Budget rules

Government expenditure and revenue

Central government revenue consists of:

• taxes (main source of revenue);
• natural gas revenue;
• income/profits from state holdings in private enterprises;
• fines.

The government sets the expenditure for its entire term of office (four years) in real terms when it takes office. The expenditure relates to three sectors: central government (the ministries), social security and care.

The greater part of central government expenditure is financed from taxes. Social security and care expenditure is funded chiefly from contributions (e.g. for unemployment insurance and exceptional medical expenses insurance).

Purpose of the budget rules

The government adopts rules on the implementation of budgetary policy when it takes office. The rules are designed to ensure that financial policy is implemented responsibly.

They are also designed to prevent undesirable developments in the EMU balance and the EMU debt. This means:

• eliminating an excessive deficit or debt. Under the Stability and Growth Pact, the EMU balance must not exceed -3% of Gross Domestic Product (GDP) and the EMU debt must not exceed 60% of GDP;
• achieving the medium-term objective (MTO) of the Stability and Growth Pact. The MTO for the Netherlands is a structural EMU balance of between -0.5 and +0.5% of GDP.

Budget rules
The current budget rules are based on the budget rules set by the previous government. They have been brought into line with the 2010 coalition agreement and incorporate the main recommendations of the Budgeting Framework Commission.

The main changes in the budget rules are:

• Warning margin instead of warning value
  The warning margin permits changes to be made if the budget deficit falls below the margin projected in the introductory memorandum by one percentage point. It improves risk management and increases the likelihood of achieving the budget objective.
• Improved response to higher than budgeted interest expenditure
  Higher than budgeted interest expenditure must in future be met from within the expenditure framework. Lower than budgeted interest expenditure may not be used for additional expenditure but must be applied to reduce the national debt.
• Improved guarantee policy
  Guarantees expose the budget to an undisclosed risk. To improve control of this risk, the government will review all new and existing guarantee schemes.
• Expenditure of relevance to the EMU balance will be settled within the spending limits
  To improve control, public expenditure is subject to pre-agreed ceilings: the spending limits. To manage the EMU balance, relevant expenditure, and thus policy, must remain within the limits. Expenditure sensitive to economic conditions, such as unemployment and welfare benefits, is therefore subject to the limits again.
• Applying surpluses to repay the national debt and cut taxes
  If the Netherlands achieves the Stability and Growth Pact’s medium-term objective and the EMU balance is in long-term surplus when a decision is taken on the revenue side of the budget in August 2011, 50% of the surplus will be applied to repay the national debt and 50% to cut taxes.

Trend-based budgetary policy

The current budget rules are derived from the trend-based budgetary policy that the government has been conducting since 1994. The main elements of this policy apply unchanged to the budget rules for 2011-2015:

• Strict separation of revenues and expenditures
  Revenue windfalls may not be applied for additional spending. Conversely, spending need not be reduced if there are setbacks on the revenue side.
• Expenditures in three sectors
  A distinction is made between central government expenditure, social security expenditure and care expenditure. Each sector is subject to a spending ceiling. Transfers between the sectors are permitted in exceptional circumstances only.
• Real spending limits for the sectors
  To control public expenditure, the government works with pre-agreed ceilings: the spending limits. Expenditure, and thus policy, must remain within the limits. To allow for inflation, the agreements are made in real terms, i.e. expressed in euros in a given year.
• Every sector must compensate for overspending within its spending limit
  Setbacks in a sector must be met within the sector’s own spending limit.
• A real revenue framework based on automatic stabilisation
  Since revenue windfalls and setbacks are recognised in the EMU balance, there are automatic stabilisers on the revenue side. The budget can respond to changes in the economy and measures need not be taken immediately if there is a windfall or setback.