Worst-case scenario: Dutch purchasing power drops by 3.4% due to war in Ukraine
The purchasing power of Dutch residents could fall by more than 3% this year, partly due to the war in Ukraine, the Central Planning Bureau (CPB) has calculated. The conflict has caused a sharp rise in energy prices, which has added to already high inflation in the wake of the coronavirus pandemic.
The CPB has developed different scenarios. In the worst case, purchasing power will fall by an average of 3.4%. The intermediate scenario, which the CPB uses for its new major economic estimate, projects a 2.7% drop in purchasing power. And in the best case scenario, purchasing power will fall by 0.6%. In these calculations, the CPB assumed inflation of 6%, 5.2% and 3%, respectively.
“We assume that sooner or later everyone will feel the higher energy bill in their wallet,” said CPB Pieter Hasekamp. “But whether it’s a hit or a hit depends on the share of energy costs in disposable income.” Hasekamp said he is concerned about low-income people, especially if they also live in poorly insulated homes. “These types of effects are not visible in standard purchasing power charts.”
Other possible economic effects of the war, for example, the impact on trade, financial markets, investment and consumption, are still limited, the CPB said. CPB mathematicians assume that the economy will continue to grow in the coming years, but not as strongly as in 2021 the economy rebounded from its contraction during the first year of coronavirus.
The size of the economy will grow by 3.6% this year and 1.7% next year, the CPB predicts. Growth in the coming years will be driven by additional government investments under the coalition agreement. The labor market will remain tight, so unemployment is likely to rise only slightly.
Politicians in The Hague eagerly awaited the purchasing power figures. There is enormous pressure on the Cabinet to compensate for huge increases in energy bills and rising gasoline prices. The Cabinet has until the Spring Memorandum at the latest, that is to say on June 1, to say what measures it will take to this end. But coalition parties in parliament are already pushing for more urgency.
“We cannot expect miracles from the Cabinet, but we can expect action,” ChristenUnie MP Pieter Grinwis said in response to the CPB figures. “Certainly for people who can least afford it, but also for people with average incomes.” He is thinking, for example, of additional support for low-income families to pay their energy bills and a temporary reduction in excise duties.”
D66 MP Steven van Weyenberg acknowledged that “war in Europe is not without damage to our economy and to the wallets of our citizens”. But he too believes that the Cabinet must quickly come up with a plan to help people “who are now seriously trapped by the sharply rising energy bill”.
CDA MP Inge van Dijk called the CPB’s estimates “grim and worrying” and called for “targeted support” for those who need it most. “We must reach out to people who risk going through the ice by limiting the loss of purchasing power as much as possible.”
On Tuesday night’s Op1 TV show, Finance Minister Sigrid Kaag declined to say what the Cabinet would do in the face of falling purchasing power. She said the Cabinet was looking at several options and would focus on the lowest incomes. As an example, Kaag mentioned that the government could reduce VAT on energy or excise duties on fuel.
Prime Minister Mark Rutte told parliament on Tuesday that the Cabinet will likely only be able to soften the blow to purchasing power, not prevent it altogether. He described as “illusory” to give guarantees on this subject.