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Political overshooting in the Dutch polder

Tuesday, 26 January 2021
This is an opinion article by an external contributor. The views belong to the writer.

One of the main dilemmas in democratic societies is political overshooting due to strong pressure from public opinion. When a scandal emerges, elected politicians are often seen to strongly overreact.

The public requires that something is done immediately. Unfortunately, changing policy is often more like navigating an oil tanker. When you turn the steering wheel at first nothing happens, but when you turn too much you notice too late that your tanker is going off course. A recent poignant example of overshooting is the Dutch childcare allowance scandal, which led to the symbolic resignation of the Rutte government, just two months before a general election and in the midst of the Covid pandemic.

Back in 2005, the Netherlands was trailing in childcare capacity and the quickest way to improve the situation was for the government to create a market for childcare. To make this demand-driven system work, low-income parents had to be given a subsidy in the form of a cash allowance with which they could pay the monthly bill of the private childcare provider. The tax service was charged to make these hundred thousand of individual payments, about 4 billion euro per year.

However, the tax service could only check the legality and correctness of the payments ex post. Checking them in advance (ex-ante) was technically almost impossible. The agency protested strongly and warned that there were considerable risks to this approach. But the government knew better, was in a hurry and pushed the new system through parliament without any hiccups.

Soon the Dutch childcare sector started to boom and everybody was proud that the Netherlands was no longer trailing its European peers in childcare.

10 years later, as the tax administration had predicted, the time bomb exploded when large misuse of the system involving hundreds of fraudulent applications was exposed on Dutch television. The stunned viewers saw a smiling man withdrawing his Dutch child care allowance from an ATM machine in Bulgaria with an orange ING bankcard.

Organized crime had brought Bulgarian citizens to the Netherlands. While living there temporarily, they had registered for the child care allowance and since control was only ex-post, they were still benefiting from it long after they had returned to their home-country. The total damage was 3.8 million euro for the Bulgarian scam alone but also several other fraudulent Dutch intermediaries were discovered.

What went wrong

Dutch public opinion was furious and in response the parliament demanded from the government that the fraud was to be stopped immediately. And more importantly, it had to make sure that it would never happen again. The tax service repeated that changing to a system of ex-ante controls was at short notice technically impossible. Its systems are designed to collect taxes from millions of tax payers and carrying out ex-post tax controls – not to check beforehand hundreds of thousands of cash payments.

As a kind of second option, it was then decided, again in a very ad hoc way, to create a formidable legal deterrent against fraud. A new law was passed with very harsh fines for every applicant who ex-post, that is years after receiving the subsidy, could not provide all the detailed evidence needed to verify the original application. And to make it worse, the parliament approved this draconian anti-fraud law without a so-called hardship clause.

Personal circumstances were deliberately not allowed to play a role when setting the fine. Everybody involved in the lawmaking process, from government, parliament, including the opposition, to the Council of State agreed to this. From now on abuse on such scale would certainly be a thing of the past.

The tax service started duly implementing the new anti-fraud regime in their ex-post controls and soon they were forced to reclaim back the full amount of the subsidy from bewildered citizens even when there were only a few irregularities. The lack of an individual hardship clause made it impossible to differentiate between plain fraud, which also happened, and unintentional irregularities due to the complexity of the scheme.

Currently there are about 20,000 families, most of them on a very low income, who were forced to pay back their full allowances over years of childcare use. Many got into deep financial trouble, were ruined and some even lost their home. Single mothers on welfare ended up with debts of more than 50,000 euros, a debt they would never be able to pay back.

Economics and ethics

Part of the scandal is that after the injustice was discovered three years ago, it has proven very difficult to help these families. Notwithstanding an official investigation and a parliamentary hearing, the system has not changed. The law is the law.

Just before stepping down, the Rutte government decided first to give every family in trouble a lump sum of 30,000 euro, without even looking at the individual case, and to unilaterally write off all outstanding debt. It is asking private creditors to do the same. After the elections in March, it will be up to the new government to design a new better system. The latest idea is to provide all childcare for free, funded by taxes, and to ask a co-payment only from richer households. But it will take two years before this new system is up and running.

One explanation for the fierce public reaction to the childcare allowance scandal in the Netherlands is its Protestant mentality. In a Catholic country people understand that when dealing with a complex system, there is a difference between an irregularity and sheer fraud. In the case of an irregularity, you get the benefit of the doubt and are allowed to make a correction. For the fraud, you have to pay a fine, after which you can ask and receive forgiveness.

There is another important social policy lesson one can draw from this case. If you are looking for a simple policy measure that is easy to implement, then you have to accept that such a measure can never take all individual personal circumstances into account. If you desire more personal customization, you will have to make the policy instrument more complicated, which in turn makes implementation more difficult and increases the risk of abuse.

There is an inevitable trade-off between practicality and fairness in policy making. It is not easy for a minister to explain in Parliament that both at the same time are not possible, let alone win the elections with that. And never ignore the advice of the civil servants who have to implement your grand scheme.

By Julius op de Beke