Council opinion of 27 February 2007 on the updated stability programme of the Netherlands, 2006-2009
Date: 2007-02-27
Institutions: Council of the European Union
Subjects: Netherlands, budget estimate, economic forecasting, public finance, stability programme

27.3.2007

EN

Official Journal of the European Union

C 70/21

COUNCIL OPINION

of 27 February 2007

on the updated stability programme of the Netherlands, 2006-2009

(2007/C 70/06)

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 particular
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 27 February 2007 the Council examined the updated stability programme of the Netherlands,
which covers the period 2006 to 2009.

The macroeconomic scenario underlying the programme envisages that real GDP will grow by 3¼ %
in 2006, 3 % in 2007 and 1¾ % per year over the rest of the programme period. Assessed against
currently available information, this scenario appears to be based on plausible growth assumptions
for 2006 and 2007 and cautious ones thereafter. The programme's projections for inflation appear
realistic until 2007 and seem to be on the low side thereafter in light of the expected tightness of the
labour market.

For 2006, the general government position is estimated to be balanced in the Commission services'
autumn 2006 forecast, against a target of -1,5 % of GDP set in the previous update of the stability
programme. This mainly reflects a strongly improved cyclical outlook resulting in higher tax revenues
as well as higher receipts from the sale of natural gas. Information that has become available since
the autumn forecast (monthly data on the general government balance) points to an even better
budgetary outcome. The latest official estimate, contained in the Autumn 2006 memorandum, puts
the outturn for 2006 at a surplus of 0,4 % of GDP.

The medium-term budgetary strategy in the programme aims at addressing the challenge of the cost
of ageing through further fiscal consolidation. The programme projects the general government
surplus to improve from 0,1 % of GDP in 2006 to 0,9 % in 2009. The primary surplus is targeted to
improve from 2,4 % of GDP in 2006 to 2,9 % in 2009, which is fully concentrated in the final year
of the programme, reflecting in large part the expected refunding in that year of the EU own
resources contribution paid over the period 2007-2009. The nominal adjustment is fully explained
by a fall in the expenditure-to-GDP ratio, which more than compensates a 0,2 percentage point
decline in the revenue-to-GDP ratio. Compared to the previous update of the stability programme,
the level of the general government balance is markedly higher throughout the programme period.
This mainly reflects higher gas receipts, the improved macroeconomic situation in 2005 and outlook
for 2006.

The structural balance (i.e.
the cyclically-adjusted balance net of one-off and other temporary
measures) calculated according to the commonly agreed methodology is expected to deteriorate by
around half a percentage point of GDP in 2007, stabilise in 2008 and improve by around half a
percentage point of GDP in 2009. As in the previous update of the stability programme, the
medium-term objective (MTO) for the budgetary position presented in the programme is a structural
deficit ranging from 0,5 to 1 % of GDP, which the programme plans to maintain throughout the
programme period. As the lower bound of the MTO range is equal to the minimum benchmark (esti-
mated at a deficit of around 1 % of GDP), achieving the MTO should fulfil the aim of providing a
safety margin against the occurrence of an excessive deficit. The MTO 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.

(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

C 70/22

EN

Official Journal of the European Union

27.3.2007

(6)

(7)

(8)

(9)

The risks to the budgetary projections in the programme appear broadly balanced from 2007
onwards. On the one hand, the possibility of a positive carry-over into 2007 of the higher tax
receipts in 2006 constitutes a positive risk to the budgetary outcome in 2007. Furthermore, for
2008 and 2009, a positive risk to the budgetary position stems from the cautious macroeconomic
scenario. On the other hand, gas receipts may turn out lower than currently anticipated throughout
the period.

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain
the MTO throughout the programme period, as envisaged in the programme. In addition, it provides
a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeco-
nomic fluctuations throughout the programme period. Nevertheless, there is a risk that the fiscal
policy stance implied by the programme may turn out to be pro-cyclical in 2007, when good times
are expected. This would not be in line with the Stability and Growth Pact.

Thanks to the sharp reduction in the general government deficit in 2004 and 2005, government
gross debt is estimated to have fallen to 50,2 % of GDP in 2006, further below the 60 % of GDP
Treaty reference value. The programme projects the debt ratio to further decline by 6 percentage
points over the programme period.

The long-term budgetary impact of ageing in the Netherlands is higher than the EU average, influ-
enced notably by a relatively high increase in pension expenditure as a share of GDP over the coming
decades. The initial budgetary position, albeit not as strong as in 2005, contributes to easing the
projected long-term budgetary impact of an ageing population, but it is not sufficient to fully cover it.
The projected future rise of revenues as a share of GDP, mainly due to deferred taxation of pensions,
would partly compensate for the increase in public expenditure over the long term. Ensuring high
primary surpluses over the medium term and/or implementing reform measures that curb the
projected increase in age-related expenditure would contribute to containing risks to the sustainability
of public finances. Overall, the Netherlands appears to be at low risk with regard to the sustainability
of public finances.

(10)

The stability programme does not contain a qualitative assessment of the overall impact of the 2006
implementation report of the national reform programme within the medium-term fiscal strategy. In
addition, it provides no systematic information on the direct budgetary costs or savings of the main
reforms envisaged in the national reform programme, although its budgetary projections seem to take
into account
the actions outlined in the national reform
programme. The measures in the area of public finances envisaged in the stability programme seem
consistent with those foreseen in the national reform programme. In particular, both programmes
describe the recent health care reform, the modifications to the corporate tax system and planned
extra outlays, for instance on infrastructure.

the public finance implications of

(11)

The budgetary strategy in the programme is broadly consistent with the broad economic policy
guidelines included in the integrated guidelines for the period 2005-2008.

(12) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme provides all required and most of the optional data (1).

The Council considers that the medium-term budgetary position is sound and the budgetary strategy
provides an example of fiscal policies conducted in compliance with the Stability and Growth Pact. Never-
theless, an important risk is that the current high level of gas receipts may not persist but overall the risks
attached to the achievement of the budgetary targets are broadly neutral.

In view of the above assessment and the good growth prospects, the Netherlands is invited to maintain a
strong structural position in 2007 and beyond, thereby avoiding pro-cyclical fiscal policies in good times.

(1) In particular, the functional breakdown of government expenditures for 2009 is missing.

27.3.2007

EN

Official Journal of the European Union

C 70/23

Comparison of key macroeconomic and budgetary projections

2005

2006

2007

2008

2009

Real GDP
(% change)

HICP inflation
(%)

Output gap
(% of potential GDP)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

Structural balance (2)
(% of GDP)

Government gross debt
(% of GDP)

SP Nov 2006

COM Nov 2006

SP Dec 2005

SP Nov 2006

COM Nov 2006

SP Dec 2005

SP Nov 2006 (1)

COM Nov 2006 (5)

SP Dec 2005 (1)

SP Nov 2006

COM Nov 2006

SP Dec 2005

SP Nov 2006

COM Nov 2006

SP Dec 2005

SP Nov 2006 (1)

COM Nov 2006

SP Dec 2005 (1)

SP Nov 2006 (3)

COM Nov 2006 (4)

SP Dec 2005

SP Nov 2006

COM Nov 2006

SP Dec 2005

1,5

1,5

¾

1,5

1,5

1,5

– 1,9

– 2,0

– 2,3

– 0,3

– 0,3

– 1,2

2,1

2,1

1,4

0,8

0,9

0,0

0,8

0,9

0,0

52,7

52,7

54,4

3 ¼

3,0

2 ½

1 ½

1,6

1,5

– 0,5

– 1,2

– 1,5

0,1

0,0

3

2,9

2 ½

1 ¾

1,8

1,1

0,6

– 0,4

– 0,9

0,2

0,1

1 ¾

2,6

2 ¼

1 ¾

2,3

n.a.

0,6

0,0

– 0,6

0,3

0,3

– 1,5

– 1,2

– 1,1

2,4

2,3

1,1

0,4

0,6

– 0,7

0,4

0,6

2,4

2,3

1,4

– 0,1

0,4

– 0,6

– 0,1

0,4

2,4

2,3

1,5

0,0

0,3

– 0,6

0,0

0,3

– 0,7

– 0,6

– 0,6

50,2

50,5

54,5

47,9

47,8

53,9

46,3

45,4

53,1

1 ¾

n.a.

n.a.

1 ¾

n.a.

n.a.

0,3

n.a.

n.a.

0,9

n.a.

n.a.

2,9

n.a.

n.a.

0,7

n.a.

n.a.

0,4

n.a.

n.a.

44,2

n.a.

n.a.

Notes:
(1) Commission services calculations on the basis of the information in the programme.
(2) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
(3) One-off and other temporary measures taken from the programme (0,3% of GDP in 2009; deficit-reducing).
(4) There are no one-offs and other temporary measures in the Commission services' autumn 2006 forecast.
(5) Based on estimated potential growth of 1,9 %, 2,1 %, 2,2 % and 2,1 % respectively in the period 2005-2008.

Source:
Stability programme; Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations