Council opinion of 10 March 2009 on the updated stability programme of the Netherlands, 2008-2011
Date: 2009-03-10
Institutions: Council of the European Union
Subjects: Netherlands, budget estimate, economic forecasting, public finance, stability programme

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COUNCIL OPINION

of 10 March 2009

on the updated stability programme of the Netherlands, 2008-2011

(2009/C 68/06)

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)

On 10 March 2009, the Council examined the updated stability programme of the Netherlands,
which covers the period 2008 to 2011.

In 2008, economic activity slowed down considerably as the global economic downturn and the
financial crisis hit both external and domestic demand. While annual growth still reached 1,9 %, this
was largely due a significant carry-over effect from strong domestic demand in the second half
of 2007, resulting from high private consumption growth. In 2009, economic activity is expected to
contract sharply by 2 % according to the Commission services' January 2009 interim forecast. The
very open Dutch economy will be relatively hard hit by the expected fall in world trade. The main
policy challenges in the downturn are related to both the financial sector, by addressing the very low
confidence and falling asset positions of pension funds, and to the real economy, by supporting
investment and competitiveness. The downturn will have a significant impact on public finances, as a
projected surplus in 2008 is expected to turn into a deficit in 2009, which will further increase in
2010. This also takes into account the impact of the support package as presented in November,
which among others provides support for private investment.

On 19 December 2008 the Netherlands submitted an addendum to the Stability programme,
containing a recovery plan and a partial update of the macro-economic scenario. This addendum
shows much less optimistic figures than the programme, with GDP growth of – 0,75 % in 2009 and
1 % in 2010 and the general government deficit at 1,2 % and 2,4 % of GDP. However, the new
figures will not be used as the baseline for the assessment, as the macro-economic scenario was not
fully-fledged and public finance data have been presented for information purposes rather than with
official endorsement by the Ministry of Finance.

The macro-economic scenario underlying the programme envisages that real GDP will decelerate
from 2,25 % in 2008 to 1,25 % in 2009 before recovering to an average rate of 2 % over the rest of
the programme period. In view of the rapid deterioration of the macro-economic outlook in the past
months, this scenario, which was finalised in September (2), appears to be based on markedly favour-
able growth assumptions, when compared to the Commission services' January interim forecast. Even
the GDP growth figure for 2009 as presented in the addendum (– 0,75 %)
is still favourable
compared to the Commission services' forecast reflecting a very rapid deterioration of the economic

(1) OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2) The assessment notably takes into account the Commission Service's January 2009 interim forecast, but also other infor-

mation that has become available since then.

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outlook. Specifically, the most recent available information points to a sharp contraction of invest-
ment on the back of tighter credit conditions, as well as a rapid fall of exports given the weak
external demand. Both the (limited) budgetary and economic impact of the support package are not
reflected in the macro-economic scenario. The programme's projections for inflation appear to be on
the high side for 2009, but seem to be realistic for the period thereafter.

(5)

(6)

(7)

(8)

For 2008, the general government balance is estimated at a surplus of 1,1 % of GDP in the Commis-
sion services' January 2009 interim forecast, against a surplus target of 0,5 % of GDP set in the
previous update of the stability programme. The improvement is mainly due to a better-than-expected
outcome in 2007. Furthermore, revenue growth in 2008 was somewhat higher than expected, as
higher gas revenues were only partly compensated by lower tax revenues resulting from the financial
crisis. Expenditure growth in 2008 was also slightly higher, largely reflecting higher-than-expected
interest payments and child care expenditure.

The budgetary target for 2009 in the update is a surplus of 1,2 % of GDP, which compares with a
projected deficit of 1,4 % of GDP in the Commission services'
interim forecast. The structural
balance, according to the information provided in the update of the stability programme and recalcu-
lated by the Commission services, is projected to attain a surplus of some 1 % of GDP in 2009,
compared to a surplus of around 0,75 % in 2008. The fiscal stance as presented in the programme
can be considered as slightly restrictive. However, the Commission services' interim forecast foresees
an expansionary fiscal stance in 2009 with a deterioration of the structural balance of 1 percentage
point of GDP, due to the budgetary impact from discretionary measures taken in response to the
economic slowdown (which could add up to 0,5 % of the GDP) as well as losses in gas revenues and
tax revenues linked to the lower growth and higher tax elasticities.

The main goal of the programme's budgetary strategy is to attain a structural surplus, that is, a cycli-
cally adjusted surplus net of one-off and other temporary measures, of 1 % of GDP at the end of the
programme period. Thereby, the Netherlands would respect, throughout the programme period, its
medium-term objective (MTO) for the budgetary position, which is a structural deficit ranging from
0,5 % to 1 % of GDP. The programme expects the headline budget surplus to fall from 1,2 % in
2009 to 0,8 % of GDP in 2010 and to rise again to 1,1 % of GDP in 2011. The primary balance is
expected to follow a similar pattern. Government gross debt, estimated in the programme at 42,1 %
of GDP in 2008, is projected to decline by 6 percentage points over the programme period. However,
these projections were finalised before the government operations to stabilise the financial markets
and therefore do not take them into account. These operations, such as the purchase of Fortis Bank
Netherlands and bank recapitalisations, led to an increase of about 15 percentage points in the debt-
to-GDP ratio of 2008. Specifically, according to the Commission services' interim forecast, the debt
ratio reached 57,3 % in 2008, declining to 53,2 % in 2009 due to a loan repayment, before
increasing again to 55,2 % in 2010. According to the indications provided in the December 2008
addendum, the expected headline balance in 2009 and 2010 is now considered to be markedly
below the targets set in the programme (indicating a deficit of 1,2 % and 2,4 % respectively). This
suggests that the planned balance for 2011 may also be outdated.

The budgetary outcomes projected in the programme are subject to (significant) downward risks.
Most importantly, the macro-economic outlook is based on markedly favourable growth assumptions,
as evidenced by recent weak economic data for example on industrial production. The economic
growth difference with the Commission services'
interim forecast amounts to 3,25 % of GDP in
2009, which implies substantial budgetary risks and which is also reflected in the worsening govern-
ment balance referred to in the addendum. Furthermore, the fiscal stimulus measures have not yet
been taken into account in the budgetary targets of the programme although their impact is very
small. Besides the direct budgetary impact, the measures involving guarantees pose a significant
indirect risk,
if these are extensively called upon. Finally, gas revenues can pose a risk for the
budgetary outcome as they are based in the programme on a more optimistic oil price hypothesis
than in the Commission services' interim forecast. In view of the negative risks to the budgetary
targets and the sizeable guarantees given to the banking sector, there is a high risk that the evolution
of the debt ratio will turn out less favourable than projected in the programme.

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(9)

(10)

The long-term budgetary impact of ageing is higher in the Netherlands than the EU average. The
projected future rise of tax revenues as a share of GDP, due to the deferred taxation of private
pensions, would partly compensate the increase in public expenditure over the long-term. The
budgetary position in 2008 as estimated in the programme, which is better than the starting position
of the previous programme, contributes to offsetting the projected long-term budgetary impact of an
ageing population but is not sufficient to fully cover future spending pressures. Higher primary
surpluses over the medium term, and implementing reform measures that curb the projected increase
in age-related expenditure would contribute to reducing the medium risks to the sustainability of
public finances. The financial crisis can also have a negative impact on the long-term sustainability of
public finances through the financial sector stabilisation schemes (e.g. recapitalisation, guarantees) put
in place by the Netherlands, primarily via their impact on government debt,
if the costs of the
government support are not fully recouped in the future.

the start of

the government

In 1994, the Netherlands introduced a trend-based budgetary framework, which has proved to be
very successful (1). While this framework was reaffirmed by the current government, some minor
adjustments were made at
in
November 2008, the fiscal rule was modified in a way that all possible expenditures and non-tax
revenues resulting from the interventions in the financial sector will not be part of the expenditure
ceiling (3). Furthermore, if, as a consequence of these government operations, the signal value (4) for
the deficit of 2 % of GDP is reached, no corrective measures will be taken. This additional budgetary
rule is meant to minimise the impact on normal budgetary decision-making of the measures taken in
response to the financial crisis. There is no end-date mentioned for this change in rules. The govern-
ment also announced a reform of the methodology with respect to the budgetary treatment of non-
tax gas revenues starting from 2012. For the period 2008-2011, the maximum amount of gas
revenues that can be used for spending is fixed.

term in 2007 (2). More recently,

(11) With a view to stabilising the financial sector, the Dutch government has adopted a number of
measures. First, it increased the amount covered by the deposit guarantee scheme to EUR 100 000.
Second, a credit guarantee scheme amounting to EUR 200 billion (33 % of GDP) for medium-term
debt instruments by banks was introduced. The scheme is aimed at improving their access to finance.
Third, a fund of EUR 20 billion (3,3 % of GDP) was created to be used for recapitalisation of financial
institutions. Finally, the government nationalised a major bank and provided a back-up facility to a
large financial institution.

(12)

In line with the European Economic Recovery Plan agreed in December by the European Council, the
Netherlands adopted measures aimed at fostering private investment through tax cuts and loan guar-
antees, protecting employment through the possibility of a temporarily lowering of hours worked,
improving the credit supply through guarantees and lowering of social contributions. These measures
are timely and targeted, in line with the EERP, and partially temporary. They should therefore not
have a major impact on the long-term sustainability of public finances. Relative to the large commit-
ments on the financial rescue packages and given the favourable starting position of the public
balance and debt and the projected severity of the downturn, the size of the fiscal support package is
modest (0,5 % of GDP). The update of the stability programme also includes a series of structural
measures, which boost demand, but are also compatible with the longer-term policy reform agenda.
The lowering of social contributions aims at boosting demand, while increasing labour supply at the
same time. Furthermore, in order to reduce labour shedding and to ease the transition in the labour
market, mobility centres are set up, which are based on public-private partnerships. The measures are
related to the medium-term reform agenda and the country-specific recommendation proposed by
the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs.

(1) This is evidenced by the fact that since 1994 the average budget deficit was 1,1 % of GDP, outperforming the euro area
deficit average of 2,3 % of GDP. Furthermore, the budgetary target as set out in respective budget memorandums was only
missed in three years.

(2) For a description of these measures, see the Macro-Fiscal assessment of the Stability Programme of the Netherlands

(Update of November 2007), Section 6.

(3) Expenditure ceilings in the Netherlands consist of expenditure and non-tax revenues.
(4) The signal value for the government balance is meant to avoid the breach of the 3 % of GDP deficit threshold. When the
budgetary deficit is expected to surpass that value, corrective measures have to be taken in order to prevent an excessive
deficit from occurring. It was introduced in 2004 in reaction to the 2003 excessive deficit. Initially the signal value was set
at a deficit of 2,5 % of GDP. In 2007 this was tightened to 2,0 % of GDP.

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(13)

The fiscal stance, as measured by the change in the structural balance and taking into account the
risks to the budgetary projections, is expansionary in 2009. This is broadly in line with the Stability
and Growth Pact, which specifies that the adjustment should be higher in good economic times and
could be lower in bad economic times. However, in light of the significant risks concerning the evolu-
tion of the government balance and debt, there is a risk that the deterioration in the public finances
affects negatively their long-term sustainability. On the other hand,
long-term sustainability is
expected to benefit somewhat from planned measures to further increase labour participation, such
as the phasing out of the transferability of the general tax credit and the introduction of an earned
income tax credit aimed at making work pay for the low-skilled. Finally, taking into account the risks
to the debt projections mentioned above, the debt ratio may not stay within the reference value over
the programme period.

(14) 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.

The overall conclusion is that the Netherlands has a sound starting budgetary position. However, due to the
projected sharp economic downturn, the government balance will again enter negative territory, after several
years in surplus. The government gross debt ratio increased significantly, as a result of measures taken to
support the financial sector. There are important downward risks to the budgetary targets in the programme
from 2009 onwards, largely due to the underlying markedly favourable economic scenario, which is already
evidenced by recent data (1).

In view of the above assessment, the Netherlands is invited to implement the 2009 fiscal policy as planned
in line with the EERP and within the framework of the SGP, to limit the risk of a substantial further dete-
rioration of the fiscal balance in 2010 relative to the most recent projections, and subsequently to move
towards its medium term objective starting in 2011.

Comparison of key macro-economic and budgetary projections

Real GDP
(% change)

SP Dec 2008

2007

3,5

2008

2,25

2009

1,25

2010

2011

2

2

COM Jan 2009

3,5

1,9

– 2,0

0,2

n.a.

SP Nov 2007

2,75

2,5

1,75

1,75

n.a.

HICP inflation
(%)

SP Dec 2008

COM Jan 2009

1,6

1,6

2,5

2,2

3,25

2

1,9

1,8

SP Nov 2007

1,5

2,25

2

2

2

n.a.

n.a.

Output gap (1)
(% of potential GDP)

SP Dec 2008

COM Jan 2009 (2)

SP Nov 2007

0,9

2,1

1,6

0,7

– 0,1

– 0,5

– 0,6

2,1

– 1,2

– 2,2

n.a.

2,3

2,7

n.a.

n.a.

(1) The National Bureau for Economic Policy Analysis (CPB) published on 17 February 2009 a new forecast projecting a dete-
rioration of economic growth to – 3,5 % in 2009 and – 0,25 % in 2010 and of the government balance to – 2,9 % of GDP
in 2009 and – 5,4 % of GDP in 2010.

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Net lending/borrowing
vis-à-vis the rest of the
world
(% of GDP)

General government
revenue
(% of GDP)

General government
expenditure
(% of GDP)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance (1)
(% of GDP)

Structural balance (3)
(% of GDP)

Government gross debt
(% of GDP)

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

SP Dec 2008

COM Jan 2009

SP Nov 2007

2007

2008

2009

2010

2011

9,5

9,4

6,6

45,6

45,6

45,9

45,3

45,3

46,3

0,3

0,3

– 0,4

2,6

2,6

1,8

– 0,1

– 0,8

– 0,2

– 0,1

– 0,8

– 0,2

45,7

45,7

46,8

8,5

7,7

6,5

46,6

46,8

46,9

45,4

45,7

46,4

1,2

1,1

0,5

3,4

3,5

2,7

0,8

0,0

0,5

0,8

0,0

0,5

42,1

57,3

45

9,5

5,9

7,2

46,3

46,1

46,9

45,1

47,4

46,3

1,2

– 1,4

0,6

3,30

1,2

2,7

1,3

7,5

5,4

7,5

46,1

45,6

47,2

45,3

48,3

46,5

0,8

– 2,7

0,7

2,9

– 0,2

2,7

1,1

– 0,7

– 1,5

1,1

1,0

n.a.

1,1

– 1,0

– 1,5

0,7

39,6

53,2

43

n.a.

38,0

55,2

41,2

8,0

n.a.

n.a.

46,3

n.a.

n.a.

45,2

n.a.

n.a.

1,1

n.a.

n.a.

3,1

n.a.

n.a.

1,5

n.a.

n.a.

1,5

n.a.

n.a.

36,2

n.a.

n.a.

Notes:
(1) Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the

information in the programmes.

(2) Based on estimated potential growth of 1,7 %, 1,8 %, 1,3 % and 1,2 % respectively in the period 2007-2010.
(3) Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,3 % of GDP

in 2009; deficit-reducing, according to the most recent programme and in the Commission services' January interim forecast.

Source:
Stability programme (SP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.