The Dutch government has announced it will implement a substantial set of measures per the first of July, aimed at dampening the decline in purchasing power driven by high inflation. Excise duties on fuel and VAT on gas and electricity will be lowered. Moreover, 800.000 minima-households will receive a lump-sum compensation of 800 euros. The total costs of this compensation scheme will cost the state treasury roughly 2.3 billion euros. Bas Jacobs, Professor of Public Economics at Erasmus School of Economics, argues why this scheme is inefficient in interviews with RTL Nieuws and BNR Nieuwsradio (11 March 2022).
Loss in purchasing power
Because the prices of fuel and gas have risen tremendously recently, our country has become poorer than before. And, since everyone in society is affected negatively by these higher prices, we cannot deviate this loss in purchasing power. However, we can think about how we should divide this pain equally among individuals. So, it can be perfectly well understood that we compensate especially the low-income group in society since they spent a relatively high amount of money on energy and fuel. This implies that the middle- and high-income groups have to be taxed additionally on top of their already lost purchasing power.
Jacobs' critique
By reducing the excise duties on fuel and VAT on gas and electricity, the Dutch government is squandering public money, because the government is compensating everyone instead of only the disproportionally affected groups in society. The government is therefore shifting the bill of this compensation scheme to future generations.
Supply constraints
Jacobs argues that this compensation scheme will not be enhancing for the demand side of the economy. We already have a substantial budgetary policy in place, lots of unspent private savings due to the COVID-pandemic, and monetary institutions who execute expansionary monetary policy. Thus, the demand side of the economy is already extremely high. In the meanwhile, the supply side of the economy is distorted which implies that the economy simply cannot satisfy any additional demand-sided impulses. Additional compensation will therefore merely result in even higher inflation.
Elective reasons
The Professor reasons that perhaps elective reasons have played a role in picking this scheme over the economically more justifiable scheme. With the municipal elections coming up, the government tries to win the favour of citizens by increasing their purchasing power. Moreover, Jacobs argues that the Dutch government has been exercising inefficient policy throughout all their plans. Billions of euros are spent on lots of inefficient plans, which leads to unnecessary high economic costs relative to the gains.
Unrealistic expectations
The government will implement these compensations on the first of June, which has led to questioning faces from society. The Professor explains that he senses that our society has gotten unrealistic expectations about what the state can do. The fact that the government is able to set up a whole compensation scheme in just a few months’ time, is quite an accomplishment. The laws substantiating this compensation scheme first have to pass the Dutch Lower House. Secondly, these laws have to pass the Dutch Higher House, and finally, the Dutch tax authority has to adjust their computers to the new scheme. All this costs time.
The Professor concludes by advocating for all of us to take a broader perspective on this loss in purchasing power, especially with the recent events in Ukraine. 'The world is on fire, and the Netherlands is complaining about a 2.7% drop in purchasing power.' He argues that the Netherlands is an extremely wealthy country and that we are - and should be - able to take this loss in purchasing power without compensating everyone.