The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of the Netherlands published on 31 January 2008.
… and automatic stabilisers should be allowed to play freely if growth falters
This high degree of uncertainty calls for a cautious fiscal policy stance. The government plans to achieve a budget surplus of 0.5% in 2008, reflecting cyclical increases in tax receipts and a rebound in natural gas revenues. The cyclically-adjusted balance is expected to become positive again and to gradually improve further over the cabinet term, which is a desirable development given the foreseeable increase in ageing-related spending. Fiscal policy needs to address both short-term downside risks and long-term ageing-related challenges. In these circumstances, a sensible fiscal strategy would be to let automatic stabilisers operate freely, while keeping the structural balance on a medium-term path of consolidation, so as to progress towards sustainability. Starting from the current fiscal position, the risk of running an excessive deficit is limited. Moreover, in case of unexpected adverse economic events, the revised Stability and Growth Pact allows some flexibility with respect to the 3% of GDP budget deficit reference value.
While the fiscal framework seeks to promote expenditure control, the budget tends to have pro-cyclical effects.
In the Netherlands, the fiscal framework is an important tool of macroeconomic management. The framework comprises: i) a set of multi annual expenditure ceilings established for the term of each coalition government ii) a requirement that new tax measures are off-set by compensating revenue measures, so as to have a neutral impact on the budget balance; iii) a “signal value” of 2% of GDP for the budget deficit that, if exceeded, triggers fiscal consolidation measures; and iv) a medium-term goal of preparing the public finances for the effects of demographic ageing. This framework did not prevent the budget deficit from breaching the 3% Maastricht limit in 2003, which forced the government to put in place a strict consolidation package, with most of budget restraint unfolding during the period of output stagnation. Nor did the framework prevent the budget from turning expansionary in 2007, when the economy was running close to full capacity and overheating risks were looming large. This pro-cyclical pattern of fiscal policy has been a recurrent feature over the past decade. In order to address this issue, the government has strengthened the fiscal framework. The efficacy of the multi annual spending ceiling has been improved by removing from its definition several items over which the government has no direct control, such as interest payments. To improve budgetary control further, the government should consider excluding all counter cyclical items from the expenditure ceilings, such as unemployment benefits. As well, including certain revenue items in the expenditure ceilings (such as dividends and central bank profit) is questionable, as this allows greater spending in good times.
The fiscal stance has been mainly pro-cyclical
1. Fiscal stance is measured by the CAPB (cyclically-adjusted primary balance) excluding natural gas revenues.
Source: OECD, Economic Outlook Database.
Tax expenditures should be kept under review
Significant deductions from income taxes are allowed, which represent a costly and growing form of government intervention. The level and purpose of these expenditures are not clearly established and contribute to higher marginal tax rates than otherwise would be necessary. The reporting of tax expenditures should be improved, as was announced in the government’s budget memorandum. Furthermore, their periodical assessment should be strengthened, so as to evaluate whether they achieve their purposes and whether they do so in a cost-effective manner, following the existing practice in some OECD countries. In addition, the government could consider including some of the tax expenditures under the expenditure ceilings when they are close substitutes to government spending.
Public spending on pension and health care is projected to increase sharply
The Netherlands is better prepared than many other countries to cope with the challenge of ageing, thanks to its second pillar pension scheme. Recent health-care reforms also aim at containing the increase in health care spending. In addition, the government has decided to raise the structural budget surplus to 1% of GDP by 2011, so as to pre-fund some of the future expenditure burdens. This nonetheless leaves a fiscal sustainability gap. This gap has been revised upwards recently as a result of lower interest rates reducing future revenue streams (second pillar pension plans are mostly on a defined-benefit basis) revisions in life expectancy and delays in securing sustainability, only partially offset by government measures to increase participation. All in all, measures equivalent to more than 2% of GDP would be necessary to achieve sustainability. The government could run large surpluses for a long period of time to close this gap, but this would be hard to achieve for political economy reasons, as experienced in other countries. Therefore, in addition to building up surpluses further after 2011, policy solutions to restore sustainability should address the core of the problem, namely to further control ageing-related costs, by cutting back public pension entitlements and by encouraging later retirement. Expanding the funding base through higher participation is also an important objective in this regard.
Public finances without budgetary measures in the baseline projection
Source: van Ewijk et al. 2006.
The first-pillar pension scheme is largely unreformed
Health care and first-pillar state pensions (AOW) are the two largest sources of ageing-related spending pressures. The health care insurance system has been subject to a comprehensive restructuring and the government plans to make further adjustments as needed. State pensions, by contrast, are largely unreformed. Under this (post-war Beveridgian) scheme, the government pays the same pensions to all residents having lived sufficiently long in the country, irrespective of past contributions. The age of eligibility to a state pension (65 years) has been kept unchanged since the establishment of the scheme in 1957, even though life expectancy has increased by more than 6 years. Hence, although the current government has decided not to do so, eligibility to state pensions should be postponed in several pre-announced steps (for instance to 67 years) over a reasonable transition period and then be kept in line with developments in life expectancy. Model simulations of increasing the pension age suggest that this would have favourable effects not only on fiscal sustainability but also on labour market participation. Moreover, first-pillar pensions are relatively high in relation to average income (about 31% of average earnings) in comparison to neighbouring countries (about 22% of average earnings) which makes the state pension a relatively costly scheme to combat old-age poverty (annual spending of 4½ per cent of GDP and rising). Indeed, simulations by the Secretariat suggest that lowering the level of first pillar pensions would have a favourable effect on labour participation and would improve public finances substantially, although this would score low in terms of equity as some people would be worse off.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the Netherlands 2008 is available from:
For further information please contact the Netherlands Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Jens Hoj, Ekkehard Ernst and Jasper Kieft under the supervision of Patrick Lenain. Research assistance was provided by Laure Meuro.