## _cr06283

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### Executive Summary: recent performance and outlook
- Growth: recovery underway; growth this year and next likely to be well above potential of about 2 percent.
- Fiscal consolidation: general government deficit narrowed to 0.3 percent of GDP in 2005 from 3.2 percent in 2003, reflecting underlying structural adjustment of 2½ percentage points of GDP.
- Monetary and price developments:
  - Monetary conditions tightened in late 2001 before easing last year; recent moderate depreciation of the real effective exchange rate has reversed about half of the monetary tightening.
  - CPI inflation averaged 1.6 percent in January–February 2006 (1.7 percent in January–May, using data available after the mission).
  - Wage growth subdued under a wage moderation agreement for 2004–05.
- Staff and official growth forecasts:
  - Official forecast: 2¾ percent in 2006 and 3 percent in 2007.
  - Staff forecast (with higher projected oil prices in line with WEO assumptions): 2.6 percent in 2006 and 2.8 percent in 2007.
- Recovery drivers and risks:
  - Drivers: stronger foreign demand, improved competitiveness supported by wage moderation, stronger corporate balance sheets, export growth, and rising employment supporting private consumption and investment.
  - Downside risks: further oil price hikes, significant euro appreciation, slower trading-partner growth, interest rate–led house price declines.
  - Upside risks: stronger-than-expected consumption and above-budgeted revenues in the first quarter cited by officials.
- Housing and household vulnerability indicators:
  - Mortgage debt-to-GDP ratio: more than 100 percent and increasing.
  - Mortgages subject to interest-rate adjustment within two years: 21 percent in 2003 to 31 percent in 2005.
  - Newly provided loans with LTVs exceeding 100 percent: increasing significantly.

### Fiscal policy: recent consolidation, near-term stance, and medium-term challenges
- Recent consolidation achieved:
  - Staff recommended cumulative structural fiscal adjustment of at least 2 percentage points of GDP during the government’s term (2004–07) — achieved in 2004–05.
  - Contributing fiscal measures included virtual freeze on public wages; reduced coverage of public health insurance; changes in disability and other social benefits; adjustments by local governments; increases in excise duties and contribution rates for health care and disability insurance; and higher natural gas revenues (together contributing ½ percentage point of GDP to structural adjustment).
- Near-term stance:
  - Budget implies about a neutral fiscal stance in 2006.
  - Preliminary plans suggested structural deterioration of 0.3 percentage point of GDP in 2007; staff urged pursuing at least a neutral stance in 2007 and recommended that any revenue overperformance or below-budget expenditures outturns go to deficit reduction.
- Population aging and sustainability:
  - CPB benchmark: fiscal sustainability requires either a structural general government surplus of 3 percent of GDP by 2011 or other sustainability-enhancing measures offsetting shortfalls in present value terms.
  - Political-economy constraint: achieving a fiscal surplus of more than 1 percent of GDP by 2011 is difficult; staff estimated a 1 percent surplus in 2011 implies structural adjustment of about 1¼ percentage point of GDP (assuming a closed output gap).
  - Remaining sustainability gap: other measures equivalent in present value terms to about 2 percentage points of GDP still needed.
  - One CPB option: increase the retirement age by two years, reducing the sustainability gap by ½ percentage point of GDP; staff supported this measure.
- Staff guiding principles through next government:
  - Continue fiscal adjustment; aim for a 1 percent surplus or more by 2011.
  - Identify and implement upfront measures to close the sustainability gap.
  - Give greater weight to downside scenarios (need for larger structural surplus than 3 percent of GDP by 2011) and use any 2007 overperformance to pursue more ambitious targets.
- Fiscal framework / ROSC recommendations (selected):
  - Report gross expenditures and nontax revenues separately with respect to expenditure ceilings.
  - Reexamine the gas revenue fund (FES) to better integrate operations into expenditure ceilings while maintaining a separate fund.
  - Formally connect tax expenditures to the fiscal framework; consider explicit ceilings.
  - Reconcile budget reporting with national accounts standards.
  - Incorporate larger buffers in the fiscal framework (lower “signal value” and err on side of more ambitious structural-balance target).
  - Enhance flexibility by allowing phased-in tax changes or permitting offsetting measures to avoid procyclicality.
- Authorities’ stance on ROSC suggestions: likely support for reporting gross expenditures separately, reexamining the FES, viewing ambitious fiscal targets as reducing need for larger buffers, and seeing staged/timed tax changes as sensible; less tendency to support tighter treatment of nontax revenues and full reconciliation measures.

### Financial sector: soundness, vulnerabilities, and supervisory reforms
- Overall assessment: financial sector generally sound; concerns centered on real estate–related risks.
- Banking sector:
  - Capital adequacy remains strong; risk-based capital-asset ratio 12.3 in 2005.
  - Return on equity improved to 14.55 in 2005; return on assets 0.54 in 2005.
  - Nonperforming loans net of provisions to capital (three largest banks) fell to 15.66 in 2005 from 31.34 in 2000.
  - A small bank failed in December 2005 without systemic repercussions.
- Pension funds and insurance:
  - Pension funds near required coverage ratios to come into effect in January 2007; one fund reportedly below minimum ratio of 105 percent.
  - New requirements: coverage ratio implied by a 97½ percent probability of meeting obligations; where indexation of benefits not guaranteed, this implies an average coverage ratio of 130 percent to be met within a supervisor-agreed period not exceeding 15 years.
  - If coverage falls below 105 percent, it must be restored within a given period (likely between one and three years, under parliamentary discussion), except in severe macroeconomic downturns or systemic risk.
  - Life insurance profitability affected by low long-term interest rates; prospects improving with expectations of rising interest rates.
- Mortgage market and household balance sheets:
  - Tight mortgage interest margins reflect heavy competition; credit quality deteriorating with mortgage expansion.
  - Household debt-to-GDP rising: household debt to GDP 1.17 in 2005 (1998 0.76; 2004 1.10).
  - Real estate prices (euros): 2005 222,167 (1998 123,358; 2004 212,500).
- Supervisory and policy actions:
  - New Financial Supervision Act expected to come into force at start of 2007; market infrastructure portion effective January 1, 2008.
  - DNB established a Financial Stability Division; coordination of stress tests; bi-annual Overview of Financial Stability reports since December 2004.
  - Authorities plan to double deposit insurance coverage to €40,000 (retroactively after small bank failure) and consider self coverage for deposits over €20,000.
  - Staff supported strengthening the mortgage-lending code of conduct, emphasizing compliance monitoring and enforcement.
  - Debate over phasing out tax deductibility of mortgage interest: active research and discussion; authorities not committed to a policy move but measures since 2001 and 2004–05 limit exposure (e.g., exclusion of consumption/second-home mortgage interest from deductibility since 2001; tightened eligibility from 2004; strengthened fiscal incentives for paying off mortgages from January 1, 2005).

### Mortgage interest deductibility, housing market, and associated policy debate
- Public debate intensifying on phasing out mortgage interest deductibility.
- Selected Issues paper: quick drop in house prices need not occur if phase-out takes place over a long period.
- Budgetary benefits of eliminating deductibility: could provide room for tax cuts that lessen downward demand impact and stimulate labor participation.
- Housing market distortions apparent; staff encouraged studying:
  - whether rent controls serve intended social/economic purpose;
  - whether administrative allocation mechanisms are appropriate.
- Mortgage-lending safeguards: reviewed and strengthened code of conduct with tightened affordability guidelines and improved consumer risk information; debate continues on adding explicit LTV tests versus relying on affordability tests; monitoring and enforcement arrangements under discussion.

### Structural reforms, labor market, and productivity
- Labor participation measures taken:
  - Tightened unemployment benefits; abolished fiscal incentives for early retirement; revamped disability; reduced inactivity traps gradually.
  - Earlier disability reforms reduced inflows; distinction between partly and fully disabled improved incentives.
  - Early retirement now actuarially fair; duration of unemployment benefits reduced to three years.
- Additional measures discussed:
  - Address inactivity traps; adjust minimum wage; consider life expectancy in retirement age; encourage greater wage differentiation.
  - Suggestions: smooth income dependency of rent subsidy; lower childcare expenses; individualize tax credit for nonparticipating partners; consider reducing minimum wage paired with an earned tax credit; further reduce duration of unemployment benefits and taper replacement rates more rapidly.
- Product and regulatory reforms:
  - Government aims for 25 percent reduction in administrative burden by 2007.
  - Actions: unbundling energy market; reducing licenses and permits; NMa activity in sectors such as construction.
  - Staff: product market reforms can facilitate labor market reforms, encourage wage differentiation, and recommend making Employment Protection Legislation less strict.
- Political economy: reform fatigue and vested interests may delay further measures; some reforms may await next government.

### Pandemic continuity planning and other supervisory concerns
- Continuity planning for an avian flu pandemic recognized as essential to minimize financial system disruptions; supervisors have queried financial institutions on preparations.
- Bank failure lessons: tension between Market Abuse Act disclosure requirements and emergency liquidity/solvency protections under the Banking Act; trustees’ report awaited; supervisory closure of the failed bank demonstrated market discipline.

### Official development assistance (ODA)
- Authorities continue to exceed United Nations’ target of 0.7 percent of GNI.

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

### Key short-term indicators and selected figures (as presented)
- Quarter-on-quarter GDP growth Q1 2006: 0.2 percent; revised Q1 2006: 0.1 (revisions noted).
- Employment: 35,000 new jobs in Q1 2006.
- Inflation: CPI-HICP in June 2006 1.8 percent; January–June average 1.7 percent.
- CPB growth projections (June 2006): 3 percent in 2006 (from 2.7), 2.8 percent in 2007 (from 3).
- DNB forecast (June 2006): 2.5 percent in 2006, 2.7 percent in 2007.
- Selected national accounts (2005; levels and percent of GDP): Private consumption 244.0 (48.6); Public consumption 120.5 (24.0); Gross fixed investment 97.6 (19.5); Exports of goods and nonfactor services 357.5 (71.2); Imports of goods and nonfactor services 316.3 (63.0); GDP 501.9 (100.0).
- Real GDP growth (selected years): 2003 revised 0.3; 2004 revised 2.0; 2005 revised 1.5; staff projections 2006 2.6; 2007 2.8.
- Output gap (percent of potential): 2005 -2.7; 2006 -2.1; 2007 -1.3; 2008 -0.6.
- Public finances (percent of GDP): General government balance 2005 -0.3; 2006 -0.9; 2007 -0.9; Structural balance 2005 0.1; 2007 -0.3.
- Public debt (general government gross debt): 2005 52.9; 2006 52.6; 2007 52.0; 2008 51.6.
- Household and housing indicators: Household debt to GDP 2005 1.17; real estate prices (euros) 2005 222,167.
- Financial soundness indicators (selected 2005): Risk-based capital-asset ratio 12.3; Regulatory Tier I capital-to-risk-weighted assets 10.0; Return on equity 14.55; Return on assets 0.54; Nonperforming loans net of provisions to capital (three largest banks) 15.66.
- Pension funds: Returns 2005 13.0; Contribution rate 2005 17.0; Assets to GDP (other financial corporations) 2005 2.17.

*Source: IMF staff Executive Summary and selected excerpts from document _cr06283.*

### Executive Summary ......................................................................................................

### Executive Summary

### Background: recent performance and fiscal consolidation
- After a period of slow or negative growth, a recovery is taking hold, with growth this year and next likely to be well above potential of about 2 percent.
- General government accounts were brought close to balance in 2005 despite weak activity, reflecting significant underlying structural fiscal adjustment of over 2 percentage points of GDP.
- The general government deficit narrowed to 0.3 percent of GDP in 2005 from 3.2 percent in 2003, reflecting underlying structural adjustment of 2½ percentage points of GDP.
- Contributing fiscal measures included a virtual freeze on public wages, reduced coverage of public health insurance, changes in disability and other social benefits, adjustments by local governments, increases in excise duties and contribution rates for health care and disability insurance, and higher natural gas revenues (together contributing ½ percentage point of GDP to structural adjustment).
- Monetary conditions started tightening in late 2001 before easing last year; recent moderate depreciation of the real effective exchange rate has reversed about half of the monetary tightening.
- CPI inflation averaged 1.6 percent in January–February 2006 (1.7 percent in January–May, using data available after the mission). Wage growth has been subdued under a wage moderation agreement for 2004–05.

### Near-term outlook
- Consensus forecast: official growth forecast is 2¾ percent in 2006 and 3 percent in 2007.
- Staff forecast (with higher projected oil prices in line with WEO assumptions): 2.6 percent in 2006 and 2.8 percent in 2007 (higher than euro area growth).
- Recovery drivers: stronger foreign demand, improved competitiveness supported by wage moderation, stronger corporate balance sheets, export growth, and rising employment supporting private consumption and investment.
- Risks:
  - Downside: further oil price hikes, significant euro appreciation, slower trading-partner growth, and interest rate-led house price declines.
  - Upside: stronger-than-expected consumption and above-budgeted revenues in the first quarter cited by officials.
- Housing and household vulnerability indicators:
  - Mortgage debt-to-GDP ratio is high at more than 100 percent and increasing.
  - Proportion of mortgages subject to an interest rate adjustment within two years increased from 21 percent in 2003 to 31 percent in 2005.
  - Percentage of newly provided loans with loan-to-value ratios (LTVs) exceeding 100 percent has been increasing significantly.

### Fiscal policy: recommendations and medium-term challenges
- Near term: staff urged safeguarding the structural fiscal adjustment of the past two years by pursuing at least a neutral fiscal stance in 2006 and 2007.
- Authorities recognized the benefits of directing any budgetary overperformance to deficit reduction rather than expansion.
- Medium term (population aging): further fiscal adjustment is required during the next government’s term (2008–11) together with other sustainability-enhancing measures.
- Authorities are aware of policy requirements based on the CPB’s study on aging, but politically and economically difficult decisions lie ahead.
- Past Fund recommendations (Box 1) and implementation:
  - Fiscal policy: prior Fund advice called for structural fiscal adjustment of at least ½ percentage point of GDP per year during a government’s term; consolidation of over 2 percentage points of GDP in structural terms was achieved in 2004–05. Improved coordination between central and local governments has occurred. Decisions on changes to the fiscal framework would wait for a new coalition agreement, although preparatory analysis is underway.

### Financial sector: soundness, vulnerabilities, and supervisory matters
- Overall assessment: the financial sector is generally sound but developments are colored by real estate–related risks.
- Banking sector:
  - Banks’ capital adequacy remains strong.
  - Return on equity, noninterest expenses to gross income, and nonperforming loans for large banks have been improving.
  - A small bank failed in December 2005 without systemic repercussions.
- Pension funds and insurance:
  - Pension funds are, on average, close to their required coverage ratios to come into effect in January 2007, with only one fund reportedly below the minimum ratio of 105 percent.
  - Under the new requirements, pension funds will be required to achieve a coverage ratio implied by a 97½ percent probability of meeting their obligations. In cases where indexation of benefits is not guaranteed, this implies a coverage ratio, on average, of 130 percent, to be met within a period agreed with the supervisor not exceeding 15 years (the required coverage ratio would be higher if funds provided guarantees).
  - If the ratio falls below 105 percent, it has to be restored within a given time period (likely between one and three years, but this is being discussed in parliament), except at times of severe macroeconomic downturns or systemic risk.
  - Life insurance profitability has been adversely affected by the low long-term interest rate environment, though prospects are improving with expectations of rising interest rates.
- Mortgage market and household balance sheets:
  - Tight interest margins on mortgages reflect heavy competition; continued demand has held up profits despite deteriorating credit quality with the expansion of mortgages.
  - Household debt-to-GDP and mortgage debt-to-GDP ratios are rising; debt-to-asset and debt-to-income indicators show increased household sensitivity to interest rate changes.
- Policy and supervisory recommendations:
  - Staff supported efforts to strengthen the code of conduct for mortgage lending, with emphasis on ensuring compliance monitoring and appropriate action for violations.
  - A new Financial Supervision Act is expected to come into force at the start of 2007; it clarifies and strengthens the supervisory framework.
  - Key pension supervision issue: appropriate length of the recovery period if a pension fund falls below the minimum coverage ratio. Staff supported supervisors arguing for an ex ante period of one year but emphasized the need for escape clauses to ensure flexibility.
  - All parties agreed on the importance of ongoing research on phasing out the tax deduction for mortgage interest payments while minimizing disruptive effects, though authorities are not committed to a policy move.

### Structural reforms and other policies
- Labor market:
  - Several measures have been taken to raise labor participation (tightening unemployment benefits, abolishing fiscal incentives for early retirement, revamping disability, reducing inactivity traps gradually).
  - Additional measures discussed include addressing inactivity traps, adjustments to the minimum wage, and unemployment benefits.
  - Recommendations not yet implemented include adjusting the minimum wage and taking into account life expectancy in determining the retirement age; calls for greater wage differentiation have not resulted in notable changes.
- Product and regulatory reforms:
  - The Fund has supported the authorities’ liberalization program, including unbundling of the energy market, reduction in required licenses and permits, and efforts to increase competition.
  - The government aims for a 25 percent reduction in the administrative burden by 2007.
- Health care reform:
  - Introduction of a new health care system at the start of 2006 shifts insurance provision to private health funds with a statutory standard package and acceptance obligation supported by risk equalization; this will shift financing through the fiscal accounts and from private to public consumption and requires careful monitoring.

*Source: IMF staff Executive Summary contained in the document _cr06283 - Executive Summary.*

### 10.      The recent fiscal consolidation is in accord with economic requirements. With an

### _cr06283 - 10.      The recent fiscal consolidation is in accord with economic requirements. With an

### Fiscal consolidation: assessment and rationale
- Staff recommended cumulative structural fiscal adjustment of at least 2 percentage points of GDP during the government’s term (2004–07) — an amount already achieved in 2004–05.
- The tightening occurred despite some weakness in economic activity; risks were judged acceptable given:
  - the marked deterioration in the public finances during 2000–03 that contributed to declining confidence;
  - the need to prepare fiscal positions for population aging;
  - the likely moderate impact on activity in a small open economy; and
  - the merits of upfront adjustment in light of the election cycle.

### Fiscal stance for the remainder of the government’s term
- The budget implies about a neutral fiscal stance in 2006.
- Preliminary plans suggested fiscal policy would turn somewhat expansionary in 2007, deteriorating structurally by 0.3 percentage point of GDP according to staff estimates.
- Staff urged the authorities to pursue at least a neutral stance in 2007 and recommended that any revenue overperformance or below-budget expenditures outturns for cyclical reasons go to deficit reduction.

### Population aging and long-term fiscal sustainability
- CPB benchmark analysis: achieving fiscal sustainability requires either a structural general government surplus of 3 percent of GDP by 2011 or other sustainability-enhancing measures offsetting shortfalls in present value terms.
- Political-economy considerations: discussions indicated difficulty for any new government to achieve a fiscal surplus of more than 1 percent of GDP by the normal end of its four-year term (2011).
  - Staff estimated that achieving a surplus of 1 percent of GDP in 2011 would represent structural adjustment of about 1¼ percentage point of GDP (assuming a closed output gap by then).
  - Other sustainability-enhancing measures equivalent in present value terms to about 2 percentage points of GDP would still be needed to close the remaining sustainability gap.
  - One CPB option: increase the retirement age by two years, which would reduce the sustainability gap by ½ percentage point of GDP. Staff supported this measure.
- Staff guiding principles for the period through the next government:
  - Continue fiscal adjustment; aiming for a 1 percent surplus or more by 2011 represents significant structural adjustment and is feasible given the upturn.
  - Identify and implement upfront other measures needed to close the sustainability gap to reduce risks to intergenerational equity and confidence.
  - Recognize asymmetrical risks: sensitivity analysis assigns greater weight to needing a larger structural surplus than 3 percent of GDP by 2011 than to a smaller one, accentuating the importance of upfront action.
  - Any budgetary overperformance in 2007 should be saved and used by the next government to pursue more ambitious fiscal targets.

### Institutional arrangements and fiscal framework developments
- An official working group (Study Group on the Budget Margin) is preparing recommendations for the next government on the fiscal framework and fiscal policy generally; it started deliberations a few months before the Fund mission and views were not uniform.
- The working group and finance ministry were broadly supportive of staff's guiding principles.
- A fiscal ROSC (Kingdom of the Netherlands—Netherlands: Report on the Observance of Standards and Codes—Fiscal Transparency Module, and the Aide-Mémoire Regarding the Fiscal Framework, IMF Country Report No. 06/124, March 2006) found the Netherlands meets or exceeds good-practice standards on the four general principles of the fiscal transparency code, while noting increased volatility of tax revenues has made forecasting more difficult.
- ROSC suggested refinements to the fiscal framework (summarized in Box 2). Key recommendations include:
  - (1) reporting gross expenditures and nontax revenues separately with respect to expenditure ceilings instead of only net expenditure;
  - (2) including only that part of nontax revenues in net expenditure ceilings whose inclusion provides incentives for line ministries to collect resources;
  - (3) reexamining the budgetary fund based on gas revenues (FES) to better integrate its operations into expenditure ceilings and the fiscal framework while maintaining a separate fund;
  - (4) formally connecting tax expenditures to the fiscal framework, possibly by setting explicit ceilings for tax expenditures;
  - (5) reconciling reporting on the budget and performance relative to expenditure ceilings with national accounts standards to improve monitoring;
  - (6) incorporating somewhat larger buffers in the fiscal framework (lowering the “signal value” and erring on the side of a more ambitious target for the structural balance at the end of a new government’s term) to reduce procyclicality and allow automatic stabilizers greater room to operate; and
  - (7) enhancing flexibility by allowing phased-in tax changes or permitting offsetting measures to avoid procyclicality.
- Authorities indicated likely support for recommendation (1), reexamination of the role of the FES in (3), that ambitious fiscal targets would render (6) less important, and that (7) made sense; there was less tendency to support (2) and (5). Tax expenditures in (4) could be given a more prominent role, but authorities noted these were documented for the budget.

### Key data points and short-term indicators
- Quarter-on-quarter GDP growth in Q1 2006 was 0.2 percent; the weakness reflected a drop in investment and inventories, while exports were robust and private consumption above expectations. On balance, the data were broadly in line with staff’s full-year GDP projections.
- The ROSC and accompanying Selected Issues paper noted increased volatility of tax revenues; a Text Figure showed coefficients of variation for Corporate income tax, Personal income tax (including social contributions), and Indirect taxes across 1975-84, 1985-94, 1995-04 for the Netherlands and an average of EU countries (figures not reproduced here).

### Financial sector: supervision, vulnerabilities, and reforms
- A new Financial Supervision Act (FSA) clarifies and strengthens the framework for financial sector supervision and is scheduled to come into force at the start of 2007.
- Market infrastructure part of the FSA expected to come into effect on January 1, 2008.
- The DNB established a Financial Stability Division and started coordinating a new round of stress tests involving the private sector; The Overview of Financial Stability has been published since December 2004; financial stability reports produced bi-annually since December 2004.
- Authorities plan to double deposit insurance coverage to €40,000 (retroactively after a small bank failure) and consider introducing self coverage for some proportion of deposits over €20,000 to limit moral hazard.
- Progress on key FSSA recommendations includes:
  - Clarifying the role of the minister of finance in areas where autonomy is not fully delegated to the supervisor (FSA to be enacted January 1, 2007).
  - Ensuring the Authority for Financial Markets has power to cooperate internationally (in the FSA).
  - Continuing work on securities settlement arrangements and cross-border crisis management (including a May 2006 memorandum of understanding between DNB and Belgian counterparts).
  - Choosing to keep an ex-post deposit guarantee scheme rather than prefunding.
  - Phasing out tax deductibility of mortgage interest over the medium term while avoiding disruptive effects is being actively discussed; measures since 2001 and 2004–05 aim to limit impact:
    - Since 2001, interest payments on mortgage loans used for consumption and second homes excluded from tax deductibility.
    - Starting in 2004, tightened eligibility requirements for mortgage interest tax deduction to prevent use of “surplus value” on a first house for consumption.
    - As of January 1, 2005, fiscal incentives for paying off mortgages were strengthened.
- Financial vulnerabilities: rapid growth of mortgage lending, tax deductibility of mortgage interest, high LTVs, increasing household sensitivity to interest rate changes, and innovations in mortgage financing have driven a rapid run-up of household debt — raising concerns that borrowers would be hurt significantly should interest rates rise substantially or house prices fall.
- In response, mortgage-lending code of conduct was reviewed and strengthened, notably by tightening lending guidelines on affordability and informing consumers about risks. Debate continues over adding an explicit LTV test versus relying on affordability tests; monitoring and enforcement arrangements remain under active discussion.

*Source: IMF country report text (excerpts provided).*

### 18.      With the subject now on the policy radar screen, public debate about policy

### _cr06283 - 18.      With the subject now on the policy radar screen, public debate about policy

### Mortgage interest deductibility and housing market
- Public debate is intensifying on phasing out the tax deduction for mortgage interest payments.
- Selected Issues paper finding: a quick drop in house prices need not necessarily occur if the phase-out takes place over a long period of time.
- Budgetary advantages of eliminating deductibility noted, including providing room for tax cuts that could:
  - lessen the downward impact on demand, and
  - stimulate labor participation.
- Severe distortions in the housing market were apparent; staff encouraged authorities to study:
  - whether rent controls appropriately serve their intended social and economic purpose, and
  - whether administrative allocation mechanisms are appropriate.

### Bank failure, disclosure, and supervision lessons
- A small bank failed; event had no macroeconomic implications but provided learning opportunities.
- Tension identified between:
  - requirement to disclose price-sensitive information (Market Abuse Act), and
  - protecting solvency/liquidity using emergency regulations (Banking Act).
- Authorities awaiting the report from “the trustees of the bankruptcy” to draw lessons.
- Supervisory response: problems were anticipated and the bank was closed, demonstrating market discipline.

### Pension supervision and recovery periods
- Key unresolved issue under the Financial Supervision Act: appropriate recovery period when a pension fund’s coverage ratio falls below the minimum requirement of 105 percent.
- Considerations:
  - Avoid unduly punishing pension holders facing temporarily unfavorable market conditions.
  - Ensure corrective actions are not unduly postponed and that intervention threat provides discipline.
  - Pension funds lack market discipline comparable to banks because individuals cannot choose their pension fund.
- Consensus leaning toward ex ante specification of a one-year recovery period, with recognition of the need for flexibility and escape clauses for longer recovery periods in exceptional circumstances.

### Continuity planning for a pandemic
- Authorities recognize continuity planning as essential to minimize financial system disruptions in the event of an avian flu pandemic.
- Supervisors have asked financial institutions how they are preparing; authorities are at the forefront of dealing with financial issues related to a possible pandemic.

### Structural reforms to raise labor participation
- Labor participation is comparatively low.
- Measures already taken:
  - Earlier disability scheme reforms reduced inflows and led to reassessments and reclassifications.
  - Distinction between partly and fully disabled enhances incentives to participate.
  - Early retirement is now actuarially fair.
  - Reduction in the duration of unemployment benefits to three years.
  - Abolition of the real estate tax and smoothing of the income dependency of the child credit reduce inactivity and poverty traps.
- Concerns:
  - Operations of the “life-course (tax-free saving) scheme” unclear; risk it could subsidize early retirement.
  - Reform fatigue noted; further reforms may await the next government.
- Additional measures suggested:
  - Smoothing income dependency of the rent subsidy to reduce spikes in marginal tax rates.
  - Lower childcare expenses and individualize the tax credit for nonparticipating partners.
  - Consider reduction in the minimum wage to increase low-skilled employment, paired with an earned tax credit to mitigate equity effects.
  - Further reduce duration of unemployment benefits and taper replacement rates more rapidly.

### Productivity, competition, and product-market reforms
- Need to boost productivity growth amid slowing potential and overall productivity.
- Authorities’ actions:
  - Increase competition (e.g., unbundling the energy market).
  - NMa work in sectors such as construction.
  - Target to reduce red tape by one quarter by the end of the government’s term.
- Staff recommendations:
  - Product market reforms can facilitate labor market reforms by dampening real-wage impacts.
  - Encourage greater wage differentiation to attract labor to higher-productivity firms and strengthen human capital incentives.
  - Make Employment Protection Legislation (EPL) less strict, as strict EPL acts as a tax on new hiring and labor reallocation and can hamper innovation.
  - Ensure sufficient budgetary space for education, infrastructure, and market-oriented incentives for R&D.
- Political economy: EPL reform under active discussion at the SER, but no consensus due to vested interests.

### Fiscal position, sustainability, and policy recommendations
- Staff appraisal: reason for optimism; recovery broadening to domestic activity.
- Fiscal achievements and recommendations:
  - Impressive fiscal adjustment: over 2 percentage points of GDP in structural terms during 2004–05.
  - Preferable to pursue at least a neutral fiscal stance in 2007 rather than expansionary policy, given medium-term fiscal requirements.
  - Any revenue overperformance or below-budget expenditure outturns in 2006 and 2007 should go to deficit reduction.
  - Further rationalizing and restraining unemployment benefits and rent subsidies could exploit synergies between fiscal consolidation and structural reforms.
- Long-term sustainability:
  - Aim for a general government surplus of at least 1 percent of GDP by the end of the next government’s term (2011).
  - Significant sustainability gap would remain even with that surplus; identify and implement upfront measures to close the gap.
  - Asymmetrical risks favor taking upfront action and using fiscal overperformance in 2006–07 to pursue more ambitious targets later.
- Fiscal framework refinements suggested:
  - Make reporting and monitoring of expenditure ceilings more transparent.
  - Incorporate in the net expenditure ceiling only nontax items for which appropriate incentives to collect resources exist.
  - Reassess the role of the budgetary fund based on gas revenues to better assess trade-offs in allocating spending.

### Financial sector soundness and recommended actions
- Financial sector remains sound; supervision improvements include the new Financial Supervision Act and risk-oriented supervision.
- Financial vulnerabilities prompted a review and proposed strengthening of the code of conduct on mortgage lending.
- To be effective, strengthened code requires monitoring compliance and appropriate actions for violations.
- The small bank failure illustrates the system working and should add market discipline.

### Official development assistance (ODA)
- Authorities continue to exceed the United Nations’ target of 0.7 percent of GNI.
- Commitment to ODA is commendable even amid budgetary pressures.

*Source: IMF staff report content unit _cr06283 - 18.      With the subject now on the policy radar screen, public debate about policy*

### 36.      It is recommended that the next Article IV Consultation with the Netherlands remain

### _cr06283 - 36.      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.

### Basic data and population (2005)
- Land area (2005): 41.5 thousand sq. km.
- Population (2005): 16.4 million
- Life expectancy at birth (2005): 76.3 (male), 81.5 (female)
- Fertility rate (2005): 1.7 children/woman
- Infant mortality rate (2005): 5.04 per 1,000 live births
- Population per sq. km. of land area (2005): 483 persons

### National accounts (2005; levels and percent of GDP)
- Private consumption: 244.0 (48.6)
- Public consumption: 120.5 (24.0)
- Gross fixed investment: 97.6 (19.5)
- Stockbuilding: -1.4 (-0.3)
- Exports of goods and nonfactor services: 357.5 (71.2)
- Imports of goods and nonfactor services: 316.3 (63.0)
- GDP: 501.9 (100.0)

### National accounts (constant prices; annual percent change, selected years)
- Private consumption: 2001 1.4; 2002 0.9; 2003 -0.7; 2004 --; 2005 0.3; 2006 -1.0; 2007 1/1.6; 2008 2.0
- Public consumption: 2001 4.8; 2002 3.3; 2003 2.4; 2004 --; 2005 0.5; 2006 7.7; 2007 1/0.8; 2008 1.2
- Gross fixed investment: 2001 0.2; 2002 -4.5; 2003 -3.5; 2004 2.9; 2005 2.2; 2006 4.8; 2007 4.4; 2008 3.4
- Total domestic demand: 2001 1.8; 2002 -0.4; 2003 -0.3; 2004 0.8; 2005 0.2; 2006 2.6; 2007 2.2; 2008 2.1
- Exports of goods and nonfactor services: 2001 1.6; 2002 0.9; 2003 2.0; 2004 8.5; 2005 5.9; 2006 6.0; 2007 6.5; 2008 6.0
- Imports of goods and nonfactor services: 2001 2.2; 2002 0.3; 2003 2.0; 2004 7.8; 2005 5.1; 2006 6.2; 2007 6.2; 2008 5.6
- Net foreign balance (contribution to GDP growth): 2001 -0.3; 2002 0.5; 2003 0.1; 2004 0.9; 2005 0.9; 2006 0.3; 2007 0.7; 2008 0.8
- Gross domestic product: 2001 1.4; 2002 0.1; 2003 -0.1; 2004 1.7; 2005 1.1; 2006 2.6; 2007 2.8; 2008 2.7
- Output gap (in percent of potential output): 2001 2.7; 2002 0.6; 2003 -1.6; 2004 -1.9; 2005 -2.7; 2006 -2.1; 2007 -1.3; 2008 -0.6

### Prices, wages, and employment
- Consumer price index (HICP): 2001 5.1; 2002 3.9; 2003 2.2; 2004 1.4; 2005 1.5; 2006 1.5; 2007 1.8; 2008 1.8
- GDP deflator: 2001 9.7; 2002 3.8; 2003 2.5; 2004 0.9; 2005 1.6; 2006 1.7; 2007 1.6; 2008 1.8
- Hourly compensation (manufacturing): 2001 3.9; 2002 3.7; 2003 2.7; 2004 1.6; 2005 0.8; 2006 0.8; 2007 2.0; 2008 2.6
- Unit labor costs (manufacturing): 2001 5.0; 2002 2.8; 2003 2.3; 2004 -1.6; 2005 -0.3; 2006 -0.4; 2007 0.8; 2008 0.8
- Employment (annual percent change): 2001 2.1; 2002 0.4; 2003 -0.4; 2004 -0.7; 2005 -0.3; 2006 1.1; 2007 1.4; 2008 0.7
- Unemployment rate (in percent): 2001 2.5; 2002 2.9; 2003 4.0; 2004 4.9; 2005 5.2; 2006 4.8; 2007 4.3; 2008 4.4

### Personal sector
- Real disposable income (annual percent change): 2001 6.2; 2002 -0.3; 2003 -0.3; 2004 40.7; 2005 -0.1; 2006 -2.0; 2007 1/2.4; 2008 1.9
- Household savings ratio (percent of disposable income): 2001 6.8; 2002 6.5; 2003 6.9; 2004 9.0; 2005 8.5; 2006 7.5; 2007 8.4; 2008 8.3

### External trade and current account
- Exports of goods, volume (annual percent change): 2001 -2.0; 2002 1.0; 2003 6.6; 2004 9.0; 2005 6.1; 2006 6.3; 2007 5.8; 2008 5.9
- Imports of goods, volume (annual percent change): 2001 0.4; 2002 3.2; 2003 2.3; 2004 8.5; 2005 7.4; 2006 6.1; 2007 5.6; 2008 5.5
- Terms of trade (annual percent change): 2001 3.3; 2002 1.5; 2003 1.4; 2004 -0.4; 2005 0.3; 2006 1.2; 2007 1.1; 2008 0.1
- Merchandise balance (percent of GDP): 2001 4.8; 2002 4.2; 2003 6.6; 2004 7.1; 2005 7.0; 2006 8.0; 2007 8.9; 2008 9.3
- Current account balance (percent of GDP): 2001 2.4; 2002 2.5; 2003 5.5; 2004 8.9; 2005 6.4; 2006 6.9; 2007 7.8; 2008 8.1

### Public sector accounts (percent of GDP)
- Revenue: 2001 44.9; 2002 44.0; 2003 43.6; 2004 44.4; 2005 45.6; 2006 45.8 1/; 2007 45.5; 2008 45.5
- Expenditure: 2001 45.2; 2002 45.9; 2003 46.8; 2004 46.3; 2005 45.8; 2006 46.7 1/; 2007 46.4; 2008 45.8
- General government balance: 2001 -0.3; 2002 -2.0; 2003 -3.2; 2004 -2.1; 2005 -0.3; 2006 -0.9; 2007 -0.9; 2008 -0.3
- Structural balance: 2001 -1.2; 2002 -2.3; 2003 -2.4; 2004 -1.2; 2005 0.1; 2006 --; 2007 -0.3; 2008 --
- Primary balance: 2001 2.1; 2002 0.2; 2003 -1.1; 2004 -0.1; 2005 2.0; 2006 1.3; 2007 1.2; 2008 1.9
- Structural primary balance: 2001 1.2; 2002 -0.1; 2003 -0.4; 2004 0.8; 2005 2.3; 2006 2.1; 2007 1.8; 2008 2.2
- General government gross debt: 2001 50.7; 2002 50.5; 2003 51.9; 2004 52.6; 2005 52.9; 2006 52.6; 2007 52.0; 2008 51.6

### Notes on 2006 health insurance reform
- The introduction of the new health insurance scheme in 2006 will cause a significant shift in health care expenditure from private to public consumption, thereby lowering private and raising public consumption growth without changing overall GDP.
- Government revenues will rise and private disposable income fall, without affecting the financial position of the public sector or households' net terms, because public expenditure for health care also rises while the fall in private disposable income is offset by a similar fall in private health consumption now financed through fiscal accounts.

### General government accounts (composition and selected items)
- Revenues (percent of GDP): 2001 44.9; 2002 44.0; 2003 43.6; 2004 44.3; 2005 45.6; 1/2006 45.8; 2/2007 45.5
- Tax revenues and social security contributions: 2001 38.4; 2002 37.8; 2003 37.5; 2004 37.8; 2005 39.7; 1/2006 39.3; 2/2007 39.3
- Expenditure (percent of GDP): 2001 45.2; 2002 45.9; 2003 46.8; 2004 46.4; 2005 45.8; 2006 46.7; 2/2007 46.4
- Direct expenditure: 2001 26.9; 2002 28.1; 2003 28.9; 2004 28.4; 2005 28.1; 2006 29.5; 2/2007 29.0
- Social benefits in kind: 2001 7.1; 2002 7.8; 2003 8.2; 2004 8.2; 2005 8.3; 2006 9.9; 2/2007 10.0
- Interest: 2001 3.2; 2002 2.8; 2003 2.7; 2004 2.6; 2005 2.5; 2006 2.4; 2/2007 2.3
- Memorandum: Primary balance: 2001 2.1; 2002 0.2; 2003 -1.1; 2004 -0.1; 2005 2.0; 2006 1.3; 2007 1.2
- Nominal expenditure growth (percent): 2001 6.5; 2002 6.2; 2003 4.4; 2004 1.3; 2005 1.8; 2006 6.6; 2007 3.4
- Real expenditure growth (percent): 2001 -3.0; 2002 2.3; 2003 1.8; 2004 0.4; 2005 0.3; 2006 4.7; 2007 1.2

### External indicators and financial markets (selected)
- Exports goods and services (annual percent change, in U.S. dollars): 2000 4.4; 2001 -0.7; 2002 4.4; 2003 16.9; 2004 17.7; 2005 13.6
- Imports goods and services (annual percent change, in U.S. dollars): 2000 2.9; 2001 -0.3; 2002 4.4; 2003 22.7; 2004 19.3; 2005 12.6
- Current account balance (percent of GDP): 2000 2.0; 2001 2.4; 2002 2.5; 2003 5.5; 2004 8.9; 2005 6.4
- Official reserves (in billions of U.S. dollars): 2000 17.6; 2001 16.9; 2002 19.0; 2003 21.6; 2004 21.2; 2005 20.5
- Foreign assets of the banking sector (in billions of U.S. dollars): 2000 163.9; 2001 211.4; 2002 256.2; 2003 308.2; 2004 376.9; 2005 408.8
- Foreign liabilities of the banking sector (in billions of U.S. dollars): 2000 206.1; 2001 250.1; 2002 305.8; 2003 328.2; 2004 392.5; 2005 416.4
- Government bond yield: 2000 5.5; 2001 5.2; 2002 5.0; 2003 4.2; 2004 4.1; 2005 3.4
- Spread of government bond yield with Germany: 2000 0.27; 2001 0.47; 2002 0.39; 2003 0.37; 2004 0.34; 2005 0.19

### Financial sector vulnerability indicators (2000–05; selected)
- Residential mortgage loans to total loans (percent): 2000 0.79; 2001 0.79; 2002 0.79; 2003 0.78; 2004 0.78; 2005 0.80
- Nonperforming loans net of provisions in percent of capital (average of three largest banks): 2000 31.34; 2001 31.13; 2002 31.22; 2003 24.32; 2004 19.19; 2005 15.66
- Classified loan to total loans (percent) (average of three largest banks): 2000 2.22; 2001 2.28; 2002 2.38; 2003 1.99; 2004 1.54; 2005 1.22
- Risk-based capital-asset ratio: 2000 11.3; 2001 11.4; 2002 11.9; 2003 12.1; 2004 12.1; 2005 12.3

### Core financial soundness indicators (1998–2005; selected)
- Regulatory capital-to-risk-weighted assets: 1998 11.4; 1999 11.1; 2000 11.2; 2001 11.4; 2002 11.8; 2003 12.0; 2004 12.0; 2005 12.3
- Regulatory Tier I capital-to-risk-weighted assets: 1998 8.5; 1999 8.4; 2000 8.6; 2001 8.5; 2002 8.9; 2003 9.3; 2004 9.7; 2005 10.0
- Return on assets: 1998 0.44; 1999 0.57; 2000 0.60; 2001 0.43; 2002 0.35; 2003 0.45; 2004 0.54; 2005 0.54
- Return on equity: 1998 10.89; 1999 14.21; 2000 14.79; 2001 10.86; 2002 9.05; 2003 11.68; 2004 13.81; 2005 14.55
- Nonperforming loans net of provisions to capital (three largest banks): 1998 30.05; 1999 32.32; 2000 31.34; 2001 31.13; 2002 31.22; 2003 24.32; 2004 19.19; 2005 15.66

### Encouraged financial soundness indicators and financial system structure (1998–2005; selected)
- Household debt to GDP: 1998 0.76; 1999 0.83; 2000 0.87; 2001 0.90; 2002 0.95; 2003 1.03; 2004 1.10; 2005 1.17
- Real estate prices (in euros): 1998 123,358; 1999 142,450; 2000 171,058; 2001 187,625; 2002 199,333; 2003 204,417; 2004 212,500; 2005 222,167
- Number of banks: 1998 99; 1999 100; 2000 104; 2001 101; 2002 98; 2003 93; 2004 94; 2005 94
- Banks: Assets (in millions of euros) 1998 1,206,632; 1999 1,367,120; 2000 1,606,591; 2001 1,749,569; 2002 1,762,511; 2003 1,911,343; 2004 2,198,404; 2005 2,767,526
- Deposits (in millions of euros): Banks 1998 560,392; 1999 637,106; 2000 734,462; 2001 817,582; 2002 838,441; 2003 909,748; 2004 999,711; 2005 1,153,049

### Pension funds performance (1990-2005; selected)
- Returns (annual average, in percent): 1990-94 7.3; 1995-99 11.6; 2000 2.6; 2001 -2.5; 2002 -8.0; 2003 10.1; 2004 9.5; 2005 13.0
- Contribution rate (percent of gross wages): 1990-94 8.5; 1995-99 9.0; 2000 9.5; 2001 10.0; 2002 12.4; 2003 15.0; 2004 16.5; 2005 17.0
- Assets to GDP (other financial corporations): 1998 1.81; 1999 2.03; 2000 1.96; 2001 1.79; 2002 1.84; 2003 1.72; 2004 1.95; 2005 2.17

### Macro and cyclical observations (figures summary)
- 2001–03 constituted a period of weak economic performance characterized by:
  - A sharp fall in Dutch economic growth into the new millennium.
  - Weak private consumption linked to modest wage and social security growth.
  - Collapse of equity prices early in the century and slowdown in house price increases.
  - Business investment deterioration up to 2003 and large increases in unit labor costs that reduced profit margins.
  - Erosion of consumer confidence, rising unemployment, and pension-policy uncertainty.
- Fiscal deficit widened sharply during 2001-03; structural effects including the 2001 tax reform and increases in health and education spending accounted for about 2 percentage points of GDP deterioration.
- Exports drove recovery in 2005; the output gap narrowed and inflation remained low.
- By second half of 2005:
  - GDP growth was robust, largely driven by net exports.
  - Quarterly employment recorded a more sustained rise than since 2001.
  - Investment and private consumption showed positive growth in recent quarters.
  - Consumer and business confidence strengthened.

### Monetary conditions and labor market (figures summary)
- Monetary conditions:
  - Tightening after 2000 reflected lower inflation raising real rates and an appreciating euro; more recently, conditions eased as the real exchange rate depreciated.
  - Euro area indicators include 3-month money market rate and main refinancing rate movements across 1998–2006 dates.
- Labor market:
  - Employment in persons is about the European average; employment in hours is low due partly to women participating part-time.
  - Wage dispersion is compressed; minimum wages are high.
  - Unemployment benefits are fairly generous; maximum duration of unemployment benefits shows the Netherlands among higher-duration countries.
  - Women participate largely part-time; effective retirement age is low.
  - Employment protection legislation (EPL) on regular contracts is high.

*Source: IMF staff compilation from the Netherlands authorities; fiscal and financial tables and figures as presented in the source document.*

### APPENDIX I. Fund Relations

### APPENDIX I. Fund Relations

### I. Membership Status
- Joined December 27, 1945; Article VIII.
- As of April 30, 2006.

### II. General Resources Account
- Quota: 5,162.40 SDR Million (100.00 percent of quota)
- Fund holdings of currency: 4,513.86 SDR Million (87.44 percent of quota)
- Reserve position in Fund: 648.59 SDR Million (12.56 percent of quota)

### III. SDR Department
- Net cumulative allocation: 530.34 SDR Million (100.00 percent of allocation)
- Holdings: 508.54 SDR Million (95.89 percent of allocation)

### IV. Outstanding Purchases and Loans
- None

### V. Latest Financial Arrangements
- None

### VI. Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming charges/interest and totals by year (SDR Million):
  - 2006: Principal 0.53; Charges/interest 0.53; Total 0.53
  - 2007: Charges/interest 0.79; Total 0.79
  - 2008: Charges/interest 0.80; Total 0.80
  - 2009: Charges/interest 0.79; Total 0.79
  - 2010: Charges/interest 0.79; Total 0.79

### VII. Exchange Rate Arrangements
- The Netherlands entered the final stage of the European Economic and Monetary Union on January 1, 1999, at a rate of 2.20371 guilders per euro.

### VIII. Article IV Consultation
- Discussions for the 2006 Article IV Consultation were held in Amsterdam and The Hague from April 27–May 9, 2006.
- The staff report for the 2005 Article IV Consultation (IMF Country Report 05/226) was considered by the Executive Board on June 29, 2005.
- The Article IV discussions with the Netherlands are on the standard 12-month consultation cycle.

### IX. Exchange Restrictions
- In compliance with relevant UN Security Council Resolutions and/or EU regulations, the Netherlands maintains exchange restrictions vis-à-vis:
  - the former government of Iraq;
  - Somalia;
  - Libya;
  - specific persons and entities of Myanmar and Zimbabwe;
  - specific individuals associated with the previous government of the former Republic of Yugoslavia;
  - certain persons and entities with a view to combating terrorism; Osama Bin Laden, the Al-Qaeda network, and the Taliban.
- These restrictions are solely for the preservation of national or international security and have been notified to the Fund in accordance with EBD No. 144-(52/51).

*Appendix I. Fund Relations — As of April 30, 2006.*

### 1.      This staff statement provides information on economic and political developments

### _cr06283 - 1.      This staff statement provides information on economic and political developments

### Revised GDP growth and recent GDP data
- Historical data on real GDP growth revised: up on an annual basis for 2003–05, but down slightly for Q1 2006.
- Main factor for 2003–05 revisions: higher private consumption; also upward revisions to investment growth (2003) and contribution of net exports (2004).
- Q1 2006 quarter-on-quarter growth revision was small: "just 0.1 percentage point of GDP."
- Q1 2006 new data show:
  - lower government consumption growth than before,
  - investment growth now positive instead of slightly negative,
  - exports remained robust,
  - private consumption above expectations.

- Revised GDP Growth (In percent)
  - Previous data: 2003 -0.1, 2004 1.7, 2005 1.1, Q1 2006 0.2
  - Revised data: 2003 0.3, 2004 2.0, 2005 1.5, Q1 2006 0.1
  - 1/ Quarter-on-quarter growth based on seasonally adjusted data.

### Labor market and confidence
- Employment continues to grow: 35,000 new jobs created in the first quarter of 2006.
- Consumer confidence strengthened further in June 2006.
- Business confidence remained at its higher level.

### Inflation
- Year-on-year inflation remained moderate.
- In June, CPI-HICP stayed at 1.8 percent (the same rate as in May and April).
- For January–June, inflation averaged 1.7 percent.

### Growth projections (external forecasts)
- CPB (June 2006) revised growth projection:
  - 3 percent in 2006 (from 2.7 percent),
  - 2.8 percent in 2007 (from 3 percent).
  - Revision mainly reflects stronger consumer spending in 2006 followed by a somewhat slower pace of consumption growth in 2007.
- DNB forecast (June 2006):
  - 2.5 percent in 2006,
  - 2.7 percent in 2007.

### Political developments
- Dutch government resigned after losing support of smallest coalition partner (D66).
- New elections scheduled for November 22, 2006.
- Interim: remaining coalition parties (CDA and VVD) formed a minority coalition government to finalize 2007 budget preparations.
- 2007 budget preparations were already well advanced, supported by D66, and appear to have broader support in parliament.

### Executive Board assessment — key findings and recommendations
- Directors encouraged by gathering economic recovery and strong policies including fiscal turnaround and structural reforms in health care, disability, and financial supervision.
- Key priorities identified:
  - Ensure sustainability of public finances in face of aging population.
  - Safeguard financial stability.
  - Undertake further structural reforms to raise labor participation, hours worked, and overall productivity.
  - Continued wage moderation to take full advantage of global upturn.
- Fiscal policy recommendations:
  - Achieve a general government surplus of at least 1 percent of GDP by 2011.
  - Implement sustainability-enhancing structural reforms (examples cited: rise in retirement age and linking it to changes in life expectancy).
  - Pursue at least a neutral fiscal stance in 2006 and 2007; use any revenue overperformance or below-budget expenditure outturns for deficit reduction.
- Fiscal framework and institutions:
  - Commended strong fiscal framework and independent central role of CPB.
  - Encouraged consideration of ROSC-recommended refinements related to expenditure ceilings and budgetary fund based on gas revenues.
- Financial sector and housing:
  - Financial sector generally sound; welcomed Financial Supervision Act and strengthened risk orientation of supervision.
  - Noted emerging vulnerabilities in mortgage sector; encouraged strengthening code on mortgage lending and monitoring/enforcing compliance.
  - Encouraged assessment of rent controls and administrative allocation mechanisms for housing.
- Pensions:
  - Agreed merits of specifying a one-year recovery period for shortfalls from minimum coverage ratio, while recognizing need for escape clauses allowing longer periods.
- Labor market reforms:
  - Encouraged further reforms to raise labor participation and productivity, including addressing generous unemployment benefits, inactivity traps, demand for low-skilled labor, and links between minimum wage and social benefits.
  - Urged making employment protection legislation less stringent to reduce hiring tax and facilitate labor reallocation.
  - Encouraged continuing efforts to increase competition and reduce red tape.
- Commended authorities’ strong commitment to Overseas Development Assistance.

### Selected economic indicators (as presented)
- Real economy (change in percent)
  - Real GDP: 2001 1.4, 2002 0.1, 2003 -0.1, 2004 1.7, 2005 1.1, 2006 2.6 1/, 2007 2.8 1/
  - Domestic demand: 2001 1.8, 2002 -0.4, 2003 -0.3, 2004 0.8, 2005 0.2, 2006 2.6 1/, 2007 2.2 1/
  - CPI (harmonized) 2/: 2001 5.1, 2002 3.9, 2003 2.2, 2004 1.4, 2005 1.5, 2006 1.5 1/, 2007 1.6 1/
  - Unemployment rate (in percent): 2001 2.5, 2002 2.9, 2003 4.0, 2004 4.9, 2005 5.2, 2006 4.8 1/, 2007 4.3 1/
  - Gross national saving (percent of GDP): 2001 25.5, 2002 24.7, 2003 24.5, 2004 28.5, 2005 25.6, 2006 26.5 1/, 2007 27.8 1/
  - Gross domestic investment (percent of GDP): 2001 21.5, 2002 19.7, 2003 19.0, 2004 19.5, 2005 19.2, 2006 19.6 1/, 2007 20.1 1/

- Public finance (percent of GDP)
  - General government balance: 2001 -0.3, 2002 -2.0, 2003 -3.2, 2004 -2.1, 2005 -0.3, 2006 -0.9 1/, 2007 -0.9 1/
  - Structural balance: 2001 -1.2, 2002 -2.3, 2003 -2.4, 2004 -1.2, 2005 0.1, 2006 ---, 2007 -0.3 1/
  - General government debt: 2001 50.7, 2002 50.5, 2003 51.9, 2004 52.6, 2005 52.9, 2006 52.6 1/, 2007 52.0 1/

- Interest rates (percent)
  - Money market rate 3/: 2001 4.3, 2002 3.3, 2003 2.3, 2004 2.1, 2005 2.2, 2006 2.7...
  - Government bond yield 4/: 2001 5.2, 2002 5.0, 2003 4.2, 2004 4.1, 2005 3.4, 2006 3.7...

- Balance of payments (Percent of GDP, unless otherwise indicated) 5/
  - Trade balance: 2001 4.8, 2002 4.2, 2003 6.6, 2004 7.1, 2005 7.0, 2006 8.0 1/, 2007 8.9 1/
  - Current account balance: 2001 2.4, 2002 2.5, 2003 5.5, 2004 8.9, 2005 6.4, 2006 6.9 1/, 2007 7.8 1/
  - Official reserves, excl. gold (in US$ billion) 3/: 2001 9.0, 2002 9.6, 2003 11.0, 2004 10.1, 2005 9.1, 2006 9.3...

- Exchange rate
  - Exchange rate regime: Member of EMU
  - U.S. dollar per euro (May 2006): 1.28
  - Nominal effective rate (1990=100) 3/: 2001 94.0, 2002 95.6, 2003 100.9, 2004 102.5, 2005 102.4, 2006 101.8...
  - Real effective rate (1990=100) 3/, 6/: 2001 99.4, 2002 102.3, 2003 107.4, 2004 109.5, 2005 108.2, 2006 107.95...

- Notes and sources as presented:
  - 1/ Staff projections, unless otherwise indicated.
  - 2/ In 2001, an indirect tax increase is estimated to have boosted inflation by 1.2 percentage points.
  - 3/ As of April for 2006.
  - 4/ As of May for 2006.
  - 5/ Transactions basis.
  - 6/ Based on relative normalized unit labor costs.
  - Sources: International Financial Statistics; information provided by the Dutch authorities; and IMF staff estimates.

*Source: IMF staff statement for the 2006 Article IV Consultation (Netherlands).*

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