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Central Ecconomic Plan 2017 Budget Rising surplus inflation 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) 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, 20132018 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)