- International Monetary Fund
- Published Date:
- March 1986
During 1972–76, with the exception of 1975 when real GDP declined by 1 percent, economic growth was fairly strong in the Netherlands, averaging 4½ percent a year. Since 1977, however, growth rates have been sluggish and were in fact negative in 1981 and 1982, reflecting depressed domestic demand, with both private consumption and business investment in particular declining sharply in real terms. Also, a strong guilder caused problems for the manufacturing export industry, and depressed external conditions contributed to a recessionary climate in the open Dutch economy where foreign trade amounts to 45 percent to 50 percent of GDP.
The rate of unemployment was below 3 percent from 1972 to 1974 and rose moderately to 5 percent to 5½ percent in the following five years; however from 1980, unemployment soared, reaching 11½ percent in 1982. In addition to deteriorating economic conditions, a rapidly increasing labor force was responsible for this rise.
From 1972 to 1975, annual inflation rates rose from 8 percent to 10 percent. From 1976, however, the price performance was better than in most other industrial countries. The rate of inflation abated to just over 4 percent in 1978 and 1979, but subsequently rose somewhat in response to the oil price pressures. To a large extent, the good price performance in the latter half of the period is due to moderate wage settlements and the strong position of the guilder through its impact on import prices, reducing the wage-price spiral in a system of widespread indexation.
For most of the period, surpluses were recorded on the external current account. The strong energy sector in part explains this performance and, in particular, the sharp increase in the price of exported natural gas. During the last two years of the period, however, the improvement in the external current balance was also the result of a drop in imports owing to depressed domestic demand. From approximate balance in 1973 and 1974, fiscal deficits grew year by year and in 1982 reached the equivalent of 7½ percent of GDP. For the last several years of the period, the Dutch experience thus represents the somewhat unusual case of growing fiscal deficits going hand in hand with rising external current account surpluses.
Between 1973 and 1982 consolidated central government expenditure expressed as a proportion of GDP expanded from 46 percent to 59 percent, which is one of the highest rates of expansion among the smaller industrial countries over the same period. While individual expenditure categories did not share equally in this growth, they all increased at a faster pace than GDP, with the exception of net lending, which was unusually large in the initial year. The share in total expenditure of subsidies and other current transfers, mainly social security transfers—by far the largest economic category—increased from 66 percent to 70 percent from 1973 to 1982; this growth reflected the combined effect of demographic factors, such as aging population, extension of benefits—especially disability benefits—growing unemployment compensation, and indexation of benefits. In the recent past disability schemes that relate benefits to the degree of disability and previous income have been made more generous by an upgrading of degrees of disability, so that minor disablement qualifies for high benefits. Also in this expenditure category are subsidies to ailing firms, which increased substantially in the second half of the period.
Expenditure on goods and services declined as a proportion of total expenditure from 17½ percent in 1973 to 14½ percent in 1982, although within this category wages and salaries declined considerably less.
Interest payments on the public debt showed a continuous relative increase from 3 percent of total expenditure to 5½ percent over the period; a steadily widening fiscal deficit, as well as rising interest rates, accounted for this rise.
Capital expenditure as a proportion of total expenditure fluctuated in the 6–8½ percent range, and net lending amounted to 2 percent to 4 percent of the total, except in 1973 when it was 6 percent of total expenditure.
|Real GDP, percentage changes||3.4||5.7||3.5||–1.0||5.3||2.4||2.5||2.4||0.9||–0.7||–1.7|
|Rate of unemployment||2.2||2.2||2.7||5.2||5.5||5.3||5.3||5.4||6.0||8.6||11.4|
|Consumer prices, percentage changes||7.8||8.0||9.6||10.2||8.8||6.4||4.1||4.2||6.5||6.7||6.0|
|External current account balance as percentage of GDP||2.8||3.8||3.0||2.3||3.0||0.7||–0.8||–1.1||–1.5||1.3||2.8|
|(as a percentage of GDP)||46.0||47.3||49.6||49.8||48.4||48.4||48.6||49.9||50.5||51.3|
|Percentages of total revenue||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0|
|Social security contributions||36.5||37.8||37.1||36.0||35.2||35.8||36.7||36.4||37.3||38.7|
|Payroll (manpower) taxes||—||—||—||—||—||—||—||—||—||—|
|Taxes on goods and services||22.2||20.4||20.1||20.4||21.3||21.5||20.5||20.1||19.0||18.3|
|Taxes on international trade||0.5||0.2||0.1||—||—||—||—||—||—||—|
|Nontax revenue and grants||5.1||6.9||8.4||10.2||10.1||9.8||9.8||11.1||13.2||13.6|
|(as a percentage of GDP)||46.0||47.3||52.4||52.1||50.3||51.3||52.6||54.3||56.7||58.8|
|Percentages of total expenditure||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0|
|Expenditure on goods and services||17.4||16.9||16.7||16.3||16.4||15.9||15.9||15.4||14.9||14.5|
|Wages and salaries||10.6||11.9||11.3||11.2||10.9||10.9||10.7||10.4||9.8||9.4|
|Subsidies and other current transfers||66.1||69.5||69.5||70.9||71.7||72.9||72.0||70.4||69.1||69.9|
|Social security funds||35.9||37.1||36.4||36.8||37.6||38.5||38.9||38.8||37.8||37.4|
|Lending minus repayments||6.0||3.6||2.9||2.9||2.5||2.1||1.9||2.2||3.1||2.3|
|(as a percentage of GDP)||—||—||–3.0||–2.6||–3.0||–3.1||–4.6||–4.6||–6.5||–7.6|
|Deposit money banks||–0.4||0.2||0.9||0.9||0.5||0.3||0.9||0.8||1.3||1.5|
|General government expenditure and net lending/GDP||…||…||…||…||…||…||…||…||…||…|
|Central government debt outstanding/GDP||22.1||21.0||22.1||22.4||22.5||23.8||25.7||29.1||33.5||39.4|
Total revenue of the Central Government increased as a proportion of GDP from 46 percent to 51½ percent during 1973–82. This ratio is substantially lower than the expenditure ratio, but is nonetheless the highest among the smaller industrial countries. Over the period, income taxes declined as a share in total revenue from 32½ percent to 27½ percent, and they also declined slightly as a proportion of GDP. The decline is in part explained by periodic adjustments for inflation to reduce fiscal drag and by a series of tax rate cuts to reduce the tax burden.
Social security contributions are the most significant single revenue source at the central government level. Slightly less than one half of the contributions is borne by employers and the rest by employees. These contributions respond to requirements of the social security system, which is self-financing, and show some year-to-year fluctuations over the period; they were as high as 38½ percent of total revenue in 1982, having risen from 36½ percent in 1973.
Taxes on goods and services, the most important of which is a value-added tax, declined from just over 22 percent of total revenue in 1973 to 18½ percent in 1982, and the proportion of these taxes to GDP also declined over the period.
The most dynamic revenue element is included in the category “nontax revenue and grants,” whose share in total revenue increased from 5 percent to 13½ percent; this category also rose as a proportion of GDP from 2½ percent to 7 percent during 1973–82. This growth is largely accounted for by revenue from the sale of natural gas whose price soared over the period. Other revenue items, namely, property taxes, taxes on international trade, and other taxes, all declined as a proportion of total revenue. Taken together, the share of these revenue sources in the total was 4 percent in 1973, compared with 2 percent in 1982.
The Fiscal Balance and ITS Financing
As already observed, the central government finances incurred a deficit in 1975 after having remained in approximate balance in the two preceding years. The deficit remained the equivalent of roughly 3 percent of GDP for the subsequent three years but started to widen in 1979 and reached 7½ percent of GDP in 1982. These deficits reflect in part the budgetary impact of stimulatory measures in late 1974 to contain the rise in unemployment, which were followed later by various fiscal incentives to stimulate private sector activity, while the depressed state of the economy in the past few years of the period limited revenue growth. That the authorities for most of the period pursued fiscal policy on the conceptual basis of a so-called structural budget deficit is relevant and is discussed in the next section.
The Government has had almost no recourse to direct external borrowing to finance the fiscal deficit, although in some years a substantial part of the government debt was taken up by nonresidents. At the beginning of the period, debt management policy was actively pursued to counteract the impact of capital inflows on domestic liquidity. The Government borrowed heavily on the capital market and repaid domestic short-term debt to the monetary authorities and deposit money banks. Domestic nonbank financing continued to be significant throughout the period, but from the mid-1970s, the banking system and the monetary authorities began assuming a role in financing; the importance of these sources fluctuated from year to year in the range of 10 to 50 percent of the central government borrowing requirement. In the last years of the period, the continuing recourse to monetary financing led the authorities to center on the actual budget deficit in the formulation of fiscal policy, rather than the structural budget deficit. Total debt of the Central Government increased substantially over the period. Expressed as a ratio to GDP, the debt expanded from 22 percent to 39½ percent between 1973 and 1982. As noted above, foreign borrowing was negligible.
The framework. While the activities of local governments are significant, from an economic viewpoint their financial autonomy is limited and the Central Government dominates fiscal policy formulation and implementation. In 1980 the ratio of general government expenditure to GDP was 62½ percent, and the Central Government accounted for almost 90 percent of this total, if transfers to other levels of government are included. Most current expenditure by local authorities is covered by appropriations from the Central Government. These revenue sources together with own sources generate, as a rule, surpluses on current account that finance part of the investments at the local level. These investments account for about three fourths of total public sector investment. Local authorities are also dependent on the Central Government for investment grants and loans, but in principle are responsible for arranging their own financing of investments not covered in the above manner. Such financing takes place through borrowing in the domestic capital market directly or through the Bank for Municipalities. In practice, long-term borrowing is nonetheless subject to central government control.
Each year since 1969, the central government budget has been accompanied by four-year expenditure estimates. The multiyear estimates are intended as projections of existing expenditure policies without any commitment on the part of the Government. Experience suggests, however, that spending departments and various pressure groups do indeed interpret the projections as commitments; the multiyear estimates have thus constituted an upward pressure on spending, as well as an element of inflexibility in public expenditure.1 The political structure and government decision-making procedure in budgetary matters may also put upward pressure on government spending. Coalition governments are the rule; cabinet members may not become or remain members of Parliament; and the cabinet votes on items in the budget, with the votes of all ministers ordinarily having equal weight.2
Macroeconomic forecasting in budget preparation has probably had more policy relevance in the Netherlands than in any other country in the group. Since 1961, fiscal policy formulation has rested on the conceptual basis of a so-called structural budget deficit. The growth of government expenditure and revenue is related to the medium-term trends in the economy, on the assumption that there is a steady trend growth of potential output and a stable structural pattern of savings and investment, as well as a stable trend in the external current account balance.
In essence, a “correct” balance was to be maintained between the budget position of the Central Government and the volume of investment and saving in other sectors of the economy that was consistent with a desired balance on external current account. Starting from a year considered to represent optimal balance, the size of the deficit in this base year was taken as a norm from which deviations were acceptable for cyclical reasons only.
The growth in tax receipts forecast on the basis of the trend growth of real national income and the progressivity of the tax system, as well as the increase in nontax revenue, provided the scope for expenditure increases or tax reductions, the so-called structural budget margin, with the budget deficit constant in absolute size (until 1973). In the calculation of this margin, allowance was made for price increases and expenditure components were treated differently according to their immediate impact on demand. However, general increases in wages and salaries were excluded from the budget margin calculation on the assumption that they would, in the long run, be covered by inflation-induced revenue increases. Forecasts of the trend growth of real national income were thus a significant determinant of the level of expenditure each year, as was the method of calculating the structural budget margin, which underwent a series of modifications over the period.
Amendments made in 1974 and 1975 with respect to norms for the structural budget deficit and the calculation method allowed a larger increase in expenditure, and subsequently amendments to achieve opposite results were formulated. The structural approach to fiscal policy gradually weakened, however, as growing imbalances in the economy obscured the distinction between cyclical and structural factors, and uncertainties in the external environment complicated the task of projecting medium-term trends in the economy. In 1980 the structural budget policy approach was abandoned for a more factual approach to the budget deficit, as mentioned above.
Aims and measures. The objectives of fiscal policy were closely connected with the emerging imbalances in the economy, which had assumed disconcerting proportions toward the end of the period. Ambitious social security schemes were promoted around the mid-1970s, but otherwise fiscal action centered on the problems of unemployment, depressed business activity, and inflation, although the emphasis differed from one time to another. Partly as a result of the policy pursued, fiscal developments themselves urgently needed structural adjustment.
Concern over high and rising taxation induced the authorities to announce the containment of the tax burden as a specific policy objective. Thus, in the 1972 budget the Government announced the policy of limiting the rise in the share of taxes in national income to 0.5 percentage point a year during 1973–77. Subsequently, this target was revised upward to 1 percentage point a year for 1976 and subsequent years, but in 1978 the norm was again changed and the target was set to stabilize the collective burden (tax and nontax revenue as proportion of national income) at the 1978 level.
Over the period, various forms of tax reductions were implemented to achieve these targets. The type of tax affected usually reflected separate policy objectives. The measures included cuts in business tax rates, tax relief for business investment, and accelerated depreciation of industrial buildings outside the most densely populated areas. Some of these were temporary measures and all aimed directly or indirectly at stimulating investment and activity in the enterprise sector. Personal income taxes, apart from being periodically adjusted for inflation, similarly underwent a series of rate cuts to reduce their disincentive impact, and also to moderate wage settlements and thereby contribute to the containment of inflation.
The interaction of fiscal and incomes policies is a distinct feature of Dutch economic policy. To partly offset the resulting revenue loss, indirect taxes have been increased from time to time, such as the value-added tax in 1976 (from 16 percent to 18 percent), taxes on energy and tobacco; and as already noted, nontax revenue, mainly from the sale of natural gas, increased rapidly over the period. Natural gas export contracts are almost fully indexed to Rotterdam fuel oil prices, with up to a six-month indexation lag.
Specific targets have also been set for the medium-term structural and actual budget deficit. In 1976, for example, this target was set at 5½ percent of national income, of which 3 percent was attributed to the Central Government, and again in 1982, when a new government announced its aim of reducing the deficit by 1 percentage point a year over the 1983–86 period.
The policy of limiting the tax burden and reducing the deficit placed the brunt of the fiscal adjustment effort on the expenditure side. However, several obstacles have been encountered on this front. Efforts to contain social security transfers, the fastest growing category, were complicated by political controversies and protective sentiments that tended to intensify in economically adverse years, such as in 1980 when the maintenance of purchasing power of social security beneficiaries was announced as a special aim of fiscal policy. The general social security system includes a guaranteed minimum income equivalent to approximately US$760 a month. Also, containment of expenditure in this category was at one time complicated by a separation of revenue authority and expenditure responsibility. Moreover, major policy objectives were concerned with the reduction of unemployment and resumption of economic growth by stimulating private sector activity, and the pursuit of these policies entailed vastly increased public spending. Measures to stimulate employment include special building projects, appropriations for local government investment, aid to social housing construction, subsidies to enterprises employing teenagers and to the clothing industry provided employment was kept at a specified minimum level, and wage-cost subsidy schemes for employing persons registered as unemployed for a specified minimum period of time.
Apart from tax incentives and wage-cost subsidies, the private enterprise sector receives various forms of selective and general government support. The oil crisis gave rise to the introduction in 1974 of special credit facilities for enterprises encountering liquidity difficulties on account of rising oil prices, and grants were made in the same year to small- and medium-sized enterprises in agriculture and horticulture to partly compensate for the adverse impact of the guilder appreciation on their incomes. Government support of a more general kind has taken the form of investment subsidies3 operated since 1978 under the WIR (investment account) scheme, which is designed to affect the direction of investment by attaching different premiums to different types of investment and its location. Capital grants under the WIR scheme, and similar investment facilities in operation prior to 1978, increased sharply under deteriorating business conditions and rising unemployment in the second half of the period.
There is evidence that in addition to the factors mentioned above, certain other features of the budgetary process may have exerted an upward pressure on spending. First, as already mentioned, the multi-year expenditure estimates, contrary to intentions, are widely interpreted as minimum commitments on the part of the Government. Second, the structural budget approach has tended to assume unrealistically high growth rates for the economy, which form the basis for determining each year’s expenditure levels in the budget. Attempts in recent years to cut expenditure were linked to these projected increases, which exceeded actual output and revenue trends, and thus had less than the intended effect on actual expenditure levels. A third, less tangible, factor is the impact of the political structure and decision-making procedures in budgetary matters as noted in the preceding section.
Overview and implications for future policy. Fiscal policy during the period was aimed at counteracting emerging imbalances in the economy and promoting generous social entitlement programs. The pursuit of both aims resulted in an explosive growth of government expenditure. Although the self-financing nature of the social security system pushed up contributions and added to a tax burden that is among the highest in industrial countries, attempts were made to reduce the tax burden, and revenue growth experienced a cyclical weakness in the past few years. As a result, the fiscal deficit widened—quite abruptly in the last years of the period. Imbalances in the economy increasingly assumed a structural character, which, according to prevailing views, could not be dealt with adequately by conventional demand management measures.
The vast diversion of resources to the public sector is widely seen as having harmed business profits and investment and overall economic growth and employment. The growing public sector borrowing requirement, which in 1982 absorbed 70 percent of the total supply of funds, contributed to the maintenance of high long-term interest rates, which also affected business investment adversely. The generous unemployment and other social security benefits are perceived as disincentives to work effort. Thus, taking account of the hidden unemployment element in these schemes, it has been estimated that the proportion of the potentially active population that is not working is as high as 20 percent.
These and other implications of past fiscal developments have engendered growing awareness of the need to reverse the trends by a substantial restructuring of the public finances. Although the authorities have long recognized this need and have repeatedly announced targets for limiting the tax burden and reducing the deficit, progress has been hampered by political controversies and also perhaps by technical forecasting factors regarding implementation of expenditure reductions, which lie at the heart of the adjustment effort. Regaining control over public expenditure, especially social security expenditure, is therefore likely to remain a major medium-term preoccupation of fiscal policy.
L.J.C.M LeBlanc and Th. A.J. Meys, “Flexibility and Adjustment in Public Budgeting: The Netherlands Experience,” Public Budgeting and Finance, Vol. 2 (Autumn 1982), p. 60.
Meys, “Spending More and Getting Less: Recent Experiences with the Allocation and Control of Public Expenditure in the Netherlands,” in The Grants Economy and Collective Consumption, ed. by R.C.O. Matthews and G.B. Stafford (New York: St. Martin’s Press, 1982), pp. 245–46.
Government assistance is also offered in the form of loans and participation through semipublic institutions and commercial banks.