December 21, 1999

CPB Report: Dutch economic growth stays above 3% in 2000

Dutch economy

The downswing in Dutch economic growth which occurred from mid 1998 was brief and very mild. Thanks to an unexpected forceful recovery of exports from the second quarter of this year, the annual GDP increase in 1999 is likely to come out at 3.5%. This is just less than last year (3.7%). For 1999 consumer expenditure is expected to increase by 4.25%. This makes consumption the main engine for economic growth this year. Next year, consumption growth is expected to decelerate to 3.5%. For 2000 CPB Netherlands Bureau for Economic Policy Analysis forecasts a moderation of economic growth to 3.25%. The expected accelerating export growth is likely to be offset by the less dynamic private consumption.
The favourable economic developments pave the way for a further reduction in unemployment. In the projection unemployment falls from 4.9% last year to 4% in 1999 and to 3.5% in 2000.

World economy
World economic activity accelerated sharply in the second half of this year. On average, world trade growth is expected to be 5% in 1999 and 8.5% in 2000.
US output growth remained strong in 1999: 4%. Consumer spending is buoyant this year, supported by wealth effects. CPB forecasts US growth to fall back to 3% in 2000.
The recovery in the European Union will gain momentum, while the upturn in Asia continues into the next year.

What else in CPB Report 1999/4?
This summarises the current view of CPB Netherlands Bureau for Economic Policy Analysis on the economic outlook for 1999 and 2000, as stated in CPB Report 1999/4. In addition to these forecasts, CPB Report (CPB's quarterly magazine, written in English) highlights completed and current research at the Bureau. This issue contains articles on budget rules and stabilisation; the future of the Dutch health insurance system; asylum seekers and the budget; taxation and employability; equilibrium unemployment; Kyoto: greenhouse gases policy; industrial land-use planning in the Netherlands; and institutional reform in Central and Eastern Europe. The Kyoto and budget rules articles are highlighted here.

Budget rules and stabilisation
The trend-based budgetary rules that were introduced by the Dutch government in 1994 have been successful in consolidating public finances in the Netherlands. These rules have contributed to orderly decision making in the budgetary proces. Yet, on a few points the rules might deserve attention in the future.
The present rules are at variance with the principle of tax smoothing. Moreover, the opportunities for automatic stabilisation are only partially exploited.
With regard to government consumption, an important issue is whether ceilings should be expressed in nominal, real or volume terms. The current system uses the GDP deflator to update ceilings. This makes government expenditure susceptible to shocks in the price of public sector goods relative to the GDP deflator.

Kyoto
In 1997, the Netherlands agreed with other countries in Kyoto (Japan) to reduce its emissions of greenhouse gases around 2010, compared to 1990. Unfortunately, Netherlands greenhouse gas emissions in 1997 were already 8% higher than in 1990. Compared to1997, the Kyoto target requires a reduction of 13%: a very ambitious goal! It is more difficult to achieve CO2-reductions in the Netherlands than in most other countries. Being a large producer of natural gas, this country has already a high contribution of natural gas in its fuel mix in 1990. Many other countries can reach substantial reductions without additional costs by switching from coal and fuel oil to natural gas. The Netherlands cannot. By agreeing to a substantial emissions reduction, the government has committed the Netherlands to other, relatively expensive measures. The very ambitious goal is not met with tough measures.
Correspondingly, the macro-economic impact of these policies is only small: a decrease in GDP by 0.2% to 0.3%. The impact on employment is negligible.
Another article focuses on a major weakness in the Kyoto protocol. Non-industrialised countries have not committed themselves to emission reductions. This may lead to substantial displacement of energy-intensive activities to non-industrialised countries: so-called carbon leakage. This harms the industrial countries and reduces the effectiveness of the Kyoto protocol.