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# 52013SC0392

**COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in the Netherlands following the adoption of the COUNCIL RECOMMENDATION to the Netherlands of 2 December 2009 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in the Netherlands /\* SWD/2013/0392 final \*/**

  

1.           Introduction

On 2 December 2009, the Council decided, in
accordance with Article 126(6) TFEU, that an excessive deficit existed in the
Netherlands and issued a recommendation to correct the excessive deficit by
2013 at the latest, in accordance with Article 126(7) TFEU and Article 3 of
Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying
the implementation of the excessive deficit procedure.

In order to bring the general government
deficit below the 3% of GDP reference value in a credible and sustainable
manner, the Dutch authorities were recommended to implement the fiscal measures
in 2010 as envisaged and, thereafter, to: '(a) ensure an average annual fiscal
effort of ¾% of GDP over the period 2011-2013, which should also contribute to
halting the rapid rise of the government gross debt ratio, which is forecast to
breach the reference value; (b) specify the measures that are necessary to
achieve the correction of the excessive deficit by 2013, cyclical conditions
permitting, and accelerate the reduction of the deficit if economic or
budgetary conditions turn out better than currently expected.' The Council
established a deadline of 2 June 2010 for effective action to be taken.

On 15 June 2010, the Commission concluded
that, based on the Commission services' 2010 Spring Forecast, the Netherlands
had taken effective action in compliance with the Council recommendation of 2
December 2009 aimed at correcting the excessive deficit by the established
deadline and considered that no additional step in the excessive deficit
procedure was therefore necessary at that point in time. In particular, the Netherlands was found to have implemented the fiscal measures in 2010 as envisaged in the
2010 budget.

Since the deadline established by the
Council for correcting the excessive deficit is approaching, this document
provides an assessment of whether the Netherlands has undertaken effective
action towards the correction of its excessive general government deficit, and
suggests a new adjustment path that would durably bring the general government
deficit below the 3% of GDP threshold. In particular, the document examines the
policy and budgetary developments since the Commission communication to the
Council of 15 June 2010.

2.           Recent macro-economic and budgetary
developments and outlook for 2014

The Netherlands is experiencing a protracted economic downturn which worsened since 2011 (Table
1). Real GDP growth turned out to be much lower than foreseen in the scenario
underpinning the 2009 EDP Council recommendation. Negative wealth and
confidence effects account for a significant part of the underperformance.
These relate to balance sheet adjustments, which to a considerable extent
reflect adjustments in the housing market. Following a contraction of real GDP
by 3.7% in 2009, economic growth rebounded moderately into positive territory
in 2010 and 2011, with real GDP growth of 1.6% and 1% respectively, and was
mainly driven by the improvement in global demand, resulting in a positive
contribution to growth of net exports.

Since the
second quarter of 2011, quarter-on-quarter economic growth in the Netherlands has been negative, apart from the first half of 2012, when it was marginally
above zero. Real GDP decreased by 1% in the third quarter of 2012, its
strongest decline since 2009. In the fourth quarter output declined even
further by 0.4%, with private consumption decreasing by 1.1%, to a level last
reached in 2001. Despite a small rebound in the first quarter of 2013  largely
on the back of higher energy consumption,  quarterly private consumption growth
 had been negative since the first quarter of 2011. This mainly reflects weak
household disposable income, the impact of consolidation measures, as well as
negative wealth effects from declining house prices and cuts in pension
allowances from second pillar pension funds. Moreover, sustained uncertainty
and subdued expectations, resulting in consumer confidence hovering around
historical lows, continue to weigh on household consumption in particular.  In
2012, real GDP contracted by 1%, with the only positive contribution coming
from the external side, largely on the back of a strong trade surplus in goods.

According to
the Commission services' 2013 Spring Forecast real GDP growth is forecast to
remain negative in 2013 at -0.8%, although it is expected to return gradually
to positive territory from the second quarter of the year onwards. Trade
developments are expected to contribute to the recovery, whereas domestic
demand is forecast to remain depressed well into 2013. Uncertainty regarding
the general economic outlook, implementation of reform proposals and possible
additional consolidation measures put an additional drag on domestic demand. In 2014, domestic demand should begin to
pick up gradually, supporting a fragile recovery, with real GDP increasing by
0.9%.

Table 1: Comparison
of macroeconomic developments and forecasts

The Netherlands had chosen to delay fiscal adjustment until 2011. This approach was endorsed in
the 2009 Council recommendation, which specifically recommended that the 2010
budget be implemented while consolidation should start only in 2011. In
response, the Netherlands initially designed a multi-annual package of mainly
expenditure-based measures over the period 2011-2015, aimed at achieving an
earlier-than-recommended correction of the excessive deficit.

After some
over-performance of real GDP in 2009 and 2010 compared to the Commission
services' 2009 Autumn forecast underlying the EDP recommendation, economic
performance in the Netherlands deteriorated significantly from 2011 onwards.
This translated into a similar development in public finances, with some
initial over-performance to the budgetary targets until and including 2011. In
2011, the general government balance reached -4.5% of GDP.

Subsequently,
the headline deficit improved to 4.1% of GDP in 2012 and is expected to
decrease further to 3.6% in 2013[1].
Without additional policy measures, the deficit is forecast at 3.6% of GDP in
2014, reflecting the adverse impact of economic headwinds on the budget deficit
as the authorities set out to continue a restrictive fiscal course according to
the measures embedded in the multi-annual fiscal adjustment path as confirmed
in the 2013 stability programme. The unadjusted structural balance is expected
to improve by around 0.7 % of GDP per year on average over the adjustment
period 2010-2013 but to deteriorate in 2014 by around 0.3 pp. On the basis of the Commission services'
2013 Spring Forecast 2013, the average fiscal effort over the period 2011-2013 would
thus be close to the required ¾% of GDP without further adjustments for
shortfalls in projected growth or composition effects. The adverse fiscal
developments reflect nominal and real GDP growth as well as potential growth
falling short of what had been expected at the time the 2009 EDP recommendation
was formulated (Table 1).

Debt dynamics
in the Netherlands have been unfavourable. In 2008, significant government
operations to support Dutch banks had been a major factor pushing up the
government debt ratio. On the basis of the Commission services 2013 Spring Forecast
the debt ratio is expected to steadily increase to 71.2% of GDP in 2012, 74.6%
of GDP in 2013 and 75.8% of GDP in 2014. This is predominantly the result of
persistent headline deficits in combination with anaemic nominal GDP growth,
whilst EFSF and ESM operations attributed to the government debt only have a
relatively small upward effect. The uptick in the expected gross debt ratio for
2013 includes debt-increasing operations equivalent to some 1% of GDP related
to the nationalisation of SNS Reaal in early 2013 (on top of the
deficit-enhancing measures amounting to around 0.6% of GDP).

Turning to the
driving forces of the deficit, swings in economic growth have mainly affected
government revenues. The initial recovery from the financial crisis,
with stronger-than-expected economic activity in 2010 and the first part of
2011, at first led to a fairly strong revenue performance (Table 2 in section
3.1). However, subsequently revenue fell short compared to plans, particularly
in the second half of 2011 and in 2012, in the wake of faltering growth. This
adverse pattern is expected to continue, largely driving the weak deficit
outlook. Overall trends mirror the cyclical sensitivity of revenue which the Netherlands typically exhibits. The increase in expenditure in 2010, a year of fiscal
policy accommodation, occurred in line with a better-than-expected economic
performance, with a moderate development in subsequent years as savings
measures started weighing in. In accordance with the Dutch fiscal framework
(implying a strict division between revenues and expenditures, i.e. automatic
stabilisation on the revenue side), which has been deemed good EU practice,
expenditure overruns have to be compensated within the ceilings.

At the current
juncture, bringing the headline deficit below 3% of GDP in 2013 is out of
reach. This is also acknowledged in the 2013 stability programme, which instead
commits to correcting the excessive deficit in 2014. The expected general
government balance for 2013 as embedded in the stability programme is broadly
in line with the Commission services' 2013 Spring Forecast 2013and risks to
this projection appear by and large balanced. The headline deficit projection
for 2014 reflects a no policy change scenario in the Commission services' 2013
Spring Forecast 2013 baseline (which does not include the savings package of
EUR 4.3 bn or around 0.6% of GDP originally presented on 1 March 2013 but
thereafter withdrawn by the government in April 2013 until further notice in
the wake of the agreement with social partners).

In the 2013
stability programme the Dutch authorities commit themselves to additional
savings measures, should these be needed to bring the headline general
government deficit below the 3% of GDP threshold in 2014. However,
non-negligible implementation risks are attached to the fiscal outlook for 2014
and beyond. As regards measures embedded in the coalition agreement, these
risks originate mainly from the foreseen efficiency gains planned to be
achieved by decentralising tasks to municipalities. The 2013 stability
programme mentions that an additional savings package of EUR 4.3 bn for 2014,
withdrawn by the government following the agreement with social partners, may
have to be revived and included in the 2014 budget (due to be presented to
Parliament in September), should further savings be necessary to correct the
excessive deficit in 2014. Following the stakeholders agreement on health care
of end-April 2013, the voluntary wage freeze in health care (0.1 to 0.2 % of
GDP) is of the table and thus can no longer be part of the package, so other
measures will have to be included. Moreover, the Commission services' 2013
Spring Forecast 2013 suggests that additional measures exceeding the amount of
€ 4.3 bn provisioned for in the stability programme will be called for in order
to bring the headline deficit below 3% of GDP in 2014.

3.           Effective action

3.1.        Background information

The current assessment of the effective
action is based on the Commission services 2013 Spring Forecast. It takes into
account the economic and budgetary developments since the last Council
recommendation under Article 126(7) of the TFEU was issued in December 2009.
The assessment starts by comparing the recommended fiscal effort in the Council
recommendation, the apparent fiscal effort, measured by the average annual change
in structural budget balance, and the adjusted structural effort. The
adjustment of the change in the structural balance takes into account (i) the
impact of revisions in potential output growth compared to that underlying the
growth scenario in the Council recommendation, and (ii) the impact on revenue
of revisions of the tax content of economic activity (composition of economic
growth or of other windfalls/shortfalls) relative to what is implied by the
standard long-term elasticities. This top-down approach in the assessment is
complemented by a careful analysis, including a bottom-up assessment of
consolidation measures undertaken by the Dutch government.

Table
2: Total government expenditure and revenue developments

Table 2 shows the development of nominal
government expenditure and revenue over the different forecast vintages since
the Commission services' 2009 Autumn Forecast, including the forecast period up
to and including 2014. Government expenditure for 2009 and 2010 turned out to
be higher than initially forecast, but in 2011 was lower than in the EDP
baseline scenario underlying the 2009 recommendation. Revenues on the other
hand turned out to be much lower than expected in 2009, but higher than expected
in 2010 and 2011. The table shows that that the widening of the deficit in 2009
was mainly on account of revenue falling well short of what was expected. In
the outer years, the increase in nominal expenditure growth is expected to be
lower than the increase in revenues (despite substantial revenue-increasing
measures), illustrating the extent of restraint on the expenditure side
committed to.

3.2.        Assessment of effective
action and budgetary implementation 2011-2013 and beyond - overview

The structural balance amounted to -4.0%,
-3.7% and -2.6% of GDP in 2010, 2011 and 2012, respectively. The Commission
services' 2013 Spring Forecast projects a further improvement in the structural
balance to -2.0% of GDP in 2013 yet some subsequent detioration to -2.3% in
2014 on unchanged policies. The average annual apparent fiscal effort over the
period 2011-2013 is estimated at 0.7% of GDP. When adjusted for the downward
revision in potential output growth since the time when the 2009 EDP
recommendation was issued and the impact of the composition of economic growth
on revenue, the average annual adjusted structural effort (1.1% of GDP) exceeds
the recommended average annual fiscal effort (¾% of GDP) over 2011-2013
required in the 2009 Council EDP recommendation by a substantial margin (Table 3).

Table
3 - Change in the structural balance corrected for revisions in potential

A bottom-up approach from listing
discretionary savings measures implemented and decided on from 2011 onwards
confirms a very sizeable multi-annual consolidation effort. Table 4 reports the
overall size of discretionary measures. The second-round impact of these
measures on the macroeconomic developments has been fully taken into account in
the Commission services' forecast[2].
For the period 2011-2013 the overall fiscal effort according to the bottom-up
approach amounts to 4% of GDP, or around 1.3 % of GDP annually, broadly equally
divided between revenue and expenditure measures.

Table 4 -
Composition of the budgetary adjustment

Source: Commission services calculations

Identified discretionary measures span a
number of consecutive packages adopted over recent years. They include the
phasing-out of the fiscal stimulus of 2010, including some additional measures
taken (EUR 5 bn); an initial round of budgetary savings from September 2010
implemented by the first Rutte government (EUR 19 bn); measures embedded in the
'Kunduz' agreement of April 2012 (EUR 9 bn); and, finally, the coalition
agreement of the second Rutte government outlined in September 2012 (EUR  15
bn). Table 4 shows that the brunt of the consolidation effort is centred on the
year 2013, with a strong emphasis on net tax increases.

Table 5 reports the main budgetary measures
over the period 2011-2013. In 2013, significant one-off operations will impact
on the deficit. The sale of 4G mobile telephony licenses and the
nationalisation of SNS Reaal (both impacting on 2013) broadly cancel out. On
balance, however, one-offs have a decreasing impact on the deficit of around
0.2% of GDP, in particular related to dividend payments from the De
Nederlandsche Bank and the restitution by Havenbedrijf Rotterdam of state
contributions to port enlargement. Implementation of the measures in 2011 and
2012 proceeded as planned. The implementation of the budgets for both years was
carried out without major slippages, which also confirms the robustness of the
the fiscal framework in the Netherlands[3].
Also the implementation of the consolidation measures planned by previous
governments for 2013 and beyond is on track.

Table 5: Main budgetary measures over 2011-2013 ||

Revenue || Expenditure ||

2011 ||

· Increase in the insurance tax (0.05 % of GDP) || · Wage moderation in the central government (-0.2 % of GDP) · International cooperation (-0.1 % of GDP) ||

2012 ||

· Limit on tax credit for single parents (0.1 % of GDP) · Reversal of health care own contribution increase (0.1 % of GDP) || · Health care benefits (-0.1 % of GDP) · Child care benefits (-0.1 % of GDP) ||

2013 ||

· Adjustment treatment of pension deductability. (From 2013 onwards, fewer pension entitlements qualifying for tax relief can be accrued.) (0.1 % of GDP) · VAT increase by 2 percentage points as of October 2012 (0.7 %  of GDP) · Environmental friendly taxation and increase in excise duty on alcohol, tobacco and soft drinks (0.25 % of GDP) · Limiting mortgage interest deductibility for new mortgage loans (0 % of GDP; structural gains far beyond the programme horizon) · Non-implementation of the vitality package (0.1 % of GDP) || · Health care benefits (-0.1 % of GDP) · Primary education (-0.1 % of GDP) · Increase of own contribution for specialised health care in combination with other measures (-0.3 % of GDP) · Increase retirement age (0 % of GDP, but sizeable structural gains beyond the programme horizon) · Wage freeze (for civil servants and non-indexation of income tax brackets) (-0.5 % of GDP) ||

Note: A positive sign implies that revenue / expenditure increases as a consequence of this measure. ||

The measure-by-measure estimate of fiscal
consolidation shows a broad congruity over the 2011-2013 assesment period over
which effective action is assessed in response to the 2009 EDP recommendations.
For 2011-2013, the two approaches yield a broadly comparable number for the
average fiscal effort, in the range of 1.1. to 1.3% of GDP. This confirms the
finding that the fiscal effort over the 2011-2013 assessment period is
projected to substantially exceed the one recommended by the Council.

3.3.        Budgetary outlook for 2014
and beyond

Whereas the
budgetary implementation in 2011-2013 by and large proceeded as planned and led
to a significant improvement in the structural balance, achieving a correction
of the excessive deficit by  2013 is clearly out of reach, even given the
sizeable fiscal effort in the face of recession. The
Commission services’ 2013 Spring Forecast for 2014 only
incorporates measures included in the Coalition
Agreement and embedded in the budget laws as passed by Parliament and on this
basis expects the headline general government balance
to reach 3.6% of GDP in 2014.

The specified and agreed measures that are
embedded in the multi-annual fiscal projections imply an ongoing consolidation
in 2014. In addition, one-offs emanating from dividend streams from the De
Nederlandsche Bank and a crisis levy on banks will have a downward effect on
the headline deficit. Nonetheless, since revenue is expected to remain subdued
in view of the sluggish recovery, the general government deficit is projected
to stabilise at 3.6% of GDP in 2014. Discretionary measures of around 0.9% of
GDP are planned to be implemented in 2014, fully on the expenditure side. The
calculated change in the underlying balance from the macro (output-gap based)
approach based on unchanged policies shows a slight worsening of the underlying
fiscal position in 2014, by some 0.3% of GDP.

The Dutch authorities are strongly
committed to correct the excessive deficit and, to this end, bring the headline
deficit below 3% of GDP in 2014. However, the measures reported in the 2013
stability programme, though fully specified and quantified, fall short of
reaching this goal[4].
Moreover, for the period beyond 2014 a sustainable adjustment as required by
the EU fiscal surveillance framework does not appear to be assured on the basis
of current policies. This implies that progress towards reaching the MTO would
not be assured.

There are implementation risks attached to
the measures incorporated in the Commission services' 2013 Spring Forecast 2013
and embedded in the medium-term budgetary plans. In the Netherlands, coalition agreements traditionally were implemented largely unchanged.
Recently, there have been several examples of substantive changes, responding
e.g. to the reappraisal of original plans by the coalition partners and the
agreement between social partners. A different type of budgetary risk relates
to the sizeable planned decentralisation measures. For example, parts of the
budgets and responsabilities concerning youth and long-term care will be
transferred to municipalities. This decentralisation process will include
cutbacks on the respective budgets, on top of generic cuts on funds transferred
to municipalities. It remains to be seen wether the implictely planned
efficiency gains can be realised and to what extent decentralisation may lead
to increased deficits of subnational governments[5].
As long as any slippages remain limited, they can be compensated within the
expenditure ceilings set. Nevertheless, more persistent deviations would have
to be countered by fresh measures.

4.           Proposed new adjustment path

According to
the baseline macroeconomic scenario, which is the Commission services’ 2013
Spring Forecast, on current policies the Netherlands is not forecast to correct
its excessive deficit by the deadline established in the Council Recommendation
of 2 December 2009 (Table 6). This is the case although the average annual
adjusted structural effort for the period 2011-2013, taking account of the
impact of revisions in potential output growth and of revisions of the revenue
content of economic activity relative to the standard elasticities, is above
the structural fiscal effort recommended by the Council. Moreover, over the
adjustment period real and potential GDP will likely turn out to have been well
below what was expected at the time that the 2009 EDP recommendation was issued.
The unexpected adverse economic developments have entailed major unfavourable
consequences for government finances. Considering all
these factors and in particular the substantial deterioration in the budgetary
position resulting from the weaker overall position of the economy relative to
the one underlying the original Council recommendation under Article 126(7)
TFEU suggests that a new deadline for the correction of the excessive deficit
in the Netherlands by 2014 is appropriate.

Table 6 -
Forecast of key macroeconomic and budgetary variables under the baseline
scenario

Source: Commission services' 2013 Spring Forecast 2013

Granting an additional
year for the correction of the excessive deficit would be commensurate with
intermediate headline deficit targets of 3.6% of GDP for 2013 and 2.8% of GDP for 2014 (Table 7). The underlying improvement in the structural budget
balance implied by these targets is 0.6% of GDP in 2013, and 0.7% of GDP in
2014. In total, to reach the above-mentioned structural targets, the Dutch
authorities would need to implement additional consolidation measures of 0% of
GDP in 2013 and at least 1% of GDP in 2014 on top of the measures already
included in the baseline scenario. These targets take into account the need to compensate
for the negative second-round effects of fiscal consolidation on public
finances, through its impact on GDP growth.

Table 7 - Forecast of key
macroeconomic and budgetary variables under the EDP scenario

Source: Commission services

The economic
crisis of the recent years has exposed weaknesses in the fiscal framework.
Successive governments amended their medium-term budgetary plans with sizeable
consolidation measures, also because initial expenditure ceilings had been
based on growth paths which turned out to overly optimistic. According to the
coalition agreement, automatic stabilisers are free to operate within each of
the separate expenditure ceilings as long as the country's overall fiscal
position remains in accordance with European fiscal rules. Interest payments
are kept outside the overall expenditure ceiling, whereas other expenditure
that is sensitive to cyclical trends (notably unemployment and social
assistance benefits) is kept within the expenditure ceiling framework. This
impedes the working of automatic stabilisers in an economic downturn. In
addition, possible actions to operationalize the commitment to abide by
European provisions are not specified in detail. The consolidation of
public finances could be underpinned by making the medium-term orientation and
institutional framework of public finances more binding and transparent,
including through legislation that will transpose the EU fiscal rules into
national legislation and by enshrining the medium-term budgetary framework in a
legal basis.

5.           Conclusions

On current information, the average annual
fiscal effort after correction for the effects of revised potential output
growth and revenue developments is estimated to amount to around 1.1% of GDP.
The calculated adjusted structural effort is thus well above the required
average annual fiscal effort of ¾% of GDP over 2010-2013 by the Council
recommendation. A bottom-up approach confirms an average size of consolidation
measures at some 1.3% of GDP over 2011-2013.

For 2013, the Dutch authorities have
adopted a budget which contains significant measures which, however, do not
suffice to achieve for the correction of the excessive deficit already in 2013,
as recommended by the Council in 2009. This reflects the severe economic
headwinds the Netherlands has been facing, translating into real and potential
GDP growth falling well short of the path envisaged in the macro-economic scenario
underlying the 2009 Council recommendation and implying severe adverse consequences
for public finances. In light of this, a new deadline for the correction of the
excessive deficit in the Netherlands by 2014 is appropriate, in line with the
commitment by the authorities in the 2013 stability programme. To ensure this,
a strict implementation of the 2013 budget target and additional measures in 2014
will be required.

Granting an additional year in the correction of the excessive
deficit requires intermediate headline deficit targets of 3.6% of GDP for 2013
(3.8% of GDP without one-off measures) and 2.8% of GDP for 2014 (close to 3%
without one-off measures). The underlying improvements in the structural budget
balance implied by these targets are 0.6% in 2013 and 0.7% of GDP in 2014, in
order to bring the headline general government deficit below the 3% of GDP
reference value by 2014.

Table 8: Comparison of key macroeconomic and
budgetary projections

[1]               The SF2013 includes the measures foreseen for 2014 on
the basis of the Coalition Agreement, but not the additional consolidation
package totalling €4.3 bln. presented on 1 March 2013, as it  has been put on
hold until August following the agreement with social partners ("Sociaal
Akkoord") on 11 April 2013.

[2]               The impact of the measures is broadly in line with
the independent assessment carried out by the CPB (Tekortreducerende
maatregelen 2011-2017, W. Suyker,  http://cpb.nl/publicatie/tekortreducerende-maatregelen-2011-2017).

[3]               In the fiscal framework of the Netherlands, every shortfall has to be compensated within the same expenditure ceiling or,
if not possible, within another expenditure ceiling. Revenues are used as
automatic stabilisers and are allowed to move freely unless the overall
budgetary position is no longer  in line with the SGP.

[4]               The SP mentions a set of possible further measures,
initially announced by the government in March 2013, but these have been
recently withdrawn by the government in reaction to the agreement among soicial
partners – possibly to be considered again only in the summer if circumstance
so require. These measures have not been taken into account in this assessment.

[5]               The Netherlands is about to transpose the rules of
the Fiscal Compact  in its national legislation. This will make it easier for
the central government to control deficits of subnational levels of government.

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