By Barend ter Haar.
In a famous experiment young children were left in a room with a marshmallow on the table. They were told that they were allowed to eat it, but if they could withstand the temptation for fifteen minutes, they would receive a second marshmallow. The children that were able to withstand the temptation of instant gratification proved to be more successful in later life.
The Dutch government is now conducting a comparable experiment with Dutch Parliament by proposing tax reductions to an amount of five billion euro. This proposal is not the consequence of an unexpected budget surplus. On the contrary, the budget deficit is still there, so the tax reductions will make the deficit even larger.
Of course, there are circumstances that can justify an increase of the budget deficit. One of them would be to fight a recession. However, the economic recession has come to a halt in the Netherlands, so stimulating the economy by lowering taxes would be procyclical rather than countercyclical.
Another reason for a temporary increase of the deficit would be to facilitate a fundamental reform of the tax system. But that is not the case.
A third reason would be to repair previous mistakes. In order to lower the budget deficit the Dutch government has for example drastically economized on diplomacy, international cooperation, defence and security in the expectation – or hope – that the Netherlands could do with less diplomacy, less international cooperation, less defence and less security. However, events have proven the government wrong.
Unexpected problems, such as climate change and growing numbers of refugees trying to reach Europe, would be a fourth reason. (Leaving aside the question why the underlying problems received so little attention before.)
Finally, a growing deficit might be justified to support people who threaten to collapse under the poverty line. However, none of these arguments apply. The main effect of the proposed tax reduction will be that middle and higher incomes will have more money to spend, money that the government will provide by borrowing more. Clearly, few people will complain about lower taxes, but the question is whether the proposed tax reduction will also serve their interests in the longer run.
On 18 November of the Second Chamber of Parliament proved unable to withstand the temptation of instant gratification and failed the marshmallow test. In December the First Chamber will have a chance to prove it is wiser.
