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Central Ecconomic Plan 2017
Budget Rising
surplus inflation
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March 2017 | ISBN 978-90-5833-764-1
Central
Economic
Plan
2017
Chapter 1
(translation)
Chapter 1 of the
Central Economic Plan 2017
CPB Netherlands Bureau for Economic Policy Analysis
March 24, 2017
1
1
Summary
Global economic growth is expected to accelerate this year and also slightly in the year thereafter;
particularly due to growth increases in emerging economies. The global increase will also
accelerate growth in relevant world trade to 3% this year, and 3.6% in 2018. The growth of the
Dutch economy is robust with 2.1% this year and 1.8% in 2018. This growth is mainly driven by
consumption and exports. Economic growth is coupled with increases in employment in the market
sector as well as in health care. For this year, unemployment is projected to be 4.9% of the labour
force, and for next year this will be 4.7%. Influenced by higher energy prices, inflation will increase
to 1.6% this year, and 1.4% the following year. The decrease in unemployment and increase in
inflation will cause contract wages to rise. For both 2017 and 2018, a moderate increase in median
static purchasing power is projected, for both 2017 and 2018, of 0.1% and 0.3%, respectively,
following the 2.7% increase in 2016. Last year’s budget surplus is projected to increase further, to
0.8% of GDP by 2018, as continued economic growth will lead to higher revenues while
government spending will lag behind.
The Dutch economy will grow with 1.7% on average in the period 2018-2021. The growth of labour
supply and employment will be roughly equal, and hence unemployment will stabilise at 4,7%.
Interest rates and inflation increase slightly, but remain low. The government budget balance will
show a surplus of 1,3% in 2021 and government debt will decrease to 47% of GDP. The
sustainability balance is in surplus, 0,5% GDP.
2
1.1
Summary and introduction
Global economy
Theglobaleconomywillseecontinuedslightgrowth,andmonetarypolicywillremain
exceptionallyloose.However,globalgrowthisprojectedtoacceleratealittle,boththisyear
andthenext,particularlyduetoincreasedgrowthinemergingeconomies.InChina,lower
growth,comparedtorecentyears,isdampeningglobalgrowthlevels,althoughthelatest
figuresonChinaareslightlymorepositivethanexpected.ThisalsoappliestotheRussian
economy,asitwillbenefitfromrisingoilprices.Recentfiguresandleadingindicatorsshowa
slightlyincreasinggrowthintheadvancedeconomies,particularlythoseoutsidethe
eurozone.USgrowthisrobustandprojectedtobefavourable,intheshortterm,whichis
connectedwiththeexpectedadjustmentstoUSbudgetarypolicy.IntheUnitedKingdom,
domesticdemandhasdevelopedmorepositivelythanexpected,followingtheBrexit
referendum.Intheeurozone,bothconsumerandproducerconfidencehaveincreasedto
levelsthatarecurrentlyhigherthanbeforethefinancialcrisis.Economicgrowthinthe
eurozoneisprojectedat1.7%,boththisyearandthenext,withgrowthinGermanybeing
slightlyaboveandFranceandItalyslightlybelowthisaverage.
Theimpactoftheincreasinggrowthinemergingeconomieswillalsoaccelerateworldtrade
growthto3%thisyear,and4.0%in2018.Lastyear’stradeelasticity(betweenglobalGDP
growthandworldtrade)of0.6wasatthelowestlevelsince2001.Thisisexpectedto
normaliseovertheprojectedperiod,toavalueofaround1.GrowthinfortheNetherlands
relevantworldtradewillslightlylagbehind,with3%and3.6%(Figure1.1,left),becausethe
maintradingpartnersoftheNetherlandsareinEurope,wheregrowthislessexuberant.
Figure 1.1
135
Steady growth in relevant world trade (left); HICP and core inflation in the eurozone
(right)
2
index 2010 = 100
%
130
125
1
hicp core
120
world trade volume
115
hicp total
world trade relevant to
the Netherlands
0
110
105
100
2010
2011
2012
2013
2014
2015
2016
2017
2018
-1
january 2014 july 2014 january 2015 july 2015 january 2016 july 2016 january 2017
Source: CPB calculation and Eurostat (link).
Nominalandreallong‐terminterestrateshaveclearlyrisen,recently—particularlyinthe
UnitedStatessinceitspresidentialelectionsinNovemberoflastyear.Theriseispartly
drivenbyanticipatedadjustmentstothepolicymixbythenewfederalgovernment.Because
ofamoreflexiblebudgetarypolicy,thespendingimpetusisexpectedtoleadtogreater
inflationarypressureandpossiblytolessgradualnormalisationofmonetarypolicy.
3
AlsoinEurope,interestrateshaverecentlygoneup,albeitlessstronglythanintheUnited
States.Overtheprojectedperiod,theGermanlong‐terminterestrateincreasesfrom0.1%in
2016to0.4%inboth2017and2018.1IntheUnitedStates,thepolicyinterestratewas
increasedsinceDecember,asexpected,whichdoesnotalterthefactthatmonetarypolicy
remainedlooseintheadvancedeconomies.Theeuroexchangerateisprojectedtodecrease
againsttheUSdollar,boththisyearandthenext,whichwillleadtoanimprovedcompetitive
pricingpositionvis‐à‐vistheUnitedStates.Ontheotherhand,theeuroexchangerateagainst
currenciesofanumberofemergingeconomieshasinfactincreased.
Forthisyear,asubstantialincreaseininflationintheeurozoneisprojected,mostlydueto
higherenergyprices.Coreinflation(inflationcorrectedforenergypricesandunprocessed
foods),however,willremainrelativelylow(Figure1.1,ontheright).Inflationarypressureis
stillnotverylarge.Nevertheless,therewillbesome,althoughfairlylimited,catch‐upgrowth.
InmanyEUcountries,unemploymentisprojectedtodecrease,butwillstillbeabovethe
multi‐annualaverage.Ontheotherhand,theexpectedfive‐yearinflationhasrecently
increasedto1.7%,togetherwiththeincreaseinlong‐terminterestrates,inboththeUnited
Statesandtheeurozone.Risingenergypricesandthedepreciationoftheeurowilldriveup
inflationfor2017to1.5%.Fornextyear,thestableriseinenergypriceswillnotgivean
extraimpetustoinflation,whichwillthengodownagain,slightly,to1.3%.Followingthe
decreasein2016,oilpricesareexpectedtoincreaseagainin2017toalittleoverUSD55per
barrel,afterwhichthetechnicalprojectionsexpectthemtostabilisein2018.Therecentoil
pricerisecanberelatedbacktoanincreaseddemand,asaresultofasteadilyrecovering
globaleconomyandtheagreementbetweenOPECcountriestolimitoilproduction.
Globaleconomicgrowthknowsanumberofrisks.IntheUnitedStates,uncertaintiesabout
policyhaveincreasedwiththenewfederalgovernment’sunknownattitudetowards
internationalinstitutions,tradeandregulationofthefinancialsector.InEurope,inlightof
upcomingnationalelections,anumberofcountriesfaceuncertaintiesaboutfuturepolicy,
includingpoliticalcommitmenttotheEU.Europealsofacestheriskofsentimentsaround
Brexitchanginginanticipationofahardexit,withhigheconomiccostsonbothsides.Finally,
theeurozonehasanumberofsimmeringrisks,whichmayflareupagainunderunexpected
setbacks,suchastheweakbalancesheetsofsomeEuropeanbanksandthesustainabilityof
Greece’sgovernmentdebt.Onthepositiveside,thereistheriskofhigherbooststospending
intheUnitedStatesandChina,havinglargerpositiveeffectsthancurrentlyexpected.
The Dutch economy
Dutcheconomicgrowthisprojectedtocontinue,boththisyearandthefollowingyear,bya
respective2.1%and1.8%.Allspendingcategorieswillcontributetothisgrowth(Figure1.2,
ontheleft).
1The technical projections of oil prices, exchange rates and interest rates are based on the realisations in week 4 of 2017.
4
Table 1.1
Main data on the Netherlands, 20132018
2013
2014
2015
2016
2017
2018
mutations per year, in %
International economy
Relevant world trade volume goods and services
Competitor prices (a)
Oil price (in USD per barrel)
Euro exchange rate (in USD per euro)
Long-term interest rate the Netherlands (level in %)
2.8
-2.8
107.1
1.33
2.0
4.5
-0.7
97.9
1.33
1.5
3.9
8.0
51.9
1.11
0.7
2.7
-3.0
43.3
1.11
0.3
3.0
1.1
55.5
1.07
0.7
3.6
1.1
56.1
1.07
0.7
Volume GDP and spending
Gross Domestic Product (GDP, economic growth)
Household consumption
Government consumption
Investments (including stocks)
Exportation of goods and services
Importation of goods and services
-0.2
-1.0
-0.1
-3.9
2.1
1.0
1.4
0.3
0.3
3.2
4.5
4.2
2.0
1.8
0.2
6.2
5.0
5.8
2.1
1.8
0.7
4.3
3.7
3.9
2.1
2.0
0.8
3.6
3.5
3.6
1.8
1.4
1.0
2.8
3.9
3.9
Prices, wages and purchasing power
Price level Gross Domestic Product
Export prices domestically produced goods, excluding energy
Price levels imported goods
Inflation, Harmonised Index of Consumer Prices (HICP)
Contract wages market sector
Purchasing power, static, median all households
1.4
0.1
-1.9
2.6
1.2
-1.4
0.1
-0.8
-2.7
0.3
1.0
1.2
0.1
0.7
-5.1
0.2
1.3
1.2
1.0
-1.0
-4.5
0.1
1.7
2.7
1.2
0.9
5.1
1.6
1.8
0.1
1.4
1.0
1.0
1.4
2.1
0.3
Labour market
Labour force
Working population
Unemployed labour force (x thousand persons)
Unemployed labour force (in % of labour force)
0.8
-0.8
647
7.3
-0.4
-0.6
660
7.4
0.4
1.0
614
6.9
0.4
1.3
538
6.0
0.8
2.0
445
4.9
0.8
1.1
430
4.7
Market sector (b)
Production
Labour productivity (per hour)
Employment (in hours)
Wage rate (per hour)
Labour income share (in %)
-0.7
0.4
-1.1
1.7
79.1
2.4
1.6
0.8
0.8
78.7
2.8
1.6
1.2
0.2
77.1
2.6
0.3
2.3
1.6
77.7
2.8
1.0
1.9
2.6
78.3
2.1
1.4
0.7
2.6
78.4
Other
Individual saving share (in % disposable income) (c)
Balance current accounts (in % of GDP)
-0.7
10.2
-1.4
8.5
0.2
8.5
0.9
8.7
0.0
8.2
0.3
8.2
-2.0
65.1
37.7
0.3
61.8
39.0
0.5
58.5
39.3
0.8
55.5
39.3
level in % of GDP
Public sector
EMU balance
EMU debt (ultimo year)
Collective financial burden
-2.4
67.7
36.5
-2.3
67.9
37.5
(a) Goods and services, excluding natural resources and fuels.
(b) Businesses, excluding health care, mineral mining and the real estate sector.
(c) Level; disposable family income includes public savings. The individual saving share will be 0.6 percentage points lower in 2017
and 0.2 percentage points lower in 2018, after also taking personal pension fund management into account, see the text box in
Chapter 1 of the MEV2017.
Theincreaseinprivateconsumptionwillberapidthisyear,easingbackalittlethenextyear,
asthe5‐billion‐europackagewillhavebeenspentandincreasinginflationwillbe
dampeningpurchasingpower.Corporateinvestmentswillincreasethisyearandthenext,
comparedto2016levels.However,fornextyear,thegrowthinhousinginvestmentsis
expectedtodecline,whereasexportswillcontinuetodowell,inbothyears,alsocompared
5
torelevantworldtradelevels.Productiongrowthwillbeachievedmoreorlessfullyinthe
marketsector.Theheathcaresector,incontrasttopreviousyears,willmakeapositive
contributiontothegrowthinaddedvalue,inbothyears.Thisyear,alowernaturalgas
productionlevelwillstilldampenGDPgrowthby0.2%,butthisisnolongerthecasein2018,
duetounchangedproductionlevels.Themostimportantdomesticuncertaintiesaroundthe
projectionsconcernthedevelopmentsinunemploymentandexports.Unemploymentcould
godownfurtherthanprojected,iftheincreaseinemploymentwouldbegreaterthan
currentlyexpected.Ontheotherside,thereistheriskoflaboursupplyincreasingmore
rapidly,duetofavourablelabourmarketconditions,whichinturnwouldincrease
unemployment(seetextbox).Therelativelyabundantgrowthinexports,comparedwith
relevantworldtrade,couldprovetobeincidental,whichwouldresultinlowerexportlevels
thancurrentlyprojected.
Figure 1.2
2.5
Growth across the board (left); the number of housing market transactions has set a
record (right)
percentage points GDP growth
25
GDP growth
monthly figures (x 1000)
2.0
20
1.5
1.0
15
0.5
10
0.0
-0.5
-1.0
2014
2015
2016
2017
2018
exports
government spending
business investments
housing investments
household consumption
5
0
2005
2007
2009
2011
2013
2015
2017
The contribution of public spending to GDP growth only concerns the direct spending effects of government consumption and
investments. Effects of other public expenditure, such as on income transfers and subsidies, may contribute to growth indirectly, via
household spending and corporate spending. This could also apply to taxation.
Source: CBS, CPB calculations (link).
Consumptionlevelsarebelievedtoincreaserapidly,thisyear,asaresultofthereductionsin
spendingamonghigherincomes,overthelastyears.Nextyear’sconsumptionisprojectedto
growinlinewiththeincreaseindisposableincome.Overthelasttwoyears,thedisposable
incomelevelhasincreased,substantially,amongotherthingsduetothereductionintax
burdenachievedbythe5‐billion‐europackageofmeasures.Someofthisadditionalincome
wasnotconsumedin2016,whichcausedaslightincreaseinthesavingsshare.Disposable
incomeisprojectedtoincreasefurther,boththisyearandthenext,astheincreasein
employmentwillgeneratemoreincome.Higherinflation,however,willdampentheincrease
inrealwages,andsocialbenefitincomeswilldecline,slightly,inbothyears,becausethere
willbenoindexationofpensionsandadecreaseinthenumberofrecipients.Inbothyears,
althoughtheincreaseindisposableincomewillbesmallercomparedtothelastfewyears,a
largershareofthisincreasewillbeconsumed.Thesavingsharewilldeclineslightly,inboth
years(which,incidentally,willpartlybeduetothemeasureregardingpersonalpensionfund
management(PensioeninEigenBeheer2)).
2
See the text box in Chapter 1 of the Macro Economic Outlook 2017.
6
Pensionpremiums,onaverage,willincreasethisyear,andstabilisenextyear.Premium
increasesarepartlyduetothelowersolvencyratioscausedbylowerinterestrates.Inthe
publicsector,however,premiumsareexpectedtoincreasein2018,aswell.Onaverage,
therewillbenopensionreductionsorindexations.
DevelopmentsonthehousingmarketarepositiveandwillcontributetoGDPgrowth.House
prices,lastyear,increasedby5.0%,causingpricestobenearly15%highertodaythanat
theirlowestpointin2013.Theincreaseinhousingpricesof2017isprojectedtocontinuein
2018.Transactionnumbersreachedtheirhighestlevelsince2005inthesecondhalfof2016
(Figure1.2,ontheright).Housinginvestmentsgrewoverthepastyearbyabout20%.This
rateofincreasewillnormaliseoverthecourseofboththisyearandthenext,to6.6%and
2.9%respectively.Thegrowingnumberoftransactionsinexistinghouseswillprovidean
impulseforrenovation,restaurationandrepairwork.
Corporateinvestmentsareprojectedtogrow,boththisyearandthenext,byaround2.5%.
Capacityutilisationwillbeatthemulti‐annualaverage,andtheinvestmentsharewillremain
stable.SMEaccesstobankingcreditcontinuestobelimited,followingthemorestringent
acceptancecriteriaforloanstoSMEs,inpreviousyears.
Dutchexportsofgoodsarerelativelypositiveand,sinceafewyears,havebeenincreasing
morerapidlythanrelevantworldtrade.Thisappliesbothtore‐exportsandtheexportof
domesticproducts.Exportsbenefitfromanimprovedcompetitiveposition,whichwillalso
increaseslightly,thisyear,becauseofthedepreciationoftheeuro.Exportscontinueto
increaseovertheprojectedperiod,althoughcomparedtothegrowthinrelevantworld
trade,thedifferencewillbecomesmaller.
Figure 1.3
Employment, labour supply and unemployment (left); purchasing power increase is
waning (right)
200 mutation in thousand persons
% of labour force
3
8
%
7
150
100
2
labour supply (left axis)
employment (left axis)
unemployment (right axis)
median static purchasing power development
6
5
1
4
50
0
3
2
-1
0
1
-50
-2
0
2014
2015
2016
2017
2018
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: CBS, CPB calculations (link).
Thegrowthinmarket‐sectoremploymentwillcontinue,andwillalsogrowinthehealthcare
sector;unemploymentwilldecreasefrom6.0%ofthelabourforcein2016,to4.9%in2017
and4.7%in2018(Figure1.3,ontheleft).Overtheprojectedperiod,theincreasein
employment(hoursworked)willdecline,toacertaindegree,underincreasingproductivity.
7
Uncertain developments on the labour market
In the recent past, rapid developments on the labour market continued to surprise, and unemployment
proved to decrease more rapidly than expected by CPB and other institutes. Employment and labour
supply both developed in a way that is atypical during a period of economic recovery, and they were
therefore difficult to project (a). Two variants illustrate the related uncertainties for unemployment
projections.
Higher growth in employment
In the last two years, employment increased, substantially. Relatively high profits enabled companies to
hire new staff. However, a tighter labour market means that finding suitable staff is becoming more and
more difficult as well as more expensive. This will cause growth in employment to level off in the central
projection. Employment is projected to see a slightly lower increase this year, compared to the previous
year, and to level off even further in 2018.
This simulation assumes average employment growth in 2017 and 2018 to be similar to that of 2015
and 2016, which would mean an additional growth of 0.4 percentage points, in both years.
Unemployment, in 2018, would thus be 0.5 percentage points below the central projection. Tightening of
the labour market leads to higher wage levels, which in turn leads to higher inflation. The additional
employment and real wage increases both stimulate consumption and, thus, economic growth. The
EMU balance would improve, due to lower expenditure on unemployment benefit payments and higher
wage and income tax revenues.
Discouraged workers returning to the labour market
During the crisis, people have become discouraged and withdrew from the labour market. When the
economy improves and unemployment declines, these people may be expected to return to the labour
market. Over the last three years, unemployment decreased from 7.4% of the labour force, to 5.3% in
late 2016. And, yet, only few of these discouraged workers have returned to the labour market. This
development is extrapolated in the central projection, and, therefore, the return of this economic labour
supply is expected to be only limited in the coming two years.
Under this simulation, it is assumed that positive circumstances encourage more discouraged workers
to enter the labour market, in 2017 and 2018,and both this year and the next, around 30,000 people
return to the labour market. This will cause an increase in unemployment of 0.7 percentage points in
2018. The higher unemployment will reduce some of the wage pressure. Lower real wages lead to less
consumption and, thus, to a slowdown in economic growth. This would also decrease the EMU balance.
In the long run the extra labour supply will find a job and tax income increases. In this case, the group of
discouraged workers returns sooner to the labour market than in the central projection. Long-run effects
on the economy and the government balance are neutral.
Consequences of increases in employment and labour supply for economic development
Employment increases
2017
2018
Return of discouraged
workers
2017
2018
effect on annual mutations in percentage points, compared to the baseline
Gross Domestic Product
Household consumption
Investments (including stocks)
0.0
0.1
-0.1
0.1
0.2
0.1
0.0
0.0
0.0
-0.1
-0.1
-0.1
Consumer Price Index (CPI)
Contract wages market sector
0.0
0.1
0.1
0.2
0.0
-0.1
-0.1
-0.3
0.4
-0.4
0.0
-0.3
0.4
-0.3
0.1
-0.5
0.0
0.0
0.4
0.4
0.0
-0.1
0.3
0.7
0.1
0.2
-0.1
-0.2
Employment market sector, in hours worked
Labour productivity market sector, in hours worked
Labour supply
Unemployed labour force (in %)
EMU balance (% of GDP)
8
Lastyear,thegrowthinemploymentwasremarkablyhighandproductivityrelativelylow.
Overtheprojectionperiod,theratiobetweenthesetwoisexpectedtonormalise,causinga
slightslowdowninemploymentgrowth.Thisgrowthwilltakeplaceinthemarketsectorand
inhealthcare,andwillbemorethansufficienttoabsorbthisyear’slaboursupply.The
increaseinlaboursupplyisgreaterovertheprojectionperiodthanithasbeenduringthe
lastyears,duetostructuralfactorssuchashigherlevelsofparticipationbywomenandolder
people,aswellaspolicyeffects(raiseinstate‐pensionage,5‐billion‐europackageof
measures).Theincreaseinemploymentinthemarketsectorwillslowdown,nextyear,
combinedwithanincreaseinlaboursupplythatismoreorlessequaltothisyear’sincrease.
Nextyear’sdecreaseinunemployment,therefore,willbesmallerthanthatofthisyear.
Thedecreaseinunemploymentandincreaseininflationwillleadtomoreupwardpressure
onwages.Theriseincontractwageswillincreasefrom1.8%thisyear,to2.1%in2018.This
year’sriseremainslimited,becausemanyoftheDutchcollectivelabouragreements(CAOs)
werealreadyconcludedlastyear,whichmeansthatthehigherinflationhasnotyetbeen
incorporatedintothoseCAOsfor2017.Realwagesinthemarketsectorwillincreaseby
morethanlabourproductivity,underrelativelyhighcorporateprofits.Atthesametime,
inflation(theHarmonisedIndexofConsumerPrices(HICP)),with1.6%thisyearand1.4%
nextyear,willbesubstantiallyhigherthanoverthelastyears.Thisisparticularlytheresult
ofhigherenergypricesandthedepreciationoftheeuroagainsttotheUSdollar.Dutch
inflationwillbeinlinewiththatoftheeurozone,inbothyears.Thisyear,inparticular,
contractwageincreaseswillnotbemuchabovetheinflationlevel,limitingthepositive
impulseonmedianhouseholdpurchasingpower,whichisalsothecasenextyear,albeittoa
slightlylowerdegree.Afterthepositiveimpactofthe5‐billion‐europackageofmeasureson
lastyear’spurchasingpower,theincreaseinpurchasingpowerwillbelessthisyearandnext
year(Figure1.3,ontheright).
Public finances
Thesurplusin2016isestimatedat0.3%GDP.Thissurplusisprojectedtoincreasethisyear
to0.5%andnextyearto0.8%.Therecentrapidincreaseinthegovernmentbalancewas
mostlyduetostrongincreasesintaxrevenues.Thisispartlyduetothecontributionto
economicgrowthbyrelativelyhighlytaxeddomesticspending.Furthermore,therewasalso
asharpincreaseincorporationtax(excludingnaturalgasproduction),from0.7%ofGDPto
3.0%.Partofthisincreasehasastructuralcharacter,becauseofincreasedcompanyprofits
andduetothefactthatcompaniesappeartohavealmostnomorecompensablelosses.
Anotherpartisonlytemporary,becauseofprovisionaltaxassessmentsbytheDutchTax
Administration.Onthesideofspending,thereisalsoanincidentalfactorthatcausesa
temporaryimprovementinthebudgetingbalance,namelytheDutchdeductionsonEU
payments,whichwillbereceivedretrospectively(0.3%ofGDP).Theimprovementtothe
budgetingbalanceisdampenedbydecliningnaturalgasrevenues,asaresultoflower
productionlevelsandlowerprices.Thebudgetsurplusisprojectedtoincreaseevenfurther,
overtheprojectedperiod.Thisisduetothecontinuedeconomicgrowth,whichreduces
unemploymentbenefitpayments,andisduetohighertaxrevenuesandgovernment
spendingthatincreaseslessrapidlythanGDP.Thebudgetsurplusalsoincreasesbecauseof
9
declininginterestrateexpenditures,andthetemporarilyhighertaxrevenues,duetofiscal
adjustmentsrelatedtopersonalpensionfundmanagement.
Figure 1.4
1.0
Government financial balance, compared against the Government Agreement
EMU balance
current projections
% of GDP
0.5
0.0
-0.5
-1.0
-1.5
-2.0
EMU balance
projections of 2012,
based on Government
Agreement
-2.5
-3.0
-3.5
-4.0
-4.5
2012
2013
2014
2015
2016
2017
Source: CBS, CPB calculations (link).
Developmentofthebudgetingbalancewasparticularlymorefavourablein2016than
expectedatthetimeoftheGovernmentAgreement(Figure1.4).Thiscanmostlybe
attributedtowindfallsintaxrevenues.Lowerexpendituresoninterestratepayments
contributedalsotothepositivebudgetingbalance.Withregardtootherexpenditure
categories,higherandlowerexpendituresvisavistheexpectationsatthetimeofthe
GovernmentAgreementcanceleachotherout.
Thestructuralbudgetingbalanceisprojectedtoresultinasurplusforboth2017and2018.
Thisbringsthestructuralbalanceabovethemedium‐termobjective(MTO)of‐0.5%ofGDP.
In2017,forthefirsttimesince2010,thegrossgovernmentdebt—at58.5%ofGDP—will
bebelowtheMaastrichtTreatymaximumof60%ofGDP.TheDutchGovernmentdebtwill
decreasefurtherin2018,to55.5%ofGDP,becauseofthebudgetsurplus,financial
transactions,suchastheprivatisationofABNAMRO,andthedenominatoreffectasaresult
oftheincreaseinGDP.
1.2
Analysis
Those were the days
2017willbethethirdyearinarowwith2%growth—isthisgoodorbadnews?Overthe30
yearsprecedingtheGreatRecession,theNetherlandsexperiencedalongperiodofhigher
economicgrowth:averagegrowthwas2½%,withpeaksofaround5%.Notonlywas
aggregateeconomicgrowthhigh,incomepercapita,whichisamorerelevantmeasurefor
individuallivingstandards,alsogrewbyabout1¾%peryear.Nowthatthiscountryis
definitelyleavingtherecessionbehind,thequestionarisesofwhethertheolddaysof2½%
growthwillreturn,orifstructurallylowergrowthshouldbeanticipated.Andwhatarethe
implicationsoflowergrowth?Woulditsimplyimplylessrapidimprovementsinliving
10
standardsordoeslowerornearzeroeconomicgrowthraisenewquestions?Whatif‘one‐
point‐something’becomesthenewnormal?
Anageingpopulationandlessgrowthinlabourmarketparticipationwillputpressureonthe
labourforceand,thus,eventuallyalsoontheincreaseinemployment.Theincreaseinthe
working‐agepopulationisslowingdown,andismostlykeptatacertainlevelthrough
gradualincreasesinthestatutoryretirementage(seeFigure1.5,ontheleft).Theincreasein
labourparticipationbywomenisexpectedtoslowdown,overthecomingyears.CPB’sstudy
onpopulationageing(2014),therefore,assumesastablelabourforce—increasingupto
2025anddecreasingthereafter—fortheperiodupto2040.Theincreaseinemployment,in
hours,willlagbehind,becauseofanaverageshorterworkingweek.Thefuturelabourforce
isexpectedtobemoreorlessstable;thedaysofmorethan1%employmentgrowthare
over.Therefore,foreconomicgrowth,wedependonproductivityincreases.Incomegrowth
percapita,inaddition,alsobenefitsfromaslightincreaseinthedegreeofparticipation.
Uncertainfactorsregardinglabourforcegrowthrelatetomigration,participationbywomen
andolderpeople,andpart‐timeworkers.Inthecomingdecades,apositivenetflowof
migrantsmaycontributetoanincreaseinlabourforce.Increasedmigration,thus,may
stimulateeconomicgrowth,butwillhaveanuncertainimpactonincomepercapita.A
contributingaspect,inthisrespect,isthedegreeofparticipationbywomenandolder
people.Theincreaseintheparticipationbywomenisexpectedtoleveloffandtolagbehind
thatofmen.Participationbyolderpeoplewillincrease,partlyasaresultoftheincreasein
thestatutoryretirementage.Furthermore,alsoasmallerdecreaseintheaveragenumberof
hoursworkedwillcontributetoanincreaseintheincomepercapita.
Figure 1.3
1000
Labour supply stable in the coming decade (left) and declining growth trend in labour
productivity (right)
x 1000 persons
8
participation
500
total labour supply
%
6
0
labour productivity
4
-500
demography
-1000
2
-1500
trend
0
-2000
-2
-2500
-3000
1980
1990
2000
2010
2020
2030
2040
2050
2060
-4
1971
1980
1990
2000
2010
2015
Inthefuture,economicgrowthwilllikelybegeneratedmostlyfromlabourproductivity.
However,anyoptimismaboutthisaspectisbeingtemperedbyrecenthistory.ArecentCPB
CommunicationbyGrabskaetal.(2017)3showsthatlabourproductivitygrowthinthe
Netherlandshasbeenonthedeclinesincethe1970s,andsloweddownevenfurther,aftera
notablebumparound2000(Figure1.5,ontheright).Thebumpandsubsequentslowdown
werenotonlycausedbyeconomicfactors,suchaseconomiccycles,theGreatRecessionor
thebankingcrisis,butalsoseemtobestronglyconnectedtotheICTrevolution.Future
3
CPB, 2017, Productivity Slowdown, Evidence for the Netherlands, Communication 9 March 2017 (link).
11
productivitygrowthmainlywillbedeterminedbytechnologicaldevelopment,ratherthan
economicrecovery.Withoutnewtechnologicalbreakthroughs,annualproductivitygrowth
willleveloffat1%to1.5%—ordecreaseevenfurther.4Incombinationwithamoreorless
stablelabourforce,aneconomicgrowthpercentagethatstartswiththefigure‘1’canbe
expectedtobecomethenewnormal.
Asisthecaseforlabourmarketparticipation,productivitygrowthalsohasanumberof
uncertainfactors,suchasnewtechnologicaldevelopments,thereturnoneducation,physical
investments,andtheeffectuationofstructuralreform.Onthepositiveside,Acemogluand
Restrepo(2017)speakoftheopportunitiesprovidedbyrobotisationincountrieswhere
labourisscarcebutcapitalisabundantlyavailable.Others,however,pointtothenegative
impactofpopulationageingonproductivitygrowth,andconcludethattheeconomicbenefit
ofanincreasinglymoreeducatedlabourforcehasitsnaturallimits.
However,if,underastableincreaseinpopulation,productivitygrowthislowerthan
expected,potentialeconomicgrowthwillcomeunderpressure,inthecomingdecades.Such
asituationwouldhaveanumberofpossibleimplications.Recessionsmaytakeplacemore
frequentlyandlastlongerasaresultofloweraveragegrowth,possiblywithadverseeffects
onlong‐termgrowth.Inaddition,lowerstructuralgrowthwillinvolvelowerrealinterest
rates,redistributionwillbemoredifficult,andthegovernmentbudgetwillalsobeaffected.
Lowergrowthlevelswillresultinmorefrequentlyoccurringrecessions,withthezerolower
boundcomingintoview,moreoften.Fluctuationsareofallages.‘Lean’yearswillalsooccur
intimesofaveragehighpotentialgrowth.Overthepastfivedecades,forexample,economic
growthwas1.5percentagepointbelowthe10‐yearaverage,oneightseparateoccasions.
Andameagre1percentagepointgrowthbelowaverage,generally,occurstwiceperdecade.
TwoyearsofrecessionperdecadeissomethingweexperiencedduringtheGreatRecession,
butnotintheprecedingperiod.Andyet,thismaybecomethenewnormal,ifaverageannual
growthdoesnotriseabove1%to1.5%.Here,itmustbenotedthat,givenhardlyany
populationgrowthorevenshrinkage,theconsequencesofarecessionwillbelesssevere,
perheadofthepopulation,thaninthepast.
Recessionswillnotonlyhappenmorefrequently,theywillalsolastlonger.Assumingthat
risks,andthusmagnitudes,ofnegativeshockswillbesimilartothoseinthepast,theperiods
ofrecoverywillbelongerunderloweraveragegrowth.Inthe1980s,ittookonlyoneyear
fortheeconomytoreturntoitsoldlevel,aftertwoyearsofrecession.Inthefuture,under
lowaveragegrowth,itwilltakeanumberofyearsfortheeconomytorecoverfroma
recessionandgetbacktoitspre‐recessionlevel.
Thereareindicationsthatrecessionsarefollowedbylongerperiodsoflowergrowth.5This
appliesnotonlytofinancialcrises,butto70%ofrecessions.Whethertheimpactis
4
CPB, 2015, Toekomstverkenning Welvaart en Leefomgeving (WLO) 2015 [Future outlook on welfare, prosperity and the
human environment (in Dutch)], (link)
5
See Blanchard, O., G. Lorenzoni and J.P. L’Huillier, 2017, Short-Run Effects of Lower Productivity Growth. A Twist on the
Secular Stagnation Hypothesise. NBER Working Paper 23160 (link) and Cerra, V. and S. Sexena, Booms, crises and
12
comparableforallcountries—theNetherlands,inparticular—isdebatable.6The
explanation,however,canbetwofold.Oneisthatofhysteresis;temporaryshockshave
permanentconsequences.Forexample,becausepeopleareoutofthelabourforcefortoo
longand,therefore,losepartoftheirrelevantknowledgeandexperience.Inperiodsoflow
economicgrowth,investmentlevelsmaybelowand,thus,slowdownnewtechnological
development.Whateverthereasonforhysteresis,thepreventionofrecessionsorthe
stimulationofarapidrecoverywillhaveapermanent,positiveimpactontheeconomy.
However,theoppositemayalsobetrue;unfavourableprospectsforstructuralgrowthmay
leadtolowerinvestments,lesslabourdemandamongcompanies,additionalspendingcuts,
andlowerconsumerspending—thus,resultinginthestartofarecession.Fromapolicy
perspective,thismeansthattemporarystimulationmeasureswillnothavealastingimpact,
andthat,incontrast,anincreaseinpotentialgrowthmayhavepositiveeffectsthatbecome
apparentalreadyintheshortterm.
Lowergrowth,certainlyinthelongerterm,iscoupledtolowerrealinterestrates.In
combinationwithamoderateinflationtarget,thenominalinterestratewillalsobelower,on
average—whichmeansthat,incaseofanewrecession,thezerolowerboundwillbe
bindingatanearlierpointintime.Undersuchconditions,itismoredifficulttocorrectthe
economybywayofmonetarypolicy.Asecondconsequenceofthelowinterestratewouldbe
thatinvestorslookmoreactivelyforhigherreturnsandarepreparedtotakehigherrisks.
Thismayhavenegativeconsequencesforeconomicstability.Afterall,alowerinterestrate
hasanadverseeffectonthesolvencyratioofpensionfunds,particularlyonpremiumsand
pensionpaymentsand,therefore,onredistribution.
Lowergrowthhasanimpactonredistribution;asmallerpiemakesitmoredifficultto
ensurepurchasingpowerwillremainatacertainlevelforeveryone.Ifproductivitygrowthis
lower,thenumbersarealsounfavourableforpurchasingpower.Thisiscertainlythecasein
timesofrecession,butalsoundermoderatepositivegrowthitwillbemoredifficultto
improvepurchasingpowerforallincomegroups.Moreover,adeclineinthesolvencyratioof
pensionfundswouldincludehigherpremiumsand/orlowerpensionpayments.Thisaffects
thepurchasingpowerofbothworkingpeopleandpensioners.
Withoutbeingexhaustive,lowergrowthultimatelyhasconsequencesforthegovernment
budget.Governmentrevenues,intheformoftaxationandpremiums,willdecrease.Thisis
alsotrueforsomeoftheexpenditures;thegovernmentwouldbenefitfromalowerinterest
rateandlowerincreaseincontractwages.But,overall,thegovernmentwillneedtocutits
coataccordingtoitscloth.Foragovernmentbudgettobesustainable,thiscallsfor
expenditurestobeinlinewitheconomicgrowth.Assumingthatgovernmentrevenuesand
expendituresincreasetogetherwithmacroeconomicproductivity,evenlowerproductivityis
beneficialforasustainablebudget.However,if,forexample,thedevelopmentofnewor
moreexpensivetreatmentsinhealthcarecontinues,thuscausingcostdevelopmentstobe
recoveries, IMF (link). The notable aspect of this research is that it focuses explicitly on recessions; the question of whether
periods of economic boom are also followed by high economic growth, is not being answered.
6
CPB 2014, Roads to Recovery (link) finds no indication of hysteresis in the Netherlands.
13
outofsyncwiththerestoftheeconomy,lowereconomicgrowthwouldonceagainpresent
thegovernmentwithlargechallenges.Andfinally,lowergrowthwillhaveanadverseeffect
onthedebtratio,whichcanbereducedbylessthroughnominalGDPgrowth(the
denominatoreffect),butinsteadwillhavetocomefromabudgetsurplus.
Lowereconomicgrowthiswhatisinstore,notonlyfortheNetherlands,butformany
westerncountriesthatareexperiencingacombinationofanageingpopulationand
decreasingproductivitygrowth.Thegovernmentmeanstostimulatepotentialgrowthare
limited.Immigrationmayleadtohighergrowth,butincomespercapitacanonlyincreaseby
attractingworkerswhoarecapableofmorethanaverageproductivity.Stimulatinglabour
participation(particularlyinhours)mayalsoleadtohigherincomegrowthpercapita.Both
optionsdohaveimplicationsoutsidethatnarrowlydefinedeconomicrealm.Migrationposes
issuesaroundintegration,increasedlabourparticipationisattheexpenseofleisuretime,
whichinturncanthennolongerbespentoncaringforfamilymembers,volunteerworkor
hobbies.Productivitygrowthinvolvesbothopportunitiesandthreatsrelatedtoclimate;
opportunitiesintermsofnewtechnologies,andthreatsbecauseofhigheremissionlevels.
Investinginpeople,knowledge,andinnovationmayleadtohigherproductivity,buteffective
policyinthisareaisintractable.
Thosewerethedays,thedaysofhigheconomicgrowth.Forthecomingdecades,Dutch
growthpotentialislowerthanitwasintheyearsprecedingthefinancialandeconomic
crises.Growthfiguresof3%,4%oreven5%areathingofthepast.Thisistheresult,among
otherthings,ofpopulationageinganddecliningproductivitygrowth.Addedtothatisthe
factthatgovernmentshaveonlyfewopportunitiestostimulatepotentialgrowth,anddoing
so,forexample,throughimmigrationorlabourparticipationalsohasitsdisadvantages.
14
Central Ecconomic Plan 2017
Pm PM
Publisher:
CPB Netherlands Bureau for Economic Policy Analysis
P.O. Box 80510 | 2508 GM The Hague
+31 (088) 9846 000 | [email protected]
March 2017 | ISBN 978-90-5833-764-1
Central
Economic
Plan
2017
Chapter 1
(translation)