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Standard and Poor’s Poor Analysis of the Dutch Economy

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Gepubliceerd om: november 29 2013

Today, Standard and Poor’s lowered it’s rating on Dutch sovereign debt. S&P is certainly right to mention low growth as one of the biggest problems in the Netherlands. And, I can only hope that Dutch policy makers finally start to be concerned with growth and unemployment, rather than being obsessed with budget deficit. However, it does not help at all that the Dutch sovereign is downgraded based on a poor understanding of the workings of the Dutch economy and the Dutch government finances.

S&P downgrades the Dutch government by referring to disappointingly low growth, but this is in no small part due to the massive amount of austerity the Dutch government is imposing on the economy, in addition to the balance-sheet problems in the private sector (see more below). However, on austerity, S&P remains suspiciously silent, probably because S&P has in the past repeatedly issued warnings that ratings would indeed be lowered if deficits larger than 3-percent would persist. See for example here.

For many years now, the Dutch government has been behaving as a dog chasing its own tail. Austerity has sent the Dutch economy into a downward spiral. Every year economic growth is lower than projected. Budget deficits are larger than projected. And, hence, every year the Dutch government announces ad hoc and ill-reasoned austerity packages so as not to breach the Brussels’ 3-percent deficit limit.

Between 2011-2017 the government takes an historically unprecedented 9% of GDP in deficit-reducing measures – all relative to baseline projections for Dutch public finances that are made at the start of each new government period (Suyker, 2013). Approximately half of which are tax increases and the other half are budget cuts.

The great irony is that every recent Dutch Minister of Finance pursued more and more austerity to retain the AAA-rating. But, today’s S&P report demonstrated that all these austerity efforts were to no avail; their reward for their painful efforts has been a downgrade.

Austerity was and remains unsound economic policy as long as the Dutch economy remains in a balance-sheet recession, with a large private mortgage-debt overhang, banks with dirty balance sheets contracting credit and pension funds coping with funding shortfalls, cutting pension entitlements and raising pension contributions.*

Under current macro-economic conditions (debt-overhang, banks contracting credit and ECB-rates stuck at the zero lower bound) is it nearly impossible to reduce public debts through austerity, as Delong and Summers (2012) and others have demonstrated. Due to high multipliers output contracts, unemployment rises, firms go bankrupt, banks get into deeper problems, the deficit hardly comes down and public debt keeps on rising.

Indeed, during 2011-2014 the Dutch government takes 6,5% of GDP in deficit-reducing measures, while the budget deficit only shrinks with a tiny 1% of GPD. And, gross public debt further increases from 65,7 percent GDP in 2011 to an expected 76,3 percent GDP in 2014 (CPB, 2013).

S&P apparently believes in a world where basic macro-economic accounting identities do not hold. Spending equals income. Saving equals borrowing. Not all sectors in the Dutch economy can simultaneously stop spending and start saving (deleveraging) without triggering a collapse in aggregate demand. Today, S&P finally discovered that basic macro-economic accounting identities do hold. Surprise! S&P downgrades the Dutch government for being so supportive in destroying economic growth.

An even greater concern is that S&P has no idea about the current state of the Dutch public finances. In fact, the Netherlands has 99 problems, but sustainability of the government finances isn’t one. If so, why downgrade the Dutch sovereign?

Fiscal gap calculations for the sustainability of the Dutch public finances point to a negative fiscal gap (Lukkezen en Suyker, 2013). That is: the Dutch government has a long-term fiscal surplus! The fiscal gap is the annuity of the present value of future deficits (Auerbach, 1994). Based on current projections regarding tax revenue and government expenditure, the net present value of future tax revenue is larger than the net present value of future expenditures.** I am not aware of another advanced country without natural resources having a long-term fiscal surplus.

The Netherlands achieved this surplus during the worst economic crisis since the Great Depression. Indeed, the favorable state of Dutch public finances has been bolstered by various policy measures taken by recent governments: raising the statutory retirement age to 67, gradually reducing the generosity of the mortgage-rent tax deduction and long-term reforms in health care, amongst other things.

Despite all these policy measures, the first and foremost reason for the negative fiscal gap is that future tax revenue will substantially increase due to the taxation of pension benefits. With the ageing of the population, private pension funds start paying out pensions. Pension contributions are tax deductible, accrual of pension wealth remains untaxed, and pension benefits are taxed.

The Netherlands has accumulated a massive amount of pension wealth of approximately 165% of GDP (DNB, 2013). Hence, the Dutch government has an gigantic tax claim on future pension benefits amounting to about 66% of GDP (approx. 40% taxes over 165% GDP pension wealth).

S&P and many foreign observers, but also Dutch public officials, consistently ignore this hugely important asset in their assessments of the Dutch public finances. Current gross public debt of 75% of GDP almost entirely cancels against the tax claim on future pensions of 67% of GDP.

In addition, the Dutch government obtains future revenue from natural gas sales, which represents an asset of 22% of GDP. And, the Dutch government has additional assets worth 92% of GDP (capital assets 65% GDP, financial assets 27% GDP), see also Lukkezen and Suyker (2013). All this implies that the Dutch government has positive net assets, not net debt.

If the government has positive net assets, low growth is not bad, as S&P suggests. Lower (structural) growth is bad when there is a positive level of debt. However, when there is a positive level of assets sustainability of public finances improves with lower growth. Intuitively, it easier to finance future outlays from initial assets if future government expenditures grow at a lower rate. Calculations in CPB (2010) demonstrate that a 0,5% lower structural economic growth per year reduces the fiscal gap in Dutch public finances with 0,6% of GDP.

Further, I am rather skeptical that the Dutch economy would enter a long-term low-growth scenario with labor-productivity growth lagging chronically behind 1.7% per year, which is currently assumed in the sustainability calculations. During 1913-1994 average labor productivity grew at 1.6% per year, and this period included two world wars and the Great Depression (Van Ark and De Jong, 1996).

However, I am deeply worried about hysteresis (DeLong and Summers, 2012). Productive capacity might get lost forever if temporary unemployment would become permanent and firms would unnecessarily go bankrupt, thereby destroying firm-specific knowledge, technology and human capital.

To conclude it’s highly unlikely that the Dutch government runs into any budgetary problems at any time soon. The following S&P statement is therefore nonsense: “Fiscal space is increasingly limited, however, with the government’s net debt expected to increase to 71% of GDP in 2014.”  Apart from the silly 3-percent deficit rule imposed by Brussels, there is absolutely no danger that the Dutch public finances spiral out of control if budget deficits were about to increase during the upcoming years. (Note also that S&P confuses gross and net public debt.)

S&P is moreover inconsistent if it tells the world: “That said, we do not expect the cost of debt service to meaningfully increase.” If S&P really believes that the outlook for the Dutch public finances deteriorates, as their downgrade suggests, then this implies that the costs of debt service increase, and not remain constant. But, again, this demonstrates that standard economic logic is not the biggest strength of S&P. Indeed, today’s bond market markets remained rightfully stoic to the downgrade of the Dutch government as interest rates on 10-year government bonds remained unchanged at 2,02 percent. S&P follows the market, rather than the other way round.

Sadly, I would not be surprised that Dutch policy makers would take an economically highly inconsistent credit-rating report to justify even more austerity, rather than take the S&P report as a wake-up call to relax austerity and help the private sector restore its balance sheets.


Ark, B. van, and H. de Jong (1996), “Accounting for Growth in The Netherlands since 1913”, Rijksuniversiteit Groningen Research Memorandum, GD-26.

Auerbach, A. J. (1994), “The U.S. Fiscal Problem: Where We Are, How We Got Here, and Where We’re Going”, in: S. Fischer and J. Rotemberg (eds.), NBER Macroeconomics Annual, Cambridge-MA: National Bureau of Economic Research.

CPB (2010), Vergrijzing Verdeeld, Den Haag: CPB Netherlands Bureau for Economic Policy Analysis.

CPB (2013), Macro Economische Verkenningen 2014, Den Haag: CPB Netherlands Bureau for Economic Policy Analysis.

DNB (2013), Pension Fund Statics, Dutch Central Bank:

DeLong, J. B., and L. H. Summers (2012), “Fiscal Policy in a Depressed Economy”, Brookings Papers on Economic Activity, 44, (1), 233-297.

Lukkezen, J., and W. Suyker (2013), De Naakte feiten over de Nederlandse Overheidsschuld. CPB Achtergronddocument, 5 juni, CPB Netherlands Bureau for Economic Policy Analysis.

Suyker, W. (2013), Tekortreducerende Maatregelen 2011–2017, MEV2014-versie, CPB Achtergronddocument, 17 september, CPB Netherlands Bureau for Economic Policy Analysis.

* This is all somewhat paradoxical, since the Netherlands has positive net wealth. The problem is that most assets are illiquid (houses and pensions) and cannot be used to bring down debts.

** Two caveats are in order here: CPB assumes a too low growth rate for health-care expenditures and the value of government interventions in and guarantees for the financial sector are excluded. Problems in a banking sector with a balance-sheet total of more than 4 times GDP could seriously undermine the health of public finances.