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The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of the Netherlands 2005 published on 15 December 2005.
How can public finances be put on a sustainable path in a context of population ageing?
After the sharp deterioration of public finances in 2002 03, consolidation measures have been implemented to cut the general government deficit. While the deficit has been reduced to 1.6% of GDP in 2005, fiscal consolidation has had an adverse impact on short-term economic growth. With hindsight, fiscal policy was too loose during the upswing, allowing a marked deterioration of the structural deficit that did not leave enough room for automatic stabilisers to work fully during the subsequent downturn while adhering to the Stability and Growth Pact.
After several years of consolidation, the structural deficit is likely to approach 0.5% of GDP in 2005. While this is an impressive achievement by EU standards, the evolution of public finances nonetheless raises a number of concerns. With economic growth projected to rise above trend and with large expected windfalls in natural gas revenues, the government has sought to restore part of the additional tax burden imposed on households in recent years and to invest in structural reforms, for example by increasing outlays for child care. As a result, the deficit is projected to rise to 1.8% of GDP in 2006, implying some deterioration in the structural deficit. This development shifts public finances further away from the sustainable path that was estimated by the authorities in 2000 to require a surplus of 1% of GDP, on what turned out to be optimistic assumptions, leaving a challenge for 2006 (using windfalls for further deficit reduction) and beyond. In the longer run a more ambitious fiscal strategy seems warranted:
In the longer run a more ambitious fiscal strategy to put public finances on
a sustainable path seems warranted
Long term public finance projections under sustainable policies, compared with actual outcomes
(In % of GDP)
Source: Van Ewijk, C., B. Kuipers, H.ter Rele, M.van de Ven and E.Westerhout (2000), 'Ageing in the Netherlands'; CPB Netherlands Bureau for Economic Policy Analysis and European Commission.
The fiscal framework has many merits, but the expenditure ceilings tend to be circumvented by recourse to tax expenditures. These tax expenditures should therefore be reviewed. The earmarking of natural gas revenues to special programmes should also be subject to close examination. It is vital that these revenues be used for capital expenditures, not current expenditures. This is in accordance with the operating rules of the fund (Fund for the improvement of the structure of the economy, FES) into which gas revenues are paid. Moreover, the authorities should ensure that investments made with these resources earn adequate rates of return, thereby enabling both current and future generations to profit fully and equitably from the natural resource rents. A study group is evaluating both the fiscal framework and the system of spending gas revenues via the FES and will report in 2006. This advice will be used by the next administration to determine the future of FES.
Achieving a sustainable medium term path for public finances would be facilitated by increases in the retirement age. Rising life expectancy at retirement age is substantially increasing pension costs. At the same time, the health status of people at the official retirement age (65 years old) is now better than in the past – most people are healthy enough at this age to continue working.
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The government should consider indexing the future official retirement age to life expectancy and encourage social partners to make concomitant adjustments to the age at which (actuarially fair) early retirement can be taken in occupational pension schemes, so as to lessen the impact of rising life expectancy on pension costs and support potential growth.
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Return to the Economic Survey of the Netherlands 2005
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For further information please contact the Netherlands Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by David Carey, Ekkehard Ernst, Jelte Theisens and Rebecca Oyomopito under the supervision of Patrick Lenain.
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