Kingdom of the Netherlands—Netherlands: Selected Issues

This Selected Issues paper for the Netherlands highlights that Dutch cost competitiveness deteriorated significantly in the years prior to 2004. The relatively poor economic performance during the new millennium contributed to these concerns generally, as did restrained export performance more specifically. The deceleration of private consumption growth started earlier than the deceleration of per capita real disposable income growth, and occurred at a time when the unemployment rate has been at a historic low and interest rates had declined.

Abstract

This Selected Issues paper for the Netherlands highlights that Dutch cost competitiveness deteriorated significantly in the years prior to 2004. The relatively poor economic performance during the new millennium contributed to these concerns generally, as did restrained export performance more specifically. The deceleration of private consumption growth started earlier than the deceleration of per capita real disposable income growth, and occurred at a time when the unemployment rate has been at a historic low and interest rates had declined.

IV. Budgetary Policymaking in the Netherlands24

A. Introduction

62. Dutch fiscal policies are embedded in a medium-term expenditure framework. The framework has helped achieve considerable fiscal consolidation during 1994–2001. At the same time, it has allowed—to an increasing extent—the free play of automatic stabilizers. Although the framework offers no panacea for fiscal management issues and would benefit from some refinements, it has various desirable features and could possibly serve as a point of reference for other countries.

63. Another interesting feature of the Dutch fiscal policy setting is the role played by the Bureau for Economic Policy Analysis (CPB)—an independent agency that provides macroeconomic forecasts and policy analysis. The CPB is closely involved in the budgetary process. Importantly, it assesses in a highly visible and public manner consistency between the government’s policies and its fiscal and other economic objectives. Although the CPB does not explicitly set or actively enforce policy objectives, its analysis strongly influences perceptions of what constitutes “good policy.” Acting as an independent check on government policies, the CPB embodies some elements of the “independent fiscal councils” that have been advocated in the context of the European Stability and Growth Pact.25

64. The authorities have also recently introduced so-called performance budgeting, with a view to further strengthening the accountability of public sector spending. Here, the experiences have been mixed and highlighted several pitfalls with respect to the use of quantitative performance targets. Nonetheless, if managed judiciously, the clearer links between objectives, policy actions, and financing could further improve policymaking over time.

65. This chapter will describe and assess these key elements of fiscal policymaking in the Netherlands. It is organized as follows: First, Section B provides a brief overview of fiscal policy before the introduction of the current framework. Then, Section C discusses the medium-term expenditure framework and its track record. Section D addresses the role of the CPB, while Section E discusses the early experiences with performance-based budgeting. Section F concludes.

B. Fiscal Policy Before 1994

66. In the Dutch experience, anchoring budgetary policy with nominal balance targets proved to have important drawbacks.26 This approach was followed during the 1980s and into the early 1990s, and is also common in many other countries. While successful in stemming the rapid fiscal deterioration of the 1970s, balance targeting proved to have two key problems.

67. The nominal balance targets were inherently procyclical. That is, worse-than-expected economic circumstances would typically necessitate additional fiscal tightening to meet the balance target, while better-than-expected economic performance tended to lead to fiscal expansion as there were no incentives for saving windfalls once the target was met. The practice of spending cyclical windfalls in good times often resulted in a need for even sharper adjustment when the cycle turned around (Berndsen, 2001).

68. In addition, the budgetary process tended to be messy and hectic, entailing many successive rounds of ad hoc policy adjustments. Indeed, every fiscal setback—whether structural or cyclical—required a response in terms of new policy measures. As Dutch governments usually comprise multiple political parties, the volatility on the fiscal front posed a considerable challenge because it gave rise to continuous tensions in the sometimes fragile coalitions. Another problem with the ad hoc nature of the policy adjustments was that short-term considerations tended to prevail and that many, sometimes major, decisions were taken in a rush.

C. Medium-Term Expenditure Framework

69. To end the problems with the nominal balance target approach, the Study Group on the Budget Margin 27 proposed a medium-term expenditure framework in 1993. This framework would be anchored by real expenditure ceilings, while allowing automatic stabilizers to operate on the revenue side. This proposal was adopted by the government and implemented in 1994. With a few modifications, it is still used at present.

Main features of the framework

70. After elections, when a new coalition government is formed, the coalition partners agree on a detailed spending plan that covers the full four years of their term in office. The agreement entails both the establishment of real expenditure ceilings for each of the four years, as well as a comprehensive package of policy measures needed to deliver adherence to the ceilings. The various choices involved are extensively negotiated and laid down in a detailed “Coalition Agreement,” which subsequently serves as the basis for policy making during the government’s term. A key advantage of this approach is that it effectively puts all the big decisions up front, thereby reducing the potential for discord between the coalition partners along the way.

71. The levels of the real spending ceilings and the associated policy measures are based on the prospective government’s assessment of the needed fiscal adjustment during the government period. That is, at the time the spending ceilings are negotiated, they imply a specified path of fiscal adjustment for the government term, given certain assumptions regarding the macroeconomic outlook, potential growth, and the estimate of the fiscal balance in the base year (which, of course, may later be revised). The amount of effort implied in the four-year plan is a political decision, guided by various considerations including analyses of the fiscal challenges of population aging and the requirements in the context of the Economic and Monetary Union (EMU) and the accompanying Stability and Growth Pact (SGP).28

72. Once the coalition agreement is concluded and the real expenditure ceilings are set, the level of expenditure serves as the policy target. The fiscal balance is allowed to fluctuate freely with developments in revenues. In contrast to the practice before 1994, there is a strict separation between revenues and expenditures. When revenue setbacks—which are often related to weaker-than-expected economic growth—cause a deterioration of the fiscal balance, no adjustment measures are required. Likewise, higher-than-expected revenues are also fully reflected in the balance and cannot be used for additional spending. The framework thus allows for the free play of automatic stabilizers on the revenue side. This play is limited only by the requirements of the SGP: the fiscal rules stipulate that if during the government’s term actual developments in revenues disappoint up to the point that the deficit is expected to exceed 2.5 percent of GDP, additional measures need to be taken in order to prevent a breach of the 3 percent of GDP Maastricht deficit ceiling.29 It should be noted that in earlier years, the framework was less binding in the sense that the partial use of revenue windfalls to finance tax cuts was permitted, with the degree depending on overall fiscal performance. However, the use of revenue windfalls for this purpose was ended in 2002.

73. Another distinctive feature of the framework is a conservative approach to budgeting. In deciding on its four-year spending plan, the government uses “cautious” assumptions with respect to the macroeconomic outlook, relying on a conservative growth scenario supplied by the CPB. The implication of this approach is that any surprises during the budget execution are likely to be on the upside. This would seem prudent as it is harder to compensate for setbacks than it is to allocate windfalls. In addition, since the emphasis, at least for the foreseeable future, is on fiscal consolidation, it makes sense to err on the side of larger-than-planned adjustment.

74. The overall spending ceilings are subdivided into subceilings for three separate sectors. These are (i) a “core” sector; (ii) social security; and (iii) the health care sector. Subsequently, these subceilings are translated into specific budgets for each individual ministry. In principle, every minister is responsible for meeting the budget ceiling of his/her ministry. There are specific rules that deal with the use of windfalls. Within its own budget, each ministry is allowed to use expenditure windfalls that may occur during the year to compensate for expenditure setbacks. However, expenditure windfalls may not be used to fund new spending without further consideration by the cabinet. The latter rule was added in 2002 in order to prevent a repetition of the experiences of the 1990s when, with hindsight, cyclical expenditure windfalls had been used to finance new structural spending. Compensation may also occur between ministries, but not across the three main government sectors. 30 Revenue windfalls, as mentioned above, are to be saved under all circumstances.

Specifics of the expenditure ceilings

75. In the four-year plan, the ceilings are set in real rather than nominal terms. This facilitates compatibility with the associated policy measures and makes the plans robust with respect to unexpected price developments, thereby fostering political tranquility. However, actual expenditure is, of course, in nominal terms. Therefore, every year, in the budget memorandum, the real ceilings for that year are translated into operational nominal ceilings on the basis of expected price developments.31 In the Spring, when the budget for the current year is updated, the deflator forecast is reviewed and the ceilings are adjusted accordingly. After the Spring review, the ceilings for the current year remain fixed in nominal terms.

76. The coverage of the expenditure ceilings is wide, but not exhaustive. In a typical year, around 85 percent of public expenditures will be subject to the ceilings (Figure 1). Interestingly, and somewhat at odds with the countercyclical qualities of other elements of the framework, unemployment spending is included under the ceilings. But other, noncyclical, spending is excluded. The two main excluded items are expenditures from a special fund for investment in infrastructure and the spending of local governments.

Figure 1.
Figure 1.

Netherlands: Expenditure Development, 1999-2003

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 225; 10.5089/9781451829518.002.A004

Sources: Ministry of Finance, CBS, and IMF staff estimates.

77. The infrastructure fund is funded with revenues from natural gas sales and interest savings resulting from the sale of government properties.32, 33 The fund has been separated from the budget process in order to exclude these volatile revenue sources from the general budget and to safeguard a sufficiently high level of infrastructure investments, which improve the economic structure. While there may be advantages to this arrangement from a political economy perspective, the earmarking has the disadvantage of separating the infrastructure investments from the trade-offs faced in the general budgetary process and of reducing the reach of the expenditure ceilings.

78. While local government spending is subject to the requirement that budgets must be balanced over the medium term, problems may arise because local governments’ accounts are compiled on a different basis than those of the central (and general) government. In particular, the local governments are allowed to spread out the fiscal impact of large investments over time by booking the annual depreciation rather than the full amount of the investment. This enables local governments to undertake relatively large investments, without breaching the medium-term balance requirement. However, in the consolidated general government accounts on an ESA 95 basis, such investments have to be booked up front, so that the actions of the local governments can pose problems for the general government’s balance in EMU-consistent terms. Further risks stem from the local government’s ability to accumulate assets, which can be sold and spend at a time of their choosing.

79. An anomaly in the framework is that the ceilings pertain to a net expenditure concept. In this approach, nontax revenues (other than those that are used to fund infrastructure investments) are treated as negative expenditures under the ceilings. It could be argued that, given the noncyclical nature of nontax revenues, this practice is not inconsistent with the main idea behind the framework. Nonetheless, it does significantly subtract from the transparency of the expenditure ceilings and hampers the monitoring of their compliance.

Experience with the framework

80. The framework has served coalitions of various compositions—including all major parties—and appears by now deeply entrenched in Dutch fiscal policymaking. At the same time, it is closely associated with the current Minister of Finance, Gerrit Zalm, who was involved in its original design as a member of the 1993 Study Group on the Budget Margin and has been in office as minister of finance in virtually all the years it was applied (with only a short break in 2002/03).

81. Between 1994 and 2000, the fiscal framework has been very successful in delivering fiscal adjustment. During this period, an initial 4.2 percent of GDP deficit was turned into a 2.2 percent surplus (Figure 2, panel A)—an impressive accomplishment. Moreover, the size of government was substantially reduced, with public expenditure being curtailed from over 58 percent of GDP to about 46 percent (panel B). In the meantime, government debt was reduced from about 77 to 53 percent of GDP (panel C).

Figure 2.
Figure 2.

Netherlands: Trends in Public Finances, 1970-2004

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 225; 10.5089/9781451829518.002.A004

Sources: CPB; and IMF staff calculations.

82. It must be acknowledged, though, that the circumstances under which this consolidation took place were exceptional. First, the period largely coincided with the run-up to the establishment of EMU. Therefore, political commitment during this period was bound to be particularly strong, which helped achieve the good performance under the framework. Second, the late 1990s were a period of economic boom: real GDP growth averaged 3.5 percent a year between 1994–2000. This greatly helped fiscal performance. That said, the framework must be credited with providing a clear set of commonly accepted rules that fostered the saving of at least a substantial part of the cyclical windfalls.

83. Since 2000, fiscal developments have been less favorable.34 After the economic cycle turned around abruptly in 2001 on the heels of a slowdown in world trade and the reversal of the ICT boom, the Dutch fiscal situation deteriorated sharply. This culminated in a 3.2 percent of GDP deficit in 2003, which exceeded the Maastricht deficit ceiling.

84. The sharp deterioration of the balance took the authorities—as well as most outside observers—by surprise. Nevertheless, even though there are indications that, during the boom years, cyclical expenditure windfalls had been used to finance new structural expenditures, on balance, there was no sizable fiscal slippage vis-à-vis the spending ceilings that were set. Indeed, the ceilings were generally adhered to (see e.g., Reininga (2001) and Zhou (2004)). The only overruns occurred in 1998 and in 2003 and were minimal (€200 and €400 million, respectively, or less than 0.1 percent of GDP in both cases).

85. The deterioration during 2001–03 mainly reflected three factors:

  • Relative stance of expenditure policy. The levels of spending for 2001, 2002, and 2003 had been determined at a time when the outlook—even on “cautious” assumptions—was considerably more favorable than the actual outturn. By implication, even with the ceilings adhered to, the pre-set spending policies turned out much more expansionary than originally envisaged, in the sense that expenditure grew relatively rapidly in comparison to real GDP. To illustrate, when the ceiling for 2003 was set in the coalition agreement of the Summer of 2002, it was assumed that real GDP would grow by 2.5 percent in 2003. The outturn, however, was a 0.9 percent decline of GDP. The forecasting error for 2003 alone accounted for about 1¼ percentage points of the deterioration of the fiscal balance in comparison to the projected baseline.

  • Cyclicality of revenues and tax reductions. Another part of the fiscal worsening since 2000 was due to developments in taxes. Tax revenues and social security contributions declined from 40.6 percent of GDP in 2000 to 38.7 percent in 2003, explaining almost 2 percentage points of the deterioration in the balance. Part of this was the likely reflection of the fact that, under the then prevailing rules for the allocation of revenue windfalls, cyclical windfalls had been used to finance permanent tax cuts. In particular, some 0.8 percentage point of the fall in the revenue ratio was related to the tax cuts in 2001, which, with the benefit of hindsight, had been based on an overly sanguine assessment of the structural revenue position. Indeed, wealth effects amplified the normal cycle, causing large revenue gains during the upswing, which were initially regarded as structural but later turned out to be cyclical, partly reflecting tax elasticities having apparently changed over the cycle.

  • Increases in spending not subject to ceilings. In 2003, after running close to balance for many years, the local governments unexpectedly ran a 0.6 percent of GDP deficit on account of spending financed by the sale of earlier accumulated assets. The surprise overrun on the part of the local governments contributed to the general government balance breaching the 3 percent of GDP Maastricht deficit ceiling.

86. These factors highlight that the operation of the framework critically hinges on the quality of the macroeconomic projections. To the extent that the sharp deterioration is explained by the relative stance of expenditure policy and the cyclical volatility of revenues, losses should eventually come back during the next upswing. Crucially, however, this only holds to the extent that the underlying assumptions with respect to the potential growth rate have been accurate. While the practice of fixing expenditure levels for four years ahead has clear advantages in terms of precommitment and helps prevent the spending of revenue windfalls in good times, it has a potential downside, too. If the estimate of potential growth turns out to be too high, the government will have, unknowingly, committed itself to a more expansionary policy stance for multiple years than would seem to have been intended. Although definitive conclusions can only be drawn ex post, this may be a relevant issue at present.

87. Apart from this fundamental conceptual issue, the recent experience also highlights a few other areas where the application of the framework has had shortcomings. Clearly, cutting taxes in the presence of sizable revenue windfalls and the associated difficulties involved in distinguishing between cyclical and structural components had its drawbacks. It is therefore welcome that the authorities have discontinued the practice of using revenue windfalls to finance cuts in taxes. Also, the strong cyclical volatility of revenues needs to be taken into account. Specifically, when fiscal consolidation is important, this would seem to argue for building, and then maintaining, a fiscal buffer as an insurance policy against unexpected sharp cyclical swings in revenues. A final lesson is that the exclusion of relevant expenditure items from the framework further reduces assurances about fiscal outcomes, thus posing a risk to adherence to the SGP. Therefore, such items could be usefully included through a widening of the coverage of the ceilings or through other measures with similar effect. In this regard, the authorities’ recent trial with an “internal stability pact” that aims at closely coordinating the fiscal policies of the central and local governments, is encouraging.

88. Since 2003, the government has taken far-reaching measures to redress the fiscal worsening. Consistent with the provision in the framework that additional measures are called for in case compliance with the SGP is threatened, the government implemented a host of new measures in 2004, aimed at bringing the deficit back under the 3 percent Maastricht ceiling. In the event, it accomplished structural adjustment of about 1¼ percentage points of GDP, reducing the deficit to 2.3 percent of GDP. In a sense, the emergency measures constituted a temporary return to balance targeting.

D. Role of the CPB

89. The CPB, or Netherlands Bureau for Economic Policy Analysis was established in 1945 as the “Central Planning Bureau” and plays a central role in the political process and policy making in the Netherlands. While it was originally intended to facilitate the central coordination of government policies and to provide advise on the sectoral production plans in the private sector (hence the socialist flavor in the initial naming of the institution), the agency has over time assumed a very different role—that of an independent economic forecaster and evaluator of public sector policies. In the latter capacity, the CPB does not provide direct policy recommendations. Rather, it tends to take an “academic” approach, stating facts and pointing out the expected effects of different courses of action, but refraining from normative judgments. Testimony to its apparent success in maintaining this impartial role, the CPB is widely accepted and respected—by political parties and the public at large—as an independent and credible source of economic projections and policy analysis.

Independence

90. While a government body (it is technically under the ministry of economic affairs), the CPB enjoys complete operational freedom, formally guaranteed by law. The director is appointed by the government, but in practice, the process appears to be relatively nonpolitical. CPB directors typically outlive various governments, irrespective of their personal party affiliation. The independence of the CPB management is rarely, if ever, questioned.

Role of the CPB in the political and budgetary process

91. The CPB plays a key role at various stages in the political process. Prior to elections, the CPB provides comprehensive medium-term macro forecasts that are used by the political parties as the basis for their policy platforms. In addition, the larger parties voluntarily submit their platforms to the CPB for an assessment of their economic impact. They do so mainly because a favorable CPB assessment greatly enhances the credibility of their proposals, and also because reluctance to submit to the scrutiny of the CPB would signal that their proposals are not sound. CPB assessments help to track errors and inconsistencies in the platforms, and political parties use the CPB’s expertise to help shape their proposals with a view to optimizing the expected economic effects (depending on political preferences, of course). In effect, the CPB provides the political parties with something of a level playing field in terms of economic forecasts and in the methodology by which policy proposals are evaluated. As a result, unlike their counterparts in many other countries, Dutch political parties generally do not quarrel about differences in macroeconomic assumptions or the expected economic impact of proposed measures.

92. After elections, the CPB plays an important role in assisting in the formation of a new coalition government. It provides an updated set of medium-term projections that forms the basis for the coalition agreement and the medium-term expenditure plan included in it. Often, the CPB is asked to supply a number of different growth scenarios from which the coalition partners choose their baseline (as discussed above, they traditionally opt for the most “cautious” scenario). Subsequently, the CPB works with the prospective coalition partners on the design of a consistent coalition agreement, a process greatly facilitated by its role in the prior assessment of the individual party platforms (i.e., by the time of the coalition negotiations, the economic features of the various policy proposals are known). In terms of the design of the medium-term fiscal framework, the CPB provides several of the key inputs such as the macroeconomic assumptions and the estimate of potential growth. It does not, however, set any fiscal targets—that is the prerogative of the government, with the CPB only assessing consistency between the proposed policies and the expected fiscal outcomes.

93. Once in office, the government continues to use the macroeconomic projections of the CPB. Specifically, CPB forecasts are used as the basis for the government’s annual budgets (including, for example, forecasts of the deflator that is used to translate the real spending ceilings of the medium-term framework into operational nominal targets for the current budget year), the Stability Program updates, and the projections of fiscal outcomes. The government does not make, or publish, any macroeconomic projections of its own. The provision of independent forecasts by the CPB serves a critical role in the elimination of possible politically-motivated forecast biases—a point that has also been emphasized in recent literature (see e.g., Jonung and Larch (2004)). Of course, the absence of political biases—however important—does not guarantee that CPB projections are always right, as has been amply highlighted by the recent experience described above.

94. Besides the regular involvement in the budgetary process, the CPB also provides ad hoc analyses of key economic issues. It does so both on its own initiative and in response to specific requests from the government or parliament. Topics covered include, for example, the fiscal cost of aging and the effects of the regulatory environment on economic growth. The CPB also regularly analyzes (aspects of) new policy proposals, such as, for instance, the overhaul of the disability scheme and health care reform.

Accountability of the CPB

95. While the CPB is a very influential institution, given its central role in the policy process and virtual monopoly position, there are forces to keep it in check. Clearly, the CPB can function effectively only by virtue of its reputation for impartiality and sound economic reasoning, and much of what the CPB does is published and under continuous public and academic scrutiny. In addition, the performance of the CPB is regularly assessed by outsiders: for example, in 2001, its role in the field of policy formation was reviewed by an ad hoc committee of domestic officials; and in 2003, it was assessed by an international independent scientific review committee.

The CPB and Independent Fiscal Councils

96. Against the background of the recent amendments to the SGP, a case has been made for strengthening national fiscal institutions in EMU member states, in particular through the establishment of so-called Independent Fiscal Councils (IFCs) (Annett (2004) and Annett and others (2005)). An IFC would be a national watchdog body providing independent assessments of fiscal policies and monitoring compliance with the SGP. If the IFC is sufficiently credible, its highlighting of any deviations by the government from either the budget or the stability program could lead to reputational costs for the government, thereby acting as a disciplinary device.

97. In practice, the role of the CPB is similar to that of an IFC. In particular, the CPB clearly provides an independent check and, given its great credibility, has the power to bring reputational costs on the government. A key difference, however, with the IFCs that have recently been advocated is that the role of the CPB is not in any way linked to the EMU requirements or the SGP. The CPB makes its own assessments of fiscal policy needs, independent of the European Commission, and does not regard itself as a guardian of Dutch SGP compliance. That said, in recent periods, such a reference to the SGP has not been necessary as the Dutch government itself has been strongly committed to compliance with European rules.

E. Performance Budgeting

98. Starting with the 2002 budget, the authorities have introduced a system of so-called “performance budgeting.” The general idea behind this approach—which is increasingly applied, to varying degrees, in many other OECD countries—is to enhance the transparency of the budget and government policies, with a view to improving accountability. To this end, budgets explicitly link (i) the ultimate policy goals; (ii) the associated policy actions; and (iii) the available financing. More specifically, to facilitate accountability, quantitative performance targets are set for the ultimate policy goals as well as for various throughput variables. After a fiscal year has ended, every ministry is required to submit an annual report that discusses the effectiveness of policies and the extent to which policy goals have been met, with reference to the quantitative targets.35

99. The experience with performance budgeting in the Netherlands has thus far been mixed.36 On the upside, the transparency of budget memoranda and their accessibility to a wider audience appear to have been enhanced considerably. In addition, improved prioritization has led to a drastic reduction in the overall number of spending items, thus contributing to the manageability of public policy. However, the new approach is also experiencing significant growing pains.

100. A key issue is the identification of meaningful performance indicators. In many instances, the way in which the effects of government policies should be measured is not straightforward, and measurement problems hamper accountability in various areas. In the four years that performance budgeting has been applied, the government succeeded in covering only about half of all policies with measurable quantitative targets. In addition, concerns have been raised about the adequacy of many of these targets. Inevitably, performance targets measure only one, or at best a few, dimensions of policy effectiveness, thereby risking an oversimplification of sometimes complex issues. Moreover, since nobody in the public sector has an interest in documenting failure, there is a risk that in practice, the most easily attainable targets are selected, rather than the most relevant ones.

101. Another main drawback is the bureaucracy and extensive paperwork that has so far been associated with the measurement and accountability process. The combined policy evaluations and annual reports that are written by each ministry reportedly span several thousands of pages each year. This places a considerable burden on the reporting ministries, and there have been complaints that the average quality of evaluations is below par. Against this background, on the other end of the spectrum, parliamentarians have so far shown little appetite for digesting the plethora of reports, and the annual discussions on past policy performance in parliament have been mostly uneventful.

102. Further problems pertain to managing trade-offs in areas where policies of different ministries affect each others success, and to the difficulties in accounting for exogenous factors—outside of the control of the government—that may influence policy outcomes. Also, the incentive structures faced by public sector managers have not yet been adjusted to the accountability framework, so that neither success nor failure to meet a target has direct consequences for the managers involved.

103. These issues argue for moving ahead gradually and selectively. Most of the problems are not unique to the Netherlands and are also experienced in other countries that have experimented with performance evaluation (see e.g., IMF, 2005). While there may be no easy answers to the problems, the overall goal of improving accountability remains a legitimate and important one. It would seem recommendable, however, to take a step-by-step approach to implementing performance budgeting. This would involve focusing first on policy areas where measurement is relatively straightforward and quantitative targets make most sense, then expanding only gradually to more complex areas, recognizing that a comprehensive coverage of policies may not be attainable for some time to come.

F. Summary and Conclusions

104. The Dutch budgetary framework has considerable merits. Its medium-term focus allows for multi-year commitment by the government, thereby lessening the role of (often political) short-run considerations, and putting a premium on structural policy measures. At the same time, by targeting real expenditure, while allowing automatic stabilizers to play freely on the revenue side, it normally avoids procyclical policy biases.

105. A main practical challenge for the framework concerns the accuracy of the four-year macroeconomic projections, including the underlying estimate of potential growth. If the potential growth rate is overestimated, this can, in effect, result in a commitment to overly expansionary fiscal policies. While the conservative budgeting approach that has been applied by the government helps alleviate this problem, the recent experience has shown that risks remain, especially at times when there is greater-than-usual uncertainty about the economic outlook.

106. Some refinements could improve fiscal policies under the framework. In light of the recent experiences that revealed strong cyclical components in revenues, a cautious approach to ensuring adequate funding for any further tax cuts would seem appropriate, as would building and maintaining a fiscal buffer to safeguard consolidation objectives and SGP compliance from unexpected swings in revenues. In addition, in order to improve the predictability of fiscal outcomes, the coverage of the framework could be usefully extended to integrate items—such as local government spending—that are currently excluded. Finally, focusing the spending ceilings exclusively on spending by ending the practice of treating nontax revenues as negative expenditures, would enhance transparency.

107. The CPB plays a key role in keeping fiscal discipline. By publicly assessing consistency between the government’s policy measures and its fiscal and other economic objectives, the CPB fosters accountability and fiscal discipline. In various respects, the CPB is a successful example of an “Independent Fiscal Council,” although it does not explicitly prescribe fiscal targets or policy measures and has no particular interest in Dutch SGP compliance.

108. The experiences in the area of performance budgeting argue for moving ahead in small steps. While performance budgeting raises the prospect of improved efficiency and accountability of fiscal policy, its implementation is somewhat of a “trial-and-error” process. In this light, efforts should focus on policy areas where quantitative targets make most sense, expanding only gradually into more complex areas.

References

  • Annett, Anthony, Jörg Decressin, and Michael Deppler, 2005, “Reforming the Stability and Growth Pact,” IMF Policy Discussion Paper, PDP/05/2 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Annett, Anthony, 2004, “Enforcement and the Stability and Growth Pact,” in IMF Staff Country Report 04/235 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Blöndal, Jón, and Jens Kromann Kristensen, 2002, “Budgeting in the Netherlands,” OECD Journal on Budgeting, Vol. 1, No. 3, pp. 39 –77.

    • Search Google Scholar
    • Export Citation
  • Berndsen, Ron, 2001, “Postwar Fiscal Rules in the Netherlands: What Can We Learn for EMU?,” in Fiscal Rules, Proceedings of a BdI Workshop (Rome: Banca d’Italia).

    • Search Google Scholar
    • Export Citation
  • IOFEZ, 2004, “Policy Budgets and Policy Accountability: Evaluation—Lessons from Practice” (The Hague: Ministry of Finance).

  • IMF, 2005, “United Kingdom: Staff Report for the 2004 Article IV Consultation,” Country Report No. 05/80 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Jonung, Lars, and Martin Larch, 2004, “Improving Fiscal Policy in the EU: the Case for Independent Forecasts,” European Economy Economics Papers No. 210 (Brussels: European Commission).

    • Search Google Scholar
    • Export Citation
  • Reininga, Ted, 2001, “Coalition Governments and Fiscal Policy in the Netherlands,” in Fiscal Rules, Proceedings of a BdI Workshop (Rome: Banca d’Italia).

    • Search Google Scholar
    • Export Citation
  • Tijsseling, I.C., and P.G.J. Uden (eds.), 2004, “Made in Holland—Dutch Public Finance: Lessons and Experiences” (The Hague: Sdu Publishers).

    • Search Google Scholar
    • Export Citation
  • Zhou, Jianping, 2004, “Recent Fiscal Developments in the Netherlands,” in IMF Country Report No. 04/301 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
24

Prepared by David Hofman.

25

See, in particular, Annett (2004) and Annett and others (2005).

26

See Tijsseling and Van Uden (2004) for an overview of the experiences with balance targeting. They also discuss various other approaches to budgeting pursued in the Netherlands in the post-WWII era, prior to nominal balance targeting. These earlier approaches are outside of the scope of this chapter.

27

The Study Group on the Budget Margin is a long-standing advisory council of high-level officials, including among others representatives of various ministries, the head of the CPB, and an executive director of the central bank. It conducts periodic reviews of the functioning of the fiscal framework.

28

For example, during 1994–98, when the Netherlands had to secure compliance with the deficit and debt criteria of the Maastricht Treaty in order to qualify for EMU membership, the ceilings were set to decline by 0.7 percent every year, implying rapid consolidation. In the subsequent period (1998–2002), with the public finances in a better shape, the effort was relaxed, allowing real spending growth of 1.5 percent per year—which still implied considerable adjustment in light of an average real GDP growth of 2.8 percent (ex post) during that period. In the current government’s term (2004–07), ceilings were set to increase by 1.4 percent a year in real terms, originally implying a nominal deficit of 0.5 percent of GDP in 2007, which was deemed consistent with a sustainable path for public finances, while providing for population aging.

29

The 2.5 percent threshold represents the desire to maintain a 0.5 percent safety margin with respect to the Maastricht ceiling.

30

The rule that bans compensation across the three main sectors has not always been adhered to in the past, but the current government renewed its commitment to the rule when it took office.

31

Specifically, a forecast for the domestic demand deflator is used for this purpose.

32

Investments from the infrastructure fund pertain, for example, to highways and high speed rail connections.

33

The proceeds of the sale of government properties are used to pay down government debt. The resulting structural flow of savings on the interest bill is then deposited in the infrastructure investment fund.

34

See Zhou (2004) for an in-depth analysis of developments in 2001–03.

35

For example, in the area of crime, the government’s ultimate policy objective is to reduce crime rates by 20-25 percent between 2002 and 2010. To achieve this goal, it pursues a policy of increasing, among various other things, the size of the police force and the capacity of penitentiary institutions. For the latter operational variables, quantitative targets are set in each year’s budget, together with the funding available to achieve them. In its annual reports, the government discusses to which extent the intermediate targets (more police, more prison cells) have been met, the amounts of tax money spent, and the progress made towards the overall objective (less crime).

36

The early experiences with performance budgeting were reviewed in 2004 by an interministerial working group (IOFEZ, 2004). The discussion in this section draws on their findings as well as on those of Tijsseling and Van Uden (2004).