Press Information Notice: IMF Concludes Article IV Consultation with the Kingdom of the Netherlands-Netherlands

July 1, 1997

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

The IMF Executive Board on June 18, 1997 concluded the 1997 Article IV consultation1 with the Kingdom of the Netherlands--Netherlands.


Since the early 1990s, the Netherlands has achieved higher employment and GDP growth than neighboring economies--a performance whose roots lie in reforms implemented during the past 15 years. Public spending restraint has allowed a sizeable cut in both the tax burden and the budget deficit--which on a Maastricht basis has declined from some 6 1/2 to some 2 1/4 percent of GDP. Labor market reforms have included substantial cuts in real minimum wages (especially for youths), in the tax wedge, and specifically in non-wage labor costs for the low-skilled and long-term unemployed. Replacement ratios and duration limits have been reduced for unemployment benefits, and disability benefits have similarly been reformed. A most important element has been continuing wage moderation--triggered by a change of labor union objectives and supported by policy reforms--which has cut the share of labor income in the value added by firms by ten percentage points. Recently, product market reform has also gained momentum. These reforms, implemented in a consultative spirit, exercised mutually-reinforcing effects.

In 1996, real GDP growth, at 2 3/4 percent, was stronger than expected, and its pattern contrasted with that in most other European countries: the main contributor was private consumption, which expanded by 3 percent--underpinned by robust consumer confidence and a continuing rise of employment. Export growth was subdued, reflecting slow market growth. Unemployment decreased only slightly to some 8 percent, since the labor supply rose significantly. On balance, it would appear that, in contrast to neighboring economies, output has been edging close to potential. So far, wage pressures have not emerged--contract wages were only 1.5 percent higher in 1996 than in the previous year. The 12-month rate of consumer price inflation increased from 1.7 percent in December 1995 to 2.5 percent in December 1996; however, this partly reflected a spike in energy prices, and by April consumer price inflation had subsided to 1.8 percent. House prices, however, have continued to advance strongly. The current account surplus rose slightly to some 5 percent of GDP.

Monetary policy in 1996 continued to be geared to the tight link between the guilder and the deutsche mark. The guilder, though it appreciated somewhat against the Deutsche mark, remained within a very narrow band until April 1996; thereafter, it declined against the mark as well as against the U.S. dollar and other EMS currencies. In parallel, short-term interest rates--which until May 1996 fell more rapidly than in Germany--ceased to decline; from then on, the negative differential vis-à-vis deutsche mark instruments narrowed. The long-term differential vis-à-vis Germany, meanwhile, remained negligible. Overall, monetary conditions eased somewhat in 1996. In early 1997, renewed movement of the exchange rate toward the ERM central parity with the deutsche mark provided a cue for the authorities to raise interest rates. The Special Advances rate was raised from 2.5 to 2.7 percent in late February 1997, and then again to 2.9 percent in March. These moves were interpreted by the market as a signal that further depreciation would be resisted.

Fiscal policy has been based on a medium-term expenditure framework since 1994, with ceilings on central government, social security, and health care spending. Together, these ceilings implied a reduction in general government spending of about 3/4 percent per year in real terms, and expenditure has thus far remained below target. During 1994-96 it was thus possible to reduce taxes and premiums further--with a cumulative structural impact on revenues estimated at some 1 1/2 percentage points of GDP. At the same time, the general government deficit declined from 3.4 percent of GDP in 1994 to an estimated 2.3 percent in 1996. The 1996 deficit was some 0.3 percent of GDP below the level projected last fall, reflecting higher-than-expected tax revenues. In 1997 the tax yield is again expected to be higher than projected earlier, and--with continuing firm control over spending--it appears that the general government deficit should be no more than 2.2 percent of GDP.

Growth in 1997 and 1998 is expected to remain vigorous. Exports are projected to accelerate as activity in other European countries strengthens, while employment should expand at the same pace as in 1996, thus supporting private consumption. With output likely to be at or slightly above potential, and a further decline in unemployment, both wages and consumer prices are expected to accelerate somewhat.

Executive Board Assessment

Executive Directors congratulated the authorities on the impressive economic performance of recent years with strong growth relative to other European Union countries, success with job creation in the private sector, and subdued inflation. Those achievements owed much to the sustained implementation of comprehensive and mutually-reinforcing adjustment policies over the preceding 15 years. The well-conceived strategy of strong fiscal consolidation, with firm restraint over public spending, a credible link to the deutsche mark, wage moderation, and structural reforms to strengthen the supply as well as the demand side of the labor market, had created a virtuous circle in economic performance. The experience in the Netherlands held useful lessons for other countries, particularly with regard to the benefits of comprehensive and consistent policies sustained over a long period and the need to foster social consensus for reforms.

At the same time, Directors observed that there remained an unfinished agenda in both fiscal and structural policies. To build on past achievements, it would be important to address continuing structural problems: underlying labor force participation was low; employment among the low-skilled was still weak; there was much hidden unemployment; and the tax burden and public debt ratio, while declining, remained high. Moreover, pressures on public spending would rise with the aging of the population. Directors stressed that there was no room for complacency and urged the authorities to seize the opportunity provided by the economic recovery to press ahead with further fiscal consolidation and structural reforms.

Directors viewed the immediate economic outlook as favorable, with the cyclical upswing projected to continue and unemployment likely to reflect mainly structural factors. Directors observed that signs of overheating were absent, but in light of reports about skilled personnel shortages and rising asset prices, the authorities should remain vigilant about a possible buildup of inflationary pressures. In that context, the recent monetary policy actions had been prudent and timely. Directors noted that the long-standing link to the deutsche mark had fostered propitious conditions for economic growth, and that the Netherlands' negative long-term interest rate differential vis-à-vis the deutsche mark showed strong policy credibility.

On the eve of Economic and Monetary Union, Directors underscored the need for fiscal and structural reforms to increase the flexibility of the economy, particularly in labor and product markets, and to create room for the operation of automatic stabilizers. On fiscal policy, Directors commended the firm spending control of recent years, which had allowed the tax burden to be eased in tandem with a substantial and steady reduction in the deficit. However, Directors expressed disappointment that recently the fruits of spending restraint had been directed more to tax cuts than to deficit reduction, with the underlying fiscal position set to plateau, at best, in 1997 and 1998. Directors agreed that revenue remained too high as a share of GDP, and that the tax burden should be reduced, but several Directors thought that further tax cuts at present might be consistent with neither cyclical considerations nor medium-term fiscal consolidation. Directors urged the authorities to identify further spending cuts and eliminate distortive tax deductions, to ensure continuing consolidation in 1998. Over the medium to longer term, Directors encouraged the authorities to proceed further with both fiscal consolidation and tax cuts, with the objective of reducing the debt ratio and reaching fiscal balance, consistent with ensuring the long-term sustainability of the public finances and with the European Stability and Growth Pact. That implied a firm approach to social security spending, where needed reform could in time contribute to higher rates of participation in the labor force.

Directors noted that labor market reform had been pursued on a broad front in recent years, including key adjustments to the minimum wage and to social benefits. They welcomed the recent initiatives in favor of the low-skilled and long-term unemployed, as well as the reform of sickness benefits and the plan to make disability insurance responsive to market forces. To foster employment growth in the future, strengthened efforts to increase labor force participation were needed; recent initiatives needed to be matched by stronger incentives to work. Directors urged the authorities to further mitigate tax traps affecting the low paid, firmly enforce eligibility and job search tests, and, most critically, tighten the availability and targeting of disability and unemployment benefits, noting that such benefits were among the most generous in the OECD countries. Directors considered that the product market reforms under way were an important complement to labor market reforms. Progress in that area would help to foster job creation, especially in services.

Directors commended the Netherlands for maintaining its official development assistance, despite budgetary stringency, and an open trade system.

Netherlands: Selected Economic Indicators

  1993 1994 1995 1996 19971

Real economy (change in percent)  
  Real GDP 0.8 3.4 2.1 2.7 3
  Domestic demand -1.2 3.1 2.2 2.6 2.7
  CPI (year average) 2.6 2.7 2 2.1 2.7
  Unemployment rate (in percent) 7.7 8.7 8.3 7.8 7
  Gross national saving (percent of GDP) 23 24.3 24.6 24.4 24.5
  Gross national investment (percent of GDP) 18.5 19.3 19.4 19.9 20
Public finance (percent of GDP)  
  Central government balance -2.9 -3.2 -3.7 -2 -2.9
  General government balance -3.2 -3.4 -4 -2.3 -2.2
  Public debt 80.8 77.4 79.7 78 73.8
Money and credit (end of year, percent change)  
  Domestic Credit 5.1 6.8 9.8 10 12.62
  M3 9.4 -1 4.2 5.3 7.32
Interest rates (percent)  
  Money market rate 7.1 5.1 4.2 2.9 2.92
  Government bond yield 6.5 7.2 7.2 6.5 5.93
Balance of payments 4  
  Trade balance (percent of GDP) 5.4 5.6 5.3 5.2 5.1
  Current account (percent of GDP) 4.3 5.3 4.5 5.2 4.4
  Official reserves (US$billion)5 31.3 34.5 33.7 26.8 28.32
  Reserve cover (months of imports of GNFS) 2.5 2.5 2 1.6 . . .
Exchange rates  
  Exchange rate regime   Member of ERM  
  Present rate (June 26, 1997)   f. 1.94 per US$1  
  Nominal effective exchange rate (1990 = 100) 104.7 105.1 109.3 107 103.22
  Real effective exchange rate (1990 = 100)6 103.3 101.1 101.5 96.4 92.82

1Staff projections.
2March 1997.
3Average of first three months.
4Transactions basis.
5Excluding gold.
6Based on relative normalized unit labor costs in manufacturing.

1Under Article IV of the IMF's Article of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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