By Nick Mann | 19 March 2013
The International Monetary Fund has approved the Netherlands’ decision not to embark on any more fiscal consolidation this year in light of weaker than expected economic growth.
An IMF statement, issued at the end of its annual review of the Dutch economy, supported the target of a budget deficit equivalent to 3.4% of gross domestic product this year.
Despite ‘very difficult’ economic circumstances, the country was still on track to achieve a ‘very substantial’ underlying structural adjustment equivalent to 2.5% of GDP over 2012 and 2013, the IMF noted. This refers to the part of the budget deficit not affected by economic growth.
‘Given the uncertainty surrounding the timing and the pace of recovery, a focus on structural fiscal targets is appropriate,’ the IMF said. ‘In order to anchor expectations and reduce uncertainty, we are of the view that fiscal policy beyond 2013 should focus on the structural adjustment outlined in the December 2012 Update of the Netherlands’ Stability Program, while allowing automatic stabilisers to respond to macroeconomic developments as they occur.
‘ A firm focus on medium-term objectives will further cement the Netherlands’ policy credibility and role as an anchor at the core of the euro area, and mitigate policy uncertainty.’
The Netherlands should avoid pro-cyclical fiscal policies – where spending is cut and taxes go up when the economy is weak and the reverse happens in a boom – because these could prolong the downturn and damage potential growth, the IMF added.
Among the structural reforms the IMF called for ‘to safeguard the economy’s long-term potential’ were measures to ‘safeguard the sustainability’ of the country’s pension system and ensuring it is less linked to the state of the Dutch economy.
The government should also contain long-term health care costs that could eventually have a negative on the country’s public finances. Measures outlined last December such as carrying out more rigorous checks on the cost-effectiveness of new treatments were ‘important steps in this direction’, the IMF said.
It also called for labour market measures to do more to avoid long-term unemployment and address the ‘duality’ between labour markets by giving temporary workers more protection and ‘reducing rigidities’ for permanent workers.
