The challenge facing Dutch policy makers is the high level of private mortgage debt, coupled with growth in the proportion of people in work but holding relatively poorly paid jobs with fewer social benefits as they are self-employed or employed part time, Scope Ratings GmbH, Europe’s leading rating agency, notes in its report.
“The high wealth gap is crystallized in high private sector indebtedness with household debt currently at 106% of GDP, well above the European Commission prudential threshold of 65%,” says Bernhard Bartels, analyst at Scope.
On April 12, Scope affirmed the Netherlands’ AAA rating with a Stable Outlook based on its multiple macro-economic strengths, sound public finances and robust banking system but noted the medium-term risks associated with a widening wealth gap and increasing political fragmentation.
Low financing costs and the existence of a generous mortgage interest deductibility mechanism have encouraged debt accumulation in the Netherlands. At the same time, salaries of low- and middle-income households have stagnated despite a rise in labor productivity. The debt-to-income ratio for the Netherlands stood at 210% in Q3 2018, the highest among euro area countries.
“High levels of household debt present a macro-economic risk as economic shocks are exacerbated by budget-constrained households,” says Bartels. The Dutch government has planned a gradual phase-down of the mortgage interest deductibility mechanism, which is due to start in 2020 and will contribute to reducing the debt bias.
The economy is officially close to full employment, but the labor market is increasingly split between many part-time workers and self-employed persons who, on average, earn lower wages than full-time employees and have limited social protection. The European Commission and IMF have encouraged the government to implement policies to narrow the gap with full-time employees and promote higher wage growth for low income groups. The labor income gap is also reflected in a widening dispersion between poor and rich households. While the average level of household wealth has increased between 2006 and 2017, the median declined over the same period, leaving 50% of households poorer in 2017 than they were in 2006.
A widening wealth gap is an emerging weakness in the Netherlands’ outlook, which is also reflected in increased political fragmentation. In the provincial elections on 20 March 2019, the four-party coalition of Prime Minister Mark Rutte lost its majority in the first chamber (‘Senate‘), which is politically important as the first chamber must agree on all legislative proposals from the Parliament (Second Chamber). “The new coalition requires the government to include the opposition in future law-making, which could lead to political stalemate,” says Bartels. The electoral success of a new right-wing populist party, the Forum for Democracy, during provincial elections in March could jeopardize the coalition’s long-term plans, such as the proposal to reduce greenhouse gas emissions by 49% of current levels by 2030. However, given the simultaneous success of the Green party, the coalition government is under pressure from both sides of the political spectrum ahead of 26 May elections to the European Parliament.