• The Dutch economy
• Public finances
• Citizens’ purchasing power
• Economic structure and business climate

The Dutch economy

The accelerating economic growth – estimated at 3 percent of GDP for next year – is beneficial for citizens and companies. The economic recovery offers more opportunities to more people in the labour market.

In 2007 the number of jobs will increase according to the forecasts of the Netherlands Bureau for Economic Policy Analysis (CPB) by 104 thousand in terms of years of employment. Unemployment is expected to decline further in 2007 by 55 thousand people. People resuming or starting paid employment for the first time will see their income grow strongly. The average increase in purchasing power for people starting paid employment after receiving welfare benefits will be 15 per cent, now that the economy is recovering so strongly.

Inflation in the Netherlands will remain low: the CPB is expecting an inflation rate of 1½ per cent for 2007. In 2007 private consumption is expected to increase by 2 per cent compared to 2006. The recovering economy will lead to greater disposable income for citizens in 2007. The wage increase, at 2 per cent, is expected to be slightly higher than in the past few years.

Public finances

Public finances have recovered from the low of 2003. An EMU balance of 0.2 is expected for 2007. This means it will be better than expected in the first Budget Memorandum of the cabinet Balkenende II, when it was put at – 0.6 percent of GDP in 2007. The Netherlands scores significantly higher than average in this respect within the euro zone. The favourable starting position for 2007 is to a considerable extent due to the reforms policy of the past few years.

Another important goal of the budget policy pursued is to improve the structural public budget balance. The specific goal was a structural deficit of at most 0.5 per cent GDP in 2007. The structural balance is expected to amount to 0.0 per cent of GDP in 2007.

Whereas the debt ratio continually increased in the past few years, a turnaround is discernible from 2006 onwards. The Budget Memorandum 2004 states that the EMU debt ratio must decrease ‘towards 50 per cent of GDP’. The expected debt ratio in 2007 is 48 per cent of GDP. That is the best ratio of the past 25 years and well over 10 per cent below the European average. Factors contributing to the decline in the debt ratio are the higher economic growth and the improved EMU balance.

Economic recovery, the reforms policy pursued, policy decisions and a number of technical factors mean that the government potentially has modest additional scope in 2007 from below-budget expenditure. That scope – 0.3 billion euros – is not being utilised now that the economy is at full steam. Arrangements have been made in the government for this type of windfalls for extra expenditure that is not to be used.

Citizens’ purchasing power

For the year 2007, reduced EU contributions and other factors provide scope for further strengthening of purchasing power. A significant portion of the tax and social security contribution reduction for citizens is effected by reducing unemployment benefit contributions. Also, the labour tax credit and the supplementary combination tax credit will be increased. These measures will benefit those in employment.

Parents will benefit from the reduced parents’ contribution to child day care and higher child benefit. The purchasing power of senior citizens will be increased by raising supplementary old-age pension benefits. Everyone will benefit from the reduction of the tax rate in the first bracket and the increase in the general tax credit. The measures will result in an overall increase in purchasing power of 1 per cent per household.

Economic structure and business climate

With the reduction of the rate for corporation tax as proposed in “Working on profit” (“Werken aan Winst”) the government is contributing to an attractive and competitive business climate, both for large companies and for small and medium-sized enterprises. Therefore the corporation tax rate for 2007 will be reduced from 29.1 per cent to 25.5 per cent. In parallel with this reduction, businesses whose profits are liable to income tax will receive an SME exemption of 10 per cent.

The strengthening of the economic structure by the reduction in the corporation tax rate and SME exemption will be reinforced by distribution of the extra funds from the Economic Structure Enhancing Fund (FES). In the coming years, 1.9 billion euros out of the rising natural gas revenues will be devoted via the FES to projects for knowledge, education and innovation, spatial economic development and acceleration of infrastructure.

Source: Ministry of Finance press release, 19 September 2006.