Leading up to Budget Day, there is a lot of pressure on the government to do something about the high inflation. Tax breaks, income support and a ‘freezer sickness tax’ for companies with mega profits are all mentioned.
If we take a step back for a moment, a wider problem for public finances looms. All forms of development require structurally higher public expenditure. Each one is necessary, but how do we get it together?
Think first of all about rising defense spending. For a long time, the Netherlands benefited from the peace dividend after the Cold War and significantly reduced defense spending. The war in Ukraine makes it clear that this is unsustainable, and spending has risen again in recent years. But we are not yet at the NATO target of 2% of GDP. A senior NATO general recently said that even that will not be enough. There is a lot of deferred maintenance and a new generation of defense technology is even more expensive.
So look at sustainability, the other big issue of our time. All studies point to an increasingly alarming development, and we need to act quickly to make our economy more sustainable. International agreements and the European Green Deal have already been announced on this. This is a transition that will require huge investments in energy, materials and food in the coming decades.
So beware. It is still cracking due to the after-effects of the previous corona waves. Corona aside, the underlying trend in healthcare is one of ever-increasing costs, strongly driven by an aging population, as the previous WRR report on sustainable healthcare has shown. A possible new wave of corona will again put a lot of pressure on care and of course require all kinds of accompanying support packages.
There is more deferred maintenance. Think about the big construction task and about strengthening the infrastructure. The aforementioned developments contribute to this: climate change requires different infrastructure, aging requires a different type of housing.
Finally, consider the technology necessary for the Dutch economy. Major new technologies such as artificial intelligence, 5G networks and quantum computing are crucial for our future earning capacity, and they require large investments from private and public parties. As in many other European countries, Dutch spending on research and development is below the OECD average, which is a worrying trend. Especially Asian countries such as China and South Korea, but also the USA, are investing massively in these new technologies.
We haven’t even mentioned the current pressure on Dutch education.
There is a lot at stake in all these areas: military threats, ecological destruction, too little care and housing, loss of competitiveness. Costs for each of these issues are required. But how are we going to manage all those expenses?
This must now be done in a context of slowing growth and high inflation, which is eroding incomes. That inflation leads to rising interest rates, which makes it more expensive to borrow money for investments.
Fortunately, the Netherlands has a relatively low national debt. This does not apply to many other countries, which also have large tasks. Sri Lanka recently went bankrupt. The same threatens several developing countries, and the debt burden of southern European countries such as Italy in particular is worrying.
The approach to this whole package requires a wider restructuring. First of all, it requires reflection on the old approach that has caused all the lapses in maintenance in so many areas.
We must pay more attention to the long-term development. Think less in terms of costs and more in terms of investments that improve society, financially but above all in other ways. Much more attention is needed to prevent problems. We must use technology more intelligently and seek synergy between the various major issues. Mission-driven politics can, for example, strengthen the economy and at the same time contribute to sustainability or security. For example, the recent US CHIPS Act is aimed at a competitive US economy, but also ensures that huge amounts of money go to sustainable technology.
The danger is that because of the combination of all these problems, we will do everything a little bit. Or even worse, that we only focus on the acute problem of the moment at the expense of the other problems. A broader response is needed.
Haroon Sheikh is a senior researcher at WRR and professor after special appointment at VU. Luuk van Middelaar is absent this week.