Costs and benefits of budgetary measures 2011-2016
Audit of six years’ spending cuts and tax increases
A wide range of measures have been announced in recent years to improve the budget balance and thus strengthen public finances. Nearly six years since the first package of measures was agreed and nearly four years since the Rutte/Asscher government took office, we have audited whether the measures have been implemented and what effect they have had.
Many measures implemented
The government has announced some 512 measures to improve public finances by a total of €50.4 billion since 2011. It has successfully implemented 486 of them. The intended benefit for the public purse totals €47.4 billion. It is not clear from the way the measures have been recognised in the budget, however, whether the government has found compensation for the measures that it has not implemented.
Improvement in public finances
Public finances have significantly improved since 2011. Only the structural EMU balance and EMU debt need further improvement in order to put public finances back in order. Projections made by the Netherlands Bureau for Economic Policy Analysis (CPB) in September 2016, however, suggest that both these indicators will continue to improve in the years ahead and public finances will be returned to health even if there are no policy changes.
Benefits of measures difficult to pin down
It is highly likely that the implementation of the 486 measures contributed to the improvements seen in public finances. The extent to which they have contributed, however, is difficult to ascertain. There are two reasons for this uncertainty quantifying the financial benefit of the measures. Firstly, it is not always easy to separate a measure’s impact from the budgetary impacts of other developments, such as movements in interest rates, oil prices, euro/dollar exchange rates, etc. Secondly, there is little insight into the extent to which the benefits of measures are offset by leakage. Leakage occurs when a saving in one budget heading leads to higher expenditure (or lower revenue) in another.
Costs of implemented measures uncertain
In addition to the positive impacts (financial benefits), measures can also have negative impacts or costs. There can be economic impacts (e.g. consequences for economic performance) and social impacts (e.g. consequences for the quality of care or access to higher education). The negative social impacts of spending cuts and tax increases, however, are poorly understood. Again, there are two reasons for this. Firstly, economists do not agree about the scope and permanency of the harm that spending cuts and tax increases can do to the economy. Secondly, the budget and accounting system are geared to what the government spends money on, not what the government no longer spends money on.
We recommend that the Minister of Finance:
- make clear agreements with parliament as soon as new spending cuts and tax increases are proposed regarding the information it can expect on the measures and on how the government will account for their budgetary and economic impacts;
- clarify the costs and benefits of the most important measures (by budgetary impact and/or potential social impact), and the lessons that can be learned for future policy;
- specifically study what impact spending cuts and tax increases had on the Dutch economy during the economic crisis.
We further recommend that the House of Representatives also consider social impacts when considering and taking decisions on the coalition agreement in order to identify the impacts on other policy goals in advance. Understanding all the impacts of a coalition agreement generates better information.
In his response to our report, the Minister of Finance agreed that it was important to have information on the budgetary and social impacts of policy changes and noted that various tools are already in place to evaluate them. The impacts of spending cuts, according to the minister, were also considered by existing evaluation tools. The minister thought the quality of evaluations could be improved because well-founded conclusions on policy effectiveness could not be drawn from many of them. To make improvements, he, like the Budget Study Group, thought it would be useful to determine earlier in the policy process what information was necessary to monitor policy effectively. The information would then be available when the evaluations are made.