Council Opinion of  14 March 2006  on the updated stability programme of the Netherlands, 2005-2008
Date: 2006-03-14
Institutions: Council of the European Union
Subjects: Netherlands, budget estimate, economic forecasting, public finance, stability programme

5.4.2006

EN

Official Journal of the European Union

C 82/27

COUNCIL OPINION

of 14 March 2006

on the updated stability programme of the Netherlands, 2005-2008

(2006/C 82/07)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

(5)

On 14 March 2006 the Council examined the updated stability programme of the Netherlands,
covering the period 2005 to 2008.

After buoyant economic growth in the second half of the 1990s, with GDP growth averaging
3,75 % per year also supported by a booming housing market and rising stock prices, growth came
to a standstill in the years 2002 and 2003 and again in early 2005. Following a comfortable surplus
in 2000, the general government balance deteriorated sharply, turning into a deficit in 2001 and
2002 and exceeding the 3 % of GDP threshold in 2003. On 2 June 2004, the Council decided that
the Netherlands were in excessive deficit and recommended that the excessive deficit be corrected by
2005. A substantial budgetary consolidation was achieved already in 2004, which reduced the
deficit to 2,1 % of GDP in 2004. On 7 June 2005, the Council decided that the excessive deficit in
the Netherlands had been corrected in 2004 and therefore abrogated the excessive deficit decision.

In its opinion of 18 January 2005 on the previous update of the stability programme, covering the
period 2004-2007, the Council invited the Netherlands to ensure that the deficit was brought below
3 % of GDP by 2005, and, in view of the risk of pro-cyclicality and the challenges of ageing popula-
tion, to take the necessary measures to achieve a budgetary position close to balance thereafter.

As regards budgetary implementation in 2005, the December 2005 update estimates that the
general government deficit fell to 1,2 % of GDP against a deficit target of 2,6 % of GDP set in the
November 2004 update of the stability programme and a deficit projection of 1,8 % of GDP in the
Commission services' autumn 2005 forecast. The largest part of the improvement can be attributed
to better-than-expected revenues mainly from higher gas prices and higher dividend, VAT and
corporate tax revenues According to most recent estimates presented to Parliament, the 2005 deficit
is even likely to be near 0,75 % of GDP, substantially lower than projected in the programme
update.

The December 2005 update of the Dutch stability programme, covering the period 2005 to 2008,
was submitted to the Commission on 22 December 2005 (i.e., three weeks after the deadline of 1
December as prescribed in the code of conduct). According to the authorities, the late submission
was caused by their wish to include new economic projections and possible supplementary policies.
The programme broadly follows the model structure for stability and convergence programmes
specified in the new code of conduct (2).

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The

documents referred to in this text can be found at the following website:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

(2) Some chapters are missing (overall policy framework) or are incomplete (quality of public finances, structural
reforms). Compulsory data regarding the basic assumptions were missing in the programme, but were subsequently
supplied by the Dutch authorities. An important part of optional data prescribed by the new code of conduct is
missing.

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5.4.2006

(6)

(7)

(8)

(9)

The programme projects real GDP growth to increase from an estimated 0,75 % in 2005 to 2,5 %
in both 2006 and 2007, before slowing to 2,25 % in 2008. The projected pick-up in growth is
driven by a recovery in both domestic demand and exports. The economic growth projections and
the implied gradual decrease of the negative output gap are plausible, also in view of recent positive
economic data. Inflation is expected to stabilise at 1,5 % in 2006, before falling to just above 1 % in
2007, which seems to be on the low side also compared to the Commission services' autumn fore-
cast.

The authorities' main strategic objective is to achieve sound public finances to support sustainable
economic growth and absorb the costs of ageing. After the substantial consolidation achieved in
2004 and 2005, the 2005 update of the stability programme projects the general government
deficit to increase to 1,5 % in 2006 and subsequently to stabilise at around 1,1 % of GDP, with the
primary surplus following a similar pattern. Compared with the previous programme which foresaw
a continued deficit reduction, the new update takes into account the better-than-expected deficit
outcome in 2005 of 1,2 % of GDP and foresees, against the background of a comparable macroeco-
nomic scenario from 2006 onwards, a broad stabilisation at this level (except for a deterioration in
2006).

Based on Commission services' calculations on the basis of the programme according to the
commonly agreed methodology, the structural balance, after having improved markedly from a
deficit of 2,25 % of GDP in 2003 when the excessive deficit occurred to a balanced position in
2005, reflecting a strong adjustment effort in line with the Stability and Growth Pact, would deterio-
rate to a deficit of nearly 0,75 % of GDP in 2006 against a diminishing although still negative
output gap. Half of this structural deterioration reflects the fact that companies paid higher-than-
expected tax advances in 2005 to take advantage of above-market interest rates paid by the Govern-
ment, with an expected mirror effect in 2006. The structural deficit balance would stabilise there-
after at a deficit slightly above half a percentage point of GDP. The programme sets the medium-
term objective (hereafter MTO) for the budgetary position of a structural (i.e. cyclically-adjusted and
net of one-off or other temporary measures) balance between -0,5 % and -1 % of GDP. This MTO is
at an appropriate level because it lies within the range indicated for euro area and ERM II Member
States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt
ratio and average potential output growth in the long term. Despite the projected fiscal deterioration
in 2006, the deficit is expected to remain within the MTO range as set in the programme.

The risks to the budgetary strategy appear broadly balanced and the budget outcome could be even
somewhat better than expected beyond 2006. On the one hand, current indicators suggest a strong
pick-up in economic activity, the 2005 deficit is now expected to be substantially lower and,
beyond 2006, there exists a positive risk to the programme's budgetary projection if the oil price
turns out higher than anticipated in the programme since the budget would benefit from higher gas
revenues while the growth forecast is already consistent with such a higher oil price. On the other
hand, some of the better-than-expected outcome in 2005 may also have negative carry-over effects.
Moreover, it is not yet clear whether the expected budgetary savings from the reforms in the health
and social security systems that came into force at the beginning of 2006 will be fully achieved as
the behavioural effects of the reforms cannot yet be assessed with accuracy.

(10)

Taking into account the risk assessment above, the budgetary strategy outlined in the programme
seems sufficient to ensure that the programme's MTO is maintained throughout the programme
period. The projected structural balance in every year falls within the MTO range as specified in the
programme and is better than the minimum benchmark of a structural deficit of around 1 % of
GDP, which ensures a sufficient margin against breaching the 3 % of GDP threshold in case of
adverse cyclical developments. Nevertheless, despite the strong economic recovery, there is a dete-
rioration of 0,75 % of GDP in the structural balance in 2006 although this is partly due to excep-
tional factors. If the recent information on the positive outcome in 2005 is confirmed, the fiscal
deterioration implied by the 2006 target could even be larger, unless the authorities take measures
to contain it.

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C 82/29

(11)

The programme projects the government debt to broadly stabilise in 2006 at 54,5 % of GDP before
gradually decreasing to around 53 % in 2008. These projections are very close to those of the
Commission services. Risks to the debt forecasts stem primarily from the risks to the deficit projec-
tions, which, as stated above, appear broadly balanced.

(12) With regard to the sustainability of public finances, the Netherlands appears to be at medium risk
on grounds of the projected budgetary costs of ageing populations. The current level of debt is
under the Treaty value of 60 % of GDP and the recent improvement of the budgetary situation in
the Netherlands has helped alleviate risks to long-term sustainability. The implementation of recent
reforms of the disability scheme will also contribute to curb long-term public spending. However,
even fully taken into account, the projected future rise in revenue, notably due to delayed taxation
of pension are not sufficient to compensate the rise in public expenditure over the long-term.
Further budgetary consolidation may therefore be necessary to fully offset the impact of ageing.

(13)

(14)

The envisaged measures in the area of public finances are broadly consistent with the broad
economic policy guidelines included in the integrated guidelines for the period 2005-2008. In par-
ticular they are in line with the integrated guideline on securing economic stability by maintaining
the medium-term budgetary objective over the economic cycle. The programme also complies with
the integrated guideline on safeguarding economic sustainability in view of the projected costs of
ageing population.

The National Reform Programme of the Netherlands, submitted on October 14, 2005 in the context
of the renewed Lisbon strategy for growth and jobs,
identifies improving labour supply; faster
growth in labour productivity through strengthening R&D and innovation; and improving price
competitiveness through containing labour costs as challenges. Of these, strengthening R&D and
innovation are expected to have significant implications for public finances. However, given limited
information especially on the timing of the structural reforms in these areas, it is difficult to ascer-
tain whether the actions outlined in the National Reform Programme are fully reflected in the
budgetary projections of the stability programme. The measures in the area of public finances envi-
saged in the stability programme seem to be broadly in line with the actions foreseen in the National
Reform Programme.

In view of the above assessment, the Council welcomes the efforts of the Dutch Government in 2005 to
bring the deficit further below the 3 % of GDP reference value, after the prompt correction of the excessive
deficit, as well as the fact that the authorities plan to respect the medium-term objective throughout the
programme period. The Council invites the Netherlands, also in view of better-than-expected results in
2005 to maintain a strong budgetary position in 2006 and thereafter.

Comparison of key macroeconomic and budgetary projections

Real GDP
(% change)

HICP inflation
(%)

SP Dec 2005 (1)

COM Nov 2005

SP Nov 2004

SP Dec 2005

COM Nov 2005

2004

1,7

1,7

1,25

1,4

1,4

2005

0,75

0,5

1,5

1,5

1,7

SP Nov 2004

1,25

1,25

2006

2007

2,5

2,0

2,5

1,5

2,0

1,5

2,5

2,4

2,5

1,1

1,9

1,5

2008

2,25

n.a.

n.a.

n.a.

n.a.

n.a.

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Output gap
(% of potential GDP)

SP Dec 2005 (2)

COM Nov 2005 (4)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance = Structural
balance (3)
(% of GDP)

Government gross debt
(% of GDP)

SP Nov 2004

SP Dec 2005

COM Nov 2005

SP Nov 2004

SP Dec 2005

COM Nov 2005

SP Nov 2004

SP Dec 2005 (2)

COM Nov 2005

SP Nov 2004

SP Dec 2005

COM Nov 2005

SP Nov 2004

2004

2005

2006

2007

2008

– 1,5

– 1,3

– 2,1

– 2,1

– 2,1

– 3,0

0,6

0,5

– 0,1

– 1,3

– 1,4

– 1,6

53,1

53,1

56,3

– 2,3

– 2,2

– 2,2

– 1,2

– 1,8

– 2,6

1,4

0,7

0,3

0,0

– 0,6

– 1,2

54,4

54,0

58,1

– 1,5

– 1,9

– 1,5

– 1,5

– 1,9

– 2,1

1,1

0,6

0,7

– 0,7

– 0,8

– 1,2

54,5

54,2

58,6

– 1,1

– 1,4

– 0,9

– 1,2

– 1,5

– 1,9

1,4

1,0

0,8

– 0,6

– 0,7

– 1,3

53,9

53,8

58,3

– 0,9

n.a.

n.a.

– 1,1

n.a.

n.a.

1,5

n.a.

n.a.

– 0,6

n.a.

n.a.

53,1

n.a.

n.a.

Notes:
(1) For further calculations, the corresponding point estimates have been used.
(2) Commission services calculations on the basis of the information in the programme.
(3) As there are no one-off and other temporary measures in the programme, the cyclically-adjusted balance and the structural balance

are identical.

(4) Based on estimated potential growth of 1.5%, 1.6%, 1.7% and 1.8% respectively in the period 2004-2007.

Source:
Stability programme (SP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations.