## I. Recent Fiscal Developments in the Netherlands

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---

### Introduction and key outcomes
- Between 2000 and 2003, the general government balance shifted from a surplus of 2.2 percent of GDP to a deficit of 3.2 percent of GDP.
- The primary balance deteriorated by more than 6 percentage points of GDP.
- The deterioration during 2000–03 (a change of 5.4 percentage points of GDP) was one of the largest among euro area countries, smaller only than the United States and the United Kingdom for the period.
- Final 2003 fiscal deficit released at end-March 2004 was 3.2 percent of GDP, higher than the 1.6 percent estimated in May 2003 and exceeding the 3 percent Maastricht ceiling.

### Fiscal deterioration: nature, magnitude, and proximate causes
- Aggregate accounting (changes during 2000–03, in percent of GDP unless noted):
  - Revenues: 47.5 (2000), 46.6 (2001), 45.9 (2002), 45.6 (2003); change -1.9.
    - Tax revenues and social security contributions: 40.6, 39.2, 38.9, 38.8; change -1.8.
      - Income tax: 5.9, 5.7, 6.6, 6.4; change 0.6.
      - Corporate tax: 4.2, 4.1, 3.5, 2.9; change -1.2.
      - VAT: 6.7, 7.1, 7.3, 7.4; change 0.7.
    - Social security contributions: 16.0, 14.3, 13.9, 14.5; change -1.5.
  - Expenditure: 45.3, 46.6, 47.8, 48.8; change 3.5.
    - Social security and assistance benefits: 17.9, 18.0, 18.7, 19.7; change 1.8.
    - Consumption: 16.3, 16.9, 17.4, 17.9; change 1.6.
    - Property income: 3.8, 3.4, 3.1, 3.0; change -0.9.
  - Fiscal balance (EMU definition): 2.2 (2000), 0.0 (2001), -1.9 (2002), -3.2 (2003); cumulative change -5.4.
  - Primary balance (percent of GDP): 6.0 (2000), 3.4 (2001), 1.2 (2002), -0.3 (2003); change -6.3.
  - Structural balance (in percent of potential GDP; IMF staff estimates): -0.2 (2000), -0.9 (2001), -2.2 (2002), -2.2 (2003); change -2.0.

- Contributing factors and uncertainties:
  - Overestimation of underlying fiscal strength due to asset price booms; the CPB later revealed the underlying structural position for 2002 and 2003 was 1 percentage point of GDP worse than previously estimated.
  - A more accentuated Dutch business cycle and potentially higher revenue elasticities, especially during boom-and-bust episodes.
  - Coverage mismatch: the fiscal framework excludes local government and treats certain nontax revenues (mainly gas revenues) as negative expenditures. For 2002 and 2003, expenditures covered by the fiscal framework were about 80 percent of total expenditures relevant to the EMU balance.

- Expenditure coverage (2002 and 2003):
  - A. Under the EMU balance (NA based): In billions of euros: 213 (2002), 222 (2003). In percent of GDP: 48 (2002), 49 (2003).
  - B. Covered by the fiscal framework: In billions of euros: 175 (2002), 184 (2003). In percent of GDP: 39 (2002), 41 (2003).

### Fiscal framework and procyclical fiscal behavior
- Design: Expenditure-based fiscal framework introduced in 1995, based on real spending ceilings fixed for the government’s four-year term, intended to support countercyclical fiscal policy.
- Embedded procyclical elements identified:
  - Cautious GDP growth assumptions in projections created a presumption of revenue outperformance; allocation rules for revenue windfalls allowed part to be used for tax and social contribution cuts, limiting automatic stabilizers.
    - Revenue windfalls grew steadily during 1999–2002, reaching some €13.2 billion in 2002.
    - Example: additional tax cuts in 2001 when the economy was above potential.
  - Revisions of nominal spending ceilings in line with revised inflation projections: higher-than-expected inflation leads to upward revisions of nominal ceilings, accommodating higher spending and adding a procyclical bias.
- Net effect:
  - Real spending ceilings largely adhered to through 2002 and exceeded by only a small margin in 2003, but procyclical discretionary measures contributed to structural fiscal deterioration in 2001 and 2002 and reduced the damping effect of automatic stabilizers.
  - Asset market bubbles exacerbated the procyclical policy bias and masked an expansionary fiscal stance during the late 1990s.

### Main conclusions
- The 2000–03 fiscal deterioration reflected both cyclical and structural components:
  - Cyclical: about 3.4 percentage points of GDP (falling revenues and increased social security spending).
  - Structural: about 2.0 percentage points of GDP (discretionary measures including 2001 tax reform and higher social sector spending) related to procyclical elements in the fiscal framework.
- Fiscal framework design features (cautious growth assumptions, revenue allocation rules, inflation-linked revisions of nominal ceilings) introduced procyclical incentives that limited countercyclical operation.
- Asset price developments (stock market and housing) complicated assessments of structural fiscal strength and amplified cycle amplitude and revenue volatility.

---

### Box 1. The Dutch Fiscal Framework

### Overview and structure
- Reformed in 1995 to emphasize expenditure rules centered on four-year real spending ceilings and strict separation between spending and revenue decisions (spending decided in March or April; revenues in August).
- Real spending ceilings:
  - Determined at the beginning of the government’s term, fixed for four years, defined in absolute levels, and based on “net expenditures” (aggregate expenditures less nontax revenues).
  - Spending on certain public infrastructure is excluded.
- Subceilings:
  - Subceilings for central government spending, public health care, and spending related to social security and the labor market.
  - Within-category overruns can be offset by cuts in other items; cross-category compensation requires cabinet approval.
- Conversion to nominal ceilings:
  - Real ceilings converted to nominal ceilings using the projected GDP deflator until 2003, and the projected expenditure deflator since 2003.
  - Nominal ceilings revised with most recent inflation projections, usually during midyear supplementary budget discussions.
- Spending reserve (until 2002):
  - Used where growth of wages and prices in the public sector diverged from the GDP deflator.
  - Official estimate: potential cuts of €1 billion between 1999 and 2002 (about 0.3 percent of the average GDP over this period) were avoided through the reserve.
- Revenue rules and windfalls:
  - Revenue targets based on cautious GDP growth assumptions (potential growth minus a “safety margin”).
  - Revenue windfalls used equally for deficit reduction and cuts in taxes and social security contributions as long as the EMU deficit was lower than 0.75 percent of GDP.
  - If the EMU deficit exceeded 0.75 percent of GDP, 75 percent of windfalls devoted to deficit reduction and 25 percent to tax cuts.
  - Rules for revenue shortfalls: 25 percent of shortfalls offset by raising taxes or social security contributions if EMU deficit < 1.75 percent; increases to 50 percent if deficit is higher.
- Structural increases via cyclical savings:
  - Savings on the cyclical component during booms were used to fund permanent spending increases in other categories; cross-subceiling allocation rules not always consistently followed.

### Outcomes, complications, and key statistics
- Revenue windfalls grew steadily during 1999–2002, reaching some €13.2 billion in 2002.
- Conversion and revision practices limited automatic stabilizers and added procyclicality via nominal ceiling revisions.
- Net versus gross expenditure measurement: ceilings applied to net rather than gross expenditures; temporarily high nontax revenues could raise gross expenditure without breaching ceilings.
- Real spending growth and targets: Between 1999 and 2002, total real spending excluding nontax revenues grew by an average of 1.75 percent, against the initial target of 1 percent.
- Transparency issue:
  - Preannounced spending ceiling defined on different terms than the expenditure outturn relevant for the EMU-defined fiscal deficit.
  - Between 2000 and 2003, the EMU-defined deficit-relevant expenditure increased by 3.5 percentage points of GDP, whereas the expenditure subject to the preannounced ceiling increased by only 1.7 percentage points.

### Effects of automatic stabilizers and empirical estimates
- Automatic stabilizers mitigate output fluctuations via taxes and transfers without explicit government action; the SGP framework emphasizes reliance on automatic stabilizers.
- Estimated effectiveness (1990–2003):
  - The Netherlands: 1 − β1 = 0.05 ; β2 = 0.27
  - Belgium: 1 − β1 = 0.22 ; β2 = 0.44
  - France: 1 − β1 = 0.18 ; β2 = 0.54
  - Finland: 1 − β1 = 0.47 ; β2 = 0.73
  - United Kingdom: 1 − β1 = 0.30 ; β2 = 0.25
  - United States: 1 − β1 = 0.58 ; β2 = 0.48
- Interpretation:
  - Only 5 percent of output fluctuations were smoothed by automatic stabilizers in the Netherlands (1990–2003), versus 22 percent in Belgium, 30 percent in the United Kingdom, and 58 percent in the United States.
  - Changes in disposable income have a smaller impact on private consumption in the Netherlands than in some other countries.
- Possible explanations for limited smoothing:
  - Rising Dutch household saving rates during recent years reducing the demand impulse from automatic stabilizers.
  - Procyclical fiscal bias embedded in the framework may have reduced or offset the effect of automatic stabilizers.
- Econometric considerations:
  - Reverse causality could bias OLS estimates downward; a Granger test failed to reject causality from disposable income to GDP; a VAR with y_d, y, and c_p produced similar results.

### Effects of asset prices on fiscal balances
- Between 2000 and 2003, Dutch share prices fell by 60 percent.
- The fiscal balance improved during asset booms and deteriorated during busts.
- Revenue allocation rule implied revenue windfalls during the boom were partly used for tax cuts.
- Correlation with revenues: real revenue growth was highly correlated with share price movements during 1995–2003.
- Revenue elasticity estimates (split periods):
  - Direct taxes on households (tax base: Compensation of employees): 1970–2003: 1.1 ; 1970–89: 1.1 ; 1990–2003: 0.9
  - Direct taxes on companies (tax base: Gross operating surplus of corporations): 1970–2003: 0.9 ; 1970–89: 0.8 ; 1990–2003: 1.4
  - Indirect taxes (tax base: Private consumption): 1970–2003: 1.1 ; 1970–89: 1.0 ; 1990–2003: 1.3
- Interpretation:
  - Corporate and indirect tax elasticities during the boom-and-bust period are significantly higher than normal, implying stronger responsiveness of fiscal balances to output shocks during boom-and-bust cycles.
  - Underestimated revenue elasticities can mask expansionary policies during booms.

---

### Fiscal deterioration (2000–03) — assessment and policy responses

### Staff assessment of causes
- Possible drivers of rapid deterioration:
  - Larger-than-expected changes in the cyclical balance due to an accentuated business cycle.
  - Higher-than-usual cyclical elasticities on revenue items during the boom-and-bust period.
  - Discretionary policy actions, including tax cuts and spending overruns.
  - Procyclical elements embedded in the fiscal framework that limited countercyclical orientation.

### Government actions to correct procyclical bias
- Adoption of a realistic macroeconomic scenario (elimination of revenue safety margins).
- Decision to devote revenue windfalls solely to debt reduction.
- Indication of change to expenditure rules: cyclical expenditure windfalls will not be used to fund other spending without further consideration.
- Renewal of intention of not allowing reallocation across spending subceilings.

### Staff recommendations and assessment
- Recognizes difficulty in determining whether spending windfalls are cyclical; suggests a stronger formulation may be needed to preclude new spending.
- Recommends enhancing transparency of spending ceilings to facilitate public monitoring and add clarity and discipline.
- Recommends aligning the spending ceiling more closely with national account concepts and discontinuing the practice of treating nontax revenues as negative expenditures.
- Notes these changes would help communicate policy and potentially enhance confidence.

### Fiscal buffers and long-run considerations
- Difficulty in gauging revenue elasticities and underlying fiscal positions in boom-and-bust environments points to need to build up structural surpluses against future shocks.
- Past agreement that a sustained fiscal surplus of between 1 and 2 percent of GDP would allow the cost of aging to be met from interest savings on public debt, avoiding the need to raise taxes.

---

### II. Recent productivity trends in the Netherlands — overview, TFP, and policy implications

### Stylized macro facts: income, labor, and productivity
- The Netherlands has not converged to U.S. per capita GDP levels since the early 1970s.
  - Attained 92 percent of the U.S. level in 1978 (real GDP per working age adult); the ratio was 12 percentage points lower ten years later; after early 1990s pickup, the ratio has remained essentially flat.
- Labor supply and utilization:
  - Growth of the working age population; increase in temporary and part-time work; hours worked per employee declined and almost exactly offset the increase in the working age population.
  - Increase in employment rate closely matched overall change in economy-wide hours worked.

- Measures of average labor productivity (average annual change in percent):
  - Real per capita GDP divided by Persons Employed: 1970-80: 2.2 ; 1980-90: 1.1 ; 1990-2002: 0.7
  - Real per capita GDP divided by Overall Hours Worked: 1970-80: 3.2 ; 1980-90: 3.4 ; 1990-2002: 1.7
  - Real per capita GDP divided by Hours per Employee: 1970-80: -0.6 ; 1980-90: 0.1 ; 1990-2002: -0.4

### Growth accounting and TFP developments
- Methodology: Traditional growth accounting decomposes growth into input growth (labor and capital) and a Solow residual TFP. Multiple data sets used for robustness (macro/AMECO/OECD, Groningen sectoral data).
- Empirical findings:
  - Growth rates of both capital and labor inputs have increased over the last three decades, while TFP growth has drastically declined.
  - Developments mirror the euro area but are more pronounced in the Netherlands.
  - United States recorded an uptick in TFP growth; divergence between U.S. and Netherlands TFP growth increased in recent past.
- TFP growth estimates (average annual changes, in percent):
  - Macro data (OECD and AMECO), overall economy: 1980-90: 0.9 ; 1991-2001: 1.3
  - Macro data, business sector: 1980-90: 0.4 ; 1991-2001: 2.1
  - Sectoral data (Groningen), 1980-90: 0.3 ; 1991-2001: 1.2
- Robustness: Secular decline in Dutch TFP growth is robust across different aggregation levels.

### Sectoral and firm-level patterns
- Range and persistence:
  - Past TFP growth appears to be a good predictor of future TFP growth in the Netherlands.
  - Range of Dutch TFP growth during the 1990s is considerably narrower than in other countries or than in the 1980s.
  - Some industries with weak TFP growth (construction, financial intermediation, nonmarket services) account for a large part of the economy and depressed the aggregate measure.
- Firm-level variation:
  - Top TFP quartile of Dutch manufacturing firms exhibits twice the TFP of the bottom quartile (multiple = 2.0), higher than German or French companies but below the U.S. multiple of 2.5.
  - Highest-productivity U.S. firms are well in excess of the highest-productivity Dutch firms.
  - Lower rate of failure of new businesses in the Netherlands, consistent with less risky experimentation than U.S. firms.

### ICT investment and sectoral performance
- ICT investments grew on average by 18 percent per year in the 1990s.
- Despite buoyant ICT investments, ICT-using and ICT-producing sectors (electronics, financial intermediation, retail trade) performed poorly relative to the United States, suggesting limited payoff from past ICT investments.

### Quantitative decomposition and explanations
- Shift-share decomposition:
  - Sectoral change explains about 6 percent of the observed decline in aggregate TFP growth.
  - 94 percent of the decline is due to a fall in TFP growth rates across all industries.
- Possible explanations explored:
  - Changing structure of the economy and labor market reforms do not appear to account for recent TFP movements.
  - Exit of firms (“creative destruction”) is a key mechanism: U.S. outperformance linked to higher firm exit freeing resources to more productive firms; exit-driven effect virtually absent in Europe, including the Netherlands.
  - Part-time employment expansion coincided with undynamic TFP growth in some sectors, but causality not established.
  - Insufficient competition in sheltered sectors (nonmarket services, construction) associated with large TFP declines.
  - Public ownership in some networks and high start-up costs/red tape hinder competition and entry.
  - Shortcomings in corporate governance may have sheltered management and reduced efficiency; recent governance-strengthening measures are promising.
  - Insufficient ICT spending or public R&D unlikely to be predominant factors; Netherlands does not spend less on public R&D than countries with better TFP growth.

### Policy recommendations and implications
- Labor market:
  - Reforms should go beyond raising participation to facilitate reallocation of labor and make employment protection less onerous to enable swifter reallocation.
  - Reduce regulatory burden on enterprises.
- Competition and entry:
  - Boost competition, particularly in sheltered sectors (nonmarket services, construction); continue tougher enforcement and efforts to reduce red tape.
  - Lower start-up costs and administrative barriers to entry.
- Corporate governance:
  - Increase managerial accountability through governance reforms; continue recent measures to strengthen governance.
- R&D and innovation policy:
  - Dirigiste intervention in R&D or fiscal incentives for capital investment seen as less fruitful.
  - Possible targeted measures: redirect public R&D to basic research; ease regulation of spin-off startups.
- Caution advised about broad fiscal incentives for ICT usage and general increases in public R&D absent clearer evidence of effectiveness.

### Conclusions and outlook
- The Netherlands has experienced a secular decline in TFP growth over the last thirty years; raising TFP growth is a policy priority.
- The decline is robust across datasets and explains stalled convergence of Dutch per capita income to U.S. levels.
- No evidence that past labor market liberalization harmed TFP growth; reforms raised labor utilization.
- Sustainability concerns about continued increases in labor utilization increase urgency to reverse TFP decline.
- Optimism: productivity evolves over long periods; historical precedents suggest significant improvements could be under way. The Netherlands’ history of structural reform supports prospects for renewed liberalization, including steps to lower firing costs and cut regulatory burden.

*Source: IMF staff report excerpt — "I. Recent Fiscal Developments in the Netherlands."*

### References..............................................................................................................

### I. Recent Fiscal Developments in the Netherlands

### Introduction and key outcomes
- Between 2000 and 2003, the general government balance shifted from a surplus of 2.2 percent of GDP to a deficit of 3.2 percent of GDP.
- The primary balance deteriorated by more than 6 percentage points of GDP.
- The deterioration during 2000–03 (a change of 5.4 percentage points of GDP) was one of the largest among euro area countries, smaller only than the United States and the United Kingdom for the period (Table 1).
- Final 2003 fiscal deficit released at end-March 2004 was 3.2 percent of GDP, higher than the 1.6 percent estimated in May 2003 and exceeding the 3 percent Maastricht ceiling.
- Main decomposition of the 2000–03 deterioration:
  - Cyclical factors: about 3.4 percentage points of GDP (sharp declines in corporate profit tax revenues and social security contributions; increases in social security spending, especially 2003).
  - Structural factors: about 2.0 percentage points of GDP (2001 tax reform and spending increases in health care and education).

### Fiscal deterioration: nature, magnitude, and proximate causes
- Aggregate accounting (selected items from Table 2; changes during 2000–03, in percent of GDP unless noted):
  - Revenues: 47.5 (2000), 46.6 (2001), 45.9 (2002), 45.6 (2003); change -1.9.
    - Tax revenues and social security contributions: 40.6, 39.2, 38.9, 38.8; change -1.8.
      - Income tax: 5.9, 5.7, 6.6, 6.4; change 0.6.
      - Corporate tax: 4.2, 4.1, 3.5, 2.9; change -1.2.
      - VAT: 6.7, 7.1, 7.3, 7.4; change 0.7.
    - Social security contributions: 16.0, 14.3, 13.9, 14.5; change -1.5.
  - Expenditure: 45.3, 46.6, 47.8, 48.8; change 3.5.
    - Social security and assistance benefits: 17.9, 18.0, 18.7, 19.7; change 1.8.
    - Consumption: 16.3, 16.9, 17.4, 17.9; change 1.6.
    - Property income: 3.8, 3.4, 3.1, 3.0; change -0.9.
  - Fiscal balance (EMU definition): 2.2 (2000), 0.0 (2001), -1.9 (2002), -3.2 (2003); cumulative change -5.4.
  - Primary balance (percent of GDP): 6.0 (2000), 3.4 (2001), 1.2 (2002), -0.3 (2003); change -6.3.
  - Structural balance (in percent of potential GDP; IMF staff estimates): -0.2 (2000), -0.9 (2001), -2.2 (2002), -2.2 (2003); change -2.0.

- Contributing factors and uncertainties:
  - Overestimation of the strength of underlying fiscal positions due to asset price booms (stock market and housing) that masked vulnerabilities. The CPB later revealed the underlying structural position for 2002 and 2003 was 1 percentage point of GDP worse than previously estimated.
  - A more accentuated Dutch business cycle and potentially higher revenue elasticities, especially during boom-and-bust episodes: revenue elasticities may be larger in boom-and-bust cycles (Eschenbach and Schuknecht, 2002).
  - Coverage mismatch: the fiscal framework excludes local government and treats certain nontax revenues (mainly gas revenues) as negative expenditures. For 2002 and 2003, expenditures covered by the fiscal framework were about 80 percent of total expenditures relevant to the EMU balance (Table 3).

- Expenditure coverage (2002 and 2003; Table 3):
  - A. Under the EMU balance (NA based):
    - In billions of euros: 213 (2002), 222 (2003).
    - In percent of GDP: 48 (2002), 49 (2003).
  - B. Covered by the fiscal framework:
    - In billions of euros: 175 (2002), 184 (2003).
    - In percent of GDP: 39 (2002), 41 (2003).

### Fiscal framework and procyclical fiscal behavior
- Design of the framework:
  - Expenditure-based fiscal framework introduced in 1995, based on real spending ceilings fixed for the government’s four-year term, intended to support countercyclical fiscal policy.
- Embedded procyclical elements identified:
  - Use of cautious GDP growth assumptions in projections created a presumption of revenue outperformance relative to these projections. Allocation rules for revenue windfalls allowed part of such windfalls to be used for tax and social contribution cuts, thereby limiting the full play of automatic stabilizers on the revenue side.
    - Revenue windfalls grew steadily during 1999–2002, reaching some €13.2 billion in 2002.
    - Example outcome: additional tax cuts in 2001 when the economy was above potential, producing undesirable macroeconomic consequences.
  - Revisions of nominal spending ceilings in line with revised inflation projections: higher-than-expected inflation leads to upward revisions of nominal ceilings, effectively accommodating higher spending and adding a procyclical bias.
- Net effect:
  - Although real spending ceilings were largely adhered to through 2002 and exceeded by only a small margin in 2003, procyclical discretionary measures embedded in the framework contributed to the structural fiscal deterioration in 2001 and 2002 and reduced or offset the damping effect of automatic stabilizers on output fluctuations.
  - Asset market bubbles exacerbated the procyclical policy bias and masked an expansionary fiscal policy stance during the late 1990s.

### Main conclusions (from the analysis)
- The 2000–03 fiscal deterioration reflected both cyclical and structural components:
  - Cyclical: falling revenues and increased social security spending accounted for the bulk of the deterioration (about 3.4 percentage points of GDP).
  - Structural: discretionary measures (2001 tax reform, higher social sector spending) accounted for about 2.0 percentage points of GDP and were related to procyclical elements in the fiscal framework.
- The fiscal framework’s design features (cautious growth assumptions, revenue allocation rules, inflation-linked revisions of nominal ceilings) introduced procyclical incentives that limited the intended countercyclical operation of fiscal policy.
- Asset price developments (stock market and housing) complicated assessments of structural fiscal strength and amplified the amplitude of the cycle and revenue volatility.

*Source: IMF staff report excerpt — "I. Recent Fiscal Developments in the Netherlands."*

### Box 1. The Dutch Fiscal Framework

### Box 1. The Dutch Fiscal Framework

### Overview
- The Dutch fiscal framework was reformed in 1995 after the 1983–1994 period when an operational target on the central government deficit produced strongly procyclical fiscal policy (e.g., the supplementary budget in 1991).
- The 1995 framework emphasizes expenditure rules centered on four-year real spending ceilings and a strict separation between spending and revenue decisions (spending decided in March or April; revenues in August).

### Structure of the framework
- Real spending ceilings:
  - Determined at the beginning of the government’s term (normal term: four years) on the basis of medium-term fiscal objectives.
  - Fixed for four years, defined in absolute levels, and based on “net expenditures” (aggregate expenditures less nontax revenues).
  - Spending on certain public infrastructure is excluded from these ceilings.
- Subceilings:
  - Individual subceilings exist for three expenditure categories: central government spending, public health care, and spending related to social security and the labor market.
  - Within a category, overruns can be offset by cuts in other items; cross-category compensation requires cabinet approval.
- Conversion to nominal ceilings:
  - Real ceilings converted to nominal ceilings using the projected GDP deflator until 2003, and the projected expenditure deflator since 2003.
  - Nominal ceilings are revised (usually during midyear supplementary budget discussions) in line with the most recent inflation projections.
- Spending reserve (until 2002):
  - Used where growth of wages and prices in the public sector diverged from the GDP deflator, preventing forced cuts in other items.
  - Official estimate: potential cuts of €1 billion between 1999 and 2002 (about 0.3 percent of the average GDP over this period) were avoided through the reserve.
- Revenue rules and windfalls:
  - Revenue targets were based on cautious GDP growth assumptions (potential growth minus a “safety margin”).
  - Revenue windfalls were to be used equally for deficit reduction and cuts in taxes and social security contributions as long as the EMU deficit was lower than 0.75 percent of GDP.
  - If the EMU deficit exceeded 0.75 percent of GDP, 75 percent of windfalls devoted to deficit reduction and 25 percent to tax cuts.
  - Rules for revenue shortfalls: 25 percent of shortfalls offset by raising taxes or social security contributions if the EMU deficit is lower than 1.75 percent; the 25 percent is increased to 50 percent if the deficit is higher.
- Structural increases via cyclical savings:
  - Savings on the cyclical component during booms were used to fund permanent spending increases in other categories.
  - Rules on cross-subceiling allocations were not always consistently followed in practice.

### Outcomes, complications, and key statistics
- Revenue windfalls and macro consequences:
  - Revenue windfalls grew steadily during 1999–2002, reaching some €13.2 billion in 2002.
  - The cautious assumptions and allocation rule limited the full play of automatic stabilizers on the revenue side and led to, for example, additional taxes being cut in 2001 when the economy was above potential.
- Nominal ceiling revisions and procyclicality:
  - Revisions of nominal ceilings in line with upward revisions of inflation projections effectively “accommodated” higher-than-expected inflation by raising nominal spending ceilings, adding a procyclical element.
- Net versus gross expenditure measurement:
  - Expenditure ceilings applied to net rather than gross expenditures; temporarily high nontax revenues (e.g., larger natural gas proceeds) could raise gross expenditure without breaching ceilings.
- Real spending growth and targets:
  - Between 1999 and 2002, total real spending excluding nontax revenues grew by an average of 1.75 percent, against the initial target of 1 percent.
- Transparency issue:
  - The preannounced spending ceiling is defined on different terms than the actual expenditure outturn relevant for the EMU-defined fiscal deficit.
  - Between 2000 and 2003, the EMU-defined deficit-relevant expenditure increased by 3.5 percentage points of GDP, whereas the expenditure subject to the preannounced ceiling increased by only 1.7 percentage points.

### Effects of automatic stabilizers
- Definition and role:
  - Automatic stabilizers mitigate output fluctuations via changes in taxes and transfers without explicit government action.
  - The SGP framework emphasizes relying on automatic stabilizers rather than active fiscal policy to smooth cyclical divergences.
- Relative size:
  - Figure 5 indicates the Netherlands—together with Sweden, Denmark, and the United Kingdom—has relatively large automatic stabilizers compared with many EU countries.
- Empirical estimation approach:
  - Uses the Fatas and Mihov (2001) approach estimating:
    - ∆ log(y_d) = α1 + β1 ∆ log(y) + ε1
    - ∆ log(c_p) = α2 + β2 ∆ log(y_d) + ε2
  - Where y = GDP, y_d = disposable income, c_p = private consumption; 1 − β1 measures the smoothing effect of automatic stabilizers on disposable income; β2 measures how private consumption reacts to disposable income.
- Estimated effectiveness (1990–2003 and comparative countries):
  - The Netherlands: 1 − β1 = 0.05 ; β2 = 0.27
  - Belgium: 1 − β1 = 0.22 ; β2 = 0.44
  - France: 1 − β1 = 0.18 ; β2 = 0.54
  - Finland: 1 − β1 = 0.47 ; β2 = 0.73
  - United Kingdom: 1 − β1 = 0.30 ; β2 = 0.25
  - United States: 1 − β1 = 0.58 ; β2 = 0.48
- Interpretation:
  - Only 5 percent of output fluctuations were smoothed by automatic stabilizers in the Netherlands (1990–2003), versus 22 percent in Belgium, 30 percent in the United Kingdom, and 58 percent in the United States.
  - Changes in disposable income appear to have a smaller impact on private consumption in the Netherlands than in some other countries.
- Possible explanations for limited smoothing:
  - Rising Dutch household saving rates during recent years (could reflect balance sheet adjustments, a “non-Keynesian” response to deteriorating fiscal balances, or weak consumer confidence), reducing the demand impulse from automatic stabilizers.
  - The procyclical fiscal bias embedded in the framework may have reduced or offset the effect of automatic stabilizers.
- Econometric considerations:
  - Reverse causality (output depending on the size and cyclicality of taxes/transfers) could bias simple OLS estimates downward.
  - A Granger test failed to reject causality from disposable income to GDP; a VAR with y_d, y, and c_p produced similar results.

### Effects of asset prices on fiscal balances
- Asset price developments:
  - Between 2000 and 2003, Dutch share prices fell by 60 percent, nearly wiping out gains of the previous four years.
  - The fiscal balance improved during the asset booms and deteriorated during busts.
- Interaction with fiscal rules and assessment:
  - The revenue allocation rule implied revenue windfalls during the boom were partly used for tax cuts.
  - Large asset price swings complicated assessing fiscal stance and underlying positions because of uncertainties in estimating output gaps and revenue elasticities.
  - Conventional methods tend to underestimate revenue elasticities and can mask expansionary policies during booms; the Dutch structural balance was revised from an estimated surplus of 0.7 percent in the EC’s spring 2000 forecasts to a deficit of 1.3 percent in the fall 2003 forecasts (staff estimate for 1999 was −0.7 percent).
- Correlation with revenues:
  - Real revenue growth was highly correlated with share price movements during 1995–2003, in contrast to earlier periods.
- Revenue elasticity estimates (split periods: 1970–2003, 1970–89, 1990–2003):
  - Direct taxes on households (tax base: Compensation of employees):
    - 1970–2003: 1.1
    - 1970–89: 1.1
    - 1990–2003: 0.9
    - (t-statistics shown in source; significance markers ***, **, * reported there)
  - Direct taxes on companies (tax base: Gross operating surplus of corporations):
    - 1970–2003: 0.9
    - 1970–89: 0.8
    - 1990–2003: 1.4
  - Indirect taxes (tax base: Private consumption):
    - 1970–2003: 1.1
    - 1970–89: 1.0
    - 1990–2003: 1.3
- Interpretation:
  - For corporate and indirect taxes (and possibly the capital tax), revenue elasticities during the boom-and-bust period are significantly higher than normal, implying stronger responsiveness of fiscal balances to a given output shock during the boom-and-bust cycle.
  - Underestimated revenue elasticities can make underlying fiscal positions look more favorable and hide expansionary policies during booms.

*Based on “The Budgetary Policy of the Second Kok Government,” Ministry of Finance, October 2000, and IMF staff analysis as presented in the source document.*

### 29.      The Dutch fiscal balance deteriorated sharply during 2000–03, breaching the

### 29.      The Dutch fiscal balance deteriorated sharply during 2000–03, breaching the 3 percent Maastricht ceiling in the latter year.

### Fiscal deterioration (2000–03) and immediate assessment
- The Dutch fiscal balance deteriorated sharply during 2000–03, breaching the 3 percent Maastricht ceiling in the latter year.
- Staff assessment points to several possible drivers of the rapid deterioration:
  - Changes in the cyclical balance may have been larger than expected, due to a more accentuated business cycle.
  - Higher-than-usual cyclical elasticities on revenue items during the boom-and-bust period may have caused a surprisingly large deterioration, even accounting for the relatively strong cycle.
  - Discretionary policy actions, including the tax cuts and spending overruns, contributed to the structural deterioration.
  - Procyclical elements embedded in the fiscal framework contributed to the structural deterioration and limited the intended countercyclical orientation of the expenditure-based fiscal framework.

### Policy responses and institutional steps taken
- Government actions to correct the procyclical policy bias:
  - Adoption of a realistic macroeconomic scenario (hence, the elimination of revenue safety margins).
  - Decision to devote revenue windfalls solely to debt reduction.
  - Indication of a change to expenditure rules: cyclical expenditure windfalls (related, for example, to unemployment and other social spending) will not be used to fund other spending without further consideration.
  - Renewal of the intention of not allowing reallocation across the spending subceilings.
- Staff recommendation / assessment of these measures:
  - Recognizes the difficulty in determining whether spending windfalls are cyclical; suggests a stronger formulation may be needed to preclude new spending.
  - Suggests that enhancing the transparency of the spending ceilings would facilitate public monitoring and broaden accessibility, adding clarity and discipline to the system.
  - Recommends aligning the spending ceiling more closely with the national account concepts and focusing the ceilings solely on spending by discontinuing the practice of treating nontax revenues as negative expenditures.
  - Notes these changes would help communicate policy and potentially enhance confidence.

### Fiscal buffers and long-run considerations
- Difficulty in reliably gauging revenue elasticities and the strength of underlying fiscal positions, especially in a boom-and-bust environment, points to the need to build up structural surpluses against future shocks (both anticipated and unanticipated).
- Past agreement (authorities and staff) that a sustained fiscal surplus of between 1 and 2 percent of GDP would allow the cost of aging to be met from interest savings on public debt, thus avoiding the need to raise taxes.

### II. Recent productivity trends in the Netherlands — overview and background
- Over the last three decades, the Dutch economy experienced dramatic turnabouts in performance:
  - 1970s: sharp deceleration in economic growth; unit labor costs accelerated; growth slowed and turned negative in the early 1980s.
  - Post-Wassenaar agreement: structural reforms and wage moderation led to a quick improvement in performance.
  - By the end of the 1990s, the Netherlands was viewed as progressing toward the Lisbon summit targets.
  - After 2000: marked drop in growth, more dramatic in the Netherlands than in the remainder of the EU or euro area.
- Concern: Dutch economy may have lost ground in raising productivity, especially compared with small, open, deregulated economies and Anglo-Saxon countries that recorded buoyant productivity growth since the mid-1990s.
- Noted simultaneity: decline in productivity occurred while major inroads were made in raising employment and participation rates; some observers suggested a potential causal link between labor market reforms and declining productivity, which the chapter later investigates.

### Stylized macroeconomic facts: income, labor, and productivity
- Relative per capita income:
  - The Netherlands has not converged to U.S. per capita GDP levels since the early 1970s.
  - After attaining 92 percent of the U.S. level in 1978 (real GDP per working age adult), the ratio was 12 percentage points lower ten years later; after early 1990s pickup, the ratio has remained essentially flat.
- Labor supply and utilization:
  - Over much of the last three decades, the Netherlands experienced considerable growth of the working age population (Table 1).
  - Temporary and part-time work arrangements gained prominence; hours worked per employee declined and almost exactly offset the increase in the working age population.
  - The increase in the employment rate closely matched the overall change in macroeconomic labor supply (overall economy-wide hours worked).
- Measures of average labor productivity (Table 2 — average annual change in percent):
  - Real per capita GDP divided by Persons Employed:
    - 1970-80: 2.2
    - 1980-90: 1.1
    - 1990-2002: 0.7
  - Real per capita GDP divided by Overall Hours Worked:
    - 1970-80: 3.2
    - 1980-90: 3.4
    - 1990-2002: 1.7
  - Real per capita GDP divided by Hours per Employee:
    - 1970-80: -0.6
    - 1980-90: 0.1
    - 1990-2002: -0.4
- Key policy debate points arising from the mix of rising employment but declining productivity growth:
  - If trends reflect convergence or mean-reversion, limits on employment growth could cast doubt on prospects for further gains in employment and sustainability of growth without structural reforms.
  - View that job-rich growth may have attracted primarily feebly qualified workers, lowering average productivity; if true, further labor supply-boosting reforms could be accompanied by lower productivity.
  - Other observers advocate productivity-raising policies (increased public R&D, boost capital spending); some are puzzled that the open and deregulated Dutch economy did not produce higher productivity growth.

### Growth accounting and TFP developments
- Methodology:
  - Traditional growth accounting decomposes growth into input growth (labor and capital) and a Solow residual TFP.
  - Measurement issues are substantial; several data sets for the Netherlands are used to assess robustness (macro/AMECO/OECD, Groningen sectoral data).
- Empirical findings:
  - While growth rates of both capital and labor inputs have increased over the last three decades, TFP growth has drastically declined (Figure 5).
  - These developments mirror those in the euro area but are more pronounced in the Netherlands.
  - In contrast, the United States and, to a smaller extent, the OECD aggregate have recorded an uptick in TFP growth, while capital input growth has declined.
  - TFP growth trends between the United States and the Netherlands have increasingly diverged in the more recent past.
- TFP growth estimates (average annual changes, in percent; Table 3):
  - Macro data (OECD and AMECO), overall economy:
    - 1980-90: 0.9
    - 1991-2001: 1.3
  - Macro data, business sector:
    - 1980-90: 0.4
    - 1991-2001: 2.1
  - Sectoral data (Groningen dataset, O'Mahony and van Ark (2003)):
    - 1980-90: 0.3
    - 1991-2001: 1.2
- Robustness and caveats:
  - The secular decline in Dutch TFP growth is robust across different aggregation levels (Table 3 and Figures 6–8).
  - Groningen data imply a more favorable development of relative TFP growth compared to the United States, but the Groningen sample stops earlier than the macro data.
  - Micro/firm-level evidence (cited literature) shows large within-industry firm variation; highest-productivity firms in the United States are much more productive than the highest-productivity firms in the Netherlands, implying that favorable industry-level Dutch performance may erode as resources reallocate to more productive firms elsewhere.

*Source: IMF staff analysis as presented in the supplied chapter content.*

### 43.      The range of TFP growth has narrowed across industries. As in other countries,

### _cr04301 - 43.      The range of TFP growth has narrowed across industries. As in other countries,

### Observations on aggregate and sectoral TFP trends
- Past TFP growth appears to be a good predictor of future TFP growth in the Netherlands (Figure 7).
- The range of Dutch TFP growth during the 1990s (the y-axis in Figure 7) is considerably narrower than in other countries, or than in the 1980s in the Netherlands.
- The narrowing range may reflect convergence/mean reversion or a lack of dynamism in the 1990s.
- Some industries with particularly weak TFP growth account for a large part of the Dutch economy; construction, financial intermediation, and nonmarket services registered steep declines in TFP growth and depressed the aggregate measure (Figure 8).
- The electronics sector also registered a decline despite high ICT investments.

### Key firm-level variation findings
- Within industries, there is considerable variation at the firm level, albeit less so than in the United States.
- The top TFP quartile of firms in the Dutch manufacturing sector exhibits twice the level of TFP than the bottom quartile (Bartelsman and Scarpetta, 2004).
- This 2.0 multiple is higher than for German or French companies, but below the 2.5 multiple exhibited in the U.S. manufacturing sector, where the TFP level of the top quintile is also well in excess of that of Dutch firms.
- The rate of failure of new businesses appears lower in the Netherlands, consistent with Dutch companies engaging in less risky experimentation than U.S. firms (see paragraph 15 reference).

### ICT investment and sectoral performance
- The Dutch economy recorded very buoyant ICT investments over the 1990s, growing on average by 18 percent per year.
- Despite these investments, ICT-using and ICT-producing sectors (notably electronics, financial intermediation, and retail trade) fared comparatively poorly relative to the United States (Figure 9).
- The observation suggests limited payoff from past ICT investments in the Netherlands.

### Quantitative decomposition of the decline in aggregate TFP growth
- A shift-share decomposition indicates that sectoral change in the economy explains only about 6 percent of the observed decline in aggregate TFP growth.
- 94 percent of the observed decline is due to a fall in TFP growth rates across all industries.
- Ten-year averages may miss temporary adverse effects of labor market reforms on measured productivity, but such temporary effects are not deemed important for assessing long-term trends.

### Possible explanations explored
- Changing structure of the economy and labor market reforms do not appear to account for recent movements in TFP growth; this runs counter to Kleinknecht (1994) formulation that rising supply of low-skilled labor led to less capital-intensive production and reduced incentives for innovation.
- Labor market reforms are likely essential to boosting TFP if they facilitate reallocation of labor rather than only raising participation rates.
- The exit of firms (“creative destruction”) is identified as a key mechanism for aggregate productivity growth. Cross-country firm-level evidence (Bartelsman and Scarpetta, 2004) suggests:
  - Within-firm productivity growth is similar between the United States and European countries.
  - Where the United States outperforms Europe is in the exit of firms, which frees resources and allows production to shift to more productive firms.
  - The exit-driven productivity-enhancing effect is virtually absent in European countries, including the Netherlands, where comprehensive employment legislation impedes swift reallocation of labor.
- The advent of part-time arrangements in the Netherlands involved both liberalization of part-time contract regulations and extension of rights to part-time work; sectors with large increases in part-time employment (trade, finance, nonmarket services) also recorded undynamic TFP growth, but causality is not established given limited observations.
- Insufficiently competitive product markets are an obstacle: the most sheltered sectors—particularly nonmarket services and construction—registered the most significant declines in TFP growth.
- Public ownership remains large in some gas and electricity networks (and other networks through “golden shares”), where TFP growth has been weak and falling.
- High start-up costs and administrative red tape hinder competition and impede entry of new firms.
- Shortcomings in corporate governance (weak supervisory board powers, ease of “poison-pill” defenses) may have sheltered management and reduced efficiency; recent governance-strengthening measures are promising.
- Insufficient ICT spending or public R&D are unlikely to be predominant factors:
  - Both ICT-using and ICT-producing sectors have performed poorly despite significant ICT investments.
  - The Netherlands does not spend less on public R&D than countries with better TFP growth.
  - Possible beneficial measures include redirecting public R&D to basic research and easing regulation of spin-off startups.
- Caution is advised about fiscal incentives for ICT usage and general increases in public R&D, given available evidence.

### Policy recommendations and implications
- Labor market reforms should go beyond raising participation and aim at:
  - Facilitating the reallocation of labor.
  - Reducing the regulatory burden on enterprises.
  - Making employment protection less onerous to enable swifter reallocation.
- Boost competition, particularly in sheltered sectors (nonmarket services, construction); recent tougher competition enforcement and efforts to reduce red tape are welcomed and should continue.
- Increase managerial accountability through corporate governance reforms; recent measures to strengthen governance are welcome and should be continued.
- Dirigiste intervention in R&D or fiscal incentives for capital investment are seen as less fruitful avenues.
- Possible targeted measures:
  - Redirect public R&D to basic research (a public good underprovided by the private sector).
  - Ease regulation of spin-off startups.

### Conclusions and outlook
- The Dutch economy has experienced a secular decline in TFP growth over the last thirty years; raising TFP growth is rightly a policy priority.
- The decline is robustly estimated from many different data sets and is an important explanation for stalled convergence of Dutch per capita income to U.S. levels.
- No evidence was found of an adverse effect from past labor market liberalization on TFP growth; past reforms did induce considerable increases in labor utilization.
- Concerns exist about the sustainability of continued increases in labor utilization, more so in the Netherlands than elsewhere in Europe, increasing urgency to reverse the decline in TFP growth.
- There is room for optimism: productivity evolves over long periods, and historical precedents (e.g., U.S. improvements) suggest significant improvements in TFP growth could already be under way in the Netherlands.
- The Netherlands’ history of adopting structural reforms supports prospects for a renewed and comprehensive liberalization effort, including steps to lower firing costs and cut the regulatory burden on business, which is currently on the political agenda.

*Source: IMF staff estimates; Groningen University (O’Mahony and van Ark, 2003); Bartelsman and Scarpetta (2004), as cited in the excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04301.pdf_