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

July 6, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 6, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of the Netherlands—Netherlands.1


Real GDP is projected to rise by nearly 3 percent this year and by about 2¾ percent next year, compared to annual growth of about 4 percent in the past three years. This deceleration reflects the weaker external environment, particularly the direct and indirect effects of the slowdown in the United States, but also lower domestic investment growth due to deteriorating profits. Despite the moderation of growth, labor markets remain very tight and consequently growth in wage costs is rising. This has, however, not been reflected in price inflation: although headline inflation has increased (reflecting oil prices and, in 2001, an increase in the VAT rate), underlying inflation remains low.

The fiscal position has improved steadily for some years, with taxes, expenditures, and the deficit all falling as a percentage of GDP. The larger than expected surplus in 2000 of 2.2 percent of GDP (of which 0.7 of a percentage point was one-time receipts from the sale of UMTS licenses) is projected to fall to 0.5 percent of GDP in 2001, mainly because of the large tax reductions that are part of the long-planned tax reform. As a result, the budget provided a substantial positive impulse to domestic demand in 2001. Apart from its effect on the balance, the tax reform lowers marginal income tax rates, changes the system of investment income taxation, and raises the VAT and some eco-taxes.

The labor market has also improved dramatically over the past several years, and the unemployment rate, at 2.4 percent, is among the lowest in the industrialized world. Nevertheless, the labor-market situation of some groups—people 55 to 65 years old, minorities, and the low-skilled—remains unsatisfactory. Also, the disability program is very large and still growing, although overall rates of dependency on government transfer programs are not particularly high in the Netherlands. The 2001 budget contained measures to alleviate these problems, both in the tax reform and by introducing the Labor Tax Credit, which lowers marginal tax rates at the low end of the earnings schedule. In addition, the administrative structure of the welfare system is undergoing substantial reform with a view to increasing reintegration of beneficiaries into the labor force.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They noted that deep rooted structural reform, substantial improvements in the fiscal position, and wage moderation had resulted in high output growth in recent years, and the lowest unemployment rate among industrial countries. Directors commended the authorities for their sustained application of these policies.

Directors judged, however, that since early 2001 labor markets have become very tight, observing that wage settlements and inflation have been rising, although in the latter case this reflected in part oil and food price increases as well as an increase in consumption taxes. The recent softening of growth since 2000 eased somewhat the concerns that wage and price pressures might intensify, and Directors agreed that rising labor costs and the consequent deterioration in international competitiveness could help to return the economy to a more sustainable position over time.

Directors emphasized that in the event of a hard landing, the robustness of the financial sector would be critical. Dutch financial institutions are large and well diversified, but Directors observed that the mortgage market may have become overextended, and cautioned that supervisors should maintain their vigilance. Indeed, they welcomed the signs that the housing market, which had helped to fuel consumer demand through wealth effects, is cooling off. Directors suggested that the Dutch authorities could find it useful to participate in the Financial Sector Assessment Program at a suitable time.

Against this backdrop, Directors recommended a prudent fiscal policy, arguing that fiscal stimulus should be avoided until inflationary pressures subside. In this connection, they noted that monetary conditions remained expansionary, given the cyclical position of the Dutch economy. They therefore commended the authorities for limiting expenditure increases this year, and for not making the tax cuts that would have been allowed under the Dutch fiscal framework. Directors recommended that such restraint be carried over to the 2002 budget, and that priority areas be funded by reallocating resources within the expenditure ceiling agreed by the coalition. This restraint would also contribute to meeting the authorities' medium-term fiscal surplus target, which is designed to cope with population aging.

In view of the successful record of fiscal consolidation over the past several years, Directors recommended that the authorities retain the key features of the current medium-term fiscal framework. They regarded the real expenditure ceiling, and thus the separation of expenditure and revenue decisions, as especially important. However, some Directors argued that the complicated rules regarding windfall revenues should be replaced by rules that would permit the full operation of automatic stabilizers. A few also noted that the framework could be further enhanced by the use of a realistic assumption for underlying growth, while cautioning against overestimating trend growth based on the experience of the past few years.

Directors welcomed the performance of the Dutch labor market, which is characterized by high employment growth and very low unemployment. Many people, nevertheless, face weak work incentives. Directors endorsed recent policy initiatives, including the introduction of the labor tax credit, which would reduce the disincentives to work at the low end, and the introduction of actuarially fairer early retirement schemes, which would encourage continued labor market participation of older workers. They noted, however, that workers at the low end of the earnings schedule face strong disincentives, owing particularly to the generous benefit system. Directors recommended that the authorities reform these programs to improve incentives. They also urged reform of the large disability program, both by restricting the inflow of beneficiaries and promoting reintegration into the workforce of those in the program.

Directors welcomed the program of product market reform, which has placed the Netherlands at the forefront of EU countries. They expressed concern, however, that momentum might be waning and encouraged the authorities to reinvigorate the process.

Directors commended the authorities for their continuing support for multilateral trade liberalization, as well as for development assistance, which exceeds the United Nations target. They also noted that the provision of economic data is complete and timely.

Kingdom of the Netherlands—Netherlands: Selected Economic Indicators

  1997 1998 1999 2000 20011

Real economy (change in percent)          
GDP 3.8 4.1 3.9 3.9 2.6
Domestic demand 3.5 4.2 4.6 3.6 2.5
CPI (year average) 2.2 2.0 2.0 2.3 4.2
Unemployment rate (in percent) 6.2 4.8 4.0 3.6 3.7
Gross national saving (percent of GDP) 27.9 25.9 27.9 27.5 27.7
Gross domestic investment (percent of GDP) 21.7 21.9 22.3 22.4 22.6
Public finance (percent of GDP)          
General government balance -1.1 -0.7 1.0 2.2 0.5
Structural balance -0.8 -1.0 -- 0.1 -1.0
Structural primary balance 3.7 3.2 3.9 3.7 2.1
General government debt 70.0 66.6 63.2 56.5 52.1
Money and credit          
(end of year, percent change)          
Domestic credit 13.1 16.2 ... ... ...
M3 7.4 9.6 10.2 10.3 ...
Interest rates (percent)          
Money market rate 2 3 3.1 3.2 3.0 4.0 4.8
Government bond yield 4 5.8 4.9 4.9 5.6 5.1
Balance of payments (percent of GDP) 5          
Trade balance 5.6 5.3 4.5 4.9 4.8
Current account 6.7 3.3 4.3 3.7 3.7
Official reserves, excl. gold (US$ billion) 3 24.9 21.4 10.1 9.2 8.6
Reserve cover (months of imports of GNFS) 1.4 1.2 0.5 0.4 ...
Exchange rate          
Exchange rate regime Member of euro area
Euros per U.S. dollar (April 20, 2001)         0.90
Nominal effective rate (1990=100) 93.5 93.4 92.1 89.7 ...
Real effective rate (1990=100) 6 90.0 88.3 86.4 83.4 ...

Sources: International Financial Statistics; Dutch authorities; and IMF staff estimates.

1IMF staff projections.
2Refers to euro rate beginning in 1999.
3For 2001, average of the first two months.
4 For 2001, average of the first three months.
5 On a transaction basis.
6Based on relative normalized unit labor costs in manufacturing.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the June 6, 2001 Executive Board discussion based on the staff report.


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