The Role of Independent Fiscal Institutions in Fiscal Frameworks: the Dutch Case

Friday, February 22, 9.00 to 10.30 am

Presenter
Mr. Sander van Veldhuizen, Program Manager Public Finance, CPB Netherlands Bureau for Economic Policy Analysis


What is the role of an independent fiscal institution in a budgetary framework? How can fiscal councils help assess the budgetary implications of political programs? And how did the Netherlands cope with “Dutch disease”? In a public JVI lecture on February 22, 2019, Mr. Sander van Veldhuizen, Program Manager for Public Finance at the CPB Netherlands Bureau for Economic Policy Analysis, the Dutch fiscal council, discussed how the Dutch budgeting process works today and the central role of the CPB. The event was chaired by Mr. Holger Flörkemeier, JVI Deputy Director.

History and Mission of the Netherlands CPB 

The CPB, established as the Central Planning Bureau in 1945, was then led by the first Nobel Prize winner in economics, Jan Tinbergen, a pioneer in econometric modelling. Its main task was policy analysis rather than preparing central plans, so to prevent any confusion with formal centrally-planned economies, its name was changed in the 1990s to CPB Netherlands Bureau for Economic Policy Analysis. Its main goal, Mr. van Veldhuizen said, is to be a trusted source of independent economic analysis, providing policy makers with feasible options and conducting high-quality research. It strives to be an impartial, independent, policy-relevant, and academically sound institution, preparing both short-term economic forecasts on which the government bases its fiscal projections and in-depth structural analyses on such topics as globalization, education, aging, financial markets, and tax reforms.

In the late 2000s, the CPB was given the role of fiscal council, performing the traditional tasks of a fiscal watchdog, such as forecasting, assessing policy initiatives, evaluating fiscal transparency, ex ante and ex post evaluation of fiscal policy, monitoring observance of fiscal rules, and evaluating fiscal sustainability. The only task the CPB Netherlands is not involved in—to preserve its independence and impartiality, Mr. van Veldhuizen said—is making “normative recommendations.” While the CPB is ready to analyze the economic and fiscal consequences of any policy proposal and could perhaps rank them by their impact, it would not express a direct preference for a specific policy. 

The CPB Netherlands as Fiscal Watchdog

Mr. van Veldhuizen focused on three of the Bureau’s main tasks: medium-term baseline projection, analysis of election platforms, and regular quarterly forecasting, of which the first two are unique to the Netherlands. 

The medium-term baseline outlook, based on an assumption of unchanged economic policies, is published by the CPB every four years, before every general parliamentary election. It is discussed in a meeting of the Budgeting Framework Commission, a body chaired by the Ministry of Finance and composed of top civil servants, among them the CPB Director, and is the starting point for assessing any policy initiative that has been proposed.

The Dutch tradition of assessing election manifestos has sparked marvel internationally. As part of this task, before every parliamentary elections, the CPB Netherlands invites all parties represented in the Dutch parliament (or that pre-election polls project may be represented) to have their election manifestos assessed (and published) in terms of the impact on the budget based on the medium-term outlook. In October 2016, for example, 11 parties responded. The CPB assesses the impact of their political promises on key indicators such as the budget balance, debt sustainability, structural employment, and income inequality (see Chart). Party manifestos tend to differ considerably in both types of measures chosen and their impact.

Chart

Finally, Mr. van Veldhuizen reviewed the role of CPB short-term forecasts in Dutch fiscal policy. The government needs CPB forecasts for the annual budget projections, traditionally prepared in August for the next year. The CPB collects all the information necessary, including confidential budget data, to produce its forecasts.

Natural Resources and the Dutch Fiscal Framework

Mr. van Veldhuizen closed his talk by discussing the role of natural resources—in the Dutch case natural gas—in the fiscal framework. The famous Dutch disease occurred in the 1960s and 1970s because after the real exchange rate of the Dutch currency appreciated, driven by price and wage inflation due to the natural resource boom, the Dutch economy lost international competitiveness in other areas, especially manufacturing. Until 2014, the revenues from natural gas (dividends, taxes, and other extraction-related income) were about 5–10% of central government revenues, though today they are less than 1%, less is being extracted and gas prices are lower.

General Discussion

The audience discussed the challenges for fiscal councils and other fiscal institutions to stay independent and impartial and help the government to run a responsible fiscal policy, such as using fiscal rules and medium-term budget frameworks. The optimal policy responses to Dutch disease were debated, including how the Netherlands tried to diversify the economy and redirected the windfall gains from natural gas extraction to social benefits.

Adam Gersl, Lead Economist, JVI

Presentation

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