Government must compensate more quickly for high inflation

As the example above illustrates, inflation is especially annoying when it comes to products and services that we really need, such as energy and food. Moreover, it mainly affects households with a low income, because they spend a relatively large part of their total income on basic necessities (see also this study by Wim Boonstra).

Because a higher energy bill due to the high gas prices for low-income earners can hardly or not at all in the short term, it is sensible that The Hague will compensate the energy bill of these households with 200 euros once.

This is in addition to the generic energy tax discount of 400 euros for an average household. In the longer term, policies that help households to reduce their gas consumption are more sensible.

But unfortunately we are not there yet. Due to the higher costs for energy and logistical disruptions worldwide, we also expect that food prices will rise considerably in the coming period.

Research by fellow economists Cyrille Filott and Sebastiaan Schreijen shows that food suppliers have to raise their prices by 9 to 10 percent to cover their increased production costs. As consumers, we will gradually see those price increases in the supermarket next year.

The new coalition expects the purchasing power of households to increase by an average of about 1.9 percent. But this still takes into account an average inflation rate of 1.8 percent for the whole of 2022. We are already assuming 3.8 percent.

The coalition agreement does state that a new estimate of the purchasing power development will be made when the CPB has updated the macroeconomic picture. We can predict that this will lead to a much more negative picture, with low incomes being hit even harder.

It is true that the cabinet has plans to increase both the minimum wage and the reimbursement of childcare, as well as to implement a 3 billion tax cut. But the effects of this will only be felt in 2023 and later years, so it is too late.

The government would therefore do well to reduce income tax more quickly, for example through a higher general tax credit. This already benefits everyone in the short term, so that even people with a low income can count on inflation compensation. And that seems like a nice message just before Christmas.

Leontine Treur and Hugo Erken

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