpopular measures to throw into the CPB's mathematical models on July 23?