September 18, 2007

Actualisatie Economische Verkenning 2008-2011.

Budget surplus of 1% GDP in 2011

Press release
The Cabinet allocates well over 3 billion euro to additional outlays during its term in office. The collective burden (including health care premiums) will increase by 7 billion euro in the period 2008-2011. A government budget surplus of 1% of GDP is expected for 2011, the end of the term in office.

This is the outcome of a CPB analysis of the budget plans of the Cabinet based on a scenario with an economic growth of 2% per annum in the years 2008-2011. In this scenario, households' purchasing power increases on average by 1% per year. Differences between households are, however, substantial.

These are the headlines of the CPB Document Update Economic Outlook 2008-2011, which has been published today. This is an update as well as an extension of the Economic Outlook 2008-2011 published in September 2006 (CPB Document 129). Last year's medium-term outlook has been used as baseline for the analysis of the election platforms and was therefore without additional policy measures for the period 2008-2011. In the current scenario, the policy measures of the new Cabinet have been taken into account. In February 2007, the CPB already provided a note on the ex-ante impact of the policy intentions of the new Cabinet. In the CPB Document published today, the outlook for 2008, The new short-term forecasts for the Dutch economy - also published today as the Macro Economic Outlook 2008- have been incorporated in the new Outlook 2008-2011.

Scenario with economic growth of 2% per year in 2008-2011
The scenario analysis is based on the growth possibilities of the Dutch economy, the so-called potential output growth. In contrast with last year's publication, CPB has not applied a safety margin to potential output growth in the current medium-term scenario, following the decision of the Cabinet on its medium-term budget policy. In the medium-term scenario, it has been taken into account that the Dutch economy is not a cyclical-neutral situation in 2007 but has a positive output gap. As cyclical developments cannot be projected for the longer term, it is assumed that the Dutch economy will return to a cyclical-neutral situation in 2011, the usual assumption in this kind of analyses. All in all the scenario includes an economic growth during the period 2008-2011 of 2% per year on average.
The largest contribution to economic growth in the period 2008-2011 comes from a rise in labour productivity of 1.5% per year. Mainly due to ageing, employment growth tapers off to 0.5% per year. In the scenario, the unemployment rate is 4.25% in 2011, broadly unchanged from 2007-2008.

Purchasing power improves despite higher taxes and social security premiums
The purchasing power of households rises by 1% per year in 2008-2011 on average. In 2008, average purchasing power is more or less flat, with some households gaining and others losing. In the years 2009-2011, on the other hand, the expected improvement in purchasing power is well over 1% per year. Employees will enjoy a stronger rise in purchasing power than social security beneficiaries and the elderly. Purchasing power of the elderly is lagging as (supplementary) pensions rise less than wages. Purchasing power improves, especially because income increases (3.25% per year) exceed price increases (1.75% per year). In addition to real income developments, the development of taxes and social security premiums and the development of government outlays is of importance.

Rise in government outlays ...
The Cabinet allocates well over 3 billion euro to additional outlays during its term in office. Additional resources will be spent on education (rising to 1 billion euro in 2011), child care (0.7 billion euro) and security (0.55 billion euro). At the same, other government outlays will be cut: government services (0.8 billion euro) and various subsidies (0.35 billion euro). Households benefit from child vouchers (1.3 billion euro) and the rise in the health care allowance.

... and a rise in the collective burden
The collective burden (including health care premiums) will increase by 7 billion euro, 5.25 billion euro at the expense of households and well over 1.5 billion euro at the expense of enterprises. This is mainly caused by rising health care premiums. Higher indirect taxes, including VAT, excises and environmental levies, are almost offset by lower direct taxes and a drop in the unemployment premium of employees.

Budget balance swings from a deficit in 2007 to a surplus in 2011
As a result of the economic and budgetary developments mentioned above, the general government budget balance swings from a deficit of 0.3% of GDP in 2007 to a surplus of 1.1% of GDP in 2011. Collective outlays as a percentage of GDP are more or less constant, but the collective burden increases by 1.5% of GDP, which reflects the tax increases mentioned and the progressiveness of the tax revenues. More remains to be done to reach sustainable government finances in the long term. In the Update Economic Outlook published today, the CPB estimates the sustainability gap in 2011 to be 2.2% of GDP.


Dick Morks

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