The Schoof cabinet wants to work on a productivity agenda, as stated in the coalition agreement. However, according to PwC's chief economist Barbara Baarsma, the Budget Memorandum shows a different reality: cuts in education and research, no buffer for financial setbacks, and inconsistent policies.
It offers a way out in a tight labour market, creates room for wage increases for workers, and provides a glimpse of future growth. Guess what it is? Labour productivity growth!
Labour productivity growth in the Netherlands lags behind most European countries and the United States, and that is concerning. While the previous 'main agreement' of the cabinet did not mention this lagging growth or formulate policies and allocate resources to stimulate labor productivity development, the tone of the actual coalition agreement is different. The Schoof cabinet wants to work on a productivity agenda.
The productivity agenda is unclear
The government program does not specify what such an agenda entail. However, if it closely aligns with the problem analysis recently sent to the House of Representatives by the Minister of Economic Affairs, it offers hope. This analysis recognizes that investments in education and training, research and development, and process and product innovation are essential to drive productivity. The same applies to replacing old, low-productivity activities with new, more innovative activities. The problem analysis also acknowledges that productivity growth benefits from predictable and workable laws and regulations, which are currently unpredictable and unnecessarily complex.
However, when looking for corresponding policies and resources in the Budget Memorandum, one will be disappointed. The budget cuts for education, knowledge, and research outlined in the main agreement are not reversed in the Budget Memorandum. In fact, the Ministry of Education, Culture and Science budget is cut by 362 million euro as part of the one billion euro generic budget reduction for government subsidies.
The government claims to aim for an investment of three per cent of GDP in research and development by 2030. Currently, it stands at 2.3 per cent, with 1.5 per cent coming from the private sector. However, the government is still cutting overall funding for R&D and innovation: while there is nearly one billion euro extra for InvestNL, there is a significant reduction of eight billion euro in funds dedicated to R&D and sustainability.
The business climate is high on the agenda of the cabinet too
The fact that Dutch companies invest less on average than other prosperous countries may be due to the inconsistency and unpredictability of our government policies. A recently published study by PwC on the business climate shows that the Netherlands has performed worse in this regard over the past ten years. Fickle policies are undermining business investments and, consequently, productivity growth.
In addition to productivity growth, a second pillar of the economic policy of the Schoof cabinet is a healthy business climate. The Budget Memorandum largely reverses measures that were suddenly introduced at the end of last year, such as the abolition of the 30% ruling for highly skilled migrants and the regulation for share buybacks. Apart from this fiscal repair work, it is unclear how the government plans to position the Netherlands in the top five most competitive economies in the world.
But business climate encompasses more than taxation
It is overlooked that the business climate encompasses more than just taxation. Companies need an adequately trained workforce, space, and network capacity. Environmental capacity is also necessary: the Netherlands needs to solve the nitrogen crisis and prevent being constrained by water quality regulations when the Water Framework Directive becomes definitively effective by the end of 2027. However, the government program does not provide the necessary policy framework that redistributes scarcity from low-productivity to high-productivity companies with a lower spatial and ecological footprint. By not making choices, the government fuels uncertainty for businesses and undermines their willingness to invest.
Risk of ad hoc adjustments and thus increasing policy unpredictability.
The Schoof cabinet does not build many buffers into the budget. In case of setbacks, as agreed in the main agreement, immediate budget cuts will be implemented. So if the EU does not agree to €1.6 billion lower contributions, ad hoc adjustments will have to be made. This increases the unpredictability of policy. Instead of overestimating itself, the Netherlands should strengthen the business climate, including by close cooperation in the EU and further integration of the internal services and capital market.
Because a good business climate and higher labour productivity growth are strongly related, a coherent agenda would be promising. Hopefully, the government will still find broad support in parliament for such a strong future-oriented productivity agenda.
How does the Dutch business climate look like?
Our Business Climate Heatmap shows it.
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