## INTERNATIONAL MONETARY FUND — KINGDOM OF THE NETHERLANDS—NETHERLANDS Staff Report for the 2004 Article IV Consultation

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### Executive summary and outlook
- Economy beginning to emerge from an extended downturn; improving exports driving recovery while domestic demand expected to take longer to recover.
- Staff projected growth of about 1 percent in 2004 and about 1¾ percent in 2005.
- CPB and DNB projections released after the mission:
  - DNB forecasts ¾ percent (2004) and 2 percent (2005).
  - CPB forecasts 1¼ percent (2004) and 1¼ percent (2005).
- Inflationary pressures low amid soft labor market conditions and economic slack; year-on-year underlying inflation has declined rapidly.
- Downside risks to the outlook for growth, especially from domestic sources, are a concern given the nascent recovery.

### Fiscal position and policy stance
- General government balance deteriorated by almost 5½ percentage points of GDP between 2000 and 2003 and breached the 3 percent Maastricht ceiling in 2003.
- Staff estimated the 2004 deficit will narrow in underlying structural terms by 0.6 percentage point of GDP.
- Authorities determined to bring the deficit below 3 percent of GDP in 2004.
- Recent rule changes to the expenditure-based fiscal framework aim to avoid using cyclical expenditure windfalls to fund permanent spending increases; staff supported changes but preferred a stronger formulation of the expenditure rule and recommended enhancing transparency of expenditure ceilings.

### Growth performance, cyclical dynamics, and sources of vulnerability
- Growth patterns:
  - Growth averaged 3.6 percent during 1995–2000.
  - Growth averaged 0.2 percent during 2001–03.
  - Growth turned negative in 2003 for the first time in twenty years.
- Labor market and competitiveness:
  - Unemployment fell below the estimated NAIRU of about 4 percent during the late 1990s, contributing to wage pressures.
  - Nominal wage freeze agreements were in place for 2004 and 2005 but collapsed for 2005 amid discord on reforms.
  - Wage moderation and an appreciated euro expected to support competitiveness.
- Wealth, balance sheets, and amplification:
  - DNB estimated asset and housing price increases added an average of 1–1½ percentage points to real GDP growth between 1998 and 2000.
  - Household debt ratio rose from 109 percent of disposable income in 1995 to some 200 percent in 2002.
  - Contribution rates (pension) increased by 4 percentage points from 2001 to 2004, to some 14 percent.
- Monetary stance:
  - ECB policy rate seen as broadly in line with requirements of the Dutch economy; monetary policy broadly appropriate at current conjuncture though judged too loose through much of the late 1990s.

### Structural reforms and labor market policies
- Key priorities: raise employment/participation and boost productivity to prepare for aging and support fiscal sustainability.
- Major planned measures:
  - Overhaul of the disability scheme (effective from 2006).
  - Abolition of tax incentives for early retirement (effective from 2006).
- Staff recommendations and concerns:
  - Implement reforms comprehensively to avoid shifts from one category of inactivity into another; staff urged including unemployment insurance reforms.
  - Staff pointed to potential benefits of reducing the minimum wage and increasing wage dispersion; authorities acknowledged economic rationale but noted political and cultural resistance.

### Fiscal framework and governance
- Expenditure ceilings were met through 2002, but temporary expenditure windfalls were used to fund permanent spending increases in recent years; the new coalition agreement in 2003 modestly ratcheted up the ceiling, which was slightly exceeded.
- Staff emphasized strengthening the expenditure rule and improving transparency to make ceilings accessible to a broader audience and add clarity and discipline.
- Staff recommended:
  - Align ceilings more closely with national accounts concepts.
  - Focus ceilings solely on spending by discontinuing practice of treating nontax revenues as negative expenditures.
  - Significant revisions to the system best made every four years when a new government explains fiscal intentions.

### Financial sector assessment and FSAP
- FSAP overall conclusion: financial system is sound, resilient to adverse shocks, and well supervised.
- System features:
  - Dominated by a small number of large complex financial institutions (LCFIs) that are sectorally integrated and internationally oriented.
  - Banking sector well capitalized and diversified; asset quality and profitability held up relatively well in the recent slowdown.
  - Insurance companies and pension funds exposed to significant falls in equity prices but reasonably liquid and rebuilding under firm supervisory action.
- FSAP recommendations and pending legislation highlights:
  - Clearly define Minister/Ministry roles where supervisory autonomy not fully delegated.
  - Ensure Authority for Financial Markets can cooperate internationally even without a “domestic interest.”
  - Improve securities settlement arrangements with cross-border counterparts.
  - Allow sufficient flexibility for pension coverage-ratio adjustments to prevent procyclical effects while avoiding unduly prolonged adjustment.
  - Continue development of crisis-management and macro-prudential surveillance frameworks.
  - Phase out tax deductibility of mortgage interest over the medium term, preferably gradually.

### Outlook uncertainties and downside risks
- Staff emphasized downside risks, especially from domestic fragilities.
- Household exposures and risks:
  - Faster-than-expected increases in interest rates combined with higher unemployment could trigger a drop in housing prices.
  - High household debt may result in a renewed increase in household savings.
  - Authorities noted mitigating factors: dominance of fixed interest mortgages; generally limited housing supply.
- Staff projects export growth to be somewhat below and then in line with market growth (from the WEO exercise) in 2004 and 2005, respectively.
- Authorities concurred that downside events could have larger magnitude impact than upside events.

### Fiscal policy — 2004 measures, outcomes, and medium-term strategy
- 2004 fiscal measures and outcomes:
  - Objective: bring the 2004 deficit from an estimated 3.8 percent of GDP (at time of budget publication in September 2003) to 2.3 percent.
  - Outturn for 2003: a deficit of 3.2 percent.
  - Revised projection for the 2004 deficit: 3.4 percent due to slower-than-expected growth.
  - Additional measures in the 2004 spring budget memorandum to meet the 3 percent ceiling.
  - Overall, measures of close to 2 percent of GDP barely stabilize the deficit at the 3 percent ceiling.
  - Measures lead to a ½ percent of GDP narrowing of the structural deficit; balance taken up by a ½ percent of cyclical weakening and 1 percent of structural weakening.
- Specific reported policy measures (numbers preserved):
  - Total 2004 policy measures: 1.5
    - Measures in Strategic Accord: 0.6
    - Measures in Global Agreement: 0.6
    - Supplementary measures in 2004 Budget: 0.3
  - Baseline projections in the 2004 Budget Memorandum, without policy measures: -2.3 -3.8
  - Baseline projections in the 2004 Budget Memorandum, with policy measures: -2.3 -2.3
  - Revisions (in April 2004) to the 2003 outcome and 2004 projection: -3.2 -3.4
  - Additional measures in the 2004 Spring Budget Memorandum: 0.4
  - EMU balance, with additional policy measures under: -3.0
- Budget execution risks and responses:
  - Deterioration in local authorities’ overall fiscal balance; regular contacts established with large municipalities to coordinate on net lending activities.
  - Large rises in health care spending amid shift to a more demand-driven system; measures include benchmarking and higher co-payments.
  - Coalition agreement suggestion to consider reimposing direct budgetary controls on health care spending if necessary; staff welcomed this as an option.
- Medium-term targets and staff recommendations:
  - Authorities’ initial 2004 budget stipulations:
    - Structural deficit should not exceed 0.5 percent of GDP in 2007.
    - Targeted cumulative underlying adjustment of 0.7 percentage point of GDP between 2003 and 2007.
  - Staff advocated structural adjustment of at least 0.5 percentage point of GDP per year through the government’s term (to 2007), aiming for about structural balance by end-2007.
  - Staff recommended a limit of about 1 percent on the average growth of real primary expenditure during 2003–07 (compared with actual average growth of 3.2 percent in the four years to 2003).
  - Staff encouraged phasing out mortgage interest deductions over the medium term.

### Boosting potential growth — labor market and productivity reforms
- Raising labor market participation:
  - Persistent low participation among older, partially disabled, and low-skilled workers.
  - Noted success from decentralization reducing inflows into welfare by incentivizing municipalities to favor reintegration.
  - Removal of fiscal incentives for early retirement:
    - Participation in collective early retirement schemes to be voluntary.
    - Government intends to fully abolish tax deductibility of early retirement savings.
    - Official retirement age currently 65; effective retirement age around 61 years; mission suggested accounting for changes in life expectancy.
  - Disability scheme:
    - Close to one million beneficiaries (equivalent to about 13 percent of employment).
    - Planned overhaul: restrict access only to the fully disabled; stricter criteria and examinations; partially disabled who work entitled to a wage subsidy bridging 70 percent of the difference between the old and new wage.
  - Unemployment benefits:
    - Follow-up unemployment benefit phased out (had added another 2½ years to up to 5 years of main benefits).
    - Plans to eliminate short-term benefits and tighten eligibility requirements for main unemployment benefits.
  - Female participation and part-time work:
    - Female participation high with a large share of part-time work; to raise hours worked need to strengthen incentives, notably through better and more available childcare.
  - Inactivity traps for low-wage earners:
    - High replacement rates and means-tested benefits imply significant inactivity traps.
    - Authorities gradually increasing the earned-income tax credit; staff suggested redesigning rent subsidies and lowering the minimum wage as possible measures.
- Reversing the decline in productivity growth:
  - Authorities established the high-level “Innovation Platform” to recommend policies boosting innovation, productivity, and growth.
  - Mission suggestions:
    - Remove obstacles to quicker reallocation of resources into innovating sectors.
    - Reduce administrative burden and revise specific regulatory content.
    - Focus on labor markets where liberalization lags product market reform; employment protection remains comparatively high.
    - Promote greater wage differentiation to realize returns from investment in human capital.

### Product-market reform findings and recommendations
- Netherlands at the forefront of product market reforms in Europe, including comprehensive opening of most network sectors.
- Some sectors (construction and nontraded services) remained protected with weak productivity growth.
- Competition agency (NMa) has quickly gained credibility; staff supported proposals to:
  - Strengthen NMa powers to investigate.
  - Strengthen NMa ability to impose penalties, including on individuals within companies.
- Corporate governance: Tabaksblat code introduced and expected to be adopted in legislation soon.
- Key policy implications:
  - Broaden and strengthen competition-agency powers.
  - Continue regulatory and structural measures to open markets dominated by strong incumbents.
  - Implement corporate governance improvements.

### Aging and the public finances — assessment, projections, and scenarios
- Findings and baseline assessments:
  - Old-age dependency ratio among the lowest in Western Europe and will remain so in next 50 years (OECD).
  - Debt level below euro area average: 54 percent of GDP in 2003 compared with 70 percent (euro area).
  - Large second pillar occupational pension schemes mandatory for public sector workers and for more than 90 percent of private sector workers.
  - Assets of Dutch occupational pension funds: 121 percent of GDP in 2001; projected could increase to nearly 200 percent of GDP by 2040.
- CPB (2000) summary:
  - Projected public spending on pensions and health care to increase by more than 9 percentage points of GDP between 2001 and 2040.
  - Taxation of private-sector pension income could raise revenue by more than 5 percentage points of GDP between 2000 and 2040.
  - Net fiscal cost of aging after offsets: rise by about 4 percentage points of GDP by 2040.
  - CPB target (2000): overall budget balance surplus of 1¼ to 1¾ percent of GDP in 2007 and public debt eliminated by 2025 under specified macro assumptions.
- Recent developments and staff alternatives:
  - Projections of future health care costs revised upward; rapid fiscal deterioration since 2000.
  - Staff note: if recent expenditure trends continue through 2007 (real spending growth 2½ percent a year), public debt by 2025 could be close to 50 percent of GDP and longer-term debt dynamics would raise concerns.
  - CPB partial update: with a permanent tax increase of 1.8 percent of GDP in 2008 and a primary surplus target of 0.4 percent of GDP in 2007, debt declines through 2030 then rises modestly with a deficit reappearing about 1.0 percent of GDP by 2050.
  - IMF staff alternative: structural adjustment of 0.5 percentage point of GDP per year during the current government term through expenditure restraint to reach a primary general government surplus of about 1½ percent of GDP in 2007 and put underlying structural position near balance.

### Data, statistics, and surveillance
- Data adequate for surveillance; need to shorten lag for annual fiscal data consistent with national accounts and consider compiling such fiscal data quarterly.
- Fund relations and statistical framework:
  - Membership: Joined December 27, 1945; Article VIII.
  - Quota: 5,162.40 (SDR Million) — 100.00 percent of Quota
  - Fund holdings of currency: 3,150.90 (SDR Million) — 61.04 percent of Quota
  - Reserve position in Fund: 2,011.53 (SDR Million) — 38.96 percent of Quota
  - Net cumulative SDR allocation: 530.34 (SDR Million) — 100.00 percent of Allocation; Holdings: 506.14 (SDR Million) — 95.44 percent of Allocation
  - Netherlands entered final stage of EMU on January 1, 1999, at a rate of 2.20371 guilder per euro.

### Key numerical highlights and selected indicators (preserved)
- Growth averages: 3.6 percent (1995–2000); 0.2 percent (2001–03).
- Staff growth projections: about 1 percent (2004); about 1¾ percent (2005).
- DNB forecasts: ¾ percent (2004); 2 percent (2005).
- CPB forecasts: 1¼ percent (2004); 1¼ percent (2005).
- Structural fiscal adjustment in 2004 (staff estimate): 0.6 percentage point of GDP (narrowing).
- General government balance deterioration: almost 5½ percentage points of GDP (2000–2003).
- Maastricht deficit ceiling breached: 3 percent (2003).
- NAIRU estimate: about 4 percent.
- Inflation peak: over 5 percent in 2001.
- Household debt ratio: 109 percent of disposable income (1995) to some 200 percent (2002).
- Pension contribution rate increase: 4 percentage points from 2001 to 2004, to some 14 percent.
- Selected recent and projected real activity (annual percent change):
  - Real GDP growth: 1999: 4.0; 2000: 3.5; 2001: 1.2; 2002: 0.2; 2003: -0.7; 2004 (Proj.): 1.1; 2005 (Proj.): 1.8
  - Output gap (percent of potential output): 1999: 2.5; 2000: 3.6; 2001: 2.5; 2002: 0.5; 2003: -2.2; 2004 (Proj.): -3.1; 2005 (Proj.): -3.3
  - Unemployment rate (percent): 1999: 3.2; 2000: 2.6; 2001: 2.0; 2002: 2.5; 2003: 4.1; 2004 (Proj.): 5.1; 2005 (Proj.): 5.6
  - CPI (year average): 1999: 2.0; 2000: 2.3; 2001: 5.1; 2002: 3.9; 2003: 2.2; 2004 (Proj.): 1.3; 2005 (Proj.): 1.0
  - General government gross debt (percent of GDP): 1999: 63.1; 2000: 55.9; 2001: 52.9; 2002: 52.4; 2003: 55.0; 2004 (Proj.): 56.3; 2005 (Proj.): 57.5
  - General government balance (percent of GDP): 1999: 0.7; 2000: 2.2; 2001: --; 2002: -1.9; 2003: -3.2; 2004 (Proj.): -3.0; 2005 (Proj.): -2.7
  - Assets of Dutch occupational pension funds: 121 percent of GDP in 2001; projected could increase to nearly 200 percent of GDP by 2040.
- Recent revisions (CBS GDP):
  - 2001: Revised 1.4, Previous 1.2
  - 2002: Revised 0.6, Previous 0.2
  - 2003: Revised -0.9, Previous -0.7
  - Average growth for 2001–03: 0.4 percent (revised), up from 0.2 percent (previous estimate).

*Source: INTERNATIONAL MONETARY FUND, Staff Report for the 2004 Article IV Consultation and accompanying staff statement (July 21, 2004; staff statement September 8, 2004).*

### 2004. The views expressed in the staff report are those of the staff team and do not

### INTERNATIONAL MONETARY FUND — KINGDOM OF THE NETHERLANDS—NETHERLANDS
Staff Report for the 2004 Article IV Consultation

### Executive summary and outlook
- The economy is beginning to emerge from an extended downturn; improving exports are driving the recovery while domestic demand is expected to take longer to recover.
- Staff projected growth of about 1 percent in 2004 and about 1¾ percent in 2005.
- The CPB and DNB projections released after the mission were: DNB forecasts ¾ and 2 percent for 2004 and 2005; CPB forecasts 1¼ percent for both years.
- Inflationary pressures are low amid soft labor market conditions and economic slack; year-on-year underlying inflation has declined rapidly (Figure 7).
- Downside risks to the outlook for growth, especially from domestic sources, are a concern given the nascent recovery.

### Fiscal position and policy stance
- The general government balance deteriorated by almost 5½ percentage points of GDP between 2000 and 2003 and breached the 3 percent Maastricht ceiling in 2003.
- Staff estimated that the 2004 deficit will narrow in underlying structural terms by 0.6 percentage point of GDP; this adjustment was judged to strike an appropriate balance between fiscal consolidation and avoiding disruptions to the recovery.
- The authorities are determined to bring the deficit below 3 percent of GDP in 2004.
- Recent rule changes to the expenditure-based fiscal framework aim to avoid using cyclical expenditure windfalls to fund permanent spending increases; staff supported the changes but preferred a stronger formulation of the expenditure rule to preclude new spending and recommended enhancing the transparency of expenditure ceilings.

### Growth performance, cyclical dynamics, and sources of vulnerability
- Growth patterns:
  - Growth averaged 3.6 percent during 1995–2000.
  - Growth averaged 0.2 percent during 2001–03.
  - Growth turned negative in 2003 for the first time in twenty years.
- Labor market and competitiveness:
  - Unemployment fell below the estimated NAIRU of about 4 percent during the late 1990s, contributing to wage pressures; nominal wage freeze agreements were in place for 2004 and 2005 but collapsed for 2005 amid discord on reforms.
  - Wage moderation and an appreciated euro are expected to support competitiveness.
- Wealth, balance sheets, and amplification:
  - DNB estimated asset and housing price increases added an average of 1–1½ percentage points to real GDP growth between 1998 and 2000.
  - Household debt ratio rose from 109 percent of disposable income in 1995 to some 200 percent in 2002.
  - Contribution rates (pension) were increased by 4 percentage points from 2001 to 2004, to some 14 percent.
- Monetary stance:
  - The ECB policy rate was seen as broadly in line with the requirements of the Dutch economy; monetary policy broadly appropriate at the current conjuncture, though it was judged too loose through much of the late 1990s.

### Structural reforms and labor market policies
- Key priorities: raise employment/participation and boost productivity to prepare for aging and support fiscal sustainability.
- Major planned measures:
  - Overhaul of the disability scheme (effective from 2006).
  - Abolition of tax incentives for early retirement (effective from 2006).
- Staff recommendations and concerns:
  - Implement reforms comprehensively to avoid shifts from one category of inactivity into another—staff urged including unemployment insurance reforms (where plans were more limited).
  - Staff pointed to potential benefits of reducing the minimum wage and increasing wage dispersion; authorities acknowledged the economic rationale but noted political and cultural resistance to increased wage dispersion.

### Fiscal framework and governance
- The expenditure ceilings were met through 2002, but temporary expenditure windfalls were used to fund permanent spending increases in recent years; the new coalition agreement in 2003 modestly ratcheted up the ceiling, which was slightly exceeded.
- Staff emphasized strengthening the expenditure rule and improving transparency to make ceilings accessible to a broader audience and add clarity and discipline.

### Financial sector assessment
- The FSAP concluded that overall the financial system is sound, resilient to adverse shocks, and well supervised.

### Key numerical highlights (preserved from the report)
- Growth averages: 3.6 percent (1995–2000); 0.2 percent (2001–03).
- Structural fiscal adjustment in 2004 (staff estimate): 0.6 percentage point of GDP (narrowing).
- General government balance deterioration: almost 5½ percentage points of GDP (2000–2003).
- Maastricht deficit ceiling breached: 3 percent (2003).
- Staff growth projections: about 1 percent (2004); about 1¾ percent (2005).
- DNB forecasts: ¾ percent (2004); 2 percent (2005).
- CPB forecasts: 1¼ percent (2004); 1¼ percent (2005).
- NAIRU estimate: about 4 percent.
- Inflation peak: over 5 percent in 2001.
- Household debt ratio: 109 percent of disposable income (1995) to some 200 percent (2002).
- Pension contribution rate increase: 4 percentage points from 2001 to 2004, to some 14 percent.

*Source: INTERNATIONAL MONETARY FUND, Staff Report for the 2004 Article IV Consultation, July 21, 2004.*

### 8.       Various uncertainties to the outlook were acknowledged, with staff emphasizing

### 8.       Various uncertainties to the outlook were acknowledged, with staff emphasizing downside risks

### Outlook uncertainties and downside risks
- Staff emphasized downside risks, especially from domestic fragilities.
- Households’ exposure to income and interest rate risk: a combination of faster-than-expected increases in interest rates and unemployment could trigger a drop in housing prices.
- Weak near-term growth unlikely to make a significant dent in still rising unemployment; modest changes to the wage and employment outlook could prompt a reassessment of income prospects and therefore consumption plans.
- High household debt may result in a renewed increase in household savings.
- Authorities viewed their projections as subject to both downside and upside risks, citing mitigating factors:
  - dominance of fixed interest mortgages;
  - generally limited housing supply.
- Authorities recognized the possibility of a stronger-than-expected external recovery and indicated investment could surprise on the upside if business confidence remained buoyant.
- Nevertheless, authorities concurred that even if upside and downside events were about evenly balanced, the potential impact of the downside was relatively larger in magnitude and a matter of concern.

### Household saving and export projections
- Staff projects export growth to be somewhat below and then in line with market growth (from the WEO exercise) in 2004 and 2005, respectively.

---

### B.   Fiscal Policy

### 2004 fiscal measures and outcomes
- Authorities took measures to comply with the 3 percent Maastricht ceiling in the current year.
- Objective: bring the 2004 deficit from an estimated 3.8 percent of GDP (at time of budget publication in September 2003) to 2.3 percent.
- Outturn for 2003: a deficit of 3.2 percent (worse than envisaged when 2004 budget prepared).
- Slower-than-expected growth in 2004 resulted in a revised projection for the 2004 deficit of 3.4 percent.
- Additional measures taken in the 2004 spring budget memorandum to meet the 3 percent ceiling.
- Overall, measures of close to 2 percent of GDP barely stabilize the deficit at the 3 percent ceiling.
- Measures lead to a ½ percent of GDP narrowing of the structural deficit.
- The balance is taken up by a ½ percent of cyclical weakening and 1 percent of structural weakening (health care, local authority spending, and shortfalls in corporate tax receipts).
- Staff viewed the correction of the structural deficit as striking an appropriate balance between consolidation and avoiding disruptions to the recovery.

### Specific policy measures (as reported)
- Total 2004 policy measures: 1.5
  - Measures in Strategic Accord: 0.6
  - Measures in Global Agreement: 0.6
  - Supplementary measures in 2004 Budget: 0.3
- Baseline projections in the 2004 Budget Memorandum, without policy measures: -2.3 -3.8
- Baseline projections in the 2004 Budget Memorandum, with policy measures: -2.3 -2.3
- Revisions (in April 2004) to the 2003 outcome and 2004 projection: -3.2 -3.4
- Additional measures in the 2004 Spring Budget Memorandum: 0.4
- EMU balance, with additional policy measures under: -3.0

### Budget execution risks and responses
- Authorities were caught off guard by deterioration in local authorities’ overall fiscal balance.
- To coordinate central and local budget execution, regular contacts established with large municipalities, especially on net lending activities (mostly related to net purchases of land).
- Large rises in health care spending amid a shift to a more demand-driven system raised concerns.
- Recent measures to contain health care costs: benchmarking and higher co-payments.
- Staff welcomed the coalition agreement suggestion to consider reimposing direct budgetary controls on health care spending if necessary.
- Need for sustained fiscal consolidation in the medium term to bolster confidence and prepare for aging costs.

### Medium-term fiscal targets and staff recommendations
- Authorities’ initial 2004 budget stipulations:
  - Structural deficit should not exceed 0.5 percent of GDP in 2007.
  - Targeted cumulative underlying adjustment of 0.7 percentage point of GDP between 2003 and 2007.
- Measures included:
  - Modest base-broadening tax policies;
  - A cut of 10,000 civil servants;
  - A general cut in subsidies;
  - Reduction in coverage of the basic public healthcare package;
  - Compulsory private health insurance starting in 2006.
- Fiscal position worsened since the budget; government has not yet revised its target.
- Staff advocated structural adjustment of at least 0.5 percentage point of GDP per year through the government’s term (2007), aiming for about structural balance by end-2007.
- Staff recommended a limit of about 1 percent on the average growth of real primary expenditure during 2003–07, compared with actual average growth of 3.2 percent in the four years to 2003.
- Staff encouraged measures improving incentives for work and complementing product and labor market reforms, including through the tax-benefits system and phasing out mortgage interest deductions over the medium term (which could also limit rent subsidies).

### Fiscal strategy on aging and sustainability
- Authorities’ medium- and longer-term fiscal strategy on aging: run down debt to use savings on interest payments to cover higher aging costs.
- Appendix III presents long-term debt and fiscal sustainability scenarios, finding the situation manageable but requiring sustained fiscal adjustment.

### Fiscal framework operations and strengthening measures
- Authorities’ recent improvements welcomed:
  - Decision to devote revenue windfalls solely to debt reduction.
  - Intention that cyclical expenditure windfalls will not be used to fund other spending without further consideration.
- Staff preferred a stronger formulation to preclude new spending from cyclical windfalls.
- Staff supported authorities’ intention of not allowing reallocation across spending subceilings (not consistently followed in practice).
- Staff recommended enhancing transparency of spending ceilings:
  - Align ceilings more closely with national accounts concepts.
  - Focus ceilings solely on spending by discontinuing practice of treating nontax revenues as negative expenditures.
  - More transparent and accessible ceilings would help communication and confidence.
- Significant revisions to the system would best be made every four years when a new government explains fiscal intentions.
- Wide-ranging health sector reforms to be introduced in 2006 aim for greater choice and efficiency, but cost control may continue to be a budgetary issue.
- General agreement on the need to reduce reporting lags in the health sector; authorities indicated efforts underway.

---

### C.   Boosting Potential Growth

### Overview
- Beyond fiscal consolidation, boosting potential growth is essential to cope with population aging.
- Recent growth performance weighed down by low participation of specific groups in the Dutch labor market and a secular decline in productivity growth.

### Raising labor market participation
- Low participation persistent among older, partially disabled, and low-skilled workers.
- Relevant policy areas: disability and sickness benefits, early retirement, inactivity traps, and administrative aspects of benefits systems.
- Success reported from recent decentralization that reduced inflows into welfare by giving municipalities incentive to favor reintegration over welfare (municipalities could keep unused funds from social welfare budgets).
- Most officials and staff agreed on comprehensive reforms, notably including the unemployment insurance scheme, to avoid shifts between inactivity categories.
- Political difficulty: consensus-oriented “polder” model complicates reform; debate on unemployment insurance ongoing; labor unions withdrew from commitment to a wage freeze in 2005 after discussions on early retirement.

Key measures and observations:
- Removal of fiscal incentives for early retirement:
  - Participation in collective early retirement schemes to be voluntary.
  - Government intends to fully abolish tax deductibility of early retirement savings.
  - Intention to suspend administrative extension to unorganized firms of wage-contract parts requiring participation in early retirement schemes.
  - Staff saw changes as fostering greater intergenerational and actuarial fairness.
  - These plans caused major upset with trade unions, seen as disadvantaging older workers.
  - Official retirement age currently 65; effective retirement age around 61 years; mission suggested taking into account changes in life expectancy.
- Disability schemes:
  - Harbor close to one million beneficiaries, equivalent to about 13 percent of employment.
  - Partial reforms (gatekeeper function, experience-rated insurance premia) contributed to recent decline in new applicants.
  - Planned overhaul: restrict access only to the fully disabled, introduce stricter criteria and examinations, strengthen incentives to work for the partially disabled to foster reintegration.
  - Under the new scheme, partially disabled who work would be entitled to a wage subsidy bridging 70 percent of the difference between the old and new wage.
  - Mission welcomed plans and stressed the importance of reassessing existing stock of cases based on new criteria.
- Unemployment benefits:
  - Phased out the so-called follow-up unemployment benefit (had added another 2½ years to the up to 5 years of main benefits, effectively allowing retirement at 57½ years).
  - Plans to eliminate short-term benefits and tighten eligibility requirements for main unemployment benefits.
  - Staff encouraged following through and noted further reform—particularly the relatively long duration of main unemployment benefits—would be beneficial.
- Female participation and part-time work:
  - Female participation is high, associated with a large share of part-time work.
  - Workers legally entitled to work part time with regular benefits; questions raised whether fixed labor costs elevate overall labor cost.
  - Authorities and employers felt part-time arrangements were working well; to raise hours worked, need to strengthen incentives, notably through better and more available childcare.
- Inactivity traps for low-wage earners:
  - High replacement rates and means-tested benefits imply significant inactivity traps at the lower end.
  - Authorities gradually increasing the earned-income tax credit.
  - Staff suggested further measures including redesign of rent subsidies and potential benefits of lowering the minimum wage (which determines levels of several social benefits and limits labor demand at lower skill levels).
  - Lowering inactivity traps and stimulating demand for low-skilled labor seen as relevant given aging population and increased demand for personal services.
  - Authorities noted complexity and political aspects; plans to abolish certain local benefits for specific groups where political consensus exists.

### Reversing the decline in productivity growth
- Reversing secular decline in productivity growth is crucial to enhance potential growth.
- Authorities established the high-level “Innovation Platform” under the Prime Minister to recommend policies boosting innovation, productivity, and growth.
- Mission suggestions:
  - Remove obstacles to quicker reallocation of resources into innovating sectors.
  - Reduce administrative burden and revise specific regulatory content.
  - Focus on labor markets where liberalization lags product market reform: employment protection remains comparatively high, hindering flexibility and acting as an implicit tax on new hiring.
  - Promote greater wage differentiation to realize returns from investment in human capital and attract labor to higher productivity companies and sectors.
- Political difficulties acknowledged: traditional preferences for egalitarian wage distribution conflict with introducing greater wage differentiation.

---

*Source: _cr04300 - 8.       Various uncertainties to the outlook were acknowledged, with staff emphasizing*

### 22.      The benefits from further improvements in the functioning of product markets

### 22.      The benefits from further improvements in the functioning of product markets

### Product-market reform findings and recommendations
- The Netherlands is considered at the forefront of product market reforms in Europe, including the comprehensive opening of most network sectors.
- Some sectors—examples given include construction and nontraded services—have remained protected and recorded particularly weak productivity growth.
- The recently established competition agency (NMa) has quickly gained credibility and focused enforcement efforts on these protected sectors.
- Authorities see benefits in persevering with efforts to open new avenues for competition in markets with strong incumbents, including:
  - approval of new electricity generation facilities and international transmission lines;
  - efforts to unbundle network transmission and production.
- To further improve NMa’s effectiveness, staff supported proposals to:
  - strengthen the agency’s powers to investigate; and
  - strengthen its ability to impose penalties, including importantly on individuals within companies rather than just the companies themselves.
- An improved corporate governance framework (the so-called Tabaksblat code) has been introduced and is expected to be adopted in legislation soon.

### Key policy implications for product markets
- Broaden and strengthen competition agency powers for investigation and penalties.
- Continue regulatory and structural measures to open markets dominated by strong incumbents.
- Implement corporate governance improvements to bolster market discipline and confidence.

### Financial sector assessment (FSAP) — findings
- Overall conclusion: the financial system is sound, resilient to potential adverse shocks, and well supervised.
- The Dutch financial system is dominated by a small number of large complex financial institutions (LCFIs) that are sectorally integrated and internationally oriented.
- Banking sector: well capitalized and diversified; asset quality and profitability held up relatively well in the recent slowdown.
- Risks from high debt levels, house prices, or the international environment appear comfortably within banks’ capacity to manage.
- Insurance companies and especially pension funds are exposed to any significant fall of equity prices but have remained reasonably liquid and are in a rebuilding phase underpinned by firm supervisory action.

### FSAP recommendations and pending legislation (Box 1 summary)
- Spelling out clearly the role of the Minister or Ministry of Finance, as applicable, in those few areas where autonomy is not fully delegated to the supervisor.
- Ensuring that the Authority for Financial Markets has the power to cooperate with securities supervisors internationally even when there is no “domestic interest.”
- Continuing to work with cross-border counterparts to further improve securities settlement arrangements.
- Ensuring that the new pensions supervisory arrangements allow sufficient flexibility in the specified timeframe for making up shortfalls in the coverage ratio, to prevent procyclical effects, but without allowing unduly prolonged adjustment.
- Continuing the development of the framework for dealing with crisis situations, both through further work with other supervisors internationally, and through completing the review of the domestic deposit guarantee scheme.
- Continuing the development of macro prudential surveillance to help strengthen the early identification of risks and vulnerabilities.
- Over the medium term, phasing out tax deductibility of mortgage interest, preferably in a gradual fashion to avoid disruptive effects.

### Staff assessment of FSAP-related legislative priorities
- New legislation should:
  - clearly define Minister/Ministry roles where supervisory autonomy is not fully delegated;
  - ensure the Authority for Financial Markets can cooperate fully internationally;
  - continue cross-border work to improve securities settlement arrangements;
  - allow sufficient flexibility for pension coverage-ratio adjustments to avoid procyclical effects while preventing unduly prolonged adjustment;
  - continue developing crisis-management and macro-prudential surveillance frameworks;
  - phase out tax deductibility of mortgage interest over the medium term in a gradual fashion to avoid disruptive effects.

### International trade and development assistance
- The Netherlands has a solid track record supporting multilateral trade liberalization and meeting the U.N. target for Official Development Assistance (ODA).
- Authorities welcomed increased stature of middle- and low-income countries in multilateral trade negotiations and noted Dutch technical assistance to improve negotiation capacities.
- Concerning the Doha round, authorities saw a small window for concluding negotiations in the current year on the coattails of the EU’s initiative on agricultural trade liberalization.
- As a large exporter of high-value agricultural goods, the Netherlands felt it could compete well in a more liberalized agricultural trading system.
- Despite recent budgetary pressures and consolidation needs, the Netherlands has consistently exceeded the ODA target of 0.7 percent of GNP.

### Staff appraisal — fiscal and structural priorities
- Recent economic reversal: annual growth declined steadily since 2000; aging population and decline in productivity growth raise concerns about falling potential growth.
- Public finances weakened significantly during 2000–03 for structural and cyclical reasons; fiscal deficit breached the 3 percent Maastricht ceiling in 2003.
- The government’s determination to hold the 2004 fiscal deficit to just under 3 percent of GDP is commendable and fits economic circumstances.
- Risks to the fiscal outlook stem particularly from health care costs and the budget situation of local governments; closer central-local cooperation is advised.
- Recent measures to contain health care costs (benchmarking, higher co-payments) are welcome; reimposition of direct budgetary controls may still be needed per the coalition agreement.

### Recommended fiscal path and structural reform measures
- Adopt ambitious medium-term fiscal targets to ensure fiscal sustainability and address population aging.
- Structural fiscal adjustment of at least ½ percentage point of GDP per year through the government’s term is recommended to prepare for aging costs and bolster confidence.
- Consider measures including:
  - gradual phasing out of mortgage interest deductions;
  - reforms to improve incentives for work, including the tax-benefits system;
  - structural reforms to raise labor productivity and participation.
- Strengthen and make more transparent the multi-year fiscal framework anchored on medium-term expenditure ceilings:
  - devote revenue windfalls solely to debt reduction;
  - preclude using cyclical expenditure windfalls to fund other spending without further consideration;
  - avoid allowing overperformance under one subceiling to raise spending under another;
  - enhance transparency of expenditure ceilings to improve accessibility and discipline.

### Labor market and productivity reform priorities
- Reforms to raise labor participation should be comprehensive:
  - Restrict access to disability benefits to the fully disabled, use stricter criteria and examinations, strengthen work incentives for the partially disabled, and rigorously reassess existing cases.
  - Remove fiscal incentives for early retirement.
  - Reduce generosity of unemployment benefits to avoid shifting inactivity between categories.
  - Lower the minimum wage and address inactivity traps to increase demand for and supply of low-skilled labor.
  - Reform benefits and tax systems to make work pay.
  - In determining retirement age, take into account changes in life expectancy.
- To accelerate productivity growth:
  - Support the government’s “Innovation Platform” and efforts to reduce administrative burden and revise regulations.
  - Facilitate resource reallocation by lowering employment protection and encouraging greater wage differentiation to attract labor to higher-productivity firms.
  - Encourage private financing of higher education as a complement to wage differentiation.

### Data and statistics
- Data are adequate for surveillance, but it would be helpful to:
  - shorten the lag with which annual fiscal data consistent with the national accounts become available; and
  - start compiling such fiscal data on a quarterly basis.

*Source: _cr04300 - 22.      The benefits from further improvements in the functioning of product markets*

### 38.      It is recommended that the next Article IV consultation with the Netherlands remain

### _cr04300 - 38.      It is recommended that the next Article IV consultation with the Netherlands remain

### Recommendation
- It is recommended that the next Article IV consultation with the Netherlands remain on the 12-month cycle.

### Macroeconomic and key national-account indicators
- Land area (2002): 41.5 thousand sq. km.
- Population (2002): 16.1 million
- Life expectancy at birth (2000): 75.3 (male), 80.6 (female)
- Fertility rate (2001): 1.7 children/woman
- Infant mortality rate (2001): 5.4 per 1,000 live births
- Population per sq. km. of land area (2002): 388 persons
- GDP (2001): 429.1 (in billions of euros) — 100.0 percent of GDP
- Private consumption (2001): 213.1 — 49.7 percent of GDP
- Public consumption (2001): 100.3 — 23.4 percent of GDP
- Gross fixed investment (2001): 93.0 — 21.7 percent of GDP
- Exports of goods and nonfactor services (2001): 280.3 — 65.3 percent of GDP
- Imports of goods and nonfactor services (2001): 257.8 — 60.1 percent of GDP

### Recent and projected real activity (selected series, annual percent change)
- Real GDP growth: 1999: 4.0; 2000: 3.5; 2001: 1.2; 2002: 0.2; 2003: -0.7; 2004 (Proj.): 1.1; 2005 (Proj.): 1.8
- Output gap (in percent of potential output): 1999: 2.5; 2000: 3.6; 2001: 2.5; 2002: 0.5; 2003: -2.2; 2004 (Proj.): -3.1; 2005 (Proj.): -3.3
- Employment: 1999: 3.0; 2000: 1.6; 2001: 2.1; 2002: 0.7; 2003: -0.6; 2004 (Proj.): --; 2005 (Proj.): 0.6
- Unemployment rate (in percent): 1999: 3.2; 2000: 2.6; 2001: 2.0; 2002: 2.5; 2003: 4.1; 2004 (Proj.): 5.1; 2005 (Proj.): 5.6

### Prices, wages, and competitiveness
- Consumer price index (year average): 1999: 2.0; 2000: 2.3; 2001: 5.1; 2002: 3.9; 2003: 2.2; 2004 (Proj.): 1.3; 2005 (Proj.): 1.0
- GDP deflator: 1999: 1.6; 2000: 3.9; 2001: 5.4; 2002: 3.4; 2003: 2.9; 2004 (Proj.): 2.1; 2005 (Proj.): 1.1
- Hourly compensation (manufacturing): 1999: 2.9; 2000: 3.7; 2001: 4.2; 2002: 3.7; 2003: 2.6; 2004 (Proj.): 0.7; 2005 (Proj.): 0.5
- Unit labor costs (manufacturing): 1999: 0.9; 2000: 0.4; 2001: 5.0; 2002: 2.8; 2003: 2.6; 2004 (Proj.): -0.4; 2005 (Proj.): -0.7

### External sector and financial indicators
- Merchandise balance (percent of GDP): 1999: 4.0; 2000: 4.8; 2001: 5.1; 2002: 4.5; 2003: 5.3; 2004 (Proj.): 6.0; 2005 (Proj.): 5.7
- Current account balance (percent of GDP): 1999: 3.9; 2000: 2.0; 2001: 1.9; 2002: 2.5; 2003: 2.2
- General government gross debt (percent of GDP): 1999: 63.1; 2000: 55.9; 2001: 52.9; 2002: 52.4; 2003: 55.0; 2004 (Proj.): 56.3; 2005 (Proj.): 57.5
- General government balance (percent of GDP): 1999: 0.7; 2000: 2.2; 2001: --; 2002: -1.9; 2003: -3.2; 2004 (Proj.): -3.0; 2005 (Proj.): -2.7
- Public sector debt (Maastricht definition): 1998: 66.8; 1999: 63.1; 2000: 55.9; 2001: 52.9; 2002: 52.4; 2003: 55.0
- Government bond yield: 1998: 4.9; 1999: 4.9; 2000: 5.5; 2001: 5.2; 2002: 5.0; 2003: 4.2

### Fiscal accounts (selected items, percent of GDP)
- Revenues: 1998: 46.4; 1999: 47.6; 2000: 47.5; 2001: 46.6; 2002: 45.9; 2003: 45.6; 2004 (Proj.): 45.2; 2005 (Proj.): 45.0
- Expenditure: 1998: 47.2; 1999: 46.9; 2000: 45.3; 2001: 46.6; 2002: 47.8; 2003: 48.8; 2004 (Proj.): 48.2; 2005 (Proj.): 47.7
- Tax revenues and social security contributions: 1998: 39.4; 1999: 40.7; 2000: 40.6; 2001: 39.2; 2002: 38.9; 2003: 38.7; 2004 (Proj.): 38.4; 2005 (Proj.): 38.1
- Social security and social assistance benefits (percent of GDP): 1998: 19.0; 1999: 18.5; 2000: 17.9; 2001: 17.9; 2002: 18.7; 2003: 19.6

### Household and asset developments (selected)
- Assets of Dutch occupational pension funds: 121 percent of GDP in 2001; projected could increase to nearly 200 percent of GDP by 2040.
- Mortgage debt (real, 1991=100): historical series displayed in figures (no numerical table in text).
- Household savings ratio (in percent of disposable income): 1999: 9.7; 2000: 7.0; 2001: 9.0; 2002: 9.3; 2003: 9.5; 2004 (Proj.): 9.8; 2005 (Proj.): 9.4

### Aging and the public finances — assessment, projections, and scenarios
Findings and baseline assessments
- The Netherlands is in a reasonably good situation to deal with population aging:
  - Old-age dependency ratio is among the lowest in Western Europe and will remain so in the next 50 years (OECD).
  - Debt level is below the euro area average: 54 percent of GDP in 2003 compared with 70 percent (euro area).
- The large second pillar (fully funded occupational pension schemes) accounts for more than 40 percent of pension income and is mandatory for public sector workers and for more than 90 percent of private sector workers.
- Assets of Dutch occupational pension funds: 121 percent of GDP in 2001; could increase to nearly 200 percent of GDP by 2040.

CPB 2000 study summary and implications
- CPB (2000), Aging in the Netherlands: projected public spending on pensions and health care are projected to increase by more than 9 percentage points of GDP between 2001 and 2040 (when fiscal cost of aging peaks).
- Taxation of private-sector pension income could raise revenue by more than 5 percentage points of GDP between 2000 and 2040.
- Net fiscal cost of aging (after offset from taxation of private pension income): rise by about 4 percentage points of GDP by 2040.
- CPB strategy: swift debt reduction to ensure intertemporal budget constraint (government revenues (T) sufficient to cover expenditures (E) in present value).
- Government target set in 2000: overall budget balance surplus of 1¼ to 1¾ percent of GDP in 2007 and public debt eliminated by 2025.
- Underlying macro assumptions (as set out with the 2000 strategy): real interest rate = 4 percent; inflation rate = 2 percent; average labor productivity growth = 1¾ percent; potential GDP growth declines to about 1.5 percent by 2030 and rises to 1.8 percent by 2050.

Recent developments and need for revision
- Projections of future health care costs have been revised upward.
- Rapid fiscal deterioration since 2000: achieving the 2000 objective would require an unrealistic reduction of public expenditure in the next three years on the order of 4 percentage points of GDP.
- If recent expenditure trends continue through 2007 (with real spending growing by 2½ percent a year), staff estimates indicate public debt by 2025 could be close to 50 percent of GDP, and longer-term debt dynamics would raise concerns (Panel A, fiscal scenarios).
- Lower-than-expected labor productivity growth increases urgency for decisive structural reforms.

CPB partial update and staff alternative
- CPB partial update: accounting for revised health care projections and a new target (primary surplus of 0.4 percent of GDP in 2007), the CPB estimates a sustainable debt path assuming a permanent increase in taxes of 1.8 percent of GDP in 2008 (Panel B).
  - Under this scenario, debt declines through 2030 then starts to rise modestly; fiscal deficit reappears reaching about 1.0 percent of GDP by 2050.
- IMF staff alternative scenario: ensures fiscal balance around zero in the long run without further tax increases.
  - Policy proposal: structural adjustment of 0.5 percentage point of GDP per year during the current government term through expenditure restraint (Panel C).
  - Implication: reach a primary general government surplus of about 1½ percent of GDP in 2007, with the underlying structural position near balance; with a zero fiscal balance, the ratio of debt to GDP would fall.
- Staff note: further reforms that raise potential growth and productivity above the baseline reduce the fiscal burden of aging and lessen the urgency of fiscal adjustment.

### Fund relations and statistical framework (selected points)
- Membership: Joined December 27, 1945; Article VIII.
- Quota: 5,162.40 (SDR Million) — 100.00 percent of Quota
- Fund holdings of currency: 3,150.90 (SDR Million) — 61.04 percent of Quota
- Reserve position in Fund: 2,011.53 (SDR Million) — 38.96 percent of Quota
- Net cumulative SDR allocation: 530.34 (SDR Million) — 100.00 percent of Allocation; Holdings: 506.14 (SDR Million) — 95.44 percent of Allocation
- The Netherlands entered the final stage of European Economic and Monetary Union on January 1, 1999, at a rate of 2.20371 guilder per euro.
- Article IV consultations: Discussions for the 2003 Article IV consultation were held during May 9–19, 2003; staff report (IMF Country Report 03/239) considered by the Executive Board on July 30, 2003; Article IV discussions are on the standard 12-month consultation cycle.
- Statistical data: annual and quarterly national account data from Central Bureau of Statistics; financial and balance of payments data from De Nederlandsche Bank; fiscal data from Ministry of Finance. Macroeconomic data generally of high quality; broader fiscal data not available quarterly and government-consistent national accounts published with lengthy delays; some discrepancies between agencies.

*Source: Statement by the IMF Staff Representative, September 8, 2004, and accompanying figures and tables in the IMF staff report (Netherlands).*

### 1.      This staff statement provides information on economic developments that has become

### This staff statement provides information on economic developments that has become available since the preparation of the staff report for the 2004 Article IV Consultation

### GDP developments
- Revised Statistics Netherlands (CBS) real GDP growth (year-average) for 2001–03:
  - 2001: Revised 1.4, Previous 1.2
  - 2002: Revised 0.6, Previous 0.2
  - 2003: Revised -0.9, Previous -0.7
- Average growth for 2001–03 was 0.4 percent, up from 0.2 percent (previous estimate).
- 2004 Q2 preliminary data:
  - Real GDP fell by 0.2 percent quarter-on-quarter (seasonally and working-day adjusted).
  - Real GDP grew by 1.1 percent year-on-year.
  - Investment dropped and was weaker than expected.
  - The contribution of the foreign balance was stronger than expected.
- Staff overall forecast for 2004: about 1 percent real growth (second quarter data on balance with this forecast).

### Fiscal policy and public finances
- New multi-year fiscal adjustment package announced:
  - Cumulative €750 million by 2007 (equivalent to 0.2 percent of estimated 2004 GDP).
  - Measures mainly in infrastructure, education, and health care.
- Staff assessment:
  - Package is a step in the right direction but, given its modest size, does not go far enough to meet staff’s call for stepping-up the medium term fiscal consolidation effort.
- Recent fiscal context:
  - Between 2000 and 2003, the general government balance worsened by almost 5 ½ percentage points of GDP, resulting in a breach of the 3 percent Maastricht ceiling in 2003.
  - Roughly 2 percentage points of GDP of the deterioration was structural.
  - Authorities’ policy measures should bring the deficit down to just under 3 percent of GDP in 2004.
- Fiscal risks highlighted:
  - Health care costs.
  - Budget situation of local governments.
- Executive Directors’ recommendations and views:
  - Support for measures to limit public spending through closer cooperation between the central and local governments and, if necessary, direct budgetary controls on health care spending.
  - Recommended structural improvement of at least half a percentage point of GDP per year through the government’s term.
  - Emphasis on debt reduction to save on interest payments to cover aging costs; stronger and more concrete medium-term fiscal consolidation plans needed.
  - Encouraged improving incentives for work, including measures in the tax-benefits system.
  - Some Directors favored gradual phasing out of mortgage interest deductions, with caution about impacts on the housing market and financial system.
  - Commended fiscal framework’s emphasis on medium-term expenditure ceilings; urged strengthening transparency, monitoring, and avoiding spending cyclical savings.

### Labor market and structural reforms
- Authorities’ planned reforms:
  - Disability scheme: restrict access only to those fully disabled; introduce stricter criteria and examinations; strengthen work incentives for the partially disabled.
  - Remove fiscal incentives for early retirement; make participation in collective early retirement plans voluntary.
  - Unemployment insurance: follow-up benefits already phased out; plan to eliminate short-term benefits and tighten eligibility requirements for main unemployment benefits.
  - Earned-income tax credit being gradually increased to reduce inactivity traps.
- Executive Directors’ assessments and recommendations:
  - Welcomed reforms to raise labor force participation and work effort.
  - Cautioned that unemployment insurance reforms should avoid shifting workers from one category of inactivity to another.
  - Urged addressing inactivity traps, including by adjusting the minimum wage to enhance demand for low-skilled labor.
  - Stressed importance of taking into account changes in life expectancy in determining the retirement age.
  - Noted overly stringent employment protection hinders flexibility and implicitly taxes new hiring.
  - Recommended greater wage differentiation to attract labor to higher productivity sectors.

### Productivity, product markets, and financial sector
- Productivity and competitiveness:
  - Overall productivity is high but its growth has slowed considerably in recent years.
  - Welcomed establishment of the high-level Innovation Platform, efforts to reduce administrative burdens, improve corporate governance, and work of the competition agency.
  - Urged regulators to persevere with efforts to open new avenues for competition.
- Financial sector and FSAP:
  - Netherlands participated in an IMF Financial Sector Assessment Program (FSAP) over the past year.
  - Authorities were concluding an overhaul of the institutional setup for financial stability policy: moving to a new cross-sectional structure of supervision by objective (prudential and conduct of business) and revising underlying laws.
  - Directors’ view: financial system is sound, resilient to potential shocks, and well supervised.
  - Commended pending new financial supervision legislation.
  - Advised allowing sufficient flexibility for making up shortfalls in pension fund coverage ratios to prevent procyclical effects.
  - Encouraged continuing efforts to strengthen securities settlement arrangements and the financial stability policy framework.
  - Welcomed implementation of strong AML/CFT measures.

### Other developments and risks
- Indicators and inflation:
  - Recent indicators consistent with a slow recovery forecast for 2004.
  - Consumer and producer confidence recovered from summer 2003 lows but showed little further improvement in recent months.
  - Year-on-year HICP inflation fell to 1.2 percent in July, despite higher oil prices.
- Downside risks to growth:
  - Domestic sources especially pronounced.
  - Near-term growth unlikely to substantially reduce rising unemployment.
  - High household debt accentuates income risks, including those associated with higher interest rates.
  - Rapid increases in house prices and household debt noted as concerns.
- Policy balance:
  - Directors viewed fiscal policy in 2004 as appropriately balanced between needed structural fiscal adjustment and avoiding excessive tightening.
  - Supported measures to limit public spending and called for ambitious medium-term fiscal adjustment to ensure fiscal sustainability and bolster confidence.

### Executive Board Assessment (summary of views)
- Noted economy emerging from extended downturn; low inflationary pressures contributing to increased external competitiveness.
- Expressed concern over:
  - Depth of the downturn.
  - Significant weakening of public finances in recent years.
  - Prospect of falling potential growth if slowing productivity growth continued amid an aging population.
- Commended authorities’ efforts to restore fiscal balance and strengthen foundations for broad-based growth.
- Emphasized need to sustain efforts to raise potential output growth through labor and product market reforms.
- Praised support for trade liberalization and generosity of overseas development assistance.

### Selected economic indicators (selected items from table)
- Real GDP (change in percent): 2000: 3.5; 2001: 1.2; 2002: 0.2; 2003: -0.7; 2004 (staff projection) 1.1; 2005 (staff projection) 1.8.
- Domestic demand (change in percent): 2000: 2.6; 2001: 1.7; 2002: 0.1; 2003: -0.4; 2004 (proj) 0.5; 2005 (proj) 1.3.
- CPI (year average): 2000: 2.3; 2001: 5.1; 2002: 3.9; 2003: 2.2; 2004 (proj) 1.3; 2005 (proj) 1.0.
- Unemployment rate (in percent): 2000: 2.6; 2001: 2.0; 2002: 2.5; 2003: 4.1; 2004 (proj) 5.1; 2005 (proj) 5.6.
- General government balance (percent of GDP): 2000: 2.2; 2001: --; 2002: -1.9; 2003: -3.2; 2004 (proj) -3.0; 2005 (proj) -2.7.
- Structural balance (percent of GDP): 2000: -0.2; 2001: -0.9; 2002: -2.2; 2003: -2.2; 2004 (proj) -1.6; 2005 (proj) -1.1.
- Structural primary balance (percent of GDP): 2000: 3.1; 2001: 1.9; 2002: 0.3; 2003: -0.2; 2004 (proj) 0.6; 2005 (proj) 1.0.
- General government debt (percent of GDP): 2000: 55.9; 2001: 52.9; 2002: 52.4; 2003: 55.0; 2004 (proj) 56.3; 2005 (proj) 57.5.
- Trade balance (percent of GDP): 2000: 4.8; 2001: 5.1; 2002: 4.5; 2003: 5.3; 2004 (proj) 6.0; 2005 (proj) 5.7.
- Current account (percent of GDP): 2000: 2.0; 2001: 1.9; 2002: 2.5; 2003: 2.2; 2004 (proj) 3.3; 2005 (proj) 3.5.
- Official reserves, excl. gold (US$ billion): 2000: 9.6; 2001: 9.0; 2002: 9.6; 2003: 11.0.
- Euros per U.S. dollar (June 2004): 1.2
- Nominal effective rate (1990=100): 2000: 100.0; 2001: 100.6; 2002: 101.4; 2003: 106.0; 2004 (May) 105.3.
- Real effective rate (1990=100), based on relative normalized unit labor costs: 2000: 100.0; 2001: 102.0; 2002: 104.9; 2003: 109.4; 2004: 108.5.

*Prepared from the staff statement and Public Information Notice (PIN) on the 2004 Article IV Consultation with the Kingdom of the Netherlands—Netherlands.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04300.pdf_