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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 economic recovery.”

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.”