Government budget deficit & Housing market
A government budget deficit arises when the government spending in any one year is higher than its revenue. The revenue or income of a Government consists of direct and indirect taxes and dividends on its state holdings (e.g. natural gas here in the Netherlands). The expenditure consists of the costs and spending of the ministries.
The Ministry of Finance finances the public debt by issuing bonds on the money market. When a bond matures, the loan must be repaid. And when government expenditure is higher than its revenue, the amount that needs to be paid back will need to be borrowed again. Also the repayments of the public debt are part of the expenditures. These circumstances create a budget deficit.
The Stability and Growth Pact (SGP) is an agreement between the 27 Member states of the European Union, to facilitate and maintain the stability of the Economic and Monetary Union (EMU). According to the EMU:
› a country should have a budget deficit of no more than 3 percent of its Gross Domestic Product
› the public debt should not exceed 60 percent of its Gross Domestic Product
Recently Mark Rutte, prime minister and leader of the VVD (Liberal) party, and Maxime Verhagen, leader of CDA (Christian Democrats) (the two coalition partners), together with the support of PVV leader Geert Wilders, spent seven weeks locked up in the "Catshuis" in the Hague trying to reach agreement on additional budget cuts of 14 billion euros to ensure that the Netherlands continues to meet EMU standards.
On Saturday April 21, Geert Wilders unexpectedly broke off all negotiations. This resulted in Mark Rutte offering the resignation of his Government to the Queen the following Monday.
Unexpectedly, and to the relief of the financial markets, VVD and CDA received help from two other parties to reach a majority vote. Groen Links (the Green party) and Christian Union (CU) came to the rescue and agreed on major budget cuts to reach the required maximum budget deficit of 3 percent.
For the housing market this meant some good news and some bad news.
Impact to the Dutch housing market
The bad news is that banks will lend up to 100 percent instead of the current 106 percent of the purchase price after January 1, 2013. This means that the transfer tax and other buyers’ costs will need to be saved up for. Partly interest-only mortgages will also cease to exist and thereby increase the monthly payments of first time buyers. Hardly a stimulating measure for Holland’s ailing housing market.
The other news is that as of January 1, 2013, new mortgages will have a different tax rebate method. The tax rebate will still be granted, but will gradually reduce over a period of 30 years down to zero. Is this bad news? Well, at least the timing is bad. The housing market needs a boost rather than additional deterrents.
The good news is that the temporary measure of a reduced transfer tax (from 6 percent to 2 percent) will be continued. The other good news is that for existing mortgages, the tax rebate on mortgage interest payments will continue. Even when a mortgage is refinanced this rebate will be respected. Especially since rents will probably be linked to income in the foreseeable future, it may be worthwhile considering buying a house this year.