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Factsheet May 2010 National Financial Annual Report 2009 Summary Table of contents 1 The Dutch economy and public finance 2 The Dutch economy in 2009 3 Government intervention 4 Public finance in 2009 Minister of Finance De Jager presents, on behalf of the Dutch cabinet, the Central Government Annual Report for 2009 to the Lower House on 19 May 2010. The report looks back on the economic and financial develoments in 2009 and shows the results of the past budgetary year. It discusses realised income and expenditure and compares them to expected income and planned expediture as presented a year and a half ago in the National Budget memorandum for 2009. To supplement this financial explanation, the results of policy are stated in the Accountability Report which is also presented to the Lower House on Accountability Day. 1. The Dutch economy and public finance The 2009 Budget Memorandum, the point of departure for this report, was written in the summer of 2008. At that time, CPB (Netherlands Bureau for Economic Policy Analysis) forecast an economic growth of 1 per cent in 2009. Looking back, we see that the Dutch economy did not grow in 2009, but contracted substantially. On account of the crisis, there is a historically high difference between the estimated figures (the economic forecast) for 2009 and the figures realised (the actual developments) in 2009. The discrepancy between estimated figures and realisation is found throughout this Financial Annual Report. 2. The Dutch economy in 2009 From crisis to cautious recovery In 2009, the Dutch economy shrank by a total of 4 per cent compared to 2008. This was primarily due to a sharp decline in exports. Because the Dutch economy is so strongly dependent on other countries, the decline in international trade had big repercussions on our national prosperity. The economic contraction in 2009 was the largest since World War II. More than half of the substantial contraction of the Dutch economy in 2009 can be attributed to decreased foreign sales. Private consumption, investments in housing and business investments declined as well. Government spending, however, made a positive contribution to economic growth. The other side of the coin is that the budgetary deficit showed a sharp rise in 2009. Business also had to accept a loss of income. Families, on the other hand, had more to spend; purchasing power rose thanks to the then still high wage rises (and lower inflation). The worldwide economic recession had a substantial downward effect on inflation (rising prices) in the Netherlands. In 2009, inflation was 1.0 per cent, which is 1.2 percentage points lower than 2008. This largely resulted from falling prices for energy and other resources. To illustrate: in July 2009 consumer gas prices dropped by nearly 20 per cent compared to the previous month. But the sombre figure for the year is also the harbinger of a cautious economic recovery. The crisis was at its deepest point in the first quarter of 2009, with economic contraction at more than 2 per cent. In the second quarter economic contraction (which started in 2008) slowed for the first time in a calendar year. In the second half of 2009, the Netherlands benefited as world trade picked up and economic growth returned (see figure 1). Production in the Netherlands has been on the rise since the third quarter of 2009, and this signals the end to the recession. But it is too early to call the recovery definitive; the financial and economic situation is still too uncertain and too fragile. For instance, growth showed another slight decline in the fourth quarter of 2009. Figure 1 Quarterly growth in GDP in 2008 and 2009 * Growth figures are always in comparison to the preceding quarter Dutch employment market When production began to decline at the end of 2008, the demand for labour fell in many sectors. The number of vacancies dropped and from the beginning of 2009, the number of jobs in the commercial sector also fell sharply. This was not accompanied by a comparable rise in unemployment: in 2009 the jobless rate was an average of 4.9 per cent, which meant a moderate increase over 2008. In part, this was because jobs in the healthcare sector continued to increase. But it was also because certain groups withdrew from the labour market or chose not to join at that point: young people stayed in school, women postponed their return to the workforce and older people took early retirement. Part-time unemployment benefits also helped check a rise in unemployment: participants in this scheme retained their jobs and so they were not included in unemployment figures. Taking the sharp economic contraction into account, the rise in unemployment was relatively small, both internationally and historically. Recovery of financial markets The cautious recovery of the economy was preceded by a recovery on the financial markets. At the close of the first quarter of 2009, the uncertain and troubled situation on the financial markets came to an end. Confidence in the financial sector was restored and uncertainty diminished. This was accompanied by a decline in the interest rate on corporate bonds as compared to the risk free rate. Especially in the latter half of 2009, the stock exchanges also showed signs of recovery; stock prices rose and price fluctuations were smaller (see figure 2). Figure 2 Votality of share prices in the United States and the euro zone Source: CEP2010 (CPB) World economy and euro zone The real world economy also showed cautious signs of recovery in 2009. In Asian countries (including Japan) GDP turned around and started rising in the second quarter. Domestic spending in Asia contributed to economic recovery elsewhere in the world. In the euro zone, the United States and Japan, the economy expanded in the second half of 2009. The recovery can partly be attributed to the budgetary incentive measures, the non-restrictive monetary policy, the improved situation on the financial markets and a positive impetus from stock build-up in industry. 3. Government intervention When the world economy seemed to have gone into free fall in late 2008 and early 2009, national governments, both in Europe and outside of it, vigorously intervened. They took measures to support and stimulate the economy in 2009 and 2010, and to restore the confidence of consumers and business. In view of the reasonably favourable national and international forecasts for economic growth in 2011, it would seem that these interventions came at the right time. Dutch measures and economic development The government took measures to combat the financial and economic crisis at several points. The year 2008 was primarily characterised by unrest on financial markets, the year 2009 by the protracted effects of the financial crisis on the real economy. The measures taken by the Dutch government are in line with this. At the end of 2008 the government had to intervene forcefully on the financial markets. These interventions were outlined in the Financial Annual Report for 2008. 1 Crisis policy in 2009 basically aimed to cushion the effects of the crisis on the real economy. The Netherlands made huge efforts to stop the recession and to prevent structural damage to the economy. Although the economic outlook for 2010 and 2011 is still uncertain, it does show that the Netherlands will return to more or less normal structural growth rates of 1.5 and 2 per cent respectively in those years. This is not to say that the expected recovery can be fully attributed to the measures taken in the Netherlands, Europe and the world. In its Central Economic Plan 2010 (CEP) the CPB analysed the consequences of government policy: what would have happened if public finance had not cushioned the blow dealt by the economic crisis as it did? The CPB also looked at the effects of the extra government expenditures. Supplementary Policy Agreement A targeted package aimed at quickly and temporarily stimulating the real economy was set forth in the Supplementary Policy Agreement, concluded in the spring of 2009. First and foremost, this agreement allowed the automatic stabilisers to operate in full. This means that the government did not take austerity measures when less revenue started to come in due to poor economic developments. In part because of this, the budgetary deficit rose to 5.3 per cent (expressed as a percentage of GDP). Ordinarily, the deficit would have been limited to a maximum of 3 per cent in accordance with the European rules of the Stability and Growth Pact. If the government had not allowed the deficit to rise, but had limited it to 3 per cent, then according to the CPB, the only option would have been to cut spending while raising taxes by 11 billion euro in 2009 and 25 billion euro in 2010. In that case economic growth would have been lower by ¾ percentage point in 2009 and by 2 percentage points in 2010, so that economic contraction would have continued in 2010. Second, on the expenditures side, it was agreed that, for the time being, extra funds would be reserved for higher spending on unemployment benefits and for a reduction in the terms of trade. This meant that on balance, 3.3bn euro more was spent in 2009. Allowing the automatic stabilisers to operate (i.e. allowing the deficit to rise as a consequence of rising unemployment expenditures and lower tax revenues) was effective. This incentive moves in sync with the economy and primarily finds its way to people whose income has dropped. Third, the agreement included a targeted and temporary incentive package to stimulate the economy with injections of 2.6bn euro in 2009 and 4.3bn euro in 2010. The incentive measures were aimed at improving the liquidity position of businesses, protecting employment for people in danger of being made redundant, preventing youth unemployment, making the Dutch economy sustainable and bringing forward infrastructure projects and housing and other construction. The measures to improve liquidity include monthly rather than quarterly VAT returns and extra deductions from wage costs of researchers. A number of capital market instruments have been included, such as the SMEs Credit Guarantee Decree, the Business Finance Guarantee and the Growth Facility. 1 Parliamentary papers II 2008/2009, 31 924, no. 1 (and see also the monitor in annex 5). As part of the labour market measures, incentive budget has been made available for the part-time unemployment benefits. The cabinet has also invested in creating extra work placement jobs and trainee positions for young people through the action plan to combat youth unemployment. The Netherlands has been able to retain highly qualified staff thanks to the scheme for leading high-tech projects and knowledge workers, and funds have been made available to launch new innovation projects and to accelerate existing ones. To strengthen economic sustainability of the country as a whole, funding was made available to speed up execution of FES (Economic Structure Enhancing Fund) projects for sustainable spatial development, extra subsidies were made available for double glazing and the VAT rate for insulation of homes was lowered. In addition, extra funds were released for matters such as sustainable agriculture and a cash-back scheme for scrapping old cars. On the housing market, the national mortgage guarantee was temporarily expanded and subsidies were made available to stimulate the construction of new homes. Funds were also released for construction plans of schools, care institutions and youth care agencies. Finally, infrastructure projects were given the option to accelerate construction. Examples of this are extra sand suppletions and accelerated investments in maintenance of roads and civil engineering projects. In comparison with other countries, automatic stabilisers play a larger role in the Dutch incentives and specific measures a smaller one. It is the question whether specific measures always satisfy the following criteria: they must be timely, temporary and targeted, and effective. Only a partial answer can be given; the CPB investigates the broad effects of extra expenditures or lower taxes, not their specific aim or intention. Given the degree of uncertainty as to the speed and the strength of economic recovery, it is unclear how to optimise the phasing of incentives (expenditures/measures) over the years. The effectiveness of economic crisis policy is another aspect that is difficult to determine. For example, how effective is crisis policy in restoring consumer and business confidence? This is an extremely important element of economic recovery, but one that is difficult to measure. However, CPB has established that this incentive package and the decision to set aside extra funds for unemployment benefits and terms of trade slowed the contraction of GDP by around ¾ percentage point in 2009 and increased economic growth in 2010 by approximately ½ percentage point. The Accountability Letter of the Prime Minister discusses in greater detail the results of the specific incentive measures. The measures are also reviewed in the ministerial annual reports. 2 2 At the request of the Dutch Lower House, the integral notes on progress made with the incentive package were annexed to the Provisional Accounts. Between the presentation of the Provisional Accounts and the Final Accounts, a total of 12m euro in public funds was moved from 2009 to 2010. Because this is a fairly minor change, the reader is referred to annex 2 of the Provisional Accounts. The Spring Budget Memorandum will present a new overview of the current pace of payments made out of the incentive package. 4. Public finance in 2009 Dutch public finance deteriorated dramatically in 2009. The expected budgetary surplus, an EMU balance of 1.2 percent of GDP, turned into a deficit of 5.3 per cent of GDP. This is a drop by 37bn euro. EMU debt grew in 2009 from an expected 39.6 per cent of GDP to 60.9 per cent of GDP, or an increase of some 101bn euro. For the Netherlands, these are unprecedented figures. (% bbp) Figure 3 Development of expectations for EMU balance and EMU debt 2009 (%) 3% 120% 1% 100% -1% 80% -3% 60% -5% 40% -7% 20% -9% 0% MN VJN EMU-schuld (rechter as) NJN FJR EMU-saldo (linker as) MN = Budget Memorandum VJN = Spring Budget Memorandum NJN = Autumn Budget Memorandum FJR = National Financial Annual Report EMU debt (right axis) EMU balance (left axis) The deteriorating EMU balance was due to two factors. First, the unfavourable economic developments caused government revenues to decline sharply, particularly revenues from value added tax, corporation tax and wage and income tax. Receipts were lower by over 27bn euro (4.8 percentage points of GDP) in 2009 than was expected on the basis of estimates. Second, government spending was not lower but higher, increasing by 7bn euro more than the estimate. This primarily involved higher spending on unemployment benefits and the expenditures in the incentives package. Local government also showed a higher deficit than expected in the 2009 budget (a rise of 3.2bn euro). Altogether, this means that the general government balance deteriorated by more than 37bn euro, which is 6.5 percentage points of GDP. EMU debt increased by around 101bn euro. Around 37bn euro stems directly from the budgetary deficit. Furthermore, EMU debt rose by over 63bn euro as a result of the interventions in the financial sector, such as the takeover of Fortis/ABN AMRO, capital reinforcements and loans to banks (‘this is offset by assets’). The figure of 63bn euro includes the repayments made in 2009.