Council opinion

of 27 February 2007

on the updated stability programme of the Netherlands, 2006-2009

(2007/C 70/06)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1], and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1) On 27 February 2007 the Council examined the updated stability programme of the Netherlands, which covers the period 2006 to 2009.

(2) The macroeconomic scenario underlying the programme envisages that real GDP will grow by 314 % in 2006, 3 % in 2007 and 134 % per year over the rest of the programme period. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions for 2006 and 2007 and cautious ones thereafter. The programme's projections for inflation appear realistic until 2007 and seem to be on the low side thereafter in light of the expected tightness of the labour market.

(3) For 2006, the general government position is estimated to be balanced in the Commission services' autumn 2006 forecast, against a target of -1,5 % of GDP set in the previous update of the stability programme. This mainly reflects a strongly improved cyclical outlook resulting in higher tax revenues as well as higher receipts from the sale of natural gas. Information that has become available since the autumn forecast (monthly data on the general government balance) points to an even better budgetary outcome. The latest official estimate, contained in the Autumn 2006 memorandum, puts the outturn for 2006 at a surplus of 0,4 % of GDP.

(4) The medium-term budgetary strategy in the programme aims at addressing the challenge of the cost of ageing through further fiscal consolidation. The programme projects the general government surplus to improve from 0,1 % of GDP in 2006 to 0,9 % in 2009. The primary surplus is targeted to improve from 2,4 % of GDP in 2006 to 2,9 % in 2009, which is fully concentrated in the final year of the programme, reflecting in large part the expected refunding in that year of the EU own resources contribution paid over the period 2007-2009. The nominal adjustment is fully explained by a fall in the expenditure-to-GDP ratio, which more than compensates a 0,2 percentage point decline in the revenue-to-GDP ratio. Compared to the previous update of the stability programme, the level of the general government balance is markedly higher throughout the programme period. This mainly reflects higher gas receipts, the improved macroeconomic situation in 2005 and outlook for 2006.

(5) The structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is expected to deteriorate by around half a percentage point of GDP in 2007, stabilise in 2008 and improve by around half a percentage point of GDP in 2009. As in the previous update of the stability programme, the medium-term objective (MTO) for the budgetary position presented in the programme is a structural deficit ranging from 0,5 to 1 % of GDP, which the programme plans to maintain throughout the programme period. As the lower bound of the MTO range is equal to the minimum benchmark (estimated at a deficit of around 1 % of GDP), achieving the MTO should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The MTO lies within the range indicated for euro-area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential output growth in the long term.

(6) The risks to the budgetary projections in the programme appear broadly balanced from 2007 onwards. On the one hand, the possibility of a positive carry-over into 2007 of the higher tax receipts in 2006 constitutes a positive risk to the budgetary outcome in 2007. Furthermore, for 2008 and 2009, a positive risk to the budgetary position stems from the cautious macroeconomic scenario. On the other hand, gas receipts may turn out lower than currently anticipated throughout the period.

(7) In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO throughout the programme period, as envisaged in the programme. In addition, it provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations throughout the programme period. Nevertheless, there is a risk that the fiscal policy stance implied by the programme may turn out to be pro-cyclical in 2007, when good times are expected. This would not be in line with the Stability and Growth Pact.

(8) Thanks to the sharp reduction in the general government deficit in 2004 and 2005, government gross debt is estimated to have fallen to 50,2 % of GDP in 2006, further below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to further decline by 6 percentage points over the programme period.

(9) The long-term budgetary impact of ageing in the Netherlands is higher than the EU average, influenced notably by a relatively high increase in pension expenditure as a share of GDP over the coming decades. The initial budgetary position, albeit not as strong as in 2005, contributes to easing the projected long-term budgetary impact of an ageing population, but it is not sufficient to fully cover it. The projected future rise of revenues as a share of GDP, mainly due to deferred taxation of pensions, would partly compensate for the increase in public expenditure over the long term. Ensuring high primary surpluses over the medium term and/or implementing reform measures that curb the projected increase in age-related expenditure would contribute to containing risks to the sustainability of public finances. Overall, the Netherlands appears to be at low risk with regard to the sustainability of public finances.

(10) The stability programme does not contain a qualitative assessment of the overall impact of the 2006 implementation report of the national reform programme within the medium-term fiscal strategy. In addition, it provides no systematic information on the direct budgetary costs or savings of the main reforms envisaged in the national reform programme, although its budgetary projections seem to take into account the public finance implications of the actions outlined in the national reform programme. The measures in the area of public finances envisaged in the stability programme seem consistent with those foreseen in the national reform programme. In particular, both programmes describe the recent health care reform, the modifications to the corporate tax system and planned extra outlays, for instance on infrastructure.

(11) The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008.

(12) As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data [2].

The Council considers that the medium-term budgetary position is sound and the budgetary strategy provides an example of fiscal policies conducted in compliance with the Stability and Growth Pact. Nevertheless, an important risk is that the current high level of gas receipts may not persist but overall the risks attached to the achievement of the budgetary targets are broadly neutral.

In view of the above assessment and the good growth prospects, the Netherlands is invited to maintain a strong structural position in 2007 and beyond, thereby avoiding pro-cyclical fiscal policies in good times.

Comparison of key macroeconomic and budgetary projections

Notes:

Source:

Stability programme; Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

| 2005 | 2006 | 2007 | 2008 | 2009 |

Real GDP (% change) | SP Nov 2006 | 1,5 | 3 14 | 3 | 1 34 | 1 34 |

COM Nov 2006 | 1,5 | 3,0 | 2,9 | 2,6 | n.a. |

SP Dec 2005 | 34 | 2 12 | 2 12 | 2 14 | n.a. |

HICP inflation (%) | SP Nov 2006 | 1,5 | 1 12 | 1 34 | 1 34 | 1 34 |

COM Nov 2006 | 1,5 | 1,6 | 1,8 | 2,3 | n.a. |

SP Dec 2005 | 1,5 | 1,5 | 1,1 | n.a. | n.a. |

Output gap (% of potential GDP) | SP Nov 2006 [3] | ‘�1,9 | ‘�0,5 | 0,6 | 0,6 | 0,3 |

COM Nov 2006 [7] | ‘�2,0 | ‘�1,2 | ‘�0,4 | 0,0 | n.a. |

SP Dec 2005 [3] | ‘�2,3 | ‘�1,5 | ‘�0,9 | ‘�0,6 | n.a. |

General government balance (% of GDP) | SP Nov 2006 | ‘�0,3 | 0,1 | 0,2 | 0,3 | 0,9 |

COM Nov 2006 | ‘�0,3 | 0,0 | 0,1 | 0,3 | n.a. |

SP Dec 2005 | ‘�1,2 | ‘�1,5 | ‘�1,2 | ‘�1,1 | n.a. |

Primary balance (% of GDP) | SP Nov 2006 | 2,1 | 2,4 | 2,4 | 2,4 | 2,9 |

COM Nov 2006 | 2,1 | 2,3 | 2,3 | 2,3 | n.a. |

SP Dec 2005 | 1,4 | 1,1 | 1,4 | 1,5 | n.a. |

Cyclically-adjusted balance (% of GDP) | SP Nov 2006 [3] | 0,8 | 0,4 | ‘�0,1 | 0,0 | 0,7 |

COM Nov 2006 | 0,9 | 0,6 | 0,4 | 0,3 | n.a. |

SP Dec 2005 [3] | 0,0 | ‘�0,7 | ‘�0,6 | ‘�0,6 | n.a. |

Structural balance [4] (% of GDP) | SP Nov 2006 [5] | 0,8 | 0,4 | ‘�0,1 | 0,0 | 0,4 |

COM Nov 2006 [6] | 0,9 | 0,6 | 0,4 | 0,3 | n.a. |

SP Dec 2005 | 0,0 | ‘�0,7 | ‘�0,6 | ‘�0,6 | n.a. |

Government gross debt (% of GDP) | SP Nov 2006 | 52,7 | 50,2 | 47,9 | 46,3 | 44,2 |

COM Nov 2006 | 52,7 | 50,5 | 47,8 | 45,4 | n.a. |

SP Dec 2005 | 54,4 | 54,5 | 53,9 | 53,1 | n.a. |

[1] OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

[2] In particular, the functional breakdown of government expenditures for 2009 is missing.

[3] Commission services calculations on the basis of the information in the programme.

[4] Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.

[5] One-off and other temporary measures taken from the programme (0,3% of GDP in 2009; deficit-reducing).

[6] There are no one-offs and other temporary measures in the Commission services' autumn 2006 forecast.

[7] Based on estimated potential growth of 1,9 %, 2,1 %, 2,2 % and 2,1 % respectively in the period 2005-2008.

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