The ‘biggest post-war purchasing power contraction’ in four questions

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Without new policy, the average household will suffer a significant drop this year, the Central Planning Bureau (CPB) predicted today. Purchasing power fell by 6.8 percent. This is the picture if the cabinet takes no further action. What do the numbers say and how definitive are they? Four questions about today’s purchasing power estimate.

1. Why does CPB come up with this calculation?

These figures play an important role in the government’s decision-making on next year’s budget.

On Budget Day, the Central Planning Office will publish an update on these expectations. In this, the researchers take into account the effect of any additional measures that the government has taken to compensate the households extra this year.

2. What do the numbers say?

To begin with, this percentage does not directly say anything about people’s individual situation. How hard a household is hit by the increased prices – and when – largely depends on how well your home is insulated, for example, and when your energy contract ends.

But across the board, people will start to feel the loss of purchasing power. Last year, almost a million people lived in poverty. This means that there is not enough money to pay the total costs of food, rent, a minimal form of relaxation and social participation (membership of a sports club, receiving visitors). Next year, the number of people below the poverty line is expected to rise to more than 1.3 million. This includes 308,000 children.

Based on the data available, CPB says a decline in purchasing power like this has not been measured before. Even at the nadir of the economic crisis in 2012, the expected decline in purchasing power for all households was much smaller: 1.7 percent. The chief economist of the Central Bureau of Statistics says it is likely to be the biggest drop in purchasing power since the Second World War.

3. Which households are in trouble?

The unemployment benefits will fall less sharply in purchasing power for the rest of this year than the employed and retired, who will both experience a fall in purchasing power of 6.8 percent. This is because the minimum income, which includes many benefit recipients, this year gets 1,300 euros extra compensation for the energy bill on top of the compensation that applies to everyone. As a result, the decline in purchasing power is limited to 2.1 percent.

But for benefit recipients, who often barely make ends meet, the drop in purchasing power of more than 2 percent can hit harder than a drop in purchasing power of just under 7 percent for someone who earns well.

And next year, the purchasing power of benefit recipients will fall further by 3.6 percent. While the purchasing power of workers and pensioners will increase slightly again, CPB expects. This is because the additional energy compensation is currently a one-off benefit, and the government has not yet decided whether the minimum wage will receive this compensation again next year and how high it will be.

4. What options are there to absorb shock?

Several parties can lend a helping hand to the growing group of low- and middle-income people with financial problems. The employee organization FNV calls on the business world to implement wage increases. CPB also observes relatively favorable profit figures in business, which in their view leaves room for a wage increase.

In addition, the coalition is also being looked at. For example, the government will discuss the state budget and measures to do something about purchasing power next week. Deputy Prime Minister and Finance Minister Kaag warned today that it is “very difficult” to set up an additional policy this year. Still, she mentioned targeted measures as an option that would only benefit groups that need the extra support the most.

Supervisor De Nederlandsche Bank warned last week against providing large-scale support. Only people who really get into trouble should be helped, otherwise, according to DNB, the government would only add fuel to the inflationary fire.

Because if you compensate everyone, we all spend more money, which will only increase prices, board member Olaf Sleijpen reasoned in an opinion piece in NRC. This distinguishes these times of inflation from the economic malaise of the corona crisis, where large support packages from the government worked well according to DNB.

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