IMF Welcomes Dutch Fiscal Consolidation Plans
Tuesday, February 16, 2010
The International Monetary Fund (IMF) has welcomed the Dutch government’s commitment
to implementing a stringent consolidation plan, starting in 2011, to reign
in the fiscal deficit that is expected to reach 6% of gross domestic product (GDP) by the end of 2010.
In its Article IV consultation with the Netherlands, the IMF observed that country has been
markedly vulnerable to the global crisis given its large financial sector, and
strong trade and financial linkages. Amid collapsing exports and investment,
GDP is expected to have contracted by about 4% in 2009. A modest recovery is
projected for 2010.
The IMF Executive Board observed that while the bailout of the financial sector
and general stimulus measures were appropriate, the fiscal deficit drifted
to around 4.5% of GDP by end-2009 as a result. The Fund has warned that this
could potentially deteriorate further as additional measures may yet be necessary
to ensure sustained recovery in the country's financial services.
“Public debt has surged as a result of the ongoing budget relaxation
and the financial sector assistance. Together with higher estimates of long-run
aging pressures, the worsening budget position has raised the estimated fiscal
sustainability gap substantially to about 8% of GDP," the Fund's report stated.
In its recommendations, the Executive Board welcomed the Dutch government's efforts to draft
ambitious fiscal consolidation to be implemented starting 2011, as the recovery
firms. Measures totalling 1.75% of GDP have already been announced. Moreover,
nineteen working groups have been set up to formulate, by the spring of 2010, proposals
for savings of up to 20% of budget expenditure. Another group is tasked with
re-examining tax policy within the same timeframe. Plans are also underway to
embed Dutch obligations under the Stability and Growth Pact into law, to help
strengthen the commitment to deficit reduction.
The Board also supported an “accommodative budgetary stance” envisaged
by the authorities for 2009-10, observing that “fiscal relaxation is warranted
in light of sizable negative output gaps and the still fragile prospects for
The Board noted that there is limited scope to raise tax rates, while efficiency
enhancements should create scope to reduce spending without jeopardizing public
service provision. However, the IMF also noted that in particular, “pension, health, and old-age-care reforms
would be crucial to containing—particularly aging-related—expenditure.”