Netherlands
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
08 Jun 1995
eISBN:
9781451829297
Language:
English
Keywords:
ISCR; CR; deutsche mark; market share; U.S. dollar; monetary policy; money market; net capital; percent of GDP; money supply; private sector; interest rate development; deutsche mark parity
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This paper describes economic developments in the Kingdom of the Netherlands during the 1990s. Following a slowdown in 1991–92, the Dutch economy experienced a mild recession in 1993 with GDP growth falling to about ½ percent. Output was sustained by external demand, which contributed nearly 1 percentage point to GDP growth, while domestic demand fell by ½ percent. Business investment decreased by 3 percent as a result of reduced profits and a low rate of capacity utilization, while the contribution to GDP of lower stockbuilding was –½ percentage point.

Abstract

This paper describes economic developments in the Kingdom of the Netherlands during the 1990s. Following a slowdown in 1991–92, the Dutch economy experienced a mild recession in 1993 with GDP growth falling to about ½ percent. Output was sustained by external demand, which contributed nearly 1 percentage point to GDP growth, while domestic demand fell by ½ percent. Business investment decreased by 3 percent as a result of reduced profits and a low rate of capacity utilization, while the contribution to GDP of lower stockbuilding was –½ percentage point.

Netherlands—Basic Data

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Sources: Dutch official publications; International Monetary Fund, International Financial Statistics; and staff estimates and projections

Staff estimates.

Contribution to growth in GDP.

At factor cost.

A minus sign indicates a depreciation of the guilder.

Corrected for statistical distortions; Central Planning Bureau.

Excluding exceptional revenues.

Transactions basis.

First nine months.

I. Domestic Economic Developments

1. Aggregate demand and output

Following a slowdown in 1991-92, the Dutch economy experienced a mild recession in 1993 with GDP growth falling to about ½ percent (see table below and Chart 1). Output was sustained by external demand, which contributed nearly 1 percentage point to GDP growth, while domestic demand fell by ½ percent. Business investment decreased by 3 percent as a result of reduced profits and a low rate of capacity utilization, while the contribution to GDP of lower stockbuilding was -½ percentage point. Residential investment decreased, albeit only slightly, as the effect of lower interest rates was offset by sluggish income growth. Public investment also fell as a result of fiscal retrenchment while public consumption stagnated. Although households reduced their saving ratio (Table A2), private consumption growth slowed sharply due to a decline in real disposable incomes.

CHART 1
CHART 1

NETHERLANDS Aggregate Demand

(In Percent Change over Previous Year)

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources: IMF, World Economic Outlook and staff estimates

On the external side, exports continued to increase despite weak external demand in the first half of 1993 as exporters cut profit margins (during the trough of the international cycle, exports were also helped by a favorable product mix; see Chapter IV below). In the second half of the year, world trade revived and strong export growth resumed. Imports virtually stagnated in 1993, reflecting the effect of the fall in domestic demand on import-intensive goods, such as consumer durables and transportation equipment (Tables A3 and A5).

Economic recovery began in the second half of 1993 and gained momentum in 1994, with GDP growing by 2 ½ percent on average (3.3 percent on a fourth quarter basis). Exports increased by 5 ½ percent in 1994, while domestic demand turned around increasing by 2 percent. Private consumption growth recovered to 1 ½ percent despite a real wage decline, as the household saving ratio fell further and profit income increased strongly. The decline of the saving ratio was related to rapid increases in house prices that produced significant wealth gains. 1/ Residential investment grew by 7 ½ percent, stimulated by low long-term interest rates and the increase in house prices. Public investment increased by 3 ½ percent following a government decision to improve public infrastructure. Business investment increased only marginally on average, though rising profitability and a high rate of capacity utilization began to stimulate investment in the latter part of the year. Stockbuilding rebounded and contributed 0.3 percent to GDP growth.

Aggregate Demand

(Volume changes, in percent)

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Source: Table A1.

Estimates.

Change as a percent of previous year’s GDP.

Sectoral developments in 1993 diverged markedly (Table A6). Agriculture grew strongly, while construction suffered from depressed business investment and a decline in residential investment. Manufacturing felt the negative effects of the international slowdown, experiencing a decline in output. However, output in the service sector grew, as consumers cut back mainly on (imported) durables. Limited data are available on sectoral developments in 1994. The impact of the international recovery was most strongly felt in manufacturing. Construction rebounded as a result of rapid growth in residential investment.

2. Labor market 2/

After increasing continuously since 1984, employment virtually stopped growing in 1993. Measured in labor years, employment in the private sector stagnated while public employment declined (Table A7). Measured in persons, total employment rose very slightly, as the share of part-time employment increased further. While employment in agriculture and industry fell, the number of employed persons in the service sector continued to rise (Table A8). Employment started to recover in 1994 with a sharp increase in the number of workers employed through temporary agencies. 3/ Other labor market indicators improved as well: the number of lay-offs fell, and vacancies, which had reached their lowest point of the cycle in December 1993, rose modestly during the year. Unemployment increased sharply in 1993 to 8.3 percent of the labor force as the labor force grew by 1 ¼ percent due to demographic factors and a continued increase in the female participation rate (Chart 2, upper panel). In 1994, unemployment rose to 9.2 percent as the labor force continued to increase, in part related to reform of the disability system that led to a decline in the number of disability claimants. 4/

CHART 2
CHART 2

NETHERLANDS Unemployment and Participation Rates

(In Percent)

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources: OECD, Economic Outlook; IMF, World Economic Outlook; and Eurostat, Labour Force Survey.1/ Net participation rate is the percentage of the population between 15 and 64 which is employed; it has been adjusted for hours worked.Countries are: BEL=Belgium, DNK=Denmark, FRA=France, DEU=Germany, GRC=Greece, IRL=Ireland, ITA=Italy, LUX=Luxembourg, NLD=Netherlands, PRT=Portugal, ESP=Spain, GBR=United Kingdom.

Although official unemployment is not high by European standards, “broad” unemployment is estimated to amount to as much as 26 percent of the labor force. 5/ Broad unemployment includes three groups of workers that are not counted as unemployed under the standard definition: certain recipients of unemployment benefits (for example, the unemployed aged 57 ½ and over are not required to be available for the labor market); those disability insurance claimants who would be more properly classified as unemployed; 6/ and workers who have taken early retirement. Broad unemployment is concentrated among the lower skilled, older workers, and ethnic minorities. 7/

The number of hours worked per person in the working age population is relatively low (Chart 2, lower panel), which is due to the high rate of broad unemployment and the high incidence of part-time work. Of all European countries, part-time employment is most widespread in the Netherlands, where almost one third of all employees work part time. Part-time employment is common among women, in the service sector and in lower skilled positions. Working part time appears to be a matter of choice, as survey data report that only 5 percent of part-time workers would prefer a full-time job. 8/

3. Prices, wages, incomes, and profits

Consumer price inflation eased in 1993, to slightly over 2 percent measured by the consumption deflator and 2 ½ percent according to the consumer price index (see table below). Import prices declined and growth of wage costs moderated. As in previous years, the main contributor to inflation was the collective sector, which has been shifting the burden of services such as housing and public transportation away from the government budget and toward users. Inflation rose slightly in 1994 with an increase in import prices largely offset by a decline in unit labor costs that resulted from lower wage growth and sharply higher productivity. The collective sector was again the main contributor to inflation. Excluding the contribution of the collective sector, inflation has varied between 0.8 and 1.5 percent a year since 1989.

In March 1994, a new consumer price index was introduced. Prices of government services and of consumption related taxes such as real estate and environmental taxes were included in the new index, while insured medical care was excluded, and the consumption basket was rebased from 1985 to 1990. The introduction of the new index led to an increase in measured inflation: between mid-January 1993 and mid-January 1994, the new index increased by 3.0 percent, whereas the old index rose by only 2.4 percent. 9/

Consumer Prices

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Source: Table A9.

Contributions.

The increase in contract wages slowed in 1993 for the first time since 1987 (see table below). Contract wages rose by 3 percent, while unit labor costs increased by 2 ¼ percent, half the rate of 1992. In manufacturing, international competitive pressures forced a sharper adjustment of employment, resulting in a higher increase of labor productivity and slightly better performance on unit labor costs. Wage growth decelerated further in 1994, with contract wages rising by 1 ½ percent (nominally). As labor productivity growth picked up strongly, unit labor costs declined by 1 ½ percent. In manufacturing, productivity increased even more as output was buoyed by the recovery of world trade, and unit labor costs fell by almost 2 ½ percent.

Real disposable wage income of the average employee in enterprises (excluding wage drift) increased by ¾ percent in 1993, slightly more than in 1992. Although gross wages rose by less than in 1992, this was more than compensated by lower inflation and reductions in taxes and social security contributions. Real disposable wage income fell by ½ percent in 1994, as gross wage growth declined further, while inflation rose slightly.

The share of labor income in value added of enterprises, which had reached its lowest level in two decades in 1990, but had risen in 1991 and 1992, continued to increase in 1993. The complement of the share of labor income may be used as an indicator for gross profitability. On the basis of this indicator, enterprises in the exposed sector, in particular, suffered from declining profitability, but domestically operating enterprises also witnessed lower profit margins. Overall, in 1993, net profits did not perform as poorly as gross profits because the interest burden fell (due to lower interest rates) and profits from foreign participations increased. In 1994, the labor income share declined as unit labor costs fell. The increase in gross profitability this implied was strongest in the exposed sector, which benefitted most from the rapid increase in world trade. Net profits increased even more as a result of a further reduction in net interest payments and an increase in profits from foreign participations.

Wages, Incomes, and Profits 1/

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Sources: Tables A11 and A12.

In private, public, and semi-public enterprises.

Modal employee, excluding wage drift.

Percent share of labor compensation in value added, excluding mining, exploitation of dwellings, and government service.

II. Fiscal Policy Developments

1. General government

General government consists of central government, social security insurance funds, and local authorities. The central government dominates public finances: its revenues represent some 34 percent of GDP, while revenues of local authorities—excluding transfers from the central government—amount to 1 percent of GDP; the central government is also ultimately responsible for the proper operation of the social security insurance funds, revenues of which amount to some 21 percent of GDP. The central government budget deficit virtually equals the general government deficit (Table A15). In recent years, the budgets of local authorities have been about in balance, and the social security insurance funds have, on average, run annual surpluses of about 0.1 percent of GDP.

a. Background

Since the late 1970s, fiscal policy has concentrated on reducing the general government deficit and slowing the growth of government spending. These efforts took on increased urgency when the deficit (on a cash basis) ballooned to 9.5 percent of GDP in 1982 and expenditures rose to 67 percent of GDP in 1983 (Chart 3). 10/ A policy of annual reductions in the central government deficit was subsequently initiated that led to a gradual decline in the general government deficit to 3 percent of GDP by 1994. The adjustment has occurred on the spending side, with a fall—primarily during the 1980s—of more than 9 percentage points in the ratio to GDP of general government spending (on a cash basis). 11/ Spending reductions were concentrated in the public sector wage bill and government lending, while domestic (income) transfers were resilient to change. The run up of debt during the 1980s caused interest payments to nearly double relative to GDP.

CHART 3
CHART 3

NETHERLANDS Fiscal Indicators

(In Percent of GDP)

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources: IMF, World Economic Outlook; CPB, Macroeconomic Outlook 1995; and staff estimates.1/ Cash basis. Corrected for statistical distortions (related mainly to effects of tax reform in 1990).2/ National accounts basis.3/ EU Countries excluding Greece and Luxembourg

The general government deficit (on a national accounts basis) in the first half of the 1980s was worse than in other European Union (EU) and industrial countries, but the gradual consolidation during the last 10 years reversed the relative position of the Netherlands in this respect (Charts 3 and 4). Gross public debt as a ratio of GDP, which in 1980 was already higher than in other countries (on average), increased faster than abroad during most of the 1980s, and the gap with other countries only began to narrow more recently. The debt ratio has been stable at just under 80 percent of GDP since 1988, while in other countries (on average) the ratio continued to rise. The ratios of revenues and expenditures—particularly the latter—have on the whole gradually become less out of line with those in other countries, but they remain relatively high (Chart 5). The “collective burden” of taxes and social-security contributions has varied within relatively narrow margins over this period, and in 1994 stood at about the same level as in the early 1980s.

CHART 4
CHART 4

NETHERLANDS General Government Deficit and Debt of EU Countries

(In Percent of GDP)

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources: European Commission, Second Convergence Report, 11/22/94 (as cited in SM/95/42); and staff estimates.Countries are: BCL=Belgium. DNK=Denmark, FRA=France. DEU=Germany. GRC=Greece. IRL=Ireland. ITA=Italy. LUX=Luxembourg. NLD=Netherlands. PRT=Portugal. ESP=Spain, GBR=United Kingdom.
CHART 5
CHART 5

NETHERLANDS General Government Revenue and Expenditure of EU Countries

(In Percent of GDP)

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources: OECD, Revenue Statistics; IMF, World Economic Outlook; and staff estimates.1/ 1992.2/ National accounts basis.Countries are: BEL=Belgium. DNK=Denmark. FRA=france, DEU=Germany. GRC=Greece. IRL=Ireland. ITA=Italy, LUX=Luxembourg, NLD=Netherlands. PRT=Portugal, ESP=Spain, GBR=United Kingdom

The Netherlands has been the most generous EU country in terms of social security expenditures (Chart 6), though comparisons have to be interpreted with caution mainly due to differences in tax treatment of benefits. 12/ The relatively high level of gross transfers has necessitated the generation of relatively high revenues, implying stronger disincentive effects than in other countries and more than proportionately higher welfare losses. The most striking difference is in the disability insurance area, where spending in the Netherlands is some 2 or 3 times greater than in neighboring countries (see table below).

CHART 6
CHART 6

NETHERLANDS Social Security Expenditure

(In Percent of GDP)

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources: Eurostat (cited in Social Note 1995); CPB, Macroeconomic Outlook 1995; and staff estimates.1/ Including supplementary private old-age pensions and administrative costs. National accounts basis.2/ Corrected for statistical distortions (related mainly to effects of tax reform in 1990). Cash basis.

Disability and Sick Leave Expenditures, 1992

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Source: Eurostat, cited in Social Security Expenditure and Receipts, 1980-1992 (as cited in Social Note 1995).

Including occupational accidents and diseases.

b. Recent developments

During 1990-92, the general government deficit was reduced as planned by 1 percentage point of GDP, falling to 4 percent of GDP in 1992. The decline was brought about by increased tax revenues, including higher excise taxes. The structural deficit declined by 2 ¼ percentage points of GDP to 4 ½ percent of GDP (see table below). The desire to maintain deficit reduction despite a recession-induced shortfall in revenues, prompted the government in late 1992 to take measures concentrated on the expenditure side amounting to 1 ¼ percent of GDP. As a result, the structural deficit dropped sharply in 1993, falling to 2 ¼ percent of GDP. A looser policy stance was chosen for 1994, and taxes were reduced. Both the actual and structural deficit increased slightly in 1994, but spending discipline was maintained and the ratio of expenditures to GDP fell by 1 percentage point. Meanwhile, after peaking in 1993, the debt ratio fell significantly in 1994 due to receipts that are not included in the general government deficit on a national accounts or (corrected) cash basis, such as asset sales. 13/

General Government Finances

(EMU definition)

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Sources: Central Planning Bureau, Macroeconomic Outlook 1995 (September 1994); Budget Memorandum 1995 (September 1994); data provided by the authorities; and staff estimates.

c. Medium-term policy

The fiscal consolidation plan of the new government that took office in August 1994 covers the period 1995-98. In a break with the fiscal policy strategy of previous governments, which concentrated on achieving specified annual reductions in the central government budget deficit, the new government is focusing on implementing a tight expenditure plan that calls for a decline in general government spending in real terms (see table below). 14/ The expenditure plan is consistent with targeted reductions in the ratios of deficit and collective burden to GDP, on the conservative assumption that average GDP growth during 1995-98 is 2 percent a year. 15/ If economic growth were to be lower than assumed, the government is committed to taking measures that would allow the targeted deficit reductions to be achieved anyway; thus, the plan also effectively imposes deficit ceilings (relative to GDP). If, on the other hand, economic growth turned out to be higher, the resulting higher revenues would be used first for an additional budget deficit reduction of 0.2 percent of GDP by 1998, while the use of any further room for maneuver—for either tax or deficit reduction—would be decided later.

Fiscal Policy Framework, 1995-98

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Sources: Coalition Agreement, August 1994; and Budget Memorandum 1995.

Excluding on-budget social security expenditure, such as welfare.

The drop reflects, in part, shifts to private financing.

Compared to the medium-term projections included in the 1994 budget, the coalition agreement provides for net reductions in expenditures of some 1 ¾ percentage points of GDP by 1998. Given a targeted decline in the central government deficit of nearly ½ percent of GDP, the collective burden can thus be lowered by some 1 ¼ percent of GDP (on top of a projected endogenous decline of about ¾ percent of GDP by 1998 16/). Measures are announced in the coalition agreement to achieve the expenditure reductions, which in the medium term would be about equally split between central government budgetary outlays and social security spending, but for 1995 fall more heavily on the former because measures in the area of social security still needed to be formulated and take time to achieve their full effect (see table below).

Expenditure Reductions, 1995 and 1998 1/

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Source: Coalition Agreement, August 1994.

Relative to the medium-term projections included in the 1994 budget.

The expenditure cuts in the budgetary area are to be achieved through a variety of measures, including cuts in subsidies related to higher education and a reduction in labor costs including through less generous early retirement provisions. Budgetary social security spending is to be reduced through cuts in welfare benefits as proposed by the previous government, 17/ and lowering family allowances by about 15 percent. In the area of benefits paid by social security insurance funds, the measures include (in order of expected savings in 1998) a nominal freeze of benefits in 1995 and indexation of 50 instead of 100 percent (to private sector contract wages) in the three following years, curtailment of survivors’ benefits, reform of disability insurance, privatization of sick leave insurance, and a few other changes such as a tightening of eligibility criteria for full unemployment benefits.

The coalition agreement also announces a number of other fiscal initiatives, such as the introduction at the beginning of 1996 of a new tax on energy consumed by “small users” (so that the tradable goods sector is effectively exempted), if no EU-wide energy tax is in effect by then. Its revenue is to be used for tax burden reduction. The coalition agreement recognizes that this is essentially burden shifting, and does not include the revenue in its financial plan. Another initiative is the intention to no longer allow interest payments on personal loans (excluding mortgages) to be deducted from income for tax purposes. Any revenues from this measure would be used for tax burden reduction, but since this is tax shifting as well it has also not been included in the financial plan.

d. Outlook for 1995

General government finances in 1995 are in line with the government’s medium-term plans. Expenditure growth is to be the lowest in domestic income transfers and wage payments due to the freeze in nominal benefits and slow private sector wage growth in 1995, respectively (Tables A13 and A14). Only income transfers abroad (primarily to the EU) and investment in infrastructure are projected to grow faster than GDP. All in all, total general government expenditures 18/ are planned to rise by 1 ¼ percent, 19/ while GDP is projected to increase by more than 5 percent. As a result, expenditures are set to decline by about 2 ½ percentage points to 55 percent of GDP in 1995. The collective burden is projected to fall by nearly 1 ½ percentage points of GDP, two thirds of which is due to reductions in social security contribution rates. 20/ The general government deficit measured on a national accounts basis (EMU definition) would decline slightly to 3 ¼ percent of GDP. However, the structural deficit would show a slight increase to 3 percent of GDP as the tax rate in the first bracket is lowered.

2. Central government, social security, and local authorities

a. Central government

(1) Recent developments

The large imbalances in the public finances of the early 1980s gave rise to a strategy of targeting annual (central government) budget deficit reductions on a cash basis that was pursued by successive governments. To prevent deficit reduction from being achieved through revenue increases, fiscal policy also attempted to keep the collective burden of taxes and social security contributions 21/ below a ceiling, but this was a secondary objective. For the period 1990-94, the central government budget deficit was to be reduced from 5.25 percent of net national income (NNI) 22/ in 1990 to 3.25 percent in 1994 through annual deficit reductions of 0.5 percent of NNI, while the ceiling for the collective burden was set at 53.3 percent of NNI. 23/ The budget for 1994, prepared in the summer of 1993, relaxed the deficit target for that year to 3.9 percent of NNI due to the economic downturn. In the event, in 1994 the budget deficit turned out to be well within the original target, while the collective burden equalled its ceiling after having exceeded it during the previous three years (see table below).

The strategy of targeting budget deficits consisted of several elements. Nominal expenditure amounts by government department were agreed for the budget, in combination with revenue measures, that were projected to achieve the targeted cash deficit. Observing the ceiling for the collective burden involved a consideration of both budgetary (tax) revenues and social security (contribution) revenues; budget deliberations therefore also involved decisions on social security spending. An important budgetary rule that had evolved over the years was that the nominal spending amounts agreed in the budget were not to be exceeded. The principle of specific compensation provided that any excess spending be compensated in the same year and government department where the excess occurred, unless the cabinet agreed to find compensation in other departments (referred to as general compensation). 24/

One drawback of the strategy was that the budget deficit targets could be met in part through incidental measures, such as asset sales, as the targets were defined on a cash basis. As the table above shows, the use of incidental measures had virtually disappeared by 1993, but in an environment marked by an uncertain economic outlook and upcoming national elections (in May 1994) substantial resort to incidental measures was again made in the subsequent year.

The 1993 budget, which was submitted in September 1992, was considered outdated two months later due to a rapid deterioration in economic prospects. It was decided to maintain the deficit reduction strategy, and additional measures amounting to 1 ¼ percent of GDP were announced in November 1992 (concentrated on the expenditure side, split equally between structural and incidental elements) aimed at achieving the 1993 deficit target of 3.3 percent of GDP. During 1993, the target was revised up to 3.5 percent of GDP, but with the exportled recovery in the second half of the year, receipts from VAT, excise and wage taxation turned out to be higher than anticipated. In addition, reorganization of the internal revenue service resulted in faster processing and collection of tax claims. As a result, the deficit for 1993 was reduced to 3.2 percent of GDP, slightly below the original target, while furthermore an excess revenue amount of more than ½ percent of GDP was moved forward through a cash shift to the 1994 budget year (and most of it subsequently in similar fashion to 1995).

Budget Deficit and Collective Burden, 1990-95

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Sources: Budget Memorandum 1995; Central Planning Bureau, Macroeconomic Outlook 1995; data provided by the authorities; and staff estimates.

Excluding exceptional revenues (amounting to about 3 percent of GDP in 1993-95), and excluding revenues from the expected second phase of the privatization of KPN in 1995.

Net asset sales, cash shifts to social security funds, and earlier tax collection affecting central government budget. A positive sign implies a deficit-reducing effect.

The Ministry of Finance uses a narrower definition than the Central Planning Bureau. For example, it only includes accelerated tax collection to the extent it was specifically intended to reduce the deficit.

Taxes and social security premiums. The original ceilings were formulated relative to NNI and including domestic gas revenue.

The budget for 1994, submitted to parliament in September 1993, aimed for a deficit of 3.5 percent of GDP in 1994, which implied a stabilization relative to the then expected outcome for 1993 and a relaxation by 0.6 percent of GDP relative to the original consolidation path. Only a moderate economic upturn was foreseen, and tax revenues were projected to be depressed due to a lagged response to economic developments. The deficit target was to be met by cutting expenditures (relative to the projection of a year earlier) by more than 1 percent of GDP and taking incidental measures (primarily the first privatization phase of KPN) of about 1 percent of GDP. Expenditure measures included a nominal freeze on social benefits (by freezing the statutory minimum wage to which they are related) and on government salaries, and the scrapping of price adjustments in other government consumption.

By early 1994, when it had become clear that budgetary prospects were improving and there were windfall revenues carried over from 1993, the government announced it would reduce the collective burden by nearly ½ percent of GDP in 1994 (and almost 1 percent of GDP on a full-year basis). At the same time, it would aim to keep the budget deficit target for 1994 at the outcome for 1993, i.e., 3.3 percent of GDP. The economic upturn proved more vigorous than expected, and projected tax revenues for the year were revised upward several times (see table below). The excess revenues ultimately amounted to more than 1 percent of GDP, and the deficit turned out 1 percent of GDP less than budgeted. Most of the deficit decline that occurred in the last few months of the year (from 3 to 2 ½ percent of GDP) was due to incidental factors, including improvements in tax collection, and contributed to the large incidental reduction in the deficit in 1994.

Projections of 1994 Central Government Deficit

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Sources: Ministry of Finance, Note to Parliament (February 1995); and staff estimates.

Expenditures minus nontax revenues, excluding exceptional revenues.

Excluding exceptional revenues.

The Ministry of Finance reports the 1994 deficit outcome as 2.2 percent because it does not count a payment to the EU of ¼ percent of GDP that was expected to be made in 1994, but was only drawn by the EU in early 1995, as a 1994 expense, while the table does.

(2) The 1995 budget

The 1995 budget (dated September 1994) was presaged by the new government’s coalition agreement, presented a month earlier. Both used an economic growth assumption for 1995 equal to the expected GDP growth rate of 3 percent. The budget filled in details of the coalition agreement, and implied a rise in the budget deficit by one half of one percentage point of GDP. Taking into account the better than expected outcome for 1994 since the budget presentation, the budget deficit in 1995 is projected at about 3 percent of GDP compared with 2 ½ percent of GDP in 1994. The use of incidental measures is to decline in 1995 (and to taper off further in 1996).

Compared to medium-term projections included in the 1994 budget, expenditures 25/ are to be reduced on balance by nearly one half of one percent of GDP through a range of measures that include cutbacks in subsidies and postponement of certain public investment projects. On the revenue side, income taxes are to fall by about one half of one percent of GDP as a result of a tax rate reduction in the first bracket. The yield of other taxes relative to GDP is projected to be little changed on balance. In 1995, any revenue excesses or shortfalls relative to budgeted amounts are to be reflected fully in the deficit (to the extent the budget deficit does not exceed its 1995 ceiling of 3.3 percent of GDP).

b. Social security

(1) Background

Social security tasks are divided between social security insurance funds, on the one hand, and central and local authorities, on the other. The first are larger by a factor of 5 than the latter, and their outlays amounted to 21 percent of GDP in 1994. The insurance funds administer social security programs with a substantial insurance element, such as old-age, unemployment, and disability insurance, while central and local authorities handle income transfer programs generally aimed at persons that have exhausted other means of support. The insurance funds are financed through contributions by employers and employees, and receive a transfer from the central government budget that is currently less than one percent of GDP (see table below). The transfer is set to increase in 1996 to allow for selected reductions in employers’ contributions. 26/ After taking into account the budgetary transfer, and allowing for a minimum level of reserves, contribution rates are set so as to balance the funds’ accounts on a pay-as-you-go basis.

Social Security

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Source: Ministry of Social Affairs and Employment. Social Note 1995.

(2) Recent developments

While the focus of attention in the domain of central government finances is the deficit, and the level of spending is not much of a concern after the significant cuts of the 1980s, in the area of social security the problem lies in an expenditure level that gives rise to high revenue needs and contributes to labor market distortions. Social security expenditures declined slightly during the 1980s, but remained high, and in 1990-93 social security transfers (excluding health care) hardly changed relative to GDP. They began to decline again in 1994, reaching their lowest level of the last 15 years. 27/ Public health care spending, on the other hand, rose relative to GDP during the 1980s and, especially, early 1990s.

In 1990-92, social security transfers were largely driven by the indexation of benefits to contract wages in the private sector (see table below). By contrast, in 1993-94 overall spending growth declined despite rising claims on social security related to the recession, because individual benefits had been frozen in nominal terms. Social security spending on health care grew relatively rapidly in the early 1990s with increases in volume as well as price components, the latter related to high private sector contract wage increases. In 1993, growth in health care spending slowed markedly as budgets that are applied to categories of health care suppliers were curtailed, in particular for hospitals and medical specialists. Slower wage growth and tight budgeting helped contain spending increases in 1994.

Social Security Income Transfers and Health Care Spending

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Sources: Central Planning Bureau, Macroeconomic Outlook 1995; and staff estimates.

Includes composition effects.

The social security income transfers that fall under the insurance schemes may be categorized in three major groups: demographic schemes, sick leave and disability benefits, and unemployment insurance (see Table A16). 28/ The first group, old-age and survivors pensions, accounts for nearly 50 percent of income transfers under the insurance schemes. Expenditure growth in this area is determined by demographic factors and the degree of benefit indexation. 29/ Growth in the number of retirees and survivors has been stable in recent years 1-2 percent a year (see Table A17), and indexation has been the same as for all other benefits (i.e., no nominal increase since 1993). Concerning the second group, expenditures on disability pensions are high by international standards and, together with sick leave benefits, account for more than 40 percent of social security insurance income transfers, with the number of (full-year equivalent) beneficiaries exceeding 1.1 million (11 percent of the working-age population). Social security reform has been concentrated in this area and resulted in a drop in expenditures of almost 1 percentage point of GDP between 1993 and 1994 as the number of recipients declined by more than one percent and their average benefit fell by nearly 6 percent. 30/ The cost of the third category of schemes, unemployment insurance, nearly doubled between 1990 and 1994 as a percent of GDP due to the deteriorating labor market, but even then only accounted for one eighth of total social security insurance income transfers.

Other social security income transfers, which are financed directly by central and local authorities, changed relatively little relative to GDP in recent years, with a small decline in expenditures on welfare nearly offset by a rise in spending on employment schemes. The number of welfare recipients declined by 10 percent between 1990 and 1993 before rising again in 1994 as unemployed whose insurance benefits had run out dropped into this safety net. Participation in employment schemes rose by 50 percent between 1990 and 1994 with the passing of the Youth Work Guarantee Law in 1992 and a significant expansion of efforts aimed at reintegrating long-term unemployed.

The main adjustment measures in the area of social security (insurance and on-budget) in 1995 are the freezing of all benefits and changes in the system of family allowances, for a total expenditure reduction (relative to projections of a year earlier) of 0.2 percent of GDP. The reform being proposed by the new government in the area of disability and sick leave benefits is to take effect in 1996. Disability reform measures taken in recent years are retained, and their effect contributes to a decline in the number of sick leave and disability insurance beneficiaries in 1995. Spending on health care is projected to grow moderately in 1995, aided by slow private sector wage growth and tight budgeting, and measures are being prepared to achieve the relatively low increases in spending planned in the coalition agreement for 1995-98.

c. Local authorities

Total outlays by local authorities (provinces and municipalities) amount to some 11 percent of GDP, or one fifth of overall public spending. The actual role of local authorities is considerably smaller than this share suggests, because more than half of their outlays fulfill strictly circumscribed mandates, for example in the areas of education and welfare payments, with financing provided by the central government (see table below). Provinces and municipalities enjoy freedom to set certain fees and taxes, but these make up only a small proportion of their revenues. An interesting aspect of spending by local authorities is that nearly 70 percent of general government investment is carried out by municipalities, in particular housing-related and infrastructure investment.

Revenues of Local Authorities

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Source: Budget Memorandum 1995 (Appendix 8).

The scope for independent policies by local authorities is growing as decentralization of government tasks and of decision making has reduced the number of specific (special purpose) grants from the central government to local authorities from 322 in 1988 to 161 in 1994, and their share in total revenues of local authorities has fallen from 67 to 55 percent. At the same time, the share of general grants, which is computed on the basis of tasks that local authorities are responsible for but can be spend freely, rose from 24 percent to 31 percent of total revenues. Own revenues also increased between 1988 and 1994, from 9 to 14 percent of the total. Between 1990 and 1994, property taxes rose by 6 percent a year, while the number of dwellings increased by only 1.3 percent a year. Municipal levies and fees also increased rapidly, by 18 percent a year during 1990-94, but this is related primarily to stricter legislated norms for refuse collection and disposal and more stringent environmental regulations for sewage.

III. Monetary and Exchange Rate Developments

1. Monetary policy objectives and instruments

Monetary policy in the Netherlands is guided by the overriding objective of maintaining a tight link of the guilder with the deutsche mark. In fact, this bilateral exchange rate currently constitutes the sole intermediate target of the Dutch monetary authorities. While the exchange rate was an important goal of monetary policy even during the pre-EMS (European Monetary System) period, imperfections in international capital flows allowed the Netherlands Bank (DNB) to also adopt independent monetary targets up to the mid-1980s. With the increased integration of international money and capital markets, however, this dual strategy eventually became untenable and potentially internally inconsistent. Accordingly, since the mid-1980s, the DNB has abandoned monetary targeting in favor of the exchange rate objective.

The implementation of exchange rate policy has itself undergone important changes over time. In the late 1980s, while recognizing that the money supply had become endogenous, the DNB began to target its composition, with an eye to supporting the exchange rate. Specifically, by allowing domestic credit to grow in line with projected domestic money demand, the DNB sought to avoid large swings in net capital movements, which in turn could create pressure on the guilder. This strategy assumed stability of the demand for money, a strong correlation between domestic credit expansion and net capital flows, and a strong correlation between net capital flows and the guilder exchange rate. It soon became apparent, however, that the usefulness of this intermediate target was limited, as the underlying assumptions came into question, mainly reflecting the increased integration of international financial markets as well as financial innovation. Accordingly, the DNB abandoned the targeting of domestic credit in the early 1990s, and since then has been focusing on implementing the fixed exchange rate policy exclusively via the interest rate instrument. 31/

These changes in the objectives and implementation of Dutch monetary policy are reflected in the evolution of the DNB’s policy instruments. Thus, during the period when the authorities’ objectives included targeting the money supply, the DNB aimed at controlling credit expansion until the mid-1980s via recourse to direct credit restrictions. 32/ As the DNB switched to targeting the composition of the money supply rather than its overall level in the late 1980s, it resorted to a somewhat more market-oriented instrument, the monetary cash reserve arrangement. This instrument relied on the imposition of a penalty rate in the case where domestic credit expansion exceeded a certain growth rate. As the link between domestic credit expansion and the guilder’s exchange rate turned out to be rather dubious in practice, however, the monetary cash reserve soon fell into disuse. While the DNB in principle has retained it among the arsenal of its policy instruments, it has made clear that it does not aim to resort to it except in an emergency situation of sizable capital outflows, and the instrument has remained de-activated since the early 1990s.

Currently, with the exchange rate being the sole intermediate target of monetary policy, the Bank relies to an important extent on the money market cash reserve instrument. Casual observation may suggest that the money market cash reserve serves a purpose similar to the monetary cash reserve. Thus, in the event of the recently experienced large capital inflows, the DNB has used the money market cash reserve to drain off liquidity from the banking system, much as it would likely have done if the monetary cash reserve were in operation. Such an interpretation is not warranted, however. As the DNB is targeting neither the money supply nor its composition, it is not aiming to sterilize capital flows, and in fact, as is described below, the impact of such inflows (or outflows) on the level of the monetary aggregates has been substantial. Rather, the instrument is used with the explicit aim of permanently keeping the banking system in a debtor position vis-à-vis the DNB, so as to ensure maximum effectiveness of the Bank’s official interest rate instruments in affecting market interest rates. 33/

In particular, the DNB uses the money market cash reserve to generate a liquidity shortage of f. 6 billion on average for the banking system as a whole. The resulting liquidity needs are met by the DNB via two facilities. In the first instance, about two thirds of the liquidity shortage is satisfied via a quota system, at a rate (the rate on special advances) which is not changed very often and stands currently (April 1995) at 4.0 percent, equal to the German discount rate. The remainder is satisfied via a system of special loans; the DNB ensures that the banking system always remains dependent on special loans. The rate on special loans constitutes the DNB’s major day-to-day policy instrument, and is comparable to the German repo rate. 34/ The DNB aims at keeping the money market cash reserve arrangement cost neutral for the banking system, and thus interest is paid on reserves and determined as a weighted average of the rate on special advances and the special loans rate.

In March 1994, the DNB introduced a second instrument designed to influence money market conditions, the Netherlands Bank Certificates (NBCs). This is the DNB’s own liquidity paper, with a six-month maturity, auctioned off on a monthly basis. 35/ Subscription is open exclusively to domestically established credit institutions and foreign central banks, and the DNB is under no obligation to repurchase the paper. Two main considerations prompted the introduction of the NBCs. The first arose from the substantial increase in the money market cash reserve necessitated by the massive capital inflows associated with the EMS crises during 1992-93, which was regarded as causing problems in view of the fact that the cash reserve instrument is not entirely market-oriented. The second related to the ongoing process of harmonization of monetary instruments within the EU. The new instrument has been very successful, with a currently outstanding amount of around f. 7.5 billion. The DNB aims at raising this amount to around f. 10 billion over the coming months, but appears reluctant to increase it further as it would like to maintain enough scope for the money market cash reserve, which can be relied upon on a day-to-day basis.

2. Exchange rate and interest rate developments

Following a 2 percent downward realignment of the deutsche mark/guilder central rate in 1983, the guilder has generally remained within a corridor of 0.5 percent around its deutsche mark central rate, much tighter than that imposed by the narrow bands of the Exchange Rate Mechanism (ERM) of the EMS. At the same time, the long- and short-term interest rate differentials vis-à-vis Germany have tended to narrow significantly over time. Thus, Dutch long-term rates, which had been over 0.5 percentage points above German rates in the early 1980s, converged to the latter by 1991, while the Dutch-German short-term interest rate differential, which had been as high as 1.5 percentage points in the mid-1980s, became negligible by 1991. Recently, there have been extended periods during which Dutch rates remained substantially below German rates at the short end (see Chart 7). This record is all the more impressive as the credibility of fiscal consolidation, at least during the larger part of the 1980s, would appear far from having been established.

CHART 7
CHART 7

NETHERLANDS Long Term Exchange and Interest Rate Developments

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources: The WEFA Group; DNB, Quarterly Bulletin; and IMF, Treasurer’s Department and International Financial Statistics.1/ Central parity after March 1983.

The success of the Dutch monetary and exchange rate policy was brought to the fore under the circumstances of the recent turbulence within the EMS. In fact, the September 1992 crisis in retrospect appears to have been an important turning point solidifying monetary policy credibility for the Netherlands (see Chart 8). Immediately after the crisis the guilder, which in September 1992 was at its deutsche mark central parity, displayed an appreciating tendency vis-à-vis the deutsche mark. At the same time, the Dutch-German long-term interest rate differential, which in September 1992 was around 50 basis points, started to decline rapidly, and was eliminated by the end of the year. Subsequently, a negative short-term interest rate differential began to emerge. The guilder’s strength enabled the DNB to start cutting its official rates ahead of Germany since late 1992.

CHART 8
CHART 8

NETHERLANDS Recent Exchange and Interest Rate Developments

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources IMF, Treasurer’s Department; The WEFA Group; and DNB, Quarterly Bulletin.

The guilder’s strength became even more pronounced around mid-1993, especially since the widening of the ERM fluctuation bands in July. At that time, the Netherlands was alone among the countries participating in the exchange rate mechanism of the EMS to enter into a formal agreement with Germany maintaining bilateral intervention obligations at the old 2.25 percent band. Since then the guilder has remained appreciated relative to its deutsche mark central rate, by about 0.5 percent on average. At the same time, a sizable negative short-term interest rate differential emerged in the second half of 1993 and early 1994, at times exceeding 70 basis points, while Dutch long-term rates remained very much in line with German rates. The guilder’s strength probably reflected concern at the time regarding Germany’s cyclical position, budgetary prospects and inflationary outlook.

The appreciating tendencies of the guilder vis-à-vis the deutsche mark have considerably eased since early 1994, in line with the marked improvement in the German “fundamentals.” In particular, while the guilder has remained appreciated relative to its deutsche mark central rate, the Dutch-German short-term interest rate differential gradually disappeared, and has actually turned slightly positive since the fall of 1994. In this context, the monetary policy stance in the Netherlands became essentially identical to that in Germany. In particular, since mid-1994, the Dutch rate on special loans has been virtually equal to the comparable German repo rate. At the same time, the Dutch-German long-term interest rate differential also turned positive in October 1994, and has since then remained in a range of 15 to 20 basis points. 36/ Such a small differential could be interpreted as largely reflecting structural differences between the Dutch and German markets, notably related to lower Dutch capital market liquidity. On the other hand, the size of this differential could be consistent with market expectations of a reversion of the guilder/deutsche mark parity to its current central rate over the longer term.

The strong credibility of Dutch exchange rate policy was once again underlined by the guilder’s experience during the most recent period of EMS turbulence in early 1995, prompted by the sharp decline of the U.S. dollar against the deutsche mark. Unlike many other EMS currencies, the guilder remained stable against the deutsche mark, with Dutch intervention rates remaining unchanged and no discernible movement in Dutch-German market interest rate differentials. More generally, the sensitivity of the deutsche mark exchange rate to the U.S. dollar-deutsche mark rate, which had been substantial in the past has tended to decline sharply in recent years. It is estimated that, currently, autonomous substantial movements out of European currencies towards the deutsche mark spill over into the guilder almost instantaneously, as investors have come to view the two currencies as constituting essentially perfect substitutes. Following the cut in the German repo rate by 35 basis points to 4.5 percent on March 30, the DNB cut its rate on special loans by 30 basis points, thus bringing the two intervention rates into exact equality.

3. Developments in monetary and credit aggregates

In a small, open economy like the Netherlands, a fixed exchange rate regime together with freedom of international capital flows would imply full endogeneity for the monetary aggregates, which therefore have no relevance as policy variables. At the same time, the well-documented instability of money demand in the Netherlands since the early 1980s, mainly reflecting rapid financial innovation and possibly also increased substitutability between European currencies, 37/ has reduced the usefulness of monetary aggregates as an indicator of economic conditions.

That said, developments in monetary aggregates in the Netherlands during 1993-94 have been quite striking. In 1993, M3 expanded at an annual rate of 8.9 percent, far in excess of nominal GDP growth. By contrast, M3 virtually stagnated in 1994, growing by a meager 0.4 percent, its lowest annual rate of increase since M3 statistics have been recorded.

The sharply contrasting trends in the money supply during 1993 and 1994 warrant some discussion. As Table A18 suggests, the above trends reflect almost entirely developments in the growth of net foreign assets, which in turn are largely related to recent developments in the EMS, as the contribution of net domestic credit remained relatively stable. 38/ The September 1992 crisis, as well as the tensions in July 1993, led to large capital inflows. Accordingly, the foreign contribution to the total growth in M3 during 1993 amounted to 4.4 percentage points. By contrast, the stabilization of European exchange rates during 1994 (and the appreciation towards their central rates of a number of currencies that had come under pressure during 1993) induced portfolio readjustments that led to an outflow of capital. In the Netherlands, these capital outflows almost exclusively related to securities transactions, mainly concerning government bonds, and were concentrated in the first half of the year. 39/ In all, the contribution of the external sector to M3 growth during 1994 was sharply negative, at -6.2 percentage points.

Developments in domestic credit, which can be regarded as a better indicator of economic conditions than monetary growth, were much less extreme in 1993-94. Thus, the banks’ net money creating operations remained relatively high during 1994, at a growth rate of 9 percent compared to 8.1 percent during 1993. Closer inspection reveals, however, that these trends were far from uniform. In particular, credit to enterprises was particularly weak: following a small expansion of 0.7 percent in 1993, lending to private companies declined by 0.7 percent in 1994. While this development can be attributed to a large extent to the weakness of private investment, whose declining trend was not reversed until mid-1994, it also reflected the very liquid position of the business sector, which induced firms to run down reserves rather than resort to borrowing. 40/

On the other hand, mortgage lending to households increased by approximately 15 percent in 1994, reaching its highest growth rate in ten years and accounting for most of the overall credit expansion. While this trend may cause some concern, especially in view of the asset price inflation recently experienced by a number of industrial countries but which the Netherlands economy has managed to avoid, a number of factors suggest that such concern may not be entirely warranted. In particular, part of mortgage credit serves as a substitute for consumer credit, given the higher interest rates on the latter, and there is some evidence that the saving aspect of mortgages may have recently increased. In addition, house prices, whose increases helped drive mortgage lending, have been stable since the summer of 1994, and the amount of new mortgages peaked in the second quarter of 1994.

IV. External Developments

1. Balance of payments

a. Current account 41/

Since the early 1980s, the current account of the balance of payments has shown a surplus of about 3 percent of GDP (Chart 9). The surplus was 2 percent of GDP in 1992, increased to 3 percent in 1993, and is estimated to have widened further to 3 ½ percent of GDP in 1994 (see table below). 42/ About two thirds of the increase during 1993-94 was due to a rise in the merchandise trade balance, and one third to improvement in the invisibles balance.

CHART 9
CHART 9

NETHERLANDS Current Account

(Percent of GDP)

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources: DNB, Annual Report and Quarterly Bulletin; data provided by the authorities; and staff estimates.1/ Services plus transfers.

Current Account on a Transactions Basis

(In percent of GDP)

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Sources: Tables A21 and A22; and staff estimates.

The merchandise trade balance increased from 3 ½ percent of GDP in 1992 to 4 ¼ percent in 1993 and an estimated 4 ½ percent of GDP in 1994. 43/ During 1993, the cyclical trough reached both in the Netherlands and in the rest of continental Europe was reflected in the very weak performance of both exports and imports. Merchandise exports (in guilder terms) fell by 1.7 percent, with both the energy and non-energy components registering declines. Merchandise imports fell even more, by 3.8 percent, as the fall in domestic demand was concentrated in import-intensive goods, such as consumer durables and transportation equipment. Growth of the world market relevant for the Netherlands started accelerating in the second half of 1993, and gained momentum during 1994 as the continental European economies entered a phase of strong recovery. Exports rose significantly in 1994, registering an annual rate of growth of 7.4 percent during the first three quarters of the year. Imports also accelerated, albeit at a somewhat slower pace, growing by 6.2 percent on an annual basis during the first three quarters of 1994. The relatively slower import growth reflected the fact that business investment, which has a relatively high import component, only started growing in the second half of the year.

The trend in exports during 1993-94 was influenced by specific features of the export product mix. The early phase of the cycle in the Netherlands’ main trading partners is typically characterized by strong demand for intermediate goods, which favors a number of Dutch export sectors, notably chemicals and, to a smaller extent, basic metals. By contrast, during the mature phase of the cycle the important food export sector, which is characterized by a low income elasticity of demand, tends to slow overall export growth. These factors suggest that the trend in Dutch exports can be expected to be more pronounced relative to the trend in the relevant world market during the early and late phases of the cycle and less pronounced during the trough and the mature phase. This is in fact reflected in the performance of the various categories of exports during 1993-94: in 1993, the food sector was the only export category that registered positive growth, while in 1994 the chemicals sector was the fastest-growing export category, registering an annual rate of growth of 15 percent in volume terms during the first three quarters.

The deficit in the invisibles balance narrowed from 1.4 percent of GDP in 1992 to 1.1 percent in 1993 and 0.9 percent of GDP in 1994. This reflected primarily a switch from deficit to surplus in factor incomes that was due to substantially higher interest earnings abroad. The surplus on nonfactor services also rose as export of construction services expanded. The deficit on unrequited transfers, on the other hand, widened further mainly on account of increased contributions to the EU.

b. Capital account

The persistence of large current account surpluses has been mirrored by correspondingly large capital outflows (Table A21), resulting in the build-up of a strong net foreign asset position. By the end of 1992, Dutch net foreign assets stood at f. 88 billion (16 percent of GDP). 44/ Net foreign assets held by the banking system amounted to f. 81 billion and was distributed roughly equally between commercial banks and the central bank, while net direct investment totalled f. 76 billion. These net creditor positions were offset by a net debtor position in securities of f. 72 billion.

The typical pattern of large capital outflows was upset by the EMS crises since late 1992, as investors first shifted their portfolios toward the stronger currencies of the system and subsequently reversed their positions when relative exchange rate stability within the EMS returned. Thus, net capital outflows fell sharply from f. 37 billion in 1992 to f. 13 billion in 1993 before rising again to f. 30 billion in 1994 (see table below). The impact of the EMS turmoil was reflected in securities transactions of the non-monetary sector. These mainly concerned Dutch government bonds, with foreign investors purchasing an estimated f. 13 billion in the course of 1993. When most currencies reverted towards their central rate by the end of 1993 and the beginning of 1994, the resulting portfolio readjustment implied substantial capital outflows in the securities account. This trend was reinforced by the fall in Dutch bond prices (in line with German bond prices) since February 1994, so that strong capital outflows related to sales of securities characterized the first half of 1994. The amount of bonds sold by foreign investors during that time is estimated to have been roughly equal to foreign purchases during the whole of 1993. 45/ In mid-1994, the capital outflows in the area of securities came to an end, suggesting that portfolio readjustments related to EMS developments had been completed. In fact, moderate net purchases by foreigners of securities of about f. 5 billion occurred during the latter half of 1994, mainly reflecting negative investor sentiments towards the dollar.

Capital Transactions of the Non-Monetary Sector

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Source: Data provided by the authorities.

Other components of the capital account exhibited more typical trends. Net capital related to direct investment flowed out in both 1993 and 1994; the extent of these outflows was considerably higher in the latter year, reflecting improved profitability prospects ensuing from the pick-up in economic activity in continental Europe. Outward direct investment is mainly concentrated in the EU, but investments in other industrial European countries grew significantly in 1994 as well. 46/ On the other hand, inward direct investment fell in 1994, mainly on account of reduced investments from EU partner countries. Developments in the traditionally very volatile “other capital transactions” category, mainly consisting of short-term capital flows, were dominated by transactions in money market paper.

2. Competitiveness

The competitiveness of the Dutch economy as captured by the real effective exchange rate has displayed no discernible trend since the early 1980s. As inflation has generally been significantly lower than in major trading partners, the guilder’s long term stability in real terms has gone hand in hand with nominal appreciation. Nevertheless, viewed from a shorter-term perspective, competitiveness has undergone substantial fluctuations in recent years (see Chart 10 and Table A20).

CHART 10
CHART 10

NETHERLANDS Effective Exchange Rates of the Guilder and Profitability

(1985=100)

Citation: IMF Staff Country Reports 1995, 048; 10.5089/9781451829297.002.A001

Sources: IMF, International Financial Statistics and staff estimates.1/ Value added deflator divided by unit labor costs in manufacturing.

The sources of fluctuation in the real effective exchange rate since the mid-1980s have varied. During 1985-87, substantial competitiveness losses primarily reflected the U.S. dollar’s sharp nominal depreciation. From 1987 until the beginning of 1991, however, the competitive position improved markedly, with the real effective exchange rate depreciating by 12 percent as the Netherlands benefitted from nominal exchange rate stability within the EMS in the face of substantial inflation differentials. Subsequently, the post-1987 gain was virtually eliminated as the guilder appreciated in real effective terms by 11 percent between the first quarter of 1991 and the end of 1994.

In the first part of the 1991-94 period, relative inflationary trends played an important role. In fact, between the first quarter of 1991 and August 1992, in the face of nominal exchange rate stability within the EMS, the guilder appreciated by 7 percent in real effective terms, mainly reflecting the brief interruption of the moderate wage developments experienced by the Netherlands since the early 1980s. 47/ Between August 1992 and the end of 1994 the guilder continued to appreciate in real terms, registering a real effective appreciation of 4 percent. This real appreciation resulted from nominal exchange rate developments: an appreciation against the U.S. dollar and, more importantly, against a number of European currencies in the wake of the EMS crises of late 1992 and mid-1993 produced a 5 percent nominal effective appreciation between August 1992 and the end of 1994.

Nominal and real exchange rate appreciation continued into the first months of 1995, reflecting the decline of the U.S. dollar and the depreciation of a number of European currencies vis-à-vis a group of hard EMS currencies, including the guilder. By the end of March, the guilder had appreciated by almost 6 percent in nominal effective terms since the beginning of the year. During that time, the dollar depreciated by 12 percent vis-à-vis the guilder, accounting for about one quarter of the guilder’s overall nominal appreciation.

Over time, the fluctuations in the real effective exchange rate appear to have been largely absorbed by variations in the level of profitability of the exposed sector. Losses of market share during periods of real appreciation, while discernible, remained rather limited. This reflects price-taking behavior in certain export markets (such as for agricultural products and chemicals), as well as deliberate pricing policy in markets for less homogeneous products. Cuts in profit margins in order to maintain market share have been possible because the periods of real appreciation have been relatively short (and the real effective exchange rate has not displayed a tendency to appreciate over time), and because profitability of the exposed sector has been good since the early 1980s. The strong competitive position of the Dutch economy is also underscored by the fact that the Netherlands has seen an increasing trend in its export market share during the last fifteen years, contrary to the general trend among EU countries. Between 1980 and 1994, the index of export market share (excluding energy) registered an increase of almost 9 percent.

The tendency to absorb the impact of real effective exchange rate appreciation in profitability was in evidence during the last two years, when export market shares (excluding energy) increased in the face of a real appreciation of the guilder. 48/ Thus, in 1993, as relevant world trade fell by 0.6 percent, the volume of Dutch exports rose by 0.7 percent, while in 1994 the growth in the volume of Dutch exports matched the growth in relevant world trade of 6.5 percent. This development is reflected in the behavior of Dutch export prices relative to competitor export prices (see table below). 49/

Export and Import Prices

(Changes in percent)

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Source: Data supplied by the authorities.

During 1993-94, exporters adjusted prices to those of their foreign competitors, so that despite the guilder’s real appreciation the terms of trade remained virtually unchanged. In 1993, the 3.5 percent reduction in export prices (of which about half reflects the impact of the guilder’s appreciation) was greater than the fall in unit costs of export goods, which dropped by 0.7 percent. In 1994, foreign competitors’ price developments allowed for a only a small export price increase, but since unit export costs are estimated to have fallen in 1994, the profitability of the export sector improved.

STATISTICAL APPENDIX

Domestic Economic Developments

Table A1.

Netherlands: Aggregate Demand

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Sources: Central Bureau of Statistics, Nationale Rekeningen 1993; Dress releases; and staff calculations.

Estimates.

Change as a percent of previous year’s GDP.

Table A2.

Netherlands: Personal Income, Consumption, and Household Saving

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Sources: Central Bureau of Statistics, Nationale Rekeningen 1993; and staff estimates.

As a percentage of disposable income.

Table A3.

Netherlands: Private Consumption of Goods and Services

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Sources: Central Bureau of Statistics, Nationale Rekeningen 1993; Central Planning Bureau, Macro Economische Verkenning 1995; press releases; and staff estimates.

Estimates.

Table A4.

Netherlands: Saving and Investment

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Sources: Central Bureau of Statistics. Nationale Rekeningen 1993

Excluding residential construction.

Table A5.

Netherlands: Gross Fixed Investment

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Source: Central Bureau of Statistics. Nationale Rekeningen 1993; press releases; and staff estimates.

Estimates.

Sales of used fixed assets included.

Mining, manufacturing, public utilities, and construction.

Table A6.

Netherlands: Sectoral Value Added

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Sources: Central Bureau of Statistics. Nationale Rekeningen 1993; and staff estimates.

The sum of percentage shares exceeds 100 because the imputed value of intermediary banking services is excluded from GDP but not from the value added of sectors.

Comprises private, public, and semi-public enterprises.

Table A7.

Netherlands: Selected Labor Market Indicators

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Sources: Central Planning Bureau, Macro Economische Verkenning 1995, Halfjaarlijke Tussenrapportage; OECD, Economic Outlook; and staff estimates.

Estimates.

The labor force includes the employed with a job of at least 12 hours per week, and the unemployed seeking employment of at least 12 hours per week.

Table A8.

Netherlands: Sectoral Distribution of Employment 1/

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Sources: Central Bureau of Statistics. Nationale Rekeningen 1993; and staff estimates.

In labor years.

Comprises private, public, and semi-public enterprises.

Table A9.

Netherlands: Decomposition of the Increase in the Consumption Deflator

(Contributions to growth in percentage points)

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Sources: Central Planning Bureau, Macro Economische Verkenning 1995; and staff estimates.

Estimates.

Improvement in gross profit margins, including depreciation costs and net interest payments.

New index.

Table A10.

Netherlands: Selected Price Developments

(Changes, in percent)

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Sources: Central Bureau of Statistics. Nationale Rekeningen 1993, Maandschrift (various issues), end press releases; Central Planning. Bureau. Macro Economische Verkenning 1995; and staff estimates.

Estimates.

Manufacturing sector.

New index.

Table A11.

Netherlands: Contract Wage and Compensation per Employee

(Changes, in percent)

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Sources: Central Bureau of Statistics. Maandschrift (various issues): Central Planning. Bureau, Macro Economische Verkenning. 1995; and staff estimates.

Estimates.

Comprises private, public and semi-public enterprises.

Contributions to growth.

For modal income earners in enterprises, excluding wage drift.

Table A12.

Netherlands: Labor Cost Indicators

(Changes, in percent)

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Sources: Central Bureau of Statistics, National Rekeningen 1993; Central Planning Bureau. Macro Economische Verkenning 1995; press releases: and staff estimates.

Estimates.

Enterprises excluding production of natural gas, other mining and quarrying, exploitation of real estate, and non-commercial services.

Gross value added at factor cost.

Deflator of gross value added at factor cost.

Percent share of labor compensation of employees and imputed labor income of self employed in value added of enterprises, excluding mining, exploitation of dwellings, and government services.

Public Sector

Table A13.

Netherlands: Revenues and Expenditures of General Government: Economic Classification 1/

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Sources: Central Planning Bureau, Macroeconcmic Outlook 1995 (September 1994); data provided by the authorities; and staff estimatee.

Corrected for statistical distortions (related mainly to effects of tax reform in 1990). Cash basis.

Excluding exceptional net revenues (in 1993-95 amounting to about 3 percent of GDP), and excluding revenues from the expected second phase of the privatization of KPN (mail and telecommunications) in 1995.

Table A14.

Netherlands: Expenditures of General Government: Functional Classification 1/

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Sources: Central Planning Bureau, Macroeconomic Outlook 1995 (September 1994); and staff estimates.

Corrected for statistical distortions (related mainly to effects of tax reform in 1990). Cash basis.

Differences with total expenditures in Table A13 are due to statistical discrepancies.

Table A15.

Netherlands: Deficit and Debt of General Government

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Sources: Central Planning Bureau, Macroeconomic Outlook 1995 (September 1994); Budget Memorandum 1995 (September 1994); De Nederlandsche Bank, Annual Report 1993; data provided by the authorities; and staff estimates.

See footnotes 1/ and 2/ of Table A13.

Debt of central and local authorities.

By original maturity.

Table A16.

Netherlands: Social Security Expenditure 1/

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Sources: Social Note 1995 (September 1994); and staff estimates.

Cash basis.

Calculated from official estimates/projections in guilders as of September 1994.

Consolidated.

Table A17.

Netherlands: Social Security: Number of Recipients of Income–Replacing Benefits 1/

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Source: Social Note 1995 (September 1994).

Converted to full–year equivalent numbers.

Official estimates/projections as of September 1994.

Monetary Developments

Table A18.

Netherlands: Monetary Survey

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Sources: De Nederlandsche Bank. Annual Report: Quarterly Bulletin: and IMF, International Financial Statistics.

Items in transit and statistical discrepancy.

M3, comprising narrow money (Ml), time deposits with maturity less than two years, foreign currency deposits, and savings deposits.

Adjusted for breaks in series.

Table A19.

Netherlands: Key Interest Rates

(In percent: averages, unless otherwise indicated)

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Sources: De Nederlandsche Bank, Quarterly Bulletin and Annual Report; IMF, International Financial Statistics.

End of period.

Amsterdam interbank offer rate.

Exchange Rates, Trade and the Balance of Payments

Table A20.

Netherlands: Exchange Rate Developments

(Period averages; changes in percent from same period a year earlier)

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Sources: International Monetary Fund. International Financial Statistics: de Nederlandsche Bank, Quarterly Bulletin.

A positive sign indicates an appreciation of the guilder.

Level in percent.

Against competitors in foreign markets.

Relative normalized unit labor costs in manufacturing in common currency (total trade weighted).

Relative CPI.

Table A21.

Netherlands: Summary Balance of Payments

(On a cash basis: in billions of guilders)

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Source: De Nederlandsche Bank. Quarterly Bulletin: and data supplied by the authorities.

Current transfers.

Table A22.

Netherlands: Current Account on a Transactions Basis

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Sources: De Nederlandsche Bank. Annual Report and Quarterly Bulletin: and data supplied by the authorities.
Table A23.

Netherlands: Merchandise Trade (Customs Basis)

(Percentage changes, year-on-year)

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Sources: De Nederlandsche Bank, Quarterly Bulletin; Central Planning Bureau. Centraal Economisch Plan: and data supplied by the authorities.

Coal, crude oil, petroleum products, natural gas, and electricity (i.e.. SITC section 3).

Table A24.

Netherlands: Direction of Trade

(Expressed as percentage of total)

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Source: International Monetary Fund, Direction of Trade.
Table A25.

Netherlands: Official Development Assistance

(In millions of guilders)

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Source: Data provided by the Dutch authorities.

Includes priority programs, trade and industry development programs, emergency aid, international education, balance of payments support and export programs.
1/

Families were able to use part of the increase in wealth to finance consumption through increases in mortgages. The total amount of mortgages on dwellings rose by 11 percent in 1993 and about 15 percent in 1994. This far exceeded the increase in the housing stock.

2/

See also the chapter on employment, wage growth, and labor productivity in the forthcoming paper on selected background issues.

3/

The number of hours worked by temporary workers was 37 percent higher in the fourth quarter of 1994 than a year earlier.

4/

See the chapter on social security reform in the forthcoming paper on selected background issues.

5/

See OECD Economic Surveys - Netherlands (1993).

6/

Disability insurance claimants are nearly 9 percent of the working-age population.

7/

In 1993, the net participation rate—the portion of the working age population that is employed—for those with little or no education was 30 percent, compared with 83 percent for those with a university degree. The net participation rate of older people (age 55 to 64) was 24 percent, whereas in the age group 45 to 54 it was 62 percent. The net participation rate of ethnic minorities was 36 percent, compared with 58 percent for the rest of the population.

8/

Eurostat, Labour Force Survey. Results 1992.

9/

The difference can be explained as follows. In the old index medical care was included. The price index of medical care in 1993 was virtually constant, which had the effect of reducing inflation as measured by the old index by 0.4 percent. The inclusion of government services and consumption related taxes, whose prices rose relatively fast, contributed another 0.3 percent to the larger increase shown by the new index.

10/

Differences between government finance data on a cash and national accounts basis are due to the inclusion in expenditures on a cash basis, but not on a national accounts basis, of net lending, net purchases of property (including shares), and government guaranteed financing of private expenditures.

11/

Data (on a cash basis) have been corrected for statistical distortions. In particular, the increase in government spending in 1990 is eliminated in the corrected data to the extent that it resulted from a major overhaul of the tax system, which caused gross benefit payments to be raised with no change in net benefits (for example, before correction social security expenditures on old-age pensions and on disability pensions each rose by 18 percent in 1990, while the number of recipients grew by only 1-2 percent).

12/

Benefits are taxed in the Netherlands but not in many other countries. Illustrative computations have been made by the Ministry of Social Affairs and Employment for the Netherlands, Germany, and the United Kingdom (in Social Note 1995). They suggest that correcting for differences between benefit payments in gross or net terms as well as for social security tax expenditures would lower the social security expenditures of the Netherlands by some 4 percentage points, while those of Germany would remain unchanged and those of the United Kingdom rise by about 2 percentage points. Such corrections would reduce considerably the differences in social security spending between the three countries.

13/

These receipts resulted from the first phase of the privatization of the post and telecommunications company KPN, which yielded 1.1 percent of GDP, and early repayment of housing loans amounting to more than 2 percent of GDP.

14/

The Ministry of Finance intends to use the GDP deflator to convert volume changes to nominal changes.

15/

The government’s plans would raise growth by ¼ percent, according to calculations by the Central Planning Bureau, so that all in all the conservative growth scenario implies average annual growth of 2 ¼ percent.

16/

This results from slower growth in the base, on which social security contributions are levied, compared with GDP growth.

17/

See “Kingdom of the Netherlands - Netherlands - Selected background Issues,” SM/94/100, 4/22/94, page 40.

18/

Excluding the financial netting operation in social housing subsidies and loans. In 1995, the approximate present value of all social housing subsidies from 1995 onward is to be paid in one lump sum, in return for early repayment at the same time by housing corporations of all outstanding social housing loans (the present value of these subsidies and loans each amounts to some 5 percent of GDP).

19/

This equals the 0.9 percent volume decline shown in the first table of Section 1.c. above topped off with a price increase of 2.1 percent (which was the projected GDP price deflator for 1995 at the time of budget preparation).

20/

Overall revenues would decline even more relative to GDP as the contribution of incidental receipts is to fall (expected receipts from the second phase of the privatization of KPN—the mail and telecommunications company—in 1995 are not included because of uncertainties regarding timing and pricing).

21/

Until 1994, the collective burden was actually defined to also include domestic gas revenues, which have amounted to 1 to 2 percent of GDP since 1987.

22/

NNI is about 11 percent less than GDP.

23/

Using revised NNI; the original figure was 53.6 percent of NNI.

24/

Appendix 23 of the 1993 Budget Memorandum (September 1992) details the rules agreed by the cabinet to contain expenditures. The set of rules currently in use represents a refinement of earlier agreements. Obviously, general compensation tends to be resisted by ministers who had been observing their budgeted amounts.

25/

Excluding on-budget social security. For measures in the area of social security, see Section b.(2) below.

26/

In addition, in 1996 disability insurance contributions are to be shifted from employees to employers to facilitate the introduction of premium differentiation.

27/

Corrected for statistical distortions (see footnote in Section 1.a. above).

28/

The figures in the table above and in Table A16 differ because the first have been adjusted by the CPB for statistical distortions, while the second are on an operational budget (cash) basis; a breakdown is only published on the latter basis.

29/

Economic incentives play no role as benefit entitlement is not changed by early retirement.

30/

See the chapter on social security reform in the forthcoming paper on selected background issues for a discussion of recent and planned reforms.

31/

The DNB does not rely on exchange market intervention to support the guilder, as it doubts the longer-term credibility of such an approach. Intervention has been reserved for supporting weaker EMS currencies in the context of EMS obligations, as well as for coordinated interventions vis-à-vis third currencies, the most recent example being coordinated support for the U.S. dollar. When it does occur, foreign exchange intervention almost invariably takes the form of foreign exchange swaps, and is therefore typically not reflected in changes in the DNB’s official reserves.

32/

In the mid-1980s the DNB also resorted to open market operations, albeit to a limited extent in view of its relatively small portfolio of government securities.

33/

Thus, the money market cash reserve plays a more limited role compared to the minimum reserve arrangement in Germany, via which the Bundesbank aims at simultaneously affecting both the level of money market rates and the level of monetary aggregates.

34/

There are some slight differences, however, the most important of which being that the special loans rate is determined in advance, whereas the repo rate has sometimes been variable, determined via an auction procedure.

35/

Evidently, an alternative instrument could in principle have been open market transactions in government securities. However, the DNB had sold its entire portfolio of government securities by the end of 1992.

36/

A positive long-term interest rate differential had already briefly emerged during March-April 1994.

37/

The income velocity of money (M3 definition) has decreased from 1.7 in 1982 to 1.3 in 1994.

38/

The substantial impact of net capital flows on the money supply provides a strong indication that the DNB does not aim at sterilizing such flows, consistent with its abandonment of monetary targeting.

39/

A more detailed discussion of capital flows during 1993-94 is presented in Chapter IV below.

40/

In this connection, it is noteworthy that the overall credit expansion to the business sector can be decomposed into an increase in long-term and a sharp decrease in short-term credit.

41/

For a discussion of the longer-term trends in the current account and its determinants, see the forthcoming paper on selected background issues.

42/

The discussion focuses on the current account on a transactions basis. The current account on a cash basis fell from 3 ½ percent in 1993 to 2 ½ percent of GDP in 1994. The DNB notes that the difference between the figures on cash and transaction basis may be due to changes in size and/or duration of trade credit, which, however, is not registered separately in the balance of payments.

43/

The introduction of a new method of registering intra-EU trade at the beginning of 1993 has rendered trade statistics less reliable relative to the pre-1993 period. Under the new registration system, information on visible trade is obtained directly from enterprises involved in exporting and importing, with subsequent correction for non-response and compatibility with other data sources. As a result, figures for 1993 (and 1994), especially concerning detailed breakdowns, are subject to substantial revision.

44/

Although the level of net foreign assets generally moves with the cumulative current account surplus, this has not been so in recent years. Between 1988 and 1992, the increase in net foreign assets was some f. 40 billion less than the cumulative balance on the current account, mainly owing to the much lower increase in the prices of foreign shares held by Dutch residents relative to the prices of Dutch shares held by foreigners during this period.

45/

The outflows, together with the fall in bond prices, led to a reduction in (market) values of Dutch government bonds held by foreigners from f. 104 billion at the end of 1993 to f. 76 billion by mid 1994.

46/

Investments in the South East Asian and Eastern European countries, which had been prominent in 1993, were less pronounced in 1994.

47/

In particular, during 1991-92, unit labor costs in manufacturing, which had remained virtually flat between 1984 and 1990, grew by an annual average of 4.5 percent. The corresponding figures for Germany, Belgium, and France (the main trading partners) were 4.5, 2.2, and 2.6 percent, respectively.

48/

It should be pointed out, however, that, as discussed above, the trends of the last two years also contain a significant cyclical component.

49/

These figures differ from those of Table A23 as they are computed on a transactions, rather than a customs, basis.

Same Series

Other IMF Content

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Cover IMF Staff Country Reports
Netherlands: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1995: Issue 048
Publisher:
International Monetary Fund
ISBN:
9781451829297
ISSN:
1934-7685
Pages:
78
DOI:
https://doi.org/10.5089/9781451829297.002
  • CHART 1
    View in gallery
    CHART 1

    NETHERLANDS Aggregate Demand

    (In Percent Change over Previous Year)

  • CHART 2
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    CHART 2

    NETHERLANDS Unemployment and Participation Rates

    (In Percent)

  • CHART 3
    View in gallery
    CHART 3

    NETHERLANDS Fiscal Indicators

    (In Percent of GDP)

  • CHART 4
    View in gallery
    CHART 4

    NETHERLANDS General Government Deficit and Debt of EU Countries

    (In Percent of GDP)

  • CHART 5
    View in gallery
    CHART 5

    NETHERLANDS General Government Revenue and Expenditure of EU Countries

    (In Percent of GDP)

  • CHART 6
    View in gallery
    CHART 6

    NETHERLANDS Social Security Expenditure

    (In Percent of GDP)

  • CHART 7
    View in gallery
    CHART 7

    NETHERLANDS Long Term Exchange and Interest Rate Developments

  • CHART 8
    View in gallery
    CHART 8

    NETHERLANDS Recent Exchange and Interest Rate Developments

  • CHART 9
    View in gallery
    CHART 9

    NETHERLANDS Current Account

    (Percent of GDP)

  • CHART 10
    View in gallery
    CHART 10

    NETHERLANDS Effective Exchange Rates of the Guilder and Profitability

    (1985=100)

CHART 1

NETHERLANDS Aggregate Demand

(In Percent Change over Previous Year)
CHART 2

NETHERLANDS Unemployment and Participation Rates

(In Percent)
CHART 3

NETHERLANDS Fiscal Indicators

(In Percent of GDP)
CHART 4

NETHERLANDS General Government Deficit and Debt of EU Countries

(In Percent of GDP)
CHART 5

NETHERLANDS General Government Revenue and Expenditure of EU Countries

(In Percent of GDP)
CHART 6

NETHERLANDS Social Security Expenditure

(In Percent of GDP)
CHART 7

NETHERLANDS Long Term Exchange and Interest Rate Developments
CHART 8

NETHERLANDS Recent Exchange and Interest Rate Developments
CHART 9

NETHERLANDS Current Account

(Percent of GDP)
CHART 10

NETHERLANDS Effective Exchange Rates of the Guilder and Profitability

(1985=100)