Kingdom of the Netherlands
Netherlands: 2008 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Kingdom of the Netherlands: Netherlands
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International Monetary Fund
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Publication Date:
03 Jun 2008
eISBN:
9781451829587
Language:
English
Keywords:
ISCR; CR; harmonized inflation; staff appraisal; rate; growth; current account; return on assets; financial system; output gap; capital ratio; Fiscal stance; Aging; Global
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Strong macroeconomic foundations have so far largely shielded the Netherlands from recent financial turbulence. Despite a tightening labor market, inflation remains subdued. Employment has grown 1¼–1½ percent in 2007, on par with the rest of the Euro area. The external current account surplus remains large, and various approaches suggest that Dutch competitiveness is satisfactory. Fiscal performance, while staying strong, has been mildly procyclical since 2007. Long-term fiscal sustainability remains elusive, owing to population aging and its attendant budgetary costs.

Abstract

Strong macroeconomic foundations have so far largely shielded the Netherlands from recent financial turbulence. Despite a tightening labor market, inflation remains subdued. Employment has grown 1¼–1½ percent in 2007, on par with the rest of the Euro area. The external current account surplus remains large, and various approaches suggest that Dutch competitiveness is satisfactory. Fiscal performance, while staying strong, has been mildly procyclical since 2007. Long-term fiscal sustainability remains elusive, owing to population aging and its attendant budgetary costs.

I. Macroeconomic Situation

1. The Dutch economy is doing well, but important challenges lie ahead. Following the prolonged stagnation early in the decade, a solid recovery has taken root, with growth above and inflation below euro area averages, unemployment decreasing, and the fiscal position strong (Figures 1-2). The expansion is set to continue, but uncertainties associated with the recent financial market turbulence are high. Looking forward, moreover, rapid aging and sluggish productivity are twin threats to longer-term growth, competitiveness, and fiscal sustainability. And comparatively weak bank profitability, complex products, and growing financial integration create new risks and supervisory challenges.

Figure 1.
Figure 1.
Figure 1.

Netherlands: The Economic Expansion Gained Strength

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Sources: Global Insight; Netherlands authorities; and IMF, IFS and WEO.
Figure 2.
Figure 2.

Netherlands: Comparative Economic Performance Has Recently Been Strong, With Growth That Is Broad Based

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Sources: Global Insight; Netherlands authorities; and IMF, IFS and WEO.1/ The consumption growth in 2006 is adjusted for the health care reform. The reform of the health care system at the beginning of 2006 resulted in a shift of health care expenditures of about euro 8.0 billion (1.5 percent of GDP) from private to public consumption, distorting private consumption downward by about 3 percentage points in 2006.

2. Strong macroeconomic foundations have so far largely shielded the Netherlands from recent financial turbulence. With growth of 3½ percent in 2007, output is estimated to have topped potential (Table 1). Growth surged to 4.1 percent (y-o-y) in the second half of 2007—the highest rate in more than seven years. The expansion has been broad based, with a rebound in consumption, strong investment, and a positive external contribution.

Table 1

Netherlands: Basic Data

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Sources: Dutch official publications; IMF, IFS; and IMF staff estimates.

The introduction of the new health insurance scheme in 2006 caused a significant shift in health care expenditure from private to public consumption, thereby lowering private and raising public consumption growth without changing overall GDP. In a related vein, government revenues rose and private disposable income fell, without affecting the financial position of the public sector or households net terms. This is because public expenditure for health care also rose, while the fall in private disposable income is offset by a similar fall in private health consumption, which is now taken care of in the public domain.

Contribution to GDP growth.

In percent of disposable income.

For 2002, the purchase of gas rights from DSM (0.3 percent of GDP) is excluded.

A01ufig01

Industrial Production (2000=100)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: Netherlands authorities.
A01ufig02

Output Gap (percent of potential GDP)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Sources: Netherlands authorities and staff estimates.

3. Despite a tightening labor market, inflation remains subdued. Employment grew 1¼–1½ percent in 2007, on par with the rest of the euro area. However, about half of the new jobs are through temporary agencies, given strict employment protection legislation (EPL) for permanent workers. The unemployment rate fell to 3.4 percent, less than half the euro area average, while registered vacancies have rebounded sharply. These growing labor market tensions notwithstanding, inflation has been restrained, reaching 2 percent only this February.

A01ufig03

Unemployment and Vacancies

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Sources: Global Insight; and IMF, WEO.
A01ufig04

HICP Inflation, 2006-08

(12-month change)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

4. The external current account surplus remains large, and various approaches suggest that Dutch competitiveness is satisfactory. Although mild weather dampened gas exports in the winter of 2006-07, the underlying export performance continued to be robust. The current account surplus reached 6¾ percent of GDP in 2007, about 1½ percentage points off the 2006 total. These developments, as well as various measures of the real effective exchange rate, together with application of the CGER methodology and other econometric tests to the Netherlands, point to adequate external competitiveness (Box 1 and Figure 4).

Figure 3.
Figure 3.

Netherlands: External Competitiveness

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Sources: CPB; OECD, Economic outlook; IMF, INS, DOT, and WEO.1/ Troughs were identified using the methodology of Harding and Pagan (2002), “Dissecting the Cycle: A Methodological Investigation,” Journal of Monetary Economics.
Figure 3.
Figure 3.

Netherlands: External Competitiveness

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Sources CPB; IMF, INS, DOT, and WEO.
Figure 4.
Figure 4.

Netherlands: Financial Stability Indicators

(In percent)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Sources: Global Insight; data provided by the authorities; and IMF, IFS.

5. Fiscal performance, while staying strong, was mildly pro-cyclical in 2007. The general government balance improved by a cumulative 3¾ percent of GDP over 2004-06, mostly owing to buoyant revenues. In 2007, it was broadly unchanged, posting a modest surplus. But in cyclically-adjusted terms it slipped about ½ percent of GDP, in light of the vanishing output gap (Table 2). This reflected the absence of an expenditure ceiling during the government interregnum as well as discretionary decisions. Nevertheless, the general government debt ratio, now about 46 percent of GDP, continued on its declining path, comfortably below the Maastricht limit.

Table 2.

Netherlands: General Government Accounts, 2002–09

(In percent of GDP)

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Sources: The Netherlands’ Bureau for Economic Policy Analysis (CPB), Ministry of Finance, and Fund staff calculations and estimates.

The introduction of the new healthcare system in 2006 did not affect the overall balance, but permanently increased both revenue and expenditure by 1.6 percentage points of GDP.

The calculation of the structural balance is based on the standard methodology which uses fixed elasticities with respect to GDP. Biases can occur, in particular in the context of asset price boom and busts (as discussed for the Netherlands in Country Report No. 04/301).

The increase in expenditure growth in 2006 largely reflects the introduction of the new health care system, as in footnote 1.

The robust primary balance is defined as the structural balance adjusted for net interest payments and gas revenues.

A01ufig05

Fiscal Balance (percent of GDP)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Netherlands’ External Competitiveness

Various standard real effective exchange rate (REER) measures have been relatively stable in recent years. Following a sizable real appreciation in 2001-03, REER gauges based on different price or cost indices have moved little (top panel and Figure 3). Manufacturing unit labor costs (ULCM) have fallen for the last four years at a pace largely on par with trading partners, and low inflation has limited the increase in the CPI-based REER.

A01ufig06

REER measures have been broadly stable…

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

However, a measure of exporter profitability displays a marked improvement. Proxying profitability of the tradables sector by the ratio of the ULCM-based REER to the REER using industry deflators suggests a persistent amelioration since 2002, similar in magnitude to Germany (and unlike the worsening trend for Italy and France). This is because, although the ULCM-REER has risen, the industrial-output-deflator-REER improved even more over the same period.

A01ufig07

…while labor’s income share in manufacturing has fallen. 1/

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: European Commission; and staff calculations.1/ Proxied by the ratio of industry price deflator-based REERs to ULMC-based REERs.

Applying the multilaterally-consistent CGER methodology to the Netherlands indicates that the real exchange rate is broadly in equilibrium. In particular, in the macroeconomic balance approach, the current account (CA) norm of 5.8 percent of GDP tracks closely the underlying medium-term CA surplus. The CA norm reflects largely the importance of the financial sector as well as of old-age pre-funding for the Dutch overall savings rate.

Equilibrium Real Exchange Rate Estimates Using the CGER Methodology

(Level relative to equilibrium in percent; minus indicates undervaluation)

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CGER (Consultative Group on Exchange Rate Issues). Values between -10 and +10 mean the real exchange rate (RER) is close to balance. International Monetary Fund, 2006, Methodology for CGER Exchange Rate Assessments (available at www.imf.org).

Macroeconomic balance approach.

Equilibrium real exchange rate approach.

External sustainability approach.

Oil balance to GDP, and dummies for the EMU creation.

Rapid export growth also suggests that external competitiveness is not at stake. With cumulative real growth of almost 40 percent since 2002, Dutch export growth exceeds the Euro area average, and lags only that in Germany among major euro area economies. Also, the growth of reexports—which represent about half of Dutch exports in value—has been very strong.

A01ufig08

Real Export Growth

(2002 = 100)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: WEO.

Figure 3 shows that the Netherlands has gained overall export market share. Further, a CPB study1 indicates that, while domestically produced exports have lost market share in recent years, this loss is much reduced if market growth is corrected by including only domestically produced exports and for the double counting due to reexports when calculating the relevant world trade.

Sectoral analysis of Dutch export performance confirms that competitiveness is not a problem, but with signs of erosion. The SIP shows that, in the 2000’s, the Netherlands generally preserved its advantage in trend export growth vis-à-vis Germany. But it lost its traditional lead over Germany in exports of manufactured goods, machinery, and transport equipment. Econometric tests also suggest that the Netherlands is more exposed to supply-driven shocks while Germany to demand-driven shocks.

1M.C. Mellens, H.G.A. Noordman and J.P. Verbruggen, Re-exports: international comparison and implications for performance indicators, CPB Document No. 149, July 2007.
A01ufig09

The Netherlands: General Government Accounts, 2000-07

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

1/ The robust primary balance is defined as the structural balance adjusted for net interest payments and gas revenues.

6. Long-term fiscal sustainability remains elusive, owing to population aging and its attendant budgetary costs. The Netherlands is in a comparatively favorable position to deal with this problem, given its relatively benign initial fiscal position. In addition, the existence of a large, fully funded, pension pillar helps mitigate the burden of aging. Nonetheless, its fiscal impact is large (about 7 percent of additional annual expenditures by 2040, mostly on account of healthcare and pension outlays). If not offset by a reduction of aging-related entitlements, or cuts in other spending and revenue increases, this prospective millstone would lead to an unsustainable deterioration in public finances.

7. The Dutch financial system has proven generally resilient to the turmoil.

  • The regulatory capital ratio of Dutch depository institutions has improved from 11.9 to 13.2 percent (e-o-y) in 2007, but equity capital ratios are comparatively low. Despite some recovery over 2003-06, return on assets remained lackluster and noninterest expenses high in international comparison, although risks—as assessed by commercial banks for purposes of determining capital requirements—are also low. Corporate loans, especially short term, rose rapidly, reflecting strong investment. While home prices held up well, mortgage lending growth fell sharply, reflecting higher interest rates and tighter credit standards under the new Code of Conduct.1 Tax incentives encourage high loan-to-value (LTV) mortgages, but banks generally maintain separate collateral against them.

  • Despite losses and write-offs of about €7 billion for 2007, the large international banks have generally small and higher-rated U.S. subprime exposure, smaller banks have little or no exposure, and the system has remained profitable. Several affected banks have raised significant new capital, and one major bank that reported higher profits and dividends is implementing a share buyback.

  • The average funding ratios in the pension and insurance sectors improved in 2007. Sectoral exposure to subprime loans is low, particularly for insurers.

  • The stock market has done better than most in the euro area from end-2006.

A01ufig10

03/31/2008 Stock Markets Index

(percent change from Dec 29, 2006)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: Bloomberg

8. Nevertheless, a few pockets of softness and the uncertain impact of the global turmoil warrant caution. In the short run, losses of major banks and pension funds from subprime loans and other assets could rise. Life insurers face stagnating premia, excess capacity, strong competition, and low margins. In general, risks relating to liquidity, valuation, and recapitalization—although manageable—have increased under disturbed market conditions. While a full-blown credit crunch is unlikely, the latest ECB survey points to a tightening of eurozone lending conditions. In the Netherlands, lending rates have increased by 50-60 basis points for corporate and mortgage loans, though reflecting changes in ECB policy rates more than spreads. In the longer run, sluggish productivity and low profitability in the Dutch financial sector weigh down on its ability to support growth and adaptation of the economy. The spread of complex products, deepening international integration, high mortgage debt, and rising securitization pose challenges—underlined by the turmoil—about internal risk management and supervision of financial institutions.

A01ufig11

Labor Productivity Growth in Finance, Insurance, Real Estate and Business Services

(5-year averages)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

II. Outlook

9. Economic expansion is set to continue, albeit at a lower pace. Staff projects that output will rise somewhat above 2 percent in 2008. With a large growth carryover from 2007, this implies a rapid within-year deceleration owing to the impact of the global financial turmoil on U.S. and European growth. Consumption is expected to lose speed as lower employment gains should be only partly offset by higher labor compensation. Fixed investment will also slow somewhat, following completion of important infrastructure projects, while the foreign contribution to growth fades. Inflation should rise moderately, above 2 percent, with the output level remaining above potential and wages expected to increase more than productivity amid a tightening labor market. For 2009, further growth deceleration at about 1½ percent is anticipated, owing to the lingering effects of the financial turbulence, with inflation edging just below 2 percent.2 The authorities’ projections were more sanguine on growth for both years, but anticipated markedly higher inflation in 2009 reflecting the tight labor market and the impact of increases in the VAT and excises.

Netherlands: GDP Growth and Inflation (HICP) Projections, 2008-09

(In percent)

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Netherlands: MediumTerm Growth Projections

Average medium-term growth is in line with potential growth (about 2 percent), reflecting a projected pick-up in domestic demand, while the net foreign contribution is expected to stabilize at about 0.7 percent of GDP.

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Impact of Financial Market Turmoil on GDP Baseline Projections

(Deviations from baseline projection in percentage points)

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10. Uncertainties regarding the outlook are high, with risks broadly balanced. Main risks include deviations from the baseline in: (i) lending conditions; (ii) housing and equity prices,3 that could affect significantly domestic demand, given the strong links between private consumption and stock market developments in the Netherlands; (iii) oil prices; (iv) external demand spillovers; and (v) labor market conditions (the sharp increase in commodity prices with attendant terms-of-trade deterioration may trigger a wage-price spiral that could undermine competitiveness and growth as in the early 2000s). In the current projection, upside and downside outcomes for these risk factors are deemed equally probable, but their dispersion is unusually pronounced, in light of uncertainties on the extent of the global financial distress and its impact on consumer and producer confidence, both of which are quite volatile. The exception is the 2009 inflation projection, for which overrun risks prevail.

A01ufig12

Real GDP Growth: Risks to the Forecast

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

The chart includes the following risks to the projections of growth (2.1 percent in 2008 and 1.6 percent in 2009):• changes in tightness of financial conditions;• housing and equity prices;• variations in oil prices;• changes in foreign demand;• variations in the labor market situation.These risks are weighted by the staff’s subjective probability assessment of their occurrence.

Netherlands: Spillover Effects of Economic Downturn in the U.S.

A 1 percentage point reduction in U.S. GDP growth is estimated to result in about ½ percentage point fall in Dutch GDP growth after 2 years. The main channels of transmission include the direct and indirect trade channels, but also private investment, inflation, the real effective exchange rate, the Dutch stock market index, and outward foreign direct investment.

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Source: Fund staff estimates.

11. The authorities concurred that external competitiveness is broadly adequate, but noted risks going forward. They considered that the business sector is in a sound position for profitability and competitiveness, but stressed the danger that buffers may be eroded quickly if wage rises exceed productivity gains, leading to increased unit labor costs. In this context, officials also remarked that appreciation of the euro, if continued, would rapidly exhaust residual competitiveness margins.

12. One important concern is the risk to longer-term growth and competitiveness posed by rapid aging and sluggish productivity. The Netherlands experiences declining trend productivity growth, which, despite some recent recovery, remains slower than in other partner economies. Furthermore, imminent population aging will shrink working-age cohorts from early the next decade. Therefore, raising the employment rate and stimulating faster productivity gains will be key for long-term potential growth and competitiveness prospects. Above all, this requires improving the lackluster productivity record of the service sector.

A01ufig13

Hourly Productivity Growth

(5-year moving average)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

A01ufig14

Elderly Dependency Ratio

(Share of Working-Age Population)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Long-Term Scenario

Prospects for labor force participation/employment and productivity growth imply a significant drop in per capita income growth.

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Sources: WEO; Central Bureau of Statistics (CBS); Bureau for Economic Policy Analysis (CPB).

GDP per employed. Projections assume a continuation of the most recent trend.

Change in the share of population 20-64 years.

Employed as a share of population 20-64 years.

III. Policy Discussions

13. Against this background, discussions focused on fiscal policy, structural reform, and financial sector issues. Specifically:

  • adopting tax and public expenditure policies that promote continued economic expansion while ensuring fiscal sustainability;

  • reforming labor and product markets to enhance utilization of soon-to-be shrinking human resources and competition;

  • maintaining stability of the financial sector—to prevent that global market tensions and rising volatility unleash a crisis of confidence—while raising its efficiency.

A. Fiscal Policy

14. Staff saw merit in a somewhat tighter fiscal stance in 2008-09. The authorities’ budget plans for both years envisage surpluses of about ½ percent of GDP, which are projected to be exceeded owing mainly to high gas revenues. However, the fiscal balance corrected for the cyclical position, gas proceeds, and net interest payments—namely the “robust” balance—weakens appreciably compared to the 2007 level, pointing to a pro-cyclical stance. Instead, in light of the expected above-potential output and labor market tensions, in the staff’s view, some withdrawal of fiscal stimulus would be appropriate—a robust balance outcome higher by ¼-½ percent of GDP in 2008-09. Nonetheless, staff underscored that, were growth to fall significantly short of current projections, automatic fiscal stabilizers should be allowed to operate fully.

15. The authorities expressed conditional support for the recommendation to err on the side of higher surpluses in budget execution. Projections point to a sizable revenue overperformance, though owing mainly to cyclical upswing and buoyant gas proceeds. But there are also potential savings associated with underexecution of investment projects financed by the Infrastructure Development Fund and other margins under the expenditure ceilings. Therefore, staff believes that a better-than-planned outturn for the robust balance could be achieved within the existing fiscal framework. The authorities indicated that they too would prefer to realize those savings, but pressures to increase spending, especially for health- and child-care, may prevent them from doing so. In any case, they were determined not to exceed the expenditure ceilings set by the multiannual budget and to ensure that the medium-term surplus objective is attained.

16. The authorities also acknowledged that their medium-run fiscal plan falls still short of ensuring long-term sustainability. It targets a structural surplus of 1 percent of GDP by 2011, corresponding to a robust surplus of ¼ percent of GDP, an improvement which reflects the impact of already announced measures over the government’s term. Furthermore, such measures will produce additional sustainability-enhancing effects after 2011 equivalent in present value to about ½ percent of GDP. These efforts notwithstanding, in an otherwise “passive” projection, the additional public spending associated with population aging eventually generates ever growing deficits and debt. Authorities and staff concurred that long-term fiscal sustainability requires a robust surplus permanently higher by some 2¼ percent of GDP than in the passive scenario—around 3 percent of GDP in 2011.4

General Government Accounts, 2006–2011 1/

(In percent of GDP)

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The long-term fiscal sustainability entails a fiscal surplus of 3.7 percent of GDP, equivalent to a robust surplus of 3.0 percent of GDP in 2011.

A01ufig15

Netherlands: Fiscal Sustainability, 2011-2060

(Percent of GDP)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: CPB Discussion Paper No. 61 (2006) and September 2007 update; and staff calculations.1/ Robust and overall balance “no measures” include in 2011 the present value of the measures already announced with effects after 2011.

17. Nevertheless, further early progress to cope with the fiscal brunt of aging is difficult. Staff recommended filling about one-third of the sustainability gap by 2011. Indeed, front-loading the fiscal adjustment is desirable for intergenerational equity and to contain the size of the required tightening. In this connection, given the better-than-budgeted outcome for 2007 and likely overperformance in 2008-09, staff argued that the 2011 robust surplus could be ½-¾ percent of GDP higher than in the authorities’ medium-term plan. The authorities did not discount this possibility, but doubted that revenue buoyancy and the margins under the expenditure ceilings could be sustained through 2011. They agreed, however, that, if preserving these margins did not prove feasible, the additional spending ought to support structural reforms that reduce the sustainability gap.

A01ufig16

Effects on cohorts of delaying the reduction of government consumption to 2040 (in 1,000 euro)

Delaying budgetary adjustment until 2040 will require a tightening of more than 7 percent of GDP to attain sustainability. Furthermore, the costs of the delay for those born after 2040 amount to almost 2½ percent of their lifetime income (or 19,000 euros in present value terms).

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: Figure 7.7 (p. 122). ’Ageing and the sustainability of Dutch public finances’ C. van Ewijk, N. Draper, H. ter Rele and E. Westerhout.

18. There was agreement that adjustment should focus on expenditure retrenchment or tax base broadening. The government’s economic footprint is already elevated—with the expenditure-to-GDP ratio projected to increase further owing to population aging. Moreover, prevailing tax rates seem to leave little upward room. Indeed, pressures from international tax competition may even suggest cuts in corporate taxation.5 Also, labor market reform will likely entail a reduction of marginal tax rates—a stated objective of the new government. In fact, the lifetime marginal income tax burden is quite high for a substantial part of the population, and relatively large tax wedges on earned income discourage work.

Marginal Effective Tax Rates for Different Income Groups and Family Types

(In percent)

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Source: OECD
A01ufig17

Revenue Ratio

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: OECD.

19. It was not disputed that further pension reform is key to contain the fiscal costs of aging. Since life expectancy has increased substantially, the authorities concurred that raising the retirement age from 65 to 67 years, as in some other European countries, was appropriate and would eventually be implemented. A reduction of the old-age related deduction under the income tax would contribute to offset rising aging outlays too. Nevertheless, the current government intended to focus on raising the effective retirement age from the current 60-61 to closer to 65 years of age through tax incentives.

Possible Sustainability-Enhancing Measures and Their Effects 1/

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Based on CPB calculations.

In percent of GDP; a positive value implies a reduction in the sustainability gap.

WW is the unemployment benefit.

20. The authorities viewed savings in healthcare as a significant contributor to longer-term fiscal sustainability. It was noted that most of the projected surge in healthcare spending is due not to demographic changes, but to expensive advances in medical technology and real income growth (given high income elasticity of health-services demand). Staff argued that an increase in user fees could moderate healthcare demand growth. The authorities objected that such a step could overburden the chronically ill or prove administratively cumbersome if designed to avoid this problem. They believed that tighter definition of entitlements in long-term care could spawn significant savings in an area that had not been touched by the 2006 reform.

21. Some scope to reduce unemployment-benefit and other expenditures was also identified. Though cut from 60 to 38 months in 2006, maximum unemployment benefit duration remains high by international standards. Staff suggested lowering it to 18 months, a period which would remain sufficiently long to support job search and simultaneously tend to raise labor participation. The authorities stated that a gradual decrease was in the longer run likely, but in the meantime they would concentrate on strengthening activation of the unemployed. Staff then noted that, according to some studies, in the Netherlands efficiency gains of roughly 20 percent may be possible in public administration, education, and infrastructure provision, when compared with best OECD practice. Thus, significant savings could be realized without jeopardizing the provision of services. The authorities pointed to ongoing efforts to strengthen efficiency through targeted reduction of public employment and diffusion of information technology.

A01ufig18

Public Sector Efficiency Measures, 2000 1/

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: Afonso, Schuknecht, and Tanzi (2005).1/ Production frontier analysis. Measured relative to the most efficient country (with a score of 1.0), the input efficiency indicates how much less input a country could use to achieve its current output (e.g., 0.6 indicates that it could achieve the same output with only 60 percent of current inputs); the output efficiency indicates how much less output a country is producing (e.g., 0.8 indicates that it is producing only 80 percent of output with the same input as the most efficient country). Input is public expenditure as a percent of GDP; output is a composite public sector performance indicator comprising seven public goods and services.

22. Officials were open to refinements of the fiscal framework to reduce procyclicality, thereby facilitating budgetary discipline and long-term sustainability. In line with the 2006 Fiscal ROSC—that gave high marks to the Dutch budgetary system and several recommendations whereof have been implemented—staff favored buttressing the role of automatic stabilizers. Specifically, it proposed that: (i) all tax expenditures (including mortgage interest deductibility and the tax exemption on pension payments) be reported in the budget and, if feasible, included in the expenditure ceilings; and (ii) unemployment benefits be excluded from the ceilings. The authorities confirmed their determination to strengthen transparency of tax expenditures and would consider options to eliminate the cyclical component of unemployment benefits from the spending ceilings.

A01ufig19

Fiscal stance (adjusted for gas revenues, in percent of GDP) 1/

The risk of procyclical fiscal policies is high in the Netherlands, also complicating the achievement of sustainability. Both the deviation of the actual budget deficit from its structural level and the sensitivity of the balance to the output gap are high in international comparison. In part, this relates to the tax deductability of mortgage interest and pension contributions to the extensive second pillar pension system, both of which are procyclical.

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

1/ Fiscal stance is measured by the change in the cyclically adjusted primary balance excluding natural gas revenues.

B. Structural Policies

23. The view prevailed that structural advances are slowing down (Table 5). This was the result of “reform fatigue” after the bold steps taken in the last few years as well as of the need to take stock of the impact of recent reforms before launching new ones. In addition, dissensions in the governing coalition prevented action in some areas like EPL. Nonetheless, the authorities have also established a commission charged with identifying further reform measures to invigorate the labor market. It will report to the government by mid-2008.

Table 3.

Netherlands: The Core Set of Financial Soundness Indicators, 1998-2006

(In percent; unless otherwise indicated)

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Source: Data provided by the authorities.
Table 4.

Netherlands: Indicators of External and Financial Vulnerability, 2001-07

(In percent of GDP; unless otherwise indicated)

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Sources: Data provided by the authorities; and IMF, IFS.

Average of the three largest banks.

Table 5.

Netherlands: Structural Measures to Raise Labor Participation and Enhance Productivity—Recent and Planned Actions

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A01ufig20

Part-Time Employment as a Percent of Total Employment, 2006

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

A01ufig21

Average Annual Hours Worked, 2006

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: OECD.

24. The authorities concurred that reforms of the tax system, social entitlements, and employment protection are key to stimulate employment. Given low labor utilization and to promote female and elderly employment, they enacted a gradual elimination of the imputation of the general tax credit to the primary worker and are planning targeted increases of tax credits for workers aged 57 and above, while exempting pensioners that have worked between ages 63-65 from the new levy for people over 65. Steps are also under consideration to limit use of the disability scheme for the young. Staff endorsed these measures, but argued that further action would be desirable, especially in light of the impending aging. Various proposals, in line with OECD recommendations, were well received in principle, but the authorities emphasized that their fiscal costs or the need to reach agreement with social partners meant that they could not be introduced soon (Table 6).

Table 6.

Netherlands: Labor and Product Market Reforms

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A01ufig22

The Share of Working-Age Population Receiving Disability Benefits

(Percentage of population aged 20-65)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: OECD, Going for Growth 2007.
A01ufig23

Employment Protection Legislation

(0-6 from least to most restrictive)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: OECD Going for Growth 2007.

25. While continuing to boost competition and innovation in product markets, officials approached liberalization cautiously. The authorities’ innovation pillar should facilitate the adoption of new technologies. The recent strengthening of the competition authority’s (NMa) investigative powers should kindle competition and thus productivity. Finally, the government intends to reduce red tape by an additional 25 percent. However, staff noted that the Netherlands is an outlier in high barriers to entrepreneurship, partly due to burdensome licensing requirements, and only achieves middling rank in product market regulation, reflecting also strict zoning regulations and stringent shop opening hours. Staff advocated greater liberalization. The authorities stressed that it had to be gradual and its impact assessed at each step to prevent deterioration in the quality of urban living.

A01ufig24

Legal Barriers to Entry

(0-6 from least to most restrictive)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: OECD Going for Growth 2007

26. The authorities support overseas development assistance (ODA), continuing to exceed the United Nations’ target of 0.7 percent of GNI.

C. Financial Sector

27. The authorities confirmed the overall robustness of the Dutch financial system, but admitted several concerns. These include: (i) the impact of prolonged turmoil on key banks; (ii) weaknesses in ratings and regulatory reliance thereon; (iii) valuation and risk management of structured products; (iv) difficulties in raising liquidity or capital under disturbed market conditions, though the authorities did not believe that Dutch banks had particular problems in this regard; and (v) quality of disclosure of complex products. The authorities are actively participating in international fora to address these problems. While low risk-weighting and higher leverage have boosted the regulatory capital ratio and return on equity, the authorities recognized that banks’ return on assets has been one of the lowest among peers. They also conceded that life insurers suffer from languishing premia and low margins, while the transparency of unit-linked insurance products was an issue. Finally, the pension funds’ cover ratio can be quite volatile (it dropped 20 percentage points in the first two months of 2008) given both the large duration mismatch and asset price volatility.

28. Based on recent stress tests, supervisors concluded that banks can withstand current global turmoil, but pension funds would suffer more.6 The regulatory capital ratio would decline by 1.4 percent. Though not similarly tested, insurers would be less vulnerable due to negligible exposure to subprime and other low-rated assets, while, as mentioned, the pension funding ratio is quite sensitive to changes in interest rates or asset prices. Regarding liquidity concerns, Dutch banks consolidate their conduits under IFRS, and accordingly their liquidity management extends to the needs of such conduits. Following the global turmoil, the central bank (DNB) is monitoring bank liquidity intensively as well as reassessing the banks’ internal risk management, use of ratings, internal models, and early warning system.

29. The authorities expressed satisfaction with progress of the ABN-AMRO takeover, while stressing managerial and supervisory challenges. They were generally pleased about cooperation with fellow supervisors and progress made by the consortium—Fortis, Royal Bank of Scotland (RBS), Santander. DNB and the Financial Supervisory Agency (FSA) have agreed that DNB will remain the consolidated supervisor of ABN-AMRO, while FSA that of RBS Group. The Dutch and Belgian supervisors already have a memorandum of understanding (MOU) regarding Fortis, which will be reviewed in light of the ABN-AMRO transaction and the increased share of Dutch activities of Fortis. Staff welcomed these steps. All concurred that this takeover underlines the difficulties of supervising large EU-wide financial institutions by national regulators and the burden of complying with multiple regulations. Accordingly, staff highlighted the importance of reviewing all existing MOUs in particular to clarify the responsibility for crisis management and lending of last resort.

30. Supervisors maintained that mortgages carry low risks, but high mortgage debt, risk concentration, house prices, and securitization require careful watch.

  • Staff questioned the very large and increasing LTV ratio of mortgages (averaging 114 percent in 2007) and the predominance of bullet loans. The authorities acknowledged these problems, but attributed them to high tax incentives, and pointed out that systemic risk is reduced by build-up of collateral in mortgage-linked insurance or savings accounts. Still, they recognized that risks are concentrated in new mortgages with high LTV ratios, especially for young workers with low incomes. In this regard, the authorities conceded that the voluntary code of conduct has not limited LTV ratios as much as expected, primarily due to high competition.

  • While aware of the large declines in housing markets in the U.S., U.K., and Spain, the authorities felt that limited land supply and generous mortgage interest deductibility reduce the likelihood of sharp house price corrections in the Netherlands. Staff and authorities concurred that, based on existing regulatory constraints, which tend to cause higher prices, house overvaluation is only slight (Box 2).

  • Officials accepted that mortgage interest deductibility results in high housing prices, lower affordability—especially for younger workers—and greater vulnerability to interest rate shocks. Mortgage debt at 95 percent of GDP is much higher than in most mature markets, and large build-up of mortgage-related collateral distorts investment.

  • With large mortgage debt, securitization has grown rapidly. The authorities agreed that this calls, inter alia, for high origination standards, good rating models, and supervisory vigilance about liquidity and capital requirements for securitized assets.

A01ufig25

Real House Price Index

(1985 = 100)

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: Bank for International Settlements.
A01ufig26

Mortgage Debt as a Share of GDP, 1996 and 2005

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: European Mortgage Federation.1/ Initial data for Portugal are 1999, and for Austria are 2001.

House Prices in the Netherlands

Some raw indicators raise concerns that housing prices deviate from fundamentals in the Netherlands. Both the price-to-income and the price-to-rent ratios have increased continuously throughout the 1990s and have remained at high levels thereafter. Nevertheless, these indicators do not consider the influence of other fundamentals that may also have changed. Hence, a more detailed analysis based on econometric techniques is appropriate.

In this regard, in a cross-country exercise, the Spring 2008 WEO points to a sizable house price gap. WEO estimates a gap of about 30 percent between actual increases in Dutch house prices over the last decade and those that can be explained by common fundamentals. At the same time, the WEO assessment is based on a house pricing model aimed at cross-country comparisons, which necessarily takes limited account of country-specific factors.

However, most Dutch-specific econometric studies suggest a small or no gap. For example, staff work for the 2005 and 2006 Article IV consultations1 found house prices to be approximately in line with fundamentals. The authorities’ own analysis broadly supports this conclusion.2 An OECD study3 of the probability of having reached a turning point in various housing markets indicates that it is very small in the Netherlands (as opposed to several other countries, including the U.S.).

The different results may be due to the choice of the base period, institutional factors, and measurement of disposable income.

  • In general, the house price level in a given year must be set as the base from which price changes explained by the respective models are compared to actual changes. If the latter exceed the former, a gap results. Because of its cross country nature, WEO, for all countries in its sample, selects 1997 as the base year. However, this may not have been an “equilibrium” from a Dutch perspective. For example, the price-to-income ratio in 1997 was some 12-13 percent below the long-term average. Accordingly, models which take periods closer to the average experience as a base interpret the fast growth of house prices in the second half of the 1990s as catching-up towards equilibrium.

  • Institutional features also matter for house prices. In the Netherlands, these include strict zoning regulations that limit housing supply and generous mortgage interest deductibility from income taxes that drives up demand, both of which tend to raise the house equilibrium price. Models which incorporate good estimates of the initial equilibrium and are better specified overall will reflect these institutional factors more accurately.

  • Housing prices are modeled by WEO as a function of, among other variables, disposable income per capita. If total disposable income were used, the size of the gap shrinks. Indeed, the latter measure captures not only the increase in household incomes, but also the rise in the number of households, which is important in the Netherlands because an increasing proportion of single-person households has contributed substantially to housing demand.

1Country Reports No. 05/225 and No. 06/284. 2J. Verbruggen et al., Welke factoren bepalen de ontwikkeling van de huizenprijs in Nederland? CPB Document No. 81, 2005. The 2005 study found evidence of a possible 10 percent overvaluation in 2003, but its recent update (CPB Memorandum No. 200, April 22, 2008) concludes that by 2007 there was no overvaluation. 3P. van den Noord, Are house prices nearing a peak? A Probit analysis for 17 OECD countries, ECO/WKP(2006) 16, No.488.

IV. Staff Appraisal

31. The Netherlands is well equipped to deal with the global financial crisis, but the outlook is unusually uncertain. Recent growth and inflation performance are excellent in the EU context. External competitiveness is adequate, the government budget is in surplus, and financial sector supervision is strong and well designed. Thus, despite the financial turmoil and U.S. slowdown, staff expects real GDP to continue expanding above the EU average in the near term, with output remaining above potential and persisting labor market tightness. Risk factors range from lending, housing, and equity market conditions, to oil prices, external demand, and labor market tensions. Staff regards current growth projections as conservative and thus these risks are broadly balanced, but with fatter-than-ordinary tails.

32. Though conjunctural indicators are positive, the challenges of an aging population and low productivity growth loom large. Despite a large, fully-funded second pension pillar, population aging is anticipated to create large fiscal burdens, including for growing health care costs. Productivity growth in the Netherlands, despite some recent recovery, remains slower than in partner economies. Further, imminent population aging will shrink the working-age cohorts from early the next decade. Thus, raising the employment rate and stimulating faster productivity gains will be essential for long-term potential growth, competitiveness, and fiscal sustainability.

33. A somewhat tighter fiscal stance is advisable from both long-term fiscal sustainability and cyclical perspectives. To stabilize net government debt despite the budgetary costs of impending aging, the robust balance must improve by about 2¼ percent of GDP relative to the path implicit in the authorities’ medium-term policies. Early reduction of the sustainability gap would limit the size of the needed fiscal correction and distribute the burden more equitably across generations. Under current growth projections, modest withdrawal of fiscal stimulus (broadly locking in the overperformance realized in 2007) is also called for because economic activity is somewhat above potential and the labor market tight. Maintaining a margin under the expenditure ceilings set in the medium-term budget framework could contribute greatly to this outcome. However, if growth turned markedly lower than projected, automatic stabilizers should be allowed to operate fully.

34. With relatively large tax wedges on labor income, fiscal adjustment should focus on spending restraint and tax base broadening. Otherwise, expenditures would rise rapidly owing to aging, while international tax competition puts pressure to lower corporate tax rates. Savings require: (i) further pension reform; (ii) additional efforts to rein in health care expenditures; (iii) enhancements in public expenditure efficiency, building on existing efforts, to curtail expenditure growth without endangering services; and (iv) tighter unemployment benefits. More transparency of tax expenditures would further strengthen budgetary discipline and reduce residual elements of procyclicality in the fiscal framework.

35. Efforts to increase employment are crucial to ease growing labor shortages, support growth, and address the impact of population aging. Despite relatively high employment rates, low hours worked attest to limited labor utilization. Reforms of the tax system, social entitlements, and employment protection, supported by enhanced activation strategies, are needed to stimulate employment. In particular, reducing the high effective marginal tax rates on second family earners could promote more female employment, while targeted tax incentives could induce elderly participation. Stricter enforcement of work availability requirements, and tightening reassessment of disability status to those aged 45 years and over would lower the share of working-age population receiving social entitlements. Strict EPL for regular employment ought to be liberalized and a funded severance pay system introduced to enhance labor mobility.

36. Further liberalization would be useful to promote productivity growth. The authorities’ “innovation pillar” and additional reductions in red tape are welcome, but barriers to entrepreneurship and product market regulation remain relatively high. Careful liberalization, including of zoning regulations and rigid shop opening hours, would favor emergence of more firms and greater use of information and communications technologies.

37. The Dutch financial system is healthy, but with scope to improve its robustness. It is well poised to weather the global turmoil, thanks to strong initial conditions and good supervision.

  • However, banks must boost equity capital and profitability and ameliorate cost efficiency, transparency of complex products, and investor relations to meet conjunctural and structural challenges. The Dutch contribution and leadership in international efforts to implement the lessons from the ongoing crisis concerning ratings, valuation, liquidity, risk management and fine-tuning of capital and other prudential regulation are welcome in this regard. The insurance sector is well-regulated, but has to consolidate and improve margins to deal with global competition and excess capacity. DNB stress testing is of high international standards, but needs to adapt to novel risks (including difficulties in raising capital and liquidity), rapid rating migration, more adverse asset valuations, and incorporate the insurance sector fully.

  • For mortgages, regulatory action to reduce high LTV ratios, better measurement of related collateral, and fine-tuning capital requirements for loans with different risk would be useful. Gradual removal of mortgage interest deductibility would lower households’ vulnerability to price swings and interest rate shocks. Rapidly growing securitization calls for vigilance about the adequacy of origination standards, rating models, liquidity, and capital requirements for securitized assets.

38. It is recommended that the next Article IV consultation with the Netherlands remains on the 12-month cycle.

Figure 5.
Figure 5.

Netherlands: Monetary Conditions

Interest rates increased steadily in 2006 and into 2007, while monetary conditions tightened through August and then paused as rising inflation reduced real short-term interest rates.

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Sources: Global Insight; and IMF, IFS.1/ An increase implies less accommodative conditions.
Figure 6.
Figure 6.
Figure 6.

Netherlands: Selected Labor Market Indicators

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Source: OECD.
Figure 7.
Figure 7.

Netherlands: Financial Indicators

Citation: IMF Staff Country Reports 2008, 171; 10.5089/9781451829587.002.A001

Sources: Thomson Financial/DataStream and Bloomberg.

Appendix I. Netherlands: Fund Relations

(As of March 31, 2008)

I. Membership Status: Joined December 27, 1945; Article VIII.

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements: None

VI. Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):

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VII. Exchange Rate Arrangements:

The Netherlands’ currency is the euro, which floats freely and independently against other currencies.

VIII. Article IV Consultation:

Discussions for the 2008 Article IV consultation were held in Amsterdam and The Hague from March 6–17, 2008. The staff report for the 2007 Article IV Consultation (IMF Country Report No. 07/216, 6/22/07) was considered by the Executive Board on June 13, 2007. The Article IV discussions with the Netherlands are on the standard 12-month consultation cycle.

IX. Exchange Restrictions:

The Netherlands maintains an exchange system free of restrictions on payments and transfers for current international transactions, except for restrictions maintained solely for security reasons. These measures are established by European Union regulations and have been notified to the Fund pursuant to Executive Board Decision No. 144-(52/51).

Appendix II. Netherlands: Staff Analytical Work, 2000–07

Fiscal Policy

  • Volatility of Tax Revenues in the Netherlands, IMF Country Report No. 06/284.

  • Budgetary Policymaking in the Netherlands, IMF Country Report No. 05/225.

  • Recent Fiscal Developments in the Netherlands, IMF Country Report No. 04/301.

  • Medium-Term Fiscal Policy, IMF Country Report No. 02/123.

  • Health Care Reform, IMF Country Report No. 02/123.

The Financial Sector

  • House Prices in the Netherlands: Determinants, Concerns, and Considerations Related to Phasing Out the Tax Deductibility of Mortgage Interest Payments, IMF Country Report No. 06/284.

  • The Financial Sector in the Netherlands: A Health Check and Progress Report on the FSSA Recommendations, IMF Country Report No. 05/225.

  • House Prices in the Netherlands, IMF Country Report No. 05/225.

  • Second Pillar Pensions, Stock Market Returns, and Labor Demand, IMF Country Report No. 03/240.

Labor Markets

  • Wage Bargaining in the Netherlands, IMF Country Report No. 03/240.

  • Inactivity and Poverty Traps, IMF Country Report No. 02/123.

  • Reform of the Disability Program, IMF Country Report No. 02/123.

  • The Labor Income Tax Credit in an International Perspective, IMF Country Report No. 01/96.

Growth, Productivity, and Related Cyclical Issues

  • Potential Growth and Total Factor Productivity in the Netherlands, IMF Country Report No. 06/284.

  • The External Competitiveness of the Dutch Economy: A Short Note on Evidence from both Aggregate and Disaggregate Data, IMF Country Report No. 05/225.

  • Long-Run Household Consumption Equilibrium in the Netherlands, IMF Country Report No. 05/225.

  • Recent Productivity Trends in the Netherlands, IMF Country Report No. 04/301.

  • Estimating Potential Growth and Output Gaps for the Netherlands, IMF Country Report No. 03/240.

  • Dealing with Cyclical Tensions, IMF Country Report No. 00/88.

Appendix III. Netherlands: Past Fund Policy Recommendations and Implementation

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The “signaling value” is the fiscal balance ratio to GDP below which corrective measures must be taken to avoid breaching the Maastricht criteria. It has been reduced to 2 percent from 2½ percent of GDP.

Appendix IV. Netherlands: Statistical Issues

April 10, 2008

The Netherlands publishes a wide range of economic and financial statistics. Specifically, annual and quarterly national account data are provided by the Central Bureau of Statistics; financial and balance of payments data are provided by De Nederlandsche Bank; and fiscal data are provided by the Ministry of Finance. These data are increasingly available in electronic form. Macroeconomic data are generally of high quality.

As a one-off matter, a number of institutional reforms had a significant impact on national account and other data in 2006. Most importantly, the reform of health care insurance caused a significant reclassification of private consumption into public consumption. This shift had a big impact on the growth rates of the components concerned, but overall GDP was not affected.

The frequency and timeliness of the availability of the statistical indicators required for Fund surveillance purposes are summarized in the attached table. The authorities subscribe to the Special Data Dissemination Standard, providing information about their data and data dissemination practices on the IMF Dissemination Standards Bulletin Board. In addition, they have committed to a ROSC data module mission tentatively set for later this year.

Netherlands: Table of Common Indicators Required for Surveillance

(as of April 10, 2008)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Pertains to contribution to EMU aggregate.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

While data on total revenues and expenditures and the fiscal balance of the general and central governments are available on a monthly basis, detailed breakdowns are not available on that high frequency.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.
1

The 2007 Code intends to limit mortgage debt service to 25–30 percent of borrower income and tightens guidelines to judge affordability and inform consumers about risks.

2

During the mission, growth was projected at 2.3 and 1.8 percent in 2008 and 2009 respectively (the comparable figures for inflation were 2.4 and 2.3 percent). Following the latest round of WEO revisions, growth was lowered to 2.1 and 1.6 percent, with inflation at 2.4 and 1.8 percent, respectively for 2008 and 2009.

3

Baseline projections assume that housing and equity prices will broadly hold steady.

4

This difference is the “sustainability gap.”

5

SIP estimates suggest a negative impact on corporate taxation of ½–1 percent of GDP, depending, inter alia, on the corporate tax rate differential with new EU members.

6

U.S. and euro zone growth rates fall to 0 and 1 percent in 2008, seizure in various credit markets, return of all structured products to originators, zero growth in European housing market, and a 40 percent USD depreciation.

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Cover IMF Staff Country Reports
Kingdom of the Netherlands: Netherlands: 2008 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Kingdom of the Netherlands: Netherlands
Author:
International Monetary Fund
Volume/Issue:
Volume 2008: Issue 171
Publisher:
International Monetary Fund
ISBN:
9781451829587
ISSN:
1934-7685
Pages:
61
DOI:
https://doi.org/10.5089/9781451829587.002
  • Figure 1. Figure 1.
    View in gallery
    Figure 1.

    Netherlands: The Economic Expansion Gained Strength

  • Figure 2.
    View in gallery
    Figure 2.

    Netherlands: Comparative Economic Performance Has Recently Been Strong, With Growth That Is Broad Based

  • View in gallery

    Industrial Production (2000=100)

  • View in gallery

    Output Gap (percent of potential GDP)

  • View in gallery

    Unemployment and Vacancies

  • View in gallery

    HICP Inflation, 2006-08

    (12-month change)

  • Figure 3.
    View in gallery
    Figure 3.

    Netherlands: External Competitiveness

  • Figure 3.
    View in gallery
    Figure 3.

    Netherlands: External Competitiveness

  • Figure 4.
    View in gallery
    Figure 4.

    Netherlands: Financial Stability Indicators

    (In percent)

  • View in gallery

    Fiscal Balance (percent of GDP)

  • View in gallery

    REER measures have been broadly stable…

  • View in gallery

    …while labor’s income share in manufacturing has fallen. 1/

  • View in gallery

    Real Export Growth

    (2002 = 100)

  • View in gallery

    The Netherlands: General Government Accounts, 2000-07

    (In percent of GDP)

  • View in gallery

    03/31/2008 Stock Markets Index

    (percent change from Dec 29, 2006)

  • View in gallery

    Labor Productivity Growth in Finance, Insurance, Real Estate and Business Services

    (5-year averages)

  • View in gallery

    Real GDP Growth: Risks to the Forecast

  • View in gallery

    Hourly Productivity Growth

    (5-year moving average)

  • View in gallery

    Elderly Dependency Ratio

    (Share of Working-Age Population)

  • View in gallery

    Netherlands: Fiscal Sustainability, 2011-2060

    (Percent of GDP)

  • View in gallery

    Effects on cohorts of delaying the reduction of government consumption to 2040 (in 1,000 euro)

    Delaying budgetary adjustment until 2040 will require a tightening of more than 7 percent of GDP to attain sustainability. Furthermore, the costs of the delay for those born after 2040 amount to almost 2½ percent of their lifetime income (or 19,000 euros in present value terms).

  • View in gallery

    Revenue Ratio

    (In percent of GDP)

  • View in gallery

    Public Sector Efficiency Measures, 2000 1/

  • View in gallery

    Fiscal stance (adjusted for gas revenues, in percent of GDP) 1/

    The risk of procyclical fiscal policies is high in the Netherlands, also complicating the achievement of sustainability. Both the deviation of the actual budget deficit from its structural level and the sensitivity of the balance to the output gap are high in international comparison. In part, this relates to the tax deductability of mortgage interest and pension contributions to the extensive second pillar pension system, both of which are procyclical.

  • View in gallery

    Part-Time Employment as a Percent of Total Employment, 2006

  • View in gallery

    Average Annual Hours Worked, 2006

  • View in gallery

    The Share of Working-Age Population Receiving Disability Benefits

    (Percentage of population aged 20-65)

  • View in gallery

    Employment Protection Legislation

    (0-6 from least to most restrictive)

  • View in gallery

    Legal Barriers to Entry

    (0-6 from least to most restrictive)

  • View in gallery

    Real House Price Index

    (1985 = 100)

  • View in gallery

    Mortgage Debt as a Share of GDP, 1996 and 2005

  • Figure 5.
    View in gallery
    Figure 5.

    Netherlands: Monetary Conditions

    Interest rates increased steadily in 2006 and into 2007, while monetary conditions tightened through August and then paused as rising inflation reduced real short-term interest rates.

  • Figure 6. Figure 6.
    View in gallery
    Figure 6.

    Netherlands: Selected Labor Market Indicators

  • Figure 7.
    View in gallery
    Figure 7.

    Netherlands: Financial Indicators

Figure 1.

Netherlands: The Economic Expansion Gained Strength
Figure 1.

Netherlands: The Economic Expansion Gained Strength
Figure 2.

Netherlands: Comparative Economic Performance Has Recently Been Strong, With Growth That Is Broad Based

Industrial Production (2000=100)

Output Gap (percent of potential GDP)

Unemployment and Vacancies

HICP Inflation, 2006-08

(12-month change)
Figure 3.

Netherlands: External Competitiveness
Figure 3.

Netherlands: External Competitiveness
Figure 4.

Netherlands: Financial Stability Indicators

(In percent)

Fiscal Balance (percent of GDP)

REER measures have been broadly stable…

…while labor’s income share in manufacturing has fallen. 1/

Real Export Growth

(2002 = 100)

The Netherlands: General Government Accounts, 2000-07

(In percent of GDP)

03/31/2008 Stock Markets Index

(percent change from Dec 29, 2006)

Labor Productivity Growth in Finance, Insurance, Real Estate and Business Services

(5-year averages)

Real GDP Growth: Risks to the Forecast

Hourly Productivity Growth

(5-year moving average)

Elderly Dependency Ratio

(Share of Working-Age Population)

Netherlands: Fiscal Sustainability, 2011-2060

(Percent of GDP)

Effects on cohorts of delaying the reduction of government consumption to 2040 (in 1,000 euro)

Delaying budgetary adjustment until 2040 will require a tightening of more than 7 percent of GDP to attain sustainability. Furthermore, the costs of the delay for those born after 2040 amount to almost 2½ percent of their lifetime income (or 19,000 euros in present value terms).

Revenue Ratio

(In percent of GDP)

Public Sector Efficiency Measures, 2000 1/

Fiscal stance (adjusted for gas revenues, in percent of GDP) 1/

The risk of procyclical fiscal policies is high in the Netherlands, also complicating the achievement of sustainability. Both the deviation of the actual budget deficit from its structural level and the sensitivity of the balance to the output gap are high in international comparison. In part, this relates to the tax deductability of mortgage interest and pension contributions to the extensive second pillar pension system, both of which are procyclical.

Part-Time Employment as a Percent of Total Employment, 2006

Average Annual Hours Worked, 2006

The Share of Working-Age Population Receiving Disability Benefits

(Percentage of population aged 20-65)

Employment Protection Legislation

(0-6 from least to most restrictive)

Legal Barriers to Entry

(0-6 from least to most restrictive)

Real House Price Index

(1985 = 100)

Mortgage Debt as a Share of GDP, 1996 and 2005
Figure 5.

Netherlands: Monetary Conditions

Interest rates increased steadily in 2006 and into 2007, while monetary conditions tightened through August and then paused as rising inflation reduced real short-term interest rates.
Figure 6.

Netherlands: Selected Labor Market Indicators
Figure 6.

Netherlands: Selected Labor Market Indicators
Figure 7.

Netherlands: Financial Indicators