Mortgage interest deduction remains, can we whistle to Brussels billions?

Anyone looking for the word ‘mortgage interest deduction’ in the coalition agreement will find exactly zero results. CDA leader Wopke Hoekstra offered clarity last Thursday: “We have agreed that we will leave the mortgage interest deduction as it is now.”

A striking choice, given the fact that the Netherlands should encourage homeownership and additional debt accumulation a little less, as far as Brussels is concerned. In fact, only with the necessary reforms of the housing market will we be able to claim money – about 6 billion euros – from the European corona recovery fund.

Abolition of mortgage interest deduction

That’s right. When submitting the plan, the Netherlands must take into account the advice that the European Commission gives all member states each year. These recommendations are drawn up after consultation with Dutch officials. In our country, repairing the labor and housing market has been at the top of the list for years. And in the latter case, it would help enormously if the mortgage interest deduction is abolished, the Commission says.

Thanks to our high mortgage debt, the Dutch economy is extra vulnerable. “When the economy is bad, the housing market is bad and vice versa,” explains economist Bas Jacobs. That is why the Netherlands often remains in a crisis longer than other countries.

The solution? Less high mortgage debts, they say in Brussels and at De Nederlandsche Bank.

Accelerated dismantling

One way of achieving this is an accelerated phasing out of mortgage interest deduction, so that taking on a high mortgage debt becomes less attractive from a tax point of view. Yet there is nothing about this in the coalition agreement, which was presented on Wednesday.

Rutte IV expects to comply with the Commission’s demands in a different way, it turns out. It is not necessary to adopt all the advice, the Netherlands can make a choice. And that is still being negotiated with the Commission, explains a spokesman for the Ministry of Finance.

“The mortgage interest deduction is not the only thing that is important. It is a whole package that goes beyond the mortgage interest deduction,” he explains. The mortgage interest deduction is also already being phased out, he adds.

Approval Brussels

The new cabinet apparently assumes that the reforms in the labor market and the other measures for the housing market (more construction and stricter rules for the rental market) are sufficient to convince the Commission.

According to Jacobs, the cabinet may well be right about that. “If Brussels says ‘this is a hard requirement’, then the Netherlands has a problem.” But often a solution is sought after all, sees Jacobs. “The Netherlands may be eligible if it makes a compromise on something else.”

Not yet submitted

The European Commission cannot yet say whether the reforms that the Netherlands will undertake will indeed be sufficient. “After all, the Dutch recovery plan still has to be written and submitted,” said a spokesperson.

It does, however, confirm that Member States have significant part’ of the recommended reforms. The Netherlands therefore does not necessarily have to adopt all of Brussels’ recommendations one-on-one.

No solution

Jacobs agrees with the European Commission that the Netherlands must reform the housing market. Although abolishing the mortgage interest deduction is not the solution, according to him. It would be better if your house was taxed in the same way as shares and savings in box 3. By gradually increasing the notional rental value, a tax on home ownership, and limiting the mortgage interest deduction to 30 percent.

“The incentive to take out as much mortgage as possible is then gone. And the government no longer controls how people build up their wealth from a fiscal point of view.” But the cabinet is also failing that solution. “Nothing happens at all,” said Jacobs.

Dutch application

The ministry expects a plan to be submitted in Brussels in the spring. This is also necessary, because in order to be able to collect the full amount, the Netherlands must have submitted a plan before the summer of 2022.

The Commission needs time to analyze the plans, and then the other EU Member States have to give their approval. Those hurdles must be overcome before December 2022, when 70 percent of all subsidies must have been distributed.

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