Households lost purchasing power in 2004

14/07/2005 09:30

Real spendable household income fell again in 2004. Enterprises made more profits. Substantial increases in pension premiums boosted the capital of the pension funds. The budget deficit fell substantially to 2.1 percent of the gross domestic product (GDP). This is shown by the most recent data by Statistics Netherlands on developments in the Dutch economy.

Real spendable household income fell by 1.4 percent

The spendable income of households in 2004 remained about the same as in 2003. Taking the inflation rate into account, this means a decrease in real spendable income by 1.4 percent. In 2003 the decrease was even larger.

Wage income increased by 1.4 percent, income received from social benefits and pensions by almost 3 percent. Nothing of these income gains remained, because households spent substantially more on the sum of taxes and premiums. This was mainly because pension premiums paid increased by almost 9 percent.

Household consumption expenditure stayed the same in volume, but due to price increases the value of the expenditure was up by 1 percent.

Increasing household debts

Household debts increased by over 44 billion euro reaching 536 billion euro. Some 90 percent of this debt consisted of mortgages for homes. By December 2004 there was a total of 451 billion euro outstanding in mortgages. As a percentage of spendable income, the household debt increased from 177 in 2001 to 234 in 2004.

Stocks unpopular

Savings in 2004 increased by 14.5 billion to 198 billion euro. Again households opted for risk avoiding savings, but the increase was down 4.7 billion on the top year 2003. Stocks were not popular in 2004. On balance, households sold 5.1 billion worth of stocks and 0.5 billion worth of bonds in 2004 whereas in 2003 households still bought 7 billion worth of stocks on balance. There was rise of almost 9 billion in stock prices, so stock ownership by households increased by 3 billion anyway. 

Profits of non-financial enterprises recovering

The value added of non-financial enterprises in 2004 rose by 2.7 percent. This is double the increase of 2003. In real terms the value added of non-financial enterprises rose by 2.2 percent compared to 1.7 percent for the economy as a whole.

Developments were not the same for all branches of industry. Retail for instance saw a drop in value added of more than 6 percent. This was almost entirely due to falling prices, mainly caused by the price war that had been raging for almost a year among the supermarkets.

In previous years the rise in value added was mainly produced by cutting costs. In 2004 it was mainly caused by a modest recovery in the production of enterprises.

The wage sum increased by 1.0 percent, clearly more than in the previous years. This modest increase was due to the continuous drop in employment among enterprises on the one hand, and substantial wage restraints on the other hand. Enterprises paid less interest and received more dividend. Profits after taxes therefore increased by 7.0 billion reaching 60.8 billion euro.

The increased profits were used for higher payments to stockholders and greater investments. The rest of the extra means was used to strengthen the financial balance, placed in deposits and used to pay outstanding loans.

Margins of banks under pressure

In 2004 banks saw their value added increase by a mere 2 percent after increases of more than 10 percent in 2002 en 2003. Still the demand for credit increased substantially. The low interest rates brought in many new mortgage applications and led to many renegotiated mortgages. In total the long-term credit supplied by banks increased by 63 billion in 2004, of which half was for home mortgages.

Despite the substantial increase in credit supply, the profitability of banks was under pressure in 2004 because the margin of interest shrank. The level of the short-term interest rate against which banks take out money stabilised, while the long-term interest rate against which banks place money dropped to a historic low. 

Lower labour income quote of the market sector

The modest recovery in production along with decreasing employment led to a strong increase in labour productivity in the market sector. In 2004 it increased by 4.3 percent, which is substantially more than the 1.0 percent increase of 2002 and the 1.7 percent increase in 2003.

Because the wage base per year increased less than in previous years the wage costs per product unit fell for the first time in years, namely by 1.1 percent. The income quote of the market sector fell on balance from 80.4 to 80.0 percent.

Capital of pension funds up

The gross pension premiums rose by almost 9 percent in 2004, hardly less than the almost 10 percent in 2003. The benefits paid barely increased. The institutional investors made a 25 billion euro in profits on their investments. The technical reserves of the pension funds and insurers therefore increased by over 61 billion euro in 2004, reaching 777 billion. The degree of coverage by the pension funds improved. However, due to the low interest rates the constant value of the outstanding obligations of the pension funds also increased strongly.

Less budget deficit, more government debt

In 2004 the budget deficit (EMU balance) reached 2.1 percent of GDP. In 2003 the budget deficit was 3.1 percent. The decrease was mainly due to a deficit cut by central government: from 2.8 to 1.8 percent of GDP.

The deficit reduction came from modestly increasing expenditure (1.5 percent) and higher income (3.9 percent). As a percentage of GDP expenditure even fell by 0.5 percent point. Income increased by 0.6 percent of GDP. Half of the increase came from higher non-tax revenues, mainly dividend. The total tax and premium pressure in the Netherlands in 2004 reached 37.3 percent of GDP, just a little higher than in 2003 (37.0 percent). Tax income increased by 3.2 percent despite the sober economy. The main increase was in corporate tax due to the higher profits enterprises made. The social insurance premiums yielded 4.2 percent more in 2004. The largest contributors were Exceptional Medical Expenses (AWBZ) and Unemployment Insurance (WW).

Government expenditure in 2004 increased only very slightly. The main cause was the small rise in expenditure on wages and material. Social insurance benefits and provisions, the largest expenditure category with 18.7 percent of GDP, increased with GDP. AWBZ and WW expenses increased substantially, which was compensated by modest developments in the other benefits and provisions. Government also invested less and paid slightly less interest.

The budget deficit in 2004 was mainly financed by the emission of bonds. The EMU debt rose by 9.4 billion euro. For the second year in a row the EMU debt quote increased, from 51.9 of GDP in 2003 to 52.5 percent in 2004. 

National income growth rate close to GDP growth rate

In 2004 the balance of the current account with the rest of the world was 2.0 billion euro higher than in 2003. The main cause of this slight improvement was a 2.4 billion euro higher surplus on the goods and services account. The balance of the primary incomes in 2004 was slightly more positive than in 2003. Interest and dividend received from abroad were higher, but the Netherlands also paid more in distribution of profits and profits on direct foreign investments.

The balance of primary income in 2004 reached 1.1 billion euro compared to the 0.8 billion in 2003. The growth in gross national income (GNI) was therefore about the same as the growth in GDP (2.6 percent). The balance of secondary income, however, fell by over 0.7 billion. The main cause was the higher GNI payment to the European Union, which rose to 3.2 billion in 2004.

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