Kingdom of Netherlands
Netherlands: 2011 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 Netherlands: Netherlands
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International Monetary Fund
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Publication Date:
21 Jun 2011
eISBN:
9781455286638
Language:
English
Keywords:
ISCR; CR; Netherlands; y-o-y growth; projection; deficit; housing market; potential GDP; unemployment rate; market share; tax credit; Global
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In this study, the stability of the economy of the Netherlands is overviewed. Bank profitability has recovered. The housing and mortgage markets are relatively stable, although vulnerabilities to household balance sheets are rising. The results of stress tests in the context of the Financial Stability Assessment Program (FSAP) update are welcomed, which show resilience of bank capital and liquidity buffers under extreme scenarios. Executive Directors agreed that structural reforms continue to be key to lifting the Netherlands’s long-term growth prospects. Further reforms of the tax and benefit systems are needed.

Abstract

In this study, the stability of the economy of the Netherlands is overviewed. Bank profitability has recovered. The housing and mortgage markets are relatively stable, although vulnerabilities to household balance sheets are rising. The results of stress tests in the context of the Financial Stability Assessment Program (FSAP) update are welcomed, which show resilience of bank capital and liquidity buffers under extreme scenarios. Executive Directors agreed that structural reforms continue to be key to lifting the Netherlands’s long-term growth prospects. Further reforms of the tax and benefit systems are needed.

I. Overview

1. Despite robust fundamentals, the crisis hit the Netherlands hard, because of adverse international spillovers, especially in the financial sector. Growth was above the euro area average during most of the decade leading to the crisis, the external current account exhibited sizable surpluses, and the fiscal position was strong, with low public debt. No major bubbles were evident in domestic asset markets, but owing to a relatively large financial sector and sizable foreign financial and trade exposures, economic activity took a major blow. Several large financial institutions had to be rescued by the government through nationalization, massive capital infusions, and other support (Figure 1; Boxes 1 and 2).

Figure 1.
Figure 1.

Netherlands: International Comparisons of Financial Markets

(2009, in percent of GDP)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: IMF, Global Financial Stability Report.
Figure 2.
Figure 2.

Netherlands: Real Sector Developments

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: Haver Analytics; IMF, WEO; and IMF staff estimates.1/ Percent balance.2/ Percent.3/ PMI: Manufacturing (SA, 50+=Expansion).

2. Recovery has commenced, but significant vulnerabilities remain. Although growth has resumed, it is significantly weaker than before the crisis. Moreover, spreading unease in sovereign debt markets and the possibility of a worse-than-anticipated impact of domestic and EU-wide fiscal tightening could darken prospects for a continuation of the recovery and even threaten financial stability, if banks in major advanced countries are affected. The housing market remains a notable domestic risk, while aging weighs on fiscal sustainability and potential growth.

II. Recent Economic Developments and Outlook

3. The Netherlands emerged from a deep recession in mid-2009, as the world economy gained strength, but the resurgence remains frail. Notwithstanding positive quarterly growth from Q3 2009, real GDP fell by 4 percent overall in 2009. The recession was spawned by collapsing exports, investment cutbacks, and massive destocking, amid near-record declines in capacity utilization and confidence (Figures 2 and 3; Tables 1 and 2). Domestic demand contracted much less, as still-substantial wage rises cushioned private consumption. Conversely, the subsequent upturn, with growth of 1¾ percent in 2010, has been stimulated by the recovery of international trade, leading to a strong pick-up of exports and restocking.

Figure 3.
Figure 3.

Netherlands: Comparative Economic Performance

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: Global Insight; Netherlands authorities; OECD; and IMF, 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.
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 fall, without affecting the financial position of the public sectororhouseholds net terms. This is because public expenditure for health care also rose, while the fall in private disposable income was 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.

In percent of potential GDP.

Robust balance is the structural primary balance excluding property income (mainly gas revenue).

Table 2.

Netherlands: Indicators of External and Financial Vulnerability, 2003–10

(In percent of GDP; unless otherwise indicated)

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Sources: Data provided by the authorities; and IMF, IFS.
uA01fig01

Unemployment and Vacancies

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: Global Insight; and IMF, WEO.

4. Unemployment has risen modestly, with subdued price and wage inflation. Despite the large output contraction, the unemployment rate increased only marginally in 2009 and peaked in 2010 at 4½ percent, well below Okun’s law predictions. Enterprises’ reluctance to shed labor, sustained by ample profitability buffers, helped suppress or delay unemployment buildup, while government-subsidized temporary reduced-hours schemes played a minor role.1 Inflation fell sharply in mid-2009 with cuts in electricity and gas tariffs, and stayed low, at less than1 percent in 2010, as recession created economic slack. Accordingly, wage growth contracted by more than half, to about 1¼ percent in 2010. However, in recent months inflation has risen sharply to about 2 percent—as in much of Europe—reflecting largely buoyant oil and commodity prices.

5. Banking system soundness has improved significantly since 2008, but fragilities persist (Table 3 and 4; Figures 6–9).

Figure 4.
Figure 4.

Netherlands: External Competitiveness

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: CPB; OECD, Economic outlook; IMF, IFS, 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 4.
Figure 4.

Netherlands: External Competitiveness (concluded)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources CPB; IMF, IFS, DOT, and WEO.
Figure 5.
Figure 5.

Netherlands: Trade Openness and Spillovers

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: EIU and IMF; DOT and IFS.
Figure 6.
Figure 6.

Netherlands: Comparative Financial Indicators

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: Thomson Financial/DataStream.
Figure 7.
Figure 7.

Netherlands: Financial Indicators

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: Thomson Financial/DataStream and Bloomberg.
Figure 8.
Figure 8.

Netherlands: Financial Stability Indicators

(In percent)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: Global Insight; data provided by the authorities; and IMF, IFS.
Figure 9.
Figure 9.

Netherlands: Monetary Conditions

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: Global Insight; and IMF, IFS.1/ An increase implies less accommodative conditions.
Table 3.

Netherlands: Financial Soundness Indicators, 2003–10

(In percent; unless otherwise indicated)

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Source: Data provided by the authorities.

Data up to 2006 are for three largest credit institutions.

Table 4.

Netherlands: Summary of State Interventions in Major Financial Institutions

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uA01fig02

Bank Capital to Asset Ratio

(2009, percent)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: IMF, GFSR.
uA01fig03

Financial Stress in the Netherlands has eased significantly.

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: IMF, WEO.1/A positive value implies strain.
uA01fig04

Bank Rollover Requirement, 2011-12

(In percent of total debt)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: IMF, GFSR.

  • Although, the (unweighted) capital-to- asset ratio is still comparatively low, all large banks maintain capital well above minimum requirements, largely due to government intervention. The banking sector capital adequacy ratio (CAR) stood at 13.9 percent as of end-2010, comprised mostly of core Tier 1 capital. Deleveraging helped raise the Tier 1 ratio above the average of major European counterparts.

  • Despite deterioration in asset quality in 2009, the NPL ratio remained at manageable levels (less than 3 percent of total loans) for the banking sector as of June 2010.

  • Bank profitability has recovered slightly but remains weak. Banks achieved a modest operating profit in 2009–10, driven by increased interest income, but hobbled by higher operating expenses and persistently large provisions due to servicing arrears. Liquid assets more than cover short-term liabilities; nevertheless funding risk remains a challenge given Dutch banks’ reliance on wholesale market funding.

  • The foreign exposure (foreign loans to total loans) of the Dutch banking sector has fallen from its 71 percent peak before the crisis to 46 percent by end-2010.

6. A strategy of gradual exit from extraordinary policy support is being implemented, amid continued restructuring of the financial sector. At the beginning of 2011, the authorities ended access to the bank credit guarantee program. Three Dutch financial institutions, AEGON, SNS Reaal and ING, have paid back part of the capital support provided by the government in 2008–09. The state guarantee for the mortgage portfolio of ABN Amro was terminated in October 2010, and ABN Amro is expected to complete its merger with Fortis Bank Nederland by end-2011.

7. Coverage ratios of pension funds are low amid widespread uncertainty on future benefits and insurers also face important challenges. After a temporary improvement, the average coverage ratio dropped under 95 percent in Q3 of 2010 and has since recovered to just above the statutory minimum of 105 percent—compressed by increasing pension liabilities, both from extended longevity and continued low interest rates. DNB has requested development of recovery plans by many funds. Nevertheless, with the low interest rate environment expected to persist in the medium-term, indexation of benefits has been widely abandoned during the crisis, and even maintenance of commitments in nominal terms is in question in many funds. Average solvency ratios of life insurers have decreased significantly and profitability is also threatened, mainly because sales of individual life policies collapsed in 2009. Nonlife insurers appear to have weathered the crisis better.

uA01fig05

Coverage Ratios of Pension Funds

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

8. Household balance sheets appear relatively comfortable, but vulnerabilities are rising. Net financial assets of households have recovered from the lows of 2008–09. However, household debt has risen steadily to over 270 percent of disposable income in 2010, among the highest in advanced economies. In addition, the loan-to-value (LTV) ratio of new mortgages has surged, exceeding 120 percent in 2010. Liberal mortgage interest tax deductibility (MID) has put upward pressure on mortgage size, and also led to the proliferation of interest-only non-amortizing mortgages—frequently with principal accumulated in separate investment/insurance accounts—since the mid-1990s. Data on the separately accumulated principal is unavailable, but the DNB believes such principal to be relatively modest. With banks having first charge at default, and full recourse against borrowers, mortgage default rates remain very low. However, fiscal consolidation and increased unemployment could exert significant pressure on household disposable income.

uA01fig06

Household debt in 2009

(percent of disposable income)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: Haver
uA01fig07

Household Debt to Disposable Income Ratio

(in percent)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

uA01fig08

Household assets and liabilities

(in percent of annualized quarterly GDP)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Netherlands: Cross-Border Spillovers1

Regional concentration of exports exposes the Netherlands to correction in the external position of developed countries. A comparatively high 77 percent of Dutch exports are directed to European countries. Only about 15 percent goes to emerging markets and developing countries, with less than 3 percent of total exports to Asia. Dutch exports are thus more vulnerable to faltering demand in advanced economies, particularly European, than many other euro area member countries.

uA01fig09

Export Market

(in percent of total exports)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Fiscal consolidation in trading partners could impact significantly export and GDP growth. Several of the main markets for Dutch exports are expected to reduce fiscal deficits markedly over the short- to medium-run. Simulation results indicate that fiscal consolidation in the Netherlands’ trading partners is likely to reduce GDP growth by close to ½ percentage points in 2012, almost equivalent to the negative effect from domestic consolidation. The extent of fiscal spillovers in the Netherlands is well above the PPP-weighted average for a sample of 20 countries. Fiscal consolidation in Germany, France, the United States, and the UK accounts for 78 percent of the adjustment spillovers to the Netherlands.

uA01fig10

Fiscal contribution to growth

(in percent)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

The concentration of financial claims abroad and the high degree of openness render the Netherlands quite susceptible to foreign default. Simulating the direct and indirect effects of a default in one or more of the major partners indicates sizeable losses to Dutch lenders. For example, a default on 10 percent of international claims on the US could generate a loss of 3.1 percent of GDP. Corresponding values for the UK, Germany or Spain are 1.6, 1 and 0.9 percent of GDP. While financial exposure remains high by international standard, the decrease in claims abroad relative to GDP from 315 percent in 2007 before the crisis to 160 percent in mid-2010 has reduced potential default losses appreciably.

Spillovers to the Netherlands from International Banking Exposures

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Source: RES/MFU Bank Contagion Module based on BIS, ECB, and IFS data.

Magnitude denotes the percent of on-balance sheet claims that default.

Deleveraging need is the amount (in percent of Tier I capital) that needs to be raised through asset sales in response to the shock in order to meet a Tier I capital asset ratio of 6 percent, expressed in percent of total assets.

Greece, Ireland, and Portugal.

Contagion from default in the Netherlands would be essentially limited to European countries. In case of Dutch default on a sizable fraction of its foreign liabilities, the United Kingdom and Switzerland suffer the most, due to their high overall financial openness, followed by Portugal, Belgium, France, Germany, Austria and Ireland. With the exception of Portugal and Belgium, Dutch assets account for less than 5 percent of any major economies’ total claims abroad (See AN2). Thus only a high default rate would inflict significant losses on any given country.

uA01fig11

Spillover from the Netherlands through International Banking Exposure

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

© IMF 2010. Own estimates using World Bank, IMF and BIS sources.
1 See AN2.

Netherlands: Macro-Financial Linkages

Financial variables had a heavy negative impact on the broader economy during the crisis. Staff estimates the cumulative contribution of deteriorating financial conditions from 2008–09 to GDP growth at 2½–3 percentage points, based on a Financial Conditions Index (FCI) approach.1 A depressed stock market and deteriorated interbank market conditions have fuelled stress in the banking sector via lower asset values and increased costs of refinancing.

Stress in the banking sector, deleveraging, and falling profitability of banks have tightened credit supply conditions. A noticeable excess demand (“credit crunch”) materialized during the financial crisis with an estimated peak of 6 percent in 2009Q2, as credit supply fell faster than demand for credit.

The prevalence of excess demand seems to be over. While credit demand remained subdued throughout 2009, credit supply recovered on the back of improved access to capital and a moderation in banking sector stress. Also the initial tightening in credit conditions was mitigated to some extent by an increase in financing via bond markets, where large corporation had ease in obtaining credit.

1 See AN3.

9. Vulnerability to a severe contraction of real estate prices is of medium intensity. Having contracted by 5 percent between mid-2008 and mid-2009, house prices steadied through late 2010, but recently resumed a slow downward drift, amid indications of increased unsold homes. Simple indicators of affordability, though still comparatively high, have improved and stabilized (AN4). There are few signs of overvaluation from econometric models, consistent with relatively modest house price rises compared with other euro area economies. Also, the Dutch economy does not display the sort of imbalances that often preceded house price busts, such as rapid credit growth, excessive shifts of expenditures into residential investment, and external imbalances. Additionally, limited land availability reduces downside risks. Commercial real estate prices fell significantly during the crisis, but are stabilizing (Figure 10).

Figure 10.
Figure 10.

Netherlands: Real Estate Market Developments

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: DNB.

10. Dutch firms entered the crisis with robust finances but saw a sharp decline in profitability and are exposed to credit tightening. This is reflected in the still large—though recently declining—number of bankruptcies. Credit growth for nonfinancial corporations has decelerated markedly but remains positive (Box 2). Given comparatively high dependence on bank lending, the Dutch business sector is quite susceptible to a drop in corporate loans or tight credit conditions.

uA01fig14

Corporate Credit Growth and Consumer Confidence

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: Haver.
uA01fig15

Total Pronounced Bankruptcies

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: CBS.

11. The fiscal position severely deteriorated during the crisis, but is already improving (Tables 5a–5b). The general government (GG) headline balance worsened by six percentage points to a deficit of 5½ percent of GDP in 2009, reflecting substantial stimulus measures and free operation of automatic stabilizers to stem the impact of the global crisis. However, in 2010 stronger-than-expected tax receipts helped reduce the deficit slightly to 5¼ percent of GDP. Discretionary measures over the two years have envisaged: (i) expansion of unemployment alleviation schemes; (ii) infrastructure and housing investment; and (iii) transfers, subsidies, and tax allowances for businesses, especially small- and medium-sized ones. In structural terms, the robust balance worsened by 2¾ percentage points over 2009–10 compared to 2008, to a deficit of 5 percent.2 Alongside, GG debt has risen to almost 64 percent of GDP in 2010, while population aging remains a challenge for long-term fiscal sustainability.

Table 5a.

Netherlands: General Government Statement of Operations, 2004–12

(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.

Table 5b.

Netherlands: General Government Integrated Balance Sheet, 2004–09

(In percent of GDP)

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Sources: The Netherlands’ Ministry of Finance, and Fund staff calculations.
uA01fig16

Fiscal Balance

(In Percent of GDP)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: WEO; and IMF staff estimates.

Evolution of Robust Balance

(In percent of potential GDP)

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Sources: Ministry of Finance; and IMF staff estimates.

12. Sizable current account surpluses and a range of indicators suggest adequate competitiveness (Box 3; Figures 4 and 5). The current account surplus increased significantly to over 7 percent of GDP in 2010 as exports regained their momentum and factor income bounced back from the 2009 lows. The surplus is expected to remain significant over the medium term.

The Netherlands: External Competitiveness

A range of indicators and the sustained large current account surplus suggest that competitiveness remains comfortable:

uA01fig17

Real Effective Exchange Rates

(Jan 1995=100)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

uA01fig18

Export Market Shares

(In percent)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

  • REER measures—using CPI and unit labor cost indices—have fallen significantly in the past year, following appreciation between 2006–09. Much of the drop has reflected the depreciation of the euro, but decelerating wage and price pressures in the aftermath of global recession have also contributed.

  • And relative profitability in manufacturing has been broadly stable. Relative profitability is proxied by the ratio of the CPI-based REER to the unit labor cost in manufacturing (ULCM)-based REER. This measure suggests limited trend changes in relative profitability, with a dip in 2007–08 quickly reversed subsequently.

  • Export growth has been relatively high and market share has perked up (Figure 4). With an expansion of around 15½ percent during 2002–08, export growth has exceeded the euro area average of less than 12 percent. And following the global collapse in trade of 2009, exports rebounded strongly in 2010. However, re-exports (which account for around half of Dutch exports by value) have been important in driving growth of the overall market share.

  • Multilaterally consistent CGER methodologies suggest that the real exchange rate is broadly in equilibrium. Despite some divergence, the average of the three approaches indicates that the real exchange rate is largely in line with fundamentals. The medium-term current account (CA) surplus is close to the CA norm, which itself largely reflects the Netherlands’ financial center role as well as a high saving rate, influenced by the robust second pillar pension system and large corporate profits arising from international operations. CGER assessments going forward may be affected by crisis-related structural breaks in the relationships underlying the methods.

Estimates of Competitiveness Margin Using CGER Methodologies

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

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Source: IMF staff estimates.

CGER (Consultatative Group on Exchange Rate Issues). Values between - 10 and +10 means the real exchange rate (RER) is close to balance. International Monetary Fund, 2008, “Exchange Rate Assessments: CGER Methologies” (available at www.imf.org). CGER estimates based on data available in March 2011.

Macroeconomic balance approach.

Macro Outlook

Prospects for 2011 and 2012

13. Following a rebound in 2010, growth is projected to dip slightly in 2011–12. Staff forecast real GDP to expand by 1½ percent in 2011 and 2012, just lower than in 2010, as base effects dissipate, the pace of exports moderates, and fiscal consolidation commences in most advanced economies. Accordingly, output will remain below potential, though the output gap will continue to decline. Private consumption and construction are expected to remain anemic but investment in machinery is predicted to grow robustly, stimulated by revival in global trade. With a firming recovery, the unemployment rate is anticipated to come down in 2011, while inflation is to stay somewhat elevated. The authorities’ projections are only slightly more optimistic.

uA01fig19

Projected Real GDP Growth, 2011

(Percent)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Medium and long-term prospects

14. The crisis may have inflicted a permanent output loss, and aging will weigh on potential growth. The latter is likely running somewhat lower than before the downturn in the near term, owing to the large contraction in investment. It could be hamstrung also by a deceleration in total factor productivity if financing constraints and increased risk aversion curb research and development. Potential growth is however expected to rise to 1¾ percent over the medium term, around the pre-crisis rate, leaving a permanent decline in the level of potential output of 6¾ percent by 2015 (AN5), when the output gap closes. In the longer run, low and slowing population growth together with population aging will squeeze working-age cohorts, while holding back trend productivity. Maintaining potential growth will therefore require boosting labor force participation and reforms to enhance productivity (¶33–34).

Medium-Term Macroeconomic Framework

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Source: Dutch authorities, and IMF staff estimates.

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; ECFIN: The 2009 Ageing Report; and Staff calculations.

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

Change in the share of population 15-64 years.

Employed as a share of population 15-64 years.

Risks

15. Risks to the outlook appear tilted downwards, with heightened uncertainties. Though house price misalignment is a possible domestic vulnerability, risks stem primarily from external sources, given the Netherlands’ extensive trade and financial links. On the downside, they emanate from heightened vulnerability to disruptions in sovereign debt markets, simultaneous fiscal tightening in several advanced European countries, and a lack of progress in resolving global imbalances. On the upside, they originate from unexpectedly positive effects of policy relaxation measures abroad or emerging market growth spurts, which could boost global demand. Specifically:

uA01fig20

Real GDP Growth: Risks to the Forecast

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

The chart includes the risks to the projections of growth (1.5 percent in 2011 and 1.5 percent in 2012) based on historical forecast errors with downside risks ncreased by a factor of 20 percent to reflect increased uncertainty.Source: IMF staff estimates.

  • Unprecedented sovereign financing is needed globally over a 12–24 month horizon. With investors already jittery, any new shocks in sovereign borrowing markets are likely to prove highly disruptive for already weakened banks and the real economy. Uncertainties could raise risk premia, with negative impact on government debt finances and bank funding costs

  • Recent WEO analysis confirms that fiscal consolidation typically has a sizable contractionary impact on growth. Moreover, when several countries in Europe envisage significant simultaneous tightening, the contractionary effects are likely to be sharper and might surpass current estimates. In addition, it may prove difficult to reverse course quickly if the collective retrenchment proves excessive.

  • Lack of progress in resolving global imbalances may constrain the global trade outlook and dampen export demand, ultimately depressing activity.

  • A larger-than-anticipated impact of the quantitative easing being implemented in the US, not offset by US dollar depreciation, and stronger-than-expected growth in emerging markets could stimulate Dutch exports beyond the central projection. Further depreciation of the euro could have a similar effect.

For each of these factors deviations from the assumed baseline could occur in either direction and impact our central projection for activity accordingly. Nevertheless, the probability of downside occurrences is deemed prevalent—with uncommonly pronounced dispersion—as reflected above. The authorities, though more sanguine on the impact of Europe-wide fiscal retrenchment, broadly shared staff’s assessment of the risks.

III. Policy Discussions

16. Against this background, the Netherlands must secure the recovery, mitigate lingering vulnerabilities, and start addressing long-term sustainability issues.

  • With monetary policy at the limits of its ability to shore up demand, fiscal policy must strike a balance between support of economic activity and prevention of further budget deterioration (¶s24–27). This argues for a relatively gradual pace of consolidation, in order not to jeopardize the upturn.

    Longer term policies should strengthen financial stability, ensure fiscal sustainability, and advance structural reforms to boost potential output. In the financial sector, these include proactive efforts to raise capital to the levels envisaged under Basel III (¶17), implementation of recovery plans for pension funds together with a redefinition of retirement benefits (¶18), strengthening supervisory standards, including by redefinition of rulemaking authority, legal protections, and data reporting (¶19), reinforcing macro-prudential supervision (¶s20–21), and refining crisis resolution procedures and dispositions (¶22). Beyond the medium term objective of substantially reducing the budget deficit, further fiscal adjustment is required to achieve long-term sustainability (¶s28–32). Structural reforms would alleviate the adverse impacts of the crisis and population aging on growth, and facilitate fiscal consolidation (¶s33–34).

A. Maintaining financial stability

Bank capitalization and pension fund solvency

17. Officials concurred that bank capital buffers appear sufficient to withstand even severe shocks, though further steps towards meeting Basel III are warranted. FSAP update stress tests, conducted following the methodology used by the Committee of European Bank Supervisors (CEBS) in 2010 for seven banks comprising more than 80 percent of the sector, indicated that no bank has Tier 1 capital falling below 6 percent. Under a more extreme scenario with shocks twice the CEBS size, all banks remain above the current regulatory minimum of 4 percent tier 1 capital and the CEBS 6 percent. Thus, banks appear in a good position to meet the increasingly robust capital requirements under Basel III; but proactive actions to fill any residual gaps—including restraint on dividend payments and raising additional capital—are desirable, especially in light of comparatively high leverage ratios. This will also be helpful to unwind the government’s substantial ownership interests in some important financial institutions. Moreover, strong capital and liquidity buffers will facilitate bank restructuring pursuant to EC competition directives.

uA01fig21

Public Capital Injection into Financial Sector, September 2008–December 2009

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Source: IMF staff estimates based on a G20 Survey.

18. DNB appropriately ordered preparation of recovery plans for several pension funds, but current proposals to reassess benefits are encountering difficulties. With interest rates not expected to return to pre-crisis levels in the near- to medium-term and with improved longevity, pension fund coverage ratios have declined markedly. The authorities agreed that a reduction in retirement benefits (through lowering of the replacement rate or further raising of the retirement age) is thus required to re-establish solvency, as they do not consider desirable an increase in contributions. Nevertheless, tripartite discussions among government, employers, and employees on ensuring solvency have been laborious and slow- moving. The opinion of the State Advocate in support of grandfathering existing risk-sharing arrangement has cast further doubts on the proposal. Staff stressed that modifications in risk- sharing arrangements need to be transparent and communicated effectively to the public to ensure broad social acceptance and suitable changes in household saving.

Supervision and regulation of financial institutions

19. Supervisory standards are generally high and the authorities have begun taking action in areas for improvement identified by the FSAP update (Table 6). Assessments showed a high degree of compliance with the Basel and other international core principles. Nonetheless, advances are possible in several fields.

Table 6.

Netherlands: Main FSAP Update Recommendations

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  • Rulemaking authority is limited and should be enhanced. It presently constrains the ability of supervisors to react swiftly to emerging risks. Both DNB and the AFM can issue sector-wide rules only in areas explicitly mentioned in the law, usually on very technical issues. DNB is also legally restricted from imposing broadly applicable intra-group exposure limits to insurance groups, and its legal authority over financial holding companies is significantly constrained. It also has limited powers to impose resolution tools.

  • Concerns about the adequacy of legal protections may have induced DNB to rely excessively on moral suasion for fear of increasing already rampant litigation. The FSAP update recommended giving supervisors legal immunity, except in cases of gross negligence or willful misconduct, in line with practice in neighboring countries.

  • Data routinely reported to supervisors no longer have sufficient granularity for full monitoring of financial sector developments and risks—the result of initiatives to reduce administrative burdens on industry. Supervisors are now reviewing data needed for proper execution of their functions and to address identified deficiencies. Greater data dissemination would strengthen market oversight.

  • The authorities have made plans for greater supervisory intrusiveness, including thematic inspections of institutions. The FSAP update welcomed these important steps, but emphasized that comprehensive oversight remains essential—not least by on-site inspections and detailed off-site provision of data. Also, the DNB should complement its work on large connected financial institutions (LCFIs) through the Supervisory Colleges with heightened direct understanding of the activities of Dutch financial institutions abroad. Additional resources are likely needed to this end.

While seeing merit in many of the proposals, the Ministry of Finance considers that the present division between rule-making and implementation powers, and the right of the Minister to take back delegated powers, are consistent with the independence of supervisors and indeed necessary for democratic accountability.

Macro-prudential supervision

20. The authorities are developing macro-prudential instruments to mitigate risks of recurrence of financial turmoil. Work is underway to develop a comprehensive toolkit for macro-prudential supervision. Instruments relating to the housing market will be key, given the latter’s centrality in determining macro-prudential vulnerabilities.

  • In this regard, for new mortgages, DNB intends to limit the maximum LTV ratio to 110 percent and require that 50 percent of principal be amortized before expiration, given that LTV ratios in the Netherlands are amongst the highest (Figure 10). In line with the FSAP update, staff welcomed these plans as a useful first step, but noted that they would permit new mortgages with LTV ratios of 110 percent indefinitely, a clear anomaly. Thus, the mission encouraged the authorities to take additional measures, including tighter conditions (closer to international practice) on LTV ratios and minimum principal repayments, setting greater risk weights on high LTV mortgages, and giving DNB the power to impose further LTV restrictions if macro-prudential conditions signal this need.

  • The authorities concurred that a key distortion fueling housing market risks is the generosity of MID, which artificially inflates housing prices and the balance sheets of households and banks. Distributional concerns also exist, with MID favoring wealthier borrowers disproportionately. However, abolishing MID in one fell swoop could result in a steep house price decline, damaging aggregate demand through perceptions of diminished wealth, especially if the fall of house prices is accelerated by rising marginal loan rates as a result of deteriorating collateral values. Thus, staff recommended lowering MID gradually, for example through capping it in nominal terms, making a clear statement in this regard soon to eliminate uncertainty. Broader regulatory reform to lessen distortions in the private rental market and in social housing is important, together with reducing the house sales tax, high in international comparison. These distortions severely hampered labor mobility and artificially limit the size of the private rental market. In addition, social housing is not targeted efficiently to low income groups. Although key officials saw merit in the proposals, they noted that a coalition agreement prevented action on MID in the near future, reflecting also concerns about the impact on housing prices.

21. More generally, the FSAP update underscored that broad supervisory discretion and enhanced legal protections should extend to macro-prudential instruments. It would also be helpful to assign DNB an explicit objective of ensuring financial stability. In addition DNB should further develop the capability and data for top-down stress testing.

Crisis resolution

22. Crisis resolution arrangements proved effective during the crisis, and officials are considering steps to strengthen them further. The FSAP update made several proposals in this area. The authorities have already announced plans for upgrading the Deposit Guarantee Scheme, which seem aligned with FSAP update recommendations and were welcomed by staff. Proposals on crisis intervention tools, also broadly consistent with FSAP update advice, have been circulated for discussion.

Key FSAP Update Recommendations on Crisis Management and Bank Resolution

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B. Fiscal Policy

Short-Term Fiscal Policy

23. The authorities plan strong and distinctly front-loaded3 fiscal adjustment over 2011–15. Under staff’s macro projections, measures envisaged by the new government will reduce the headline deficit to 3¼ percent of GDP in 2011, and 1¼ percent of GDP by 2015. Structural tightening of 1 percent of GDP is envisaged for 2011 and 2012, with the pace of retrenchment declining to about ¾ percent of GDP for 2013, and dropping to ½ percent of GDP for 2014 and 2015. The adjustment in 2011 is roughly equally split between revenue increases (with a significant hike in social contributions partly offset by lower taxes) and broad-based expenditure cuts. The authorities stated that their aggressive retrenchment is intended to protect the AAA rating of Dutch sovereign bonds and its acceleration was opportune in light of the domestic political cycle.

uA01fig22

General Government Accounts

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: WEO; and IMF staff estimates

24. Staff welcomed the authorities’ commitment to consolidation, but advocated flexible handling of the marked front-loading in case of a serious slowdown.

  • The conflicting objectives of reducing the output gap and making progress towards fiscal sustainability (¶26) have to be balanced. For this reason, in the 2009 Article IV, the Fund supported as prudent the authorities’ plan of a gradual structural adjustment (about ½ percent of GDP in 2011 and ¾ percent of GDP thereafter),4 aimed at bringing the headline deficit below the SGP ceiling by 2013, while not jeopardizing the recovery (also reflecting the considerations outlined in ¶29).

  • The tightening now envisaged is much more front-loaded than that previously scheduled, and both the authorities and staff have correspondingly incorporated some additional contractionary impact on short-term growth in their central projections. At the same time, the accelerated adjustment is expected to benefit fiscal sustainability considerably. Nevertheless, historical experience indicates that negative effects on demand from budget consolidation are likely to be higher when monetary policy is not able to accommodate tightening, as is currently the case. Staff analysis also suggests that spillovers to the Netherlands from the concomitant fiscal retrenchment in Europe are sizable (AN2), complicating options for tempering the policy if an unexpected slowdown occurs. While both these factors have been taken into account in the baseline scenario, a significant downside risk is that the contractionary impact of simultaneous fiscal tightening in several advanced European countries could prove sharper than currently estimated.

  • In addition, despite a substantial sustainability gap, there is no immediate fiscal credibility issue, and debt is lower than in many advanced economies; hence pressure from markets with regard to Dutch financing requirements is negligible. Furthermore, evidence of bubbles in fiscal revenues that could justify more substantive early tightening is scant (AN6).

  • These considerations suggest that flexibility in the implementation of the planned fiscal adjustment is both possible and desirable should economic outcomes be significantly worse than anticipated, so as not to exacerbate downside risks for growth prospects in the near-term. To moderate adverse impacts on aggregate demand, in any case, it might be preferable to substitute part of the headline tightening with structural measures (such as increasing further the retirement age), which improve significantly fiscal sustainability, but impact only modestly the government balance in the short-run.

uA01fig23
1/ Fiscal stance is measured by the change in the robust balance.

Summary of Measures in the Government’s Fiscal Consolidation Program 1/

(in percent of GDP)

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Source: Dutch authorities.

Excludes the impact of the withdrawal of the discretionary stimulus measures of 2009-10

Overall structural impact. Includes the effect of measures taken during 2011-15 but with impact that extends beyond 2015

25. In particular, automatic stabilizers ought to be allowed to operate freely and contingency plans developed to moderate the adjustment, should the recovery stall. Staff argued that unhindered operation of automatic stabilizers would require excluding unemployment benefits from expenditure ceilings. Moreover, unexpected serious setbacks to the recovery that cause the headline deficit to rise substantially above targeted levels should not trigger further discretionary retrenchment—as envisaged under the government program. Staff also advised that contingency plans be prepared beforehand to ease the envisioned fiscal tightening, so that prompt action would be possible, in the event that (i) domestic growth falters markedly below envisaged rates; or (ii) high frequency indicators and adverse developments in international financial markets and economic activity abroad suggest that the recovery is coming to a standstill.

26. The authorities generally concurred, but stressed that only a very severe shock to the recovery would warrant relaxation of their fiscal adjustment plans. In their view, automatic stabilizers on revenues were sufficiently large, limiting need for discretionary action. Thus, discretionary action would only be justified by the clear and present danger of another major recession. Staff noted however that, under existing fiscal rules, the operation of automatic stabilizers would be capped, if the deficit exceeded the plan by 1 percent of GDP. The authorities were also concerned that public articulation of contingency plans could lead to a push for more spending even if the recovery continues.

Medium-Term Fiscal Policy and Sustainability

27. The long-term GG position remains weak (AN7 and AN8), reflecting in part the impact of the crisis. Staff estimates a fiscal sustainability gap of 7½ percent of GDP. 5,6 Despite comparatively low initial debt, several crisis-related factors have inflated the sustainability gap: (i) the marked structural fiscal relaxation in 2009–10; (ii) large operations in support of the financial sector, which have not increased the deficit but added to public debt; and (iii) weaker potential output. In addition, aging-related spending is expected to increase by nine percent of GDP over 2011–60, on account of pensions, health- and old-age care.

28. Accordingly, there was agreement that consolidation will need to continue beyond 2015 to ensure fiscal sustainability. Reasonable calibration of the tradeoff between output stabilization and fiscal sustainability, broadly consistent with the Netherlands’ medium-term pledges under the SGP, suggests that adjustment of about ¾ percent of GDP per annum would be desirable and close the sustainability gap by 2021. As noted above, though, the authorities now aim for a notably more frontloaded consolidation in 2011–12, albeit with a slower pace of tightening over the medium term. In any case, staff argued, supporting measures beyond 2011 should be adopted promptly.

uA01fig24

Netherlands: Fiscal Sustainability, 2012–60 1/

(in percent of GDP)

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: CPB: Ageing and the Sustainability of Dutch Public Finances (2006), ECFIN: The 2009 Ageing Report, and Staff calculations.1/ Plausible adjustment path 1 is somewhat less ambitious than authorities’ adjustment path in the short run, but envisages stronger consolidation thereafter such that the sustainability gap is closed in 2021. This also corresponds to the variable weights scenario in Table 7-1. Plausible adjustment path 2 is consistent with the authorities’ adjustment path up to 2015, and further assumes that consolidation continues at a pace of ½ percent of GDP until the sustainability gap is closed in 2025.
Table 7.

Netherlands: Proposed Structural Fiscal Measures

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Illustrative Optimal Annual Fiscal Adjustment Paths Under Quadratic Preferences 1/

article image
Source: IMF staff calculations.

Initial sustainability gap (given no consolidation from 2012 onward) = 7.5 percent of GDP; Initial output gap (in 2011) = -1.0 percent of GDP; fiscal multiplier is taken to be 0.6; autoregressive parameter for output gap (lambda) is taken to be 0.5; nominal interest rate = 5 percent; nominal GDP growth rate = 3.4 percent.

Alpha is the weight on the output gap, while gamma is the weight on the sustainability gap.

Alpha is assumed to decline over time from an initial value of 0.9 to zero over a 10-year period, while Beta rises at the same pace from an initial value of 0.1. This scenario corresponds to “Plausible adjustment path 1” in the Netherlands: Fiscal Sustainability, 2012-60 textchart.

The underlying output gap is not directly comparable with the output gap in staff’s WEO projections, as the WEO projections assume that other effects (including confidence e.t.c) will provide some offset to the negative impact of fiscal tightening, such that the output gap closes in 2016. These other effects could be modeled by introducing an exogenous term into the equation governing the evolution of the underlying output gap.

Measures to Achieve Sustainability

29. The consensus was that scope for increasing the tax burden is limited (Figure 11), thus expenditure retrenchment has to play a key role in adjustment. Expenditure- based consolidations have generally been more successful, based on international evidence. Moreover, given international competition to lower corporate taxation and relatively large tax wedges on earned income which discourage work, direct tax rates have little upward room. The mission therefore advised that focus on the revenue side should be on base broadening—for example curtailing generosity of MID (¶31)—and a shift from labor to less distortionary taxation of consumption and property, including by reducing the number of items on reduced VAT rates. Concerning outlays, the priority should be reducing the impact of aging on fiscal expenditures, through increases in the effective retirement age and measures to restrain growth in demand for health- and long-term care (Table 7).

Figure 11.
Figure 11.

Netherlands: Tax Comparisons

Citation: IMF Staff Country Reports 2011, 142; 10.5089/9781455286638.002.A001

Sources: OECD and IMF, WEO.

30. In this regard, the authorities considered that the fiscal correction’s focus on outlays was apt, though staff expressed concern at its limited structural content. The deep broad-ranging cuts in expenditure over 2011–15 envisage restraining growth of public wages, curtailing the size of the civil service, slowing down health care costs, and reducing grants and transfers. Staff stressed that the ambitious fiscal objectives throughout 2015 should not come at the expense of progress in structural reforms with beneficial budgetary implications, which seem to have been given limited prominence in the new government’s program.

31. Staff argued that eliminating the costly MID scheme would benefit both growth and the budget in the long run, but should be implemented gradually. The implicit subsidy to homeowners represents around 7 percent of total revenues. Phasing out the deduction could have considerable long-run benefits. A gradual reduction that allows households time to adjust and does not affect existing mortgage contracts greatly is desirable. Nonetheless, to realize the benefits of the reform quickly, a credible commitment to eventual elimination or radical curtailment of the subsidy is needed (AN9 and ¶20). However, despite much public discussion, the momentum to tighten the MID regime appears to have lost steam.

C. Structural Reforms

32. The authorities agreed that, with a stagnating population amid aging pressures, policies need to encourage greater work effort to maintain potential growth (Table 8).

Table 8.

Netherlands: Policy Responses to the Recommendation to Improve Labor Supply

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Source: Annual Progress Report 2009 and national authorities, The Netherlands, in the context of the Lisbon Strategy and the Europe 2020 strategy.

  • The participation rate of the elderly is relatively low by international standards and the effective average retirement age is close to 4 years below the statutory rate of 65 years, while hours worked by women are low. Officials are considering steps to: (i) increase the minimum age—together with steeper penalties—for early retirement; and (ii) further curtail disincentives in taxation or social benefits to longer working hours by females. It had been envisaged to lift the statutory retirement age by two years to 67, but this has now been reduced to 66. The authorities noted that that a majority in parliament—not coinciding with that supporting the government—could vote for linking the retirement age to life expectancy, a measure in line with staff recommendations.

  • Unemployment benefits are fairly generous and may discourage job search, lifting the duration of unemployment. Lowering the benefits and limiting their length, however, are not included in the government program.

33. Similarly, fostering research and development (R&D) and combating traffic congestion would enhance productivity and thus also growth.

  • Gross domestic expenditure on R&D, public and private, is fairly modest. More support for R&D could not only fuel productivity through innovation, but also improve incentives for higher education by building up demand for top-skilled workers.

  • Various estimates put the Netherlands among the countries with the highest costs of congestion. Stepped up investment in roads and railways, which would require some relaxation of strict zoning regulations, road pricing, and opening the transportation sector to more competition could alleviate congestion and thus spur productivity.

The authorities are considering options in these areas. In particular, their Europe 2020 plan does focus on increasing efficiencies in current arrangements.

Model Based Estimates of Impacts of Relevant Structural Policy Reforms on Growth 1/

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Source: OECD

Assessments of the impact of structural reform on growth or GDP should be taken with great caution.

IV. Staff Appraisal

34. The Dutch economy is on the mend, but the recovery still frail. The upturn has been fueled by strong exports. Unemployment has risen only modestly and is the lowest in Europe, mainly because strong pre-crisis profitability coupled with the fear of future labor shortages from population aging have kindled labor hoarding by firms. With output still well below potential, inflation has remained subdued, even if it is now picking up because of rising oil and commodity prices. Wages though are under control and external competitiveness is adequate. A subdued continuation of the recovery is projected for 2011—12, with output remaining below potential and modest inflation. Risks—primarily from external sources—appear tilted downwards. The crisis has also led to a permanent loss of output aggravating the problems posed by aging, not least to fiscal sustainability.

35. Lingering risks require continued vigilance on bank capital and liquidity, given also increasingly robust regulatory requirements. FSAP update stress tests outcomes and spillovers are benign, with banks’ capital and liquidity positions able to withstand even quite severe scenarios. Nevertheless, with relatively high leverage ratios and tighter capital standards to be phased in under Basel III, proactive measures are desirable to prevent emergence of any capital or liquidity shortcomings. Such steps will also smooth the phasing out of government equity from intervened banks and bank restructuring.

36. It is crucial to address promptly housing market vulnerabilities and distortions. Given heavy exposure of the financial system to the housing market, a determined response to the buildup of vulnerabilities there is warranted. Authorities’ plans to limit the maximum LTV ratio and impose a fractional minimum principal repayment are welcome, but insufficient. Further tightening of LTV ratios and minimum principal repayments, setting greater risk weights on high LTV mortgages, and giving DNB the authority to impose further LTV restrictions if required would be useful. Moreover, a clear and credible statement that MID will be gradually reduced should be made to eliminate uncertainty and minimize the possible impact on the housing market. This should be accompanied by deep regulatory reform of the housing sector and a cut of the house sales tax.

37. Despite improved supervisory practices, the effectiveness of supervision and crisis resolution mechanisms can be further buttressed. Concerns include rule-making authority and legal protections of supervisors; adequacy of data reporting requirements; banking supervision culture; resource limitations; and the crisis resolution framework. In particular, DNB and the AFM should be provided with broad supervisory discretion over macro-prudential instruments, in line with their respective responsibilities, and a single regime created for resolving banks under official control. Welcome efforts are being made to address these issues, but further early and sustained action in these areas is needed, with a focus on intensifying and coordinating supervision of large international financial institutions and improving reporting requirements. The insurance sector warrants careful monitoring too, given its tarnished reputation, and the financial pressures under which it is operating.

38. To restore pension fund viability, second-pillar pension benefits should be recalibrated. Persistently low interest rates and rising longevity have put pressure on the coverage ratios of many funds. Lower retirement benefits (including through further raises of the retirement age) or higher contributions are thus required. The public should be made fully aware of risk-sharing modifications, not least to induce fitting changes in saving behavior.

39. The planned strong fiscal adjustment should be implemented flexibly in case of a sharp and prolonged slowdown to prevent harming the recovery. While it remains appropriate to close the fiscal sustainability gap within 10–15 years, the conflicting objectives of reducing the output gap and making progress towards fiscal sustainability have to be balanced in the short run. The front-loaded adjustment is expected to benefit fiscal sustainability considerably, with potential positive effects on consumer and investor confidence on the long-run prospects of the economy. Nevertheless, there are no immediate concerns about Dutch fiscal credibility. Moreover, a significant downside risk is that the contractionary impact of simultaneous fiscal tightening in several advanced European countries could prove sharper than currently estimated, particularly since monetary policy is at the limit of its ability to provide stimulus. Thus, if the recovery were to stall, automatic stabilizers ought to function unhindered and contingency plans developed to moderate the adjustment.

40. Measures that directly reduce the impact of aging on public expenditures or broaden the tax base must be a key plank of adjustment. Expenditure-based consolidations have generally been more successful than tax-centered ones and there is not much scope to raise tax rates. Therefore, revenues could only be augmented by expanding the base—for example by limiting MID, a large tax expenditure—and a further move away from labor to less distortionary indirect taxation. Concerning fiscal outlays, the priority is to increase the effective retirement age and to restrain growth in demand for and costs of health- and long-term care, also by raising co-payments and user fees. In general, renewed emphasis should be placed on structural fiscal reform efforts.

41. To maintain potential growth amid a stagnating population and aging pressures, policies should encourage greater work effort and productivity. Apart from increasing the retirement age, labor market reforms should overhaul tax and benefit systems to curtail disincentives to full-time female and elderly work. Excessive generosity of unemployment benefits should be pared down not to discourage job search and prolong unemployment spells. Fostering research and development (R&D) expenditure, which is quite limited, would enhance productivity. Less strict zoning regulations, more competition in the transport sector together with an upgrade of its infrastructure, and extension of road pricing could counter congestion and also stimulate productivity.

42. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

1

See Analytical Note 1 (AN1).

2

Robust balance is the structural primary balance excluding property income (mainly gas revenue).

3

The accentuated front-loading of the structural adjustment results from the combination of the discretionary retrenchment over 2011–15 with the phasing out of the stimulus provided in 2009–10. The former alone is roughly uniformly distributed over time.

4

Specifically, a structural retrenchment of ¾ percent of GDP per year (a bit less in 2011) was sought, until the headline deficit fell below 3 percent of GDP in 2013. Beyond 2013, tightening would take place at a more measured pace, with a view to close progressively the sustainability gap.

5

This is the improvement in the GG robust balance after 2011 compared with the no-measures path needed to attain long-term stability of public debt as a share of GDP. The sustainability indicator used here is based on the intertemporal budget constraint (see AN7), and is consistent with the S2 measure of the EC (Sustainability Report 2009, pp148–49). The sustainability gap—evaluated as of 2012—has decreased from 8 percent of GDP in IMF Country Report No. 10/34, primarily reflecting the strong consolidation of 2011. This estimate assumes that the outlays for the financial sector bailout are fully recouped. Without recovery of these outlays the sustainability gap increases to 7¾ percent of GDP.

6

The authorities’ latest estimates of the sustainability gap are significantly smaller because they incorporate the corrective adjustment planned throughout 2015, although measures have been enacted only for 2011, and allow for a putative long-term boost to consumption tax revenues from population aging (AN7).

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Cover IMF Staff Country Reports
Kingdom of Netherlands: Netherlands: 2011 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 Netherlands: Netherlands
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 142
Publisher:
International Monetary Fund
ISBN:
9781455286638
ISSN:
1934-7685
Pages:
72
DOI:
https://doi.org/10.5089/9781455286638.002
Figure 1.

Netherlands: International Comparisons of Financial Markets

(2009, in percent of GDP)
Figure 2.

Netherlands: Real Sector Developments
Figure 3.

Netherlands: Comparative Economic Performance

Unemployment and Vacancies
Figure 4.

Netherlands: External Competitiveness
Figure 4.

Netherlands: External Competitiveness (concluded)
Figure 5.

Netherlands: Trade Openness and Spillovers
Figure 6.

Netherlands: Comparative Financial Indicators
Figure 7.

Netherlands: Financial Indicators
Figure 8.

Netherlands: Financial Stability Indicators

(In percent)
Figure 9.

Netherlands: Monetary Conditions

Bank Capital to Asset Ratio

(2009, percent)

Financial Stress in the Netherlands has eased significantly.

Bank Rollover Requirement, 2011-12

(In percent of total debt)

Coverage Ratios of Pension Funds

Household debt in 2009

(percent of disposable income)

Household Debt to Disposable Income Ratio

(in percent)

Household assets and liabilities

(in percent of annualized quarterly GDP)

Export Market

(in percent of total exports)

Fiscal contribution to growth

(in percent)

Spillover from the Netherlands through International Banking Exposure
Figure 10.

Netherlands: Real Estate Market Developments

Corporate Credit Growth and Consumer Confidence

Total Pronounced Bankruptcies

Fiscal Balance

(In Percent of GDP)

Real Effective Exchange Rates

(Jan 1995=100)

Export Market Shares

(In percent)

Projected Real GDP Growth, 2011

(Percent)

Real GDP Growth: Risks to the Forecast

Public Capital Injection into Financial Sector, September 2008–December 2009

General Government Accounts

(In percent of GDP)

Netherlands: Fiscal Sustainability, 2012–60 1/

(in percent of GDP)
Figure 11.

Netherlands: Tax Comparisons