Short-term thinking wins out over long-term vision

Political stability, labour, infrastructure and physical space - key indicators of the quality of the Dutch business climate - are under pressure in the Netherlands. The government should prioritise long-term solutions to problems in these areas. Instead, short-term thinking dominates budget plans, says PwC Chief Economist Barbara Baarsma.  

Let me start with something positive: the business climate is prominent on the cabinet's agenda. Moreover, it is positive that the cabinet has backtracked on several tax measures that would have a negative impact on the business climate, such as the reversal of the intention to scrap the 30% rule for highly educated knowledge workers, although it will be made slightly more austere. We also see significant remedial work on taxes on dividends and share buybacks.

Besides these fiscal repair works, however, the new cabinet will have to invest in the business climate to reverse a further downturn. The Business Climate Heatmap, which we released shortly before the Budget Day, shows that the business climate in the Netherlands has deteriorated since 2018. The short-term thinking in the current budget plans will not change this. I would like to use our heatmap to show what exactly the plans mean for the Dutch business climate. 

Although the cabinet's plans cover many of the 60 indicators in the Business Climate Heatmap, I now focus on three categories, on which the new government policy will have a negative impact: 

• Politics, Regulation, Institutions and Society 
• Human Capital 
• Infrastructure and Physical Space

Politics, Regulation, Institutions and Society  

This category includes indicators of social, democratic, governance and regulatory stability. Many of these indicators have deteriorated since 2018, affecting political stability and regulatory certainty. Both are important conditions for companies to make long-term investments.  

Although the government wants to improve the business environment, I doubt that the current plans will lead to more political and regulatory stability. First, the planned spending stimulus is likely to have adverse effects by contributing to the overheating of the economy and thus being procyclical. Indeed, at this stage of the business cycle, with an expected gross domestic product (GDP) growth rate of 1.6 per cent in 2025, the economy is already close to its maximum productive capacity.¹  

This is also reflected in the inflation and wage figures: although inflation is expected to fall to 2.8 per cent for 2024, it will remain well above the two per cent target.² Moreover, collectively agreed wage increases are estimated at 5.9 per cent for 2023, 6.6 per cent for 2024 and 4.3 per cent for 2025.³ Labour shortages, grid congestion, congested infrastructure and a lack of physical and environmental space also point to overheating of the economy.

Government spending is mainly focused on boosting purchasing power in the short term rather than investing in long-term economic growth and will only increase inflationary pressures and volatility.

In addition, these policies do not leave the government much room for manoeuvre in case public finances deteriorate more than expected. In several areas, government spending could be much higher than budgeted. This applies, for instance, to the loans granted to TenneT for their German grid. After loans of thirteen billion euro and twelve billion euro in 2024 and 2025, the government is providing an additional bridging loan of two billion euro for 2025 and seventeen billion euro for 2026.⁴ Additional loans are likely to be needed in the future. 

Furthermore, additional spending may also be needed to resolve the box 3 issue, the allowance scandal (‘toeslagenschandaal’), tax system reform or other tax-related issues. I gave another example in an earlier blog, namely that halving the deductible in healthcare premiums is not good economic policy. This only increases health insurance premiums and demand for care. In addition, it is unclear whether cuts in migration, remittances to the EU and the civil service will actually deliver the expected savings.   

The third reason why I doubt that the current cabinet plans will lead to greater political and regulatory stability is the risk that the government will prioritise short-term ad hoc cuts. This is because the government has agreed that in case of fiscal setbacks, cuts elsewhere will immediately follow. This will hurt the business environment because it comes at the expense of predictable and consistent government policies. 

This has already been a weakness for the Netherlands in recent years. And by budgeting so close to budget norms, the government is further worsening the business climate in this regard. Budget space for considered long-term investment is also becoming increasingly limited. This particularly affects the most important asset of a highly developed knowledge economy like the Netherlands: human capital.

Human Capital  

The human capital category focuses on the availability, quality and productivity of the workforce. Regarding availability, the heatmap colours red. This indicates a deteriorating trend. Nevertheless, the government has clearly expressed its desire to reduce labour migration of certain groups of workers. By doing so, it hopes to ease the pressure on public infrastructure and services. Therefore, boosting labour productivity growth is essential for a healthy business environment. However, as the government cuts education, research and science, productivity will lag behind and the business climate will deteriorate.

In total, the government is proposing nearly two billion euro in cuts to education. This comes at a time when the educational performance of Dutch students, as measured by PISA scores, has fallen sharply over the past twenty years, more so than in other European countries. This is very worrying because education is the main driver of labour productivity growth in the Netherlands, we showed in an earlier study. That study also showed how labour productivity growth in the Netherlands lags behind most European countries and the US.

After education, innovation is also an important driver of labour productivity growth, as our research has demonstrated. While the Netherlands has improved in some of the human capital and research indicators recently, the total (public and private) R&D expenditure currently amounts to 2.3 per cent of GDP, which is below the OECD average.⁵ Looking into the future for research and innovation funding, although there will be more funds available for Invest-NL and Invest-International with some one billion euro extra available up to and including 2029, there are several measures of cutting public research funding.

The government is discontinuing start-up grants at universities worth 175 million euro. In addition, the government will reduce the funding of the Netherlands Organisation for Scientific Research (NWO) by 27 million euro in 2030 and forty million euro in later years. Furthermore, the government is cutting 125 million euro from the Research and Science Fund. Additionally, the government has decided to phase out the National Growth Fund, skimming off the unallocated funds that were earmarked for future investment rounds, totaling 6.8 billion euro. Thus, it is highly likely that reduced research potential will severely impact innovation in the Netherlands. 

This brings us to the third point: without investments in education and innovation, labour productivity growth and economic growth potential will be lower. That will make it more challenging to solve other problems related to the business climate, such as solving the net congestion, sufficient maintenance of motorways, railways and waterways, and investments in energy transition, low-nitrogen agriculture and adequate water quality. 

Infrastructure and physical Space 

The Infrastructure and Physical Space category focuses on three areas: decarbonisation and environmental performance, housing and the quality of transport, and physical and digital infrastructure. For now, several of the indicators in the energy and environment, and infrastructure and transport areas have performed well.

The Netherlands has done well over time by reducing carbon intensity (emissions per capita) and nitrogen emissions in the economy. The heatmap indicates that emissions have fallen but does not show whether that is sufficient to stay within the legal standards. In terms of carbon and nitrogen as well as water quality (not yet included in the heatmap), additional policies are needed to achieve the set targets. Experts stress that the government agreement lacks the required policies.⁶ Until effective policies are implemented, economic activity will be constrained by the limited environmental space, which has a negative impact on the Dutch business climate.  

When it comes to infrastructure, both physical and digital, the Netherlands still scores relatively well. However, to maintain rail, road and water infrastructure quality and capacity and tackle issues such as electricity grid congestion, the right investments and policy decisions must be made.

Ultimately, the government should set the framework conditions for a shift from low-productivity to high-productivity activities while steering towards activities that have a more limited spatial and environmental footprint and do not rely on underpaid labour. Otherwise, the scarcity in terms of labour, physical and environmental space, and infrastructure will become too severe, especially if short-termism keeps triumphing over solving longer-term issues.

Research support by Guntars Upis. 

_{¹CPB (2024-09): Macro Economic Outlook 2025. 
²CPB (2024-09): Macro Economic Outlook, DNB (2024-06): The state of the Dutch economy.
³CPB (2024-09): Macro Economic Outlook 2025
⁴Tennet (2024-09-18): The Dutch Ministry of Finance providing new and extended loan facility.
⁵OECD (2024-03): OECD Main Science and Technology Indicators. Only 1.5% of the 2.3% is spent by the private   sector Rijksoverheid (2024-09-17): Miljoenennota 2025.
⁶Netherlands Environmental Assessment Agency PBL (2024-06-12): Reflectie PBL op het Hoofdlijnenakkoord 2024-2028}