Kingdom of the Netherlands—Netherlands Selected Issues
Author: International Monetary Fund
Publication Date:
22 Sep 2004
eISBN:
9781451829464
Language:
English
Keywords:
ISCR; CR; Netherlands; TFP growth; GDP deflator; business cycle; allocation rule; cyclical expenditure windfall; revenue windfall; Social security contributions
Download PDF (2.4 MB)

This Selected Issues paper for the Kingdom of the Netherlands—Netherlands underlies recent fiscal developments. Fiscal deterioration during economic slowdowns is not unusual and can be justified on economic grounds. Although the real spending ceilings were largely adhered to, procyclical elements embedded in the fiscal framework contributed to the structural fiscal deterioration. Sharp declines in the revenues from corporate profit taxes and social security contributions, as well as increases in social security spending, were largely responsible for the cyclical deterioration.

Abstract

This Selected Issues paper for the Kingdom of the Netherlands—Netherlands underlies recent fiscal developments. Fiscal deterioration during economic slowdowns is not unusual and can be justified on economic grounds. Although the real spending ceilings were largely adhered to, procyclical elements embedded in the fiscal framework contributed to the structural fiscal deterioration. Sharp declines in the revenues from corporate profit taxes and social security contributions, as well as increases in social security spending, were largely responsible for the cyclical deterioration.

I. Recent Fiscal Developments In The Netherlands1

A. Introduction

1. The Dutch fiscal position deteriorated sharply during 2000–03, amid a steady decline in economic growth. Between 2000 and 2003, the general government balance shifted from a surplus of 2.2 percent of GDP to a deficit of 3.2 percent of GDP, while the primary balance deteriorated by more than 6 percentage points of GDP. The deterioration, either in nominal or in structural terms, was one of the largest among euro area countries and only smaller than those recorded by the United States and the United Kingdom, countries in which recent economic growth has been propped up by substantial fiscal stimuli (Table 1). With the sharp fiscal deterioration in the Netherlands accompanied by sizeable output fluctuations, questions arise about the effectiveness of automatic stabilizers.

Table 1.

The Netherlands: Fiscal Developments in Selected Countries, 2000-03

(General government balance; in percent of GDP)

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Source: WEO database.

2. Fiscal deterioration during economic slowdowns is not unusual and can be justified on economic grounds. Indeed, according to “tax-smoothing” theory, it is optimal for the budget balance to serve as a buffer to allow tax rates to be approximately constant at the level that keeps the budget in intertemporal balance (Barro, 1979). Moreover, staff has generally argued for letting the automatic stabilizers act as a damper to slowing economic activity. In this case, however, deteriorations would be expected to reverse themselves during economic expansions.

3. The magnitude of the deterioration in the Dutch fiscal position surprised many. After taking office in May 2003 and until recently, the government has had to deal with worse–than-expected fiscal outcomes. The final figure on the 2003 fiscal deficit released at end-March 2004 was 3.2 percent of GDP, much higher than the 1.6 percent estimated in May 2003 and exceeding the 3 percent Maastricht ceiling (Figure 1). New budgetary measures were introduced in August 2003 and again in April 2004 to address the fiscal deterioration and to bring the deficit in 2004 to below the 3 percent ceiling.

Figure 1.
Figure 1.

The Netherlands: Fiscal Deficit in 2003

(EMU definition; percent of GDP)

Citation: IMF Staff Country Reports 2004, 301; 10.5089/9781451829464.002.A001

Source: Ministry of Finance.

4. Those who were surprised by these events had good reason to be. First, the remarkable fiscal consolidation undertaken during the 1990s led to sustained improvements in the fiscal balance: by 2000, the structural balance was close to zero. According to the policy guidelines of the SGP and related studies, this should have provided sufficient room to allow for the free play of the automatic stabilizers while avoiding a breach of the 3 percent deficit ceiling. Second, the Dutch fiscal framework—with its emphasis on real expenditure ceilings and strong spending discipline—played an important role in the fiscal consolidation of the 1990s and has been held up as a role model for other countries (Daban and others, 2003).

5. The fiscal slippage during 2000–03 was all the more puzzling because it took place while the real spending ceilings were largely adhered to. As shown in Figure 2, the spending ceilings were met through 2002 and exceeded by only a small margin in 2003.

Figure 2.
Figure 2.

The Netherlands: Real Expenditures Covered by the Fiscal Framework

(In billions of euros; at 1998 prices)

Citation: IMF Staff Country Reports 2004, 301; 10.5089/9781451829464.002.A001

Source: Ministry of Finance.

6. With a focus on the role of the fiscal framework and the effects of movements in asset prices, this paper analyzes the fiscal deterioration during 2000–03 and the effectiveness of the automatic stabilizers in the Netherlands. The main results are as follows:

  • The deterioration reflected contributions from (i) cyclical factors, especially falling revenue; and (ii) structural factors, including the 2001 tax reform and spending increases, particularly in the social sector (and notably health care).

  • Although the real spending ceilings were largely adhered to, procyclical elements embedded in the fiscal framework contributed to the structural fiscal deterioration, particularly in 2001 and 2002. This reduced or offset the damping effect of the automatic stabilizers on output fluctuations.

  • Asset market bubbles exacerbated the procyclical policy bias and masked an expansionary fiscal policy stance during the late 1990s.

7. The rest of paper is organized as follows: Section B examines various factors that may have contributed to the fiscal deterioration during 2000–03. Section C discusses the procyclical elements of the fiscal framework. Section D analyzes the effectiveness of the automatic stabilizers in smoothing output fluctuation. Section E looks at the effects of changes in asset prices on revenue elasticities. Section F concludes.

B. Fiscal Deterioration: Nature and Causes2

8. Distinguishing between the cyclical and structural nature of fiscal deterioration is important for assessing the fiscal policy stance. In theory, cyclical deteriorations reflect the play of automatic stabilizers and should be reversed during the subsequent economic upturn. Structural deteriorations, measured by changes in structural balances, are usually the result of discretionary changes in fiscal policy.3 In practice, however, estimates of the cyclical-structural breakdown are sensitive to the assumptions about output gaps and revenue elasticities. These assumptions, as discussed in Section E, are subject to large uncertainties, especially during periods of asset price swings. There is also the possibility that part of the structural deterioration may be self-correcting and in this sense could be treated as cyclical.4

9. With these caveats in mind, staff estimates indicate that of the 5.4 percentage points of GDP of the deterioration during 2000–03 (Table 2), some 3.4 percentage points were of cyclical nature. Sharp declines in the revenues from corporate profit taxes and social security contributions, as well as increases in social security spending (especially in 2003), were largely responsible for the cyclical deterioration.

10. Structural factors, though accounting for less than half of the fiscal deterioration, were still significant (2 percentage points). These included the 2001 tax reform and increase in health care and education spending, a result of the discretionary changes in fiscal policy. These changes were related to the procyclical elements embedded in the fiscal framework (see Section C).

Table 2.

The Netherlands: General Government Accounts 1/

(In percent of GDP, unless otherwise indicated)

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Sources: CPB, CBS, and IMF staff estimates.

Based on CPB data, except for the total revenue and expenditure, which are based on the CBS data and consistent with the EMU deficit.

Reflecting the difference between the CPB and CBS data.

Including UMTS receipts (0.7 percent of GDP) in 2000 and the purchase of gas rights from DSM (0.3 percent of GDP) in 2001.

IMF staff estimates. Excluding the UMTS receipts in 2000 and the purchase of gas rights from DSM in 2001.

11. Several possible factors may have contributed to the unexpectedly large fiscal deterioration during 2000–03.

  • First, the strength of the underlying fiscal positions during 2000–03 had been overestimated. The recent fiscal deterioration occurred against the background of both the end of the stock market boom and the sudden halt of rapidly rising housing prices, and asset price bubbles can give rise to spurious assessments of the strength of underlying structural fiscal positions (Jaeger and Schuknecht, 2004).5 Indeed, in April 2004, the CPB revealed that the underlying structural position for 2002 and 2003 was 1 percentage point of GDP worse than the bureau had previously estimated.

  • Second, the impact of the cycle may have been larger than normally assumed. This could be due to a more accentuated Dutch business cycle or higher cyclical elasticities. Relative to both its previous cycle and the euro area economy, the boom–and–bust cycle that the Dutch economy has gone through since the mid-1990s, has been more pronounced (Figure 3), amplified by wealth as well as policy effects.6 Moreover, revenue elasticities seem to be sensitive to the changes in asset prices. A study by Eschenbach and Schuknecht (2002) finds that during a boom–and–bust cycle, revenue elasticities tend to be larger than during a normal cycle.

  • Finally, the link between total expenditures under to the EMU deficit and those spending items covered by the fiscal framework is not obvious. While the coverage of the former is based on the national accounts definition and includes the general government, the latter excludes the local governments and is based on a net concept (e.g., it treats nontax revenues, mainly gas revenues, as negative expenditures). For 2002 and 2003 (with available data), the expenditures covered by the framework are about 80 percent of the total expenditures relevant to the EMU balance (Table 3). Local government finances, which are excluded from the fiscal framework, also contributed to the worsening of the EMU balance in 2003 by surprisingly recording a deficit of 0.6 percent of GDP, after years of running close to balance.

Figure 3.
Figure 3.

The Netherlands: Output Gaps, 1982-2004

(In percent of potential output)

Citation: IMF Staff Country Reports 2004, 301; 10.5089/9781451829464.002.A001

Source: WEO database.
Table 3.

The Netherlands: Expenditures Under Different Coverages

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Sources: Minitry of Finance; and IMF staff estimates.

C. Fiscal Framework and Procyclical Fiscal Behavior

12. The expenditure–based fiscal framework was introduced in 1995 by the first Kok government, with a view to achieving a countercyclical fiscal policy. It is based on real spending ceilings, which are determined at the beginning of the government’s term of office on the basis of medium-term fiscal objectives and fixed for the subsequent four years. The key features of the framework are summarized in Box 1.

13. However, certain elements embedded in the framework have resulted in procyclical discretionary measures. These were related, notably, to the cautious GDP growth assumptions, the allocation rules for revenue or expenditure windfalls and shortfalls, and the revisions of nominal ceilings in line with the inflation outlook.

  • The use of cautious growth assumptions led to the presumption that the revenue would tend to outperform the projections under the framework. Based on the allocation rule, part of revenue windfalls would be used for cuts in taxes and social contributions. Indeed, revenue windfalls grew steadily during 1999–2002, reaching some €13.2 billion in the latter year. The full play of automatic stabilizers on the revenue side was limited as a result of the cautious growth assumptions and the revenue allocation rule, with, for example, additional taxes being cut in 2001 when the economy was above its potential. This had undesirable macroeconomic consequences.

  • Revisions of nominal ceilings in line with revisions of inflation projections imply that higher-than-expected inflation is “accommodated” by raising the nominal spending ceilings, adding another procyclical element to the fiscal policy.

The Dutch Fiscal Framework1

During the period of 1983 to 1994, the Dutch fiscal framework was based on the operational target of the central government deficit, which at times generated a strongly procyclical fiscal policy. In some cases, for example, lower–than–expected economic growth led to substantial ad hoc austerity measures, such as the supplementary budget in 1991, under which the government was forced to cut spending and raise taxes.

This experience led to the adoption in 1995 of a framework emphasizing expenditure rules. Specifically, the framework centers on four-year real spending ceilings and a strict separation between spending and revenue decisions (decisions on spending are taken in March or April, whereas decisions on revenues are made in August):

  • The real spending ceilings are determined at the beginning of the government’s term of office, on the basis of medium-term fiscal objectives, and are fixed for the subsequent four years (the normal term of office). They are defined in absolute levels and based on “net expenditures”, i.e., aggregate expenditures less nontax revenues. Moreover, spending on certain public infrastructure does not fall under these ceilings.

  • In addition to ceilings on total net expenditures, the framework sets individual subceilings for three categories of expenditures: central government spending, public health care, and spending related to social security and the labor market. Within each category, spending overruns for some items are allowed to be offset by cuts in other items. Any cross-category compensation, however, would require cabinet approval.

  • The real ceilings are converted to nominal ceilings using, until 2003, the projected GDP deflator, and the projected expenditure deflator since 2003. Unlike the fixed real ceilings, nominal ceilings are revised—usually during the midyear supplementary budget discussion—in line with the most recent inflation projections.

  • Until 2002, a spending reserve was set up to deal with the situation where the growth of wages and prices in the public sector diverged from that of the GDP deflator. In this case, nominal spending on some items (e.g., unemployment benefits, which are wage adjusted) could turn out to be higher than the GDP deflator-adjusted nominal ceiling. The difference was offset by the use of the reserve, to avoid spending cuts on other items. According to official estimates, such potential cuts amounted to €1 billion between 1999 and 2002 (about 0.3 percent of the average GDP over this period) and were avoided through the help of the spending reserve.

  • Until recently, revenue targets were based on cautious GDP growth assumptions (potential growth minus a “safety margin”). Also, until recently, revenue windfalls were to be used equally for deficit reduction and cuts in taxes and social security contributions, as long as the EMU deficit was lower than 0.75 percent of GDP; if the deficit turned out to be higher, more of the windfalls (75 percent) would be devoted to deficit reduction and less to tax cuts (25 percent). In principle, any unexpected increase in tax or social security revenues should not lead to higher government spending, and vice versa. There are also rules governing revenue shortfalls: 25 percent of shortfalls are to be offset by raising taxes or social security contributions if the EMU deficit is lower than 1.75 percent; the 25 percent is increased to 50 percent if the deficit is higher.

1 Based on “The Budgetary Policy of the Second Kok Government,” Ministry of Finance, October 2000.

  • In addition, structural increases in spending were made possible by savings on the cyclical component of expenditure during the boom. The room under the ceilings due to temporary expenditure shortfalls in some categories was used to fund permanent increases in others. At the same time, rules regarding spending allocation across subceilings have not, in practice, been followed consistently as below-ceiling expenditure in one category has been used to accommodate overspending in another. As shown in Table 4, lower-than-expected social security spending and interest payments during 1999–2002 were offset by higher spending in other items, including health care and education. However, when the temporary shortfalls in unemployment benefits vanished, higher spending in other items—in this case health care—was not lowered commensurately.

Table 4.

The Netherlands: Growth of Real Public Spending, 1999-2002

(Annual percentage changes)

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Sources: Budget Memorandum 2003 (Table 3.16); and IMF staff estimates.

Excluding nontax revenues.

On the national account basis and excludes the privately-funded spending on health care.

  • The use of cautious growth assumptions led to the presumption that the revenue would tend to outperform the projections under the framework. Based on the allocation rule, part of revenue windfalls would be used for cuts in taxes and social contributions. Indeed, revenue windfalls grew steadily during 1999–2002, reaching some €13.2 billion in the latter year. The full play of automatic stabilizers on the revenue side was limited as a result of the cautious growth assumptions and the revenue allocation rule, with, for example, additional taxes being cut in 2001 when the economy was above its potential. This had undesirable macroeconomic consequences.

  • Revisions of nominal ceilings in line with revisions of inflation projections imply that higher-than-expected inflation is “accommodated” by raising the nominal spending ceilings, adding another procyclical element to the fiscal policy.

In addition, structural increases in spending were made possible by savings on the cyclical component of expenditure during the boom. The room under the ceilings due to temporary expenditure shortfalls in some categories was used to fund permanent increases in others. At the same time, rules regarding spending allocation across subceilings have not, in practice, been followed consistently as below-ceiling expenditure in one category has been used to accommodate overspending in another. As shown in Table 4, lower-than-expected social security spending and interest payments during 1999–2002 were offset by higher spending in other items, including health care and education. However, when the temporary shortfalls in unemployment benefits vanished, higher spending in other items—in this case health care—was not lowered commensurately.

14. Undercutting the transparency of the framework to some degree, the preannounced spending ceiling is defined on different terms than the actual expenditure outturn relevant for the EMU-defined fiscal deficit. For example, between 2000 and 2003, the latter increased by 3.5 percentage points of GDP, whereas the former increased by only 1.7 percentage points (Figure 4).

Figure 4.
Figure 4.

The Netherlands: Expenditure Development, 1999-2003

(In Percent of GDP)

Citation: IMF Staff Country Reports 2004, 301; 10.5089/9781451829464.002.A001

Source: Ministry of Finance, CBS, and staff estimates.

15. The treatment of nontax revenues as negative expenditures adds another element of complication to assessing fiscal policy. Specifically, expenditure ceilings are applied to net rather than gross expenditures.7 Thus, temporarily high nontax revenue (for instance, resulting from larger natural gas proceeds) could raise gross expenditure without breaching the spending ceilings. Table 4 shows that between 1999 and 2002, total real spending excluding nontax revenues grew by an average of 1.75 percent, against the initial target of 1 percent.

D. Effects of Automatic Stabilizers

16. Automatic stabilizers are those elements of fiscal policy that tend to mitigate output fluctuations without any explicit government action. As activity slows, tax revenues fall and some expenditures (transfers and unemployment benefits, for example) rise, cushioning private sector incomes. The SGP’s budgetary framework emphasizes the need to rely on automatic stabilizers, rather than active fiscal policies, to smooth output fluctuations—especially those representing divergences from euro area–wide developments—over the business cycle.

17. The size of automatic stabilizers tend to increase with the size of the government sector, the progressivity of the tax system, and the relative importance of the cyclically–sensitive revenue, as well as expenditure, items. (Figure 5). suggests that the Netherlands—together with Sweden, Denmark, and the United Kingdom—has relatively large automatic stabilizers.

Figure 5.
Figure 5.

Automatic Fiscal Stabilizers in EU Countries

Citation: IMF Staff Country Reports 2004, 301; 10.5089/9781451829464.002.A001

Source: Annett and Jaeger (2004).1/ Automatic change in general government balance-GDP ratio in response to a 1 percentage point increase in real GDP growth. Note: BEL=Belgium, ITA=Italy, GER=Germany, IRE=Ireland, GRE=Greece, POR=Portugal, AUS=Austria, LUX=Luxembourg, NET=Netherlands, FRA=France, SPA=Spain, UK=United Kingdom, FIN=Finland, DEN=Denmark, SWE=Sweden.

18. In general, the smoothing effect of the automatic stabilizers on output fluctuations can be significantly influenced by country-specific factors. These include the openness of the economy, the flexibility of the labor, product, and financial markets, and the types of shocks.8 For example, Brunila, Buti and ‘t Veld (2002) find that automatic stabilizers are largely ineffective in smoothing output fluctuations induced by supply–side shocks.

19. In this section, the effects of automatic stabilizers on output are estimated following the simple approach in Fatas and Mihov (2001). In this approach, the role of automatic stabilizers implies that disposable income should be less volatile than total income because fluctuations in GDP or income are partially smoothed by changes in taxes and transfers over the business cycle. This view is based on Keynesian models of the business cycle, in which, owing to imperfections in the credit market, consumers cannot smooth consumption completely and therefore can benefit from the stabilizing effect of transfers and taxes on disposable income and, hence, consumption.

20. Empirically, this view implies that the smoothing effects of the automatic stabilizers can by estimated with the following equations:

Δlog⁡(ytd)=α1+β1Δlog⁡(yt)+ε1t(1)
Δlog⁡(ctp)=α2+β2Δlog⁡(ytd)+ε2t(2)

where y, yd, and cp are GDP, disposable income, and private consumption. Hence, 1- β1 measures the sensitivity of after–tax–and–transfer income (disposable income) to before–tax–and – transfer income (GDP); a smaller β1 implies a greater effect of automatic stabilizers. β2 measures the extent to which private consumption reacts to current disposable income.

21. Estimation results suggest that the smoothing effects of automatic stabilizers on output were small in the Netherlands. During the period 1990–2003, only 5 percent of output fluctuations were smoothed by the automatic stabilizers, compared with 22 percent in Belgium, 30 percent in the United Kingdom, and 58 percent in the United States (Table 5). Moreover, changes in disposable income seem to have a smaller impact on private consumption in the Netherlands than in some other countries.

Table 5.

The Effectiveness of Automatic Stabilizers

article image

22. From an econometric standpoint, the small coefficient of β1 could be due to the problem of reverse causality.9 In other words, the estimation treats the changes in income as exogenous and, hence, ignores the possibility that output itself might depend on the size and cyclicality of taxes, transfers, and government spending. This problem may lead to a downward bias in a simple ordinary least square (OLS) regression. A Granger test based on two lagged values of y and yd was performed but failed to reject the causality from yd to y. For this reason, a VAR model with three endogenous variables—yd, y, and cp – was estimated to assess the effects of automatic stabilizers in the Netherlands. Similar results to those shown in (Figure 6) were found.

Figure 6.
Figure 6.

Response to Cholesky One S.D. Innovations ± 2 S.E.

Citation: IMF Staff Country Reports 2004, 301; 10.5089/9781451829464.002.A001

23. There are two possible explanations for these somewhat surprising results. First, Dutch household saving rates have risen sharply during recent years. While this may have largely reflected the balance sheet adjustments related to the adverse developments in the equity and housing markets, there is a possibility that these rising rates were partly a reaction to the deteriorating fiscal balances (a “non-Keynesian” response), or were a reflection of the weak consumer confidence (amid rising unemployment). If so, the demand impetus stemming from the automatic stabilizers would be smaller than expected. Second, it is possible that the procyclical fiscal policy bias embedded in the framework may have reduced or offset the effect of the automatic stabilizers.

E. Effects of Asset Prices

24. The recent fiscal deterioration occurred against the background of a sharp decline in share prices and a sudden halt to the acceleration of housing prices. Between 2000 and 2003, Dutch share prices fell by 60 percent, nearly wiping out the gain of the previous four years. The Dutch experience thus fits the pattern also observed in other countries: the fiscal balance improved during the asset market booms but deteriorated significantly during the bust phase (see Jaeger and Schuknecht (2004)).

25. The boom–and–bust cycle of asset prices could have exacerbated already existing procyclical policy biases in the Netherlands. The revenue allocation rule implied that revenue windfalls during the boom were partly used for tax cuts. In addition, during the period of large asset price swings, the assessment of fiscal stance and the strength of underlying fiscal positions was complicated by the large uncertainties surrounding the estimations of output gaps and revenue elasticities. In particular, conventional methods tend to underestimate revenue elasticities and could help hide expansionary policies in the boom by assigning too much of the fiscal improvement to structural, or noncyclical factors. This can result in significant ex-post revision of the structural balance, as was the case for the Dutch structural balance in 1999: an estimated surplus of 0.7 percent in the European Commission’s (EC) spring 2000 forecasts was revised down to a deficit of 1.3 percent in its fall 2003 forecasts.10 The bottom line is that, given the benefit of hindsight, the adjustment needed during the boom period of the late 1990s may have been delayed into the bust period of the early 2000s, thereby contributing to the procyclicality of fiscal policy.

26. Particularly important were the asset price changes and their effect on fiscal balances through their direct and indirect effects on tax revenues. These changes can affect revenues directly via taxes on capital and financial transactions, and indirectly via wealth effects on consumption and indirect taxes.11 Indeed, the real growth of revenues was highly correlated with the movements of share prices during the latest boom–and–bust phase of 1995–2003, in contrast to earlier periods (Figure 7).

Figure 7.
Figure 7.

The Netherlands: Developments of Revenues and Assets Prices

Citation: IMF Staff Country Reports 2004, 301; 10.5089/9781451829464.002.A001

27. The responsiveness of tax revenues to the changes in asset prices can be investigated by examining the sensitivity of revenue elasticities to these changes. In particular, we estimate separately the revenue elasticities for the normal period of 1970–89 and the boom-and-bust period of 1990 to 2003. Recognizing that the estimation could be complicated by the effects of the tax reform in 2000 (which entailed a shift from income to value-added taxation), a dummy variable is included in the following equations to capture these effects:12

Δlog⁡(REVit)=αi1+αi2Δlog⁡(TAXBASEIT)+αI3Dummy2000+εit.(3)

28. The estimation results indicate that, for corporate and indirect taxes (and possibly the capital tax), the revenue elasticities during the boom-and-bust period are indeed significantly higher than normal (Table 6). This suggests that the responsiveness of fiscal balances to a given output shock was stronger during the boom–and–bust cycle than during the normal cycle. Calculations of structural balances based on underestimated revenue elasticities could make the underlying fiscal position look more favorable and, hence, hide expansionary policies during the boom period.13

Table 6.

The Netherlands: Estimates of Revenue Elasticities 1/

article image
Sources: OECD, AMECO, and IMF staff estimates.

Values in parentheses are t -statistics; ***, **, and * indicate 1 percent, 5 percent, and 10 percent significance levels, respectively.

F. Concluding Remarks

29. The Dutch fiscal balance deteriorated sharply during 2000–03, breaching the 3 percent Maastricht ceiling in the latter year.

30. A key question is why the fiscal situation deteriorated so rapidly and staff’s assessment points to several possibilities. First, changes in the cyclical balance may have been larger than expected, due to a more accentuated business cycle. Second, higher–than–usual cyclical elasticities on revenue items during the boom–and–bust period may have caused a surprisingly large deterioration, even accounting for the relatively strong cycle. Finally, discretionary policy actions, including the tax cuts and spending overruns, contributed to the structural deterioration. Procyclical elements embedded in the fiscal framework contributed to the structural deterioration and limited the intended countercyclical orientation of the expenditure-based fiscal framework.

31. The Dutch government has appropriately taken steps to correct the procyclical policy bias. These include the adoption of a realistic macroeconomic scenario (hence, the elimination of revenue safety margins) and the decision to devote revenue windfalls solely to debt reduction. Most recently, the government also indicated it would change the expenditure rules: cyclical expenditure windfalls (related, for example, to unemployment and other social spending) will not be used to fund other spending without further consideration. However, recognizing the difficult in determining whether spending windfalls are cyclical, a stronger formulation may be needed to preclude new spending. The authorities have also renewed their intention of not allowing reallocation across the spending subceilings.

32. Enhancing the transparency of the spending ceilings would facilitate public monitoring and their accessibility to a broader audience, adding an additional element of clarity and discipline to the system. In this regard, there is a merit in aligning the spending ceiling more closely with the national account concepts and focusing the ceilings solely on spending by discontinuing the practice of treating nontax revenues as negative expenditures. All this would also help to communicate policy, with the potential advantage of enhancing confidence.

33. The difficulty in reliably gauging the revenue elasticities and the strength of the underlying fiscal positions, especially in a boom–and–bust environment, points to the need to build up structural surpluses against future shocks. This includes both anticipated (for example, the aging of population) and unanticipated shocks. In the past, the authorities and the staff both agreed that a sustained fiscal surplus of between 1 and 2 percent of GDP would allow the cost of aging to be met from interest savings on public debt, thus avoiding the need to raise taxes.14

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1

Prepared by Jianping Zhou.

2

The assessment of total revenue and expenditure developments is based on data from the Dutch Statistics Bureau (CBS), which are consistent with the national accounts and EMU balance. However, the detailed “accounting” breakdown of the fiscal deterioration is based on the Netherlands Bureau for Economic Policy Analysis’s (CPB) standard tables on government finance, because the CBS data for 2002 (revised) and 2003 are still unavailable. Since the coverage of government accounts by the CBS is different from that by the CPB, the presentation in (Table 2). includes a category labeled “other.”

3

In the longer term, population aging could also generate changes in structural balances, even in the absence of discretionary policy changes.

4

For example, the large losses that companies appear to have carried forward are coming to an end.

5

Asset price bubbles can pose serious challenges to fiscal policymakers. Jaeger and Schuknecht (2004) find that, in many euro area countries, fiscal policy behavior during boom-and-bust periods often raises questions about the commitment to fiscal rules and discipline.

6

The staff report for the 2004 Article IV consultation discusses these wealth and policy effects.

7

The expenditure framework also excludes the government’s infrastructure investment, which is financed through a special fund replenished partly with gas revenues and privatization proceeds.

9

This problem, which is quite common in estimating tax revenue elasticities, highlights the attraction of using stochastic dynamic general equilibrium models.

10

While the staff estimate of -0.7 percent for 1999 is slightly different from the EC estimate of -1.3 percent, a similar revision was made.

12

Revenue elasticities were estimated based on the simple OLS method and were statistically significant.

13

By the same token, if the misestimation of the elasticities is symmetric in booms and busts, current estimates of the structural balance would be too gloomy.

14

IMF Country Report No. 01/94.

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  • Kleinknecht, Alfred, 1994, “Heeft Nederland een loongolf nodig?” Tijdschrift voor Politieke Ekonomie, 17, pp. 5–24.

  • Nicoletti, Giuseppe, and Stefano Scarpetta, 2003, “Regulation, Productivity and Growth: OECD Evidence,” Economic Policy, Vol. 36, April, pp. 9–72.

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  • OECD, 2004, Economic Survey Netherlands, Paris: OECD.

  • O’Mahony, Mary and Bart van Ark (eds), 2003, EU Productivity and Competitiveness: An Industry Perspective, Brussels: European Commission.

15

Prepared by Gerwin Bell.

16

It should, however, be pointed out that the Groningen data mask the large variation of firms within a given industry. For example, Bartelsman and de Groot (2004) document that while the Netherlands and the United States are closely matched in terms of industry performance, the highest-productivity firms in the United States are much more productive than the highest-productivity firms in the Netherlands. It would thus appear that the relatively favorable industry-level performance of the Netherlands may well erode over time as resources are reallocated to the more productive firms in either county.

17

Note that, even if the argument held true, per capita GDP would still be permanently lifted by job–rich growth.

18

The data set covers firms in Italy, Finland, France, the western Länder of Germany, the Netherlands, Portugal, and the United Kingdom.

19

Recall, however, that productivity levels have been found to be quite different, with the highest productivity firms in the United States being significantly more productive than their European counterparts (see footnote 2).

20

On the other hand, there may also be some trade offs involved in that employment protection can provide incentives for workers to acquire firm-specific human capital, which may be conducive to measured TFP growth (given that labor quality can only be imperfectlyassessed). Still, such protection could arguably be provided through private contracts ratherthan public regulation.

21

In addition, a firm’s ICT investment reflects the outcome of a self–selection process, importantly based on complementarities with other production factors such as human or organization capital. Studies of rates of return on ICT typically do not control for such factors, and high estimated rates of return are likely to reflect such omitted variables–rather than market failures and unrealized arbitrage opportunities that policies could usefully remedy (see Bartelsman and Doms, 2000).

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Kingdom of the Netherlands—Netherlands Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2004: Issue 301
Publisher:
International Monetary Fund
ISBN:
9781451829464
ISSN:
1934-7685
Pages:
42
DOI:
https://doi.org/10.5089/9781451829464.002
  • View in gallery

    The Netherlands: Fiscal Deficit in 2003

    (EMU definition; percent of GDP)

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    The Netherlands: Real Expenditures Covered by the Fiscal Framework

    (In billions of euros; at 1998 prices)

  • View in gallery

    The Netherlands: Output Gaps, 1982-2004

    (In percent of potential output)

  • View in gallery

    The Netherlands: Expenditure Development, 1999-2003

    (In Percent of GDP)

  • View in gallery

    Automatic Fiscal Stabilizers in EU Countries

  • View in gallery

    Response to Cholesky One S.D. Innovations ± 2 S.E.

  • View in gallery

    The Netherlands: Developments of Revenues and Assets Prices

The Netherlands: Fiscal Deficit in 2003

(EMU definition; percent of GDP)

The Netherlands: Real Expenditures Covered by the Fiscal Framework

(In billions of euros; at 1998 prices)

The Netherlands: Output Gaps, 1982-2004

(In percent of potential output)

The Netherlands: Expenditure Development, 1999-2003

(In Percent of GDP)

Automatic Fiscal Stabilizers in EU Countries

Response to Cholesky One S.D. Innovations ± 2 S.E.

The Netherlands: Developments of Revenues and Assets Prices