Households spend more than they earn

13/07/2006 09:30

According to the most recent figures released by Statistics Netherlands, Dutch economy grew by 1.5 percent in 2005, but taking inflation into account, household incomes declined once again. Households spent more than they earned and had to draw on their savings accounts. Corporate profits, on the other hand, increased and the budget deficit was practically reduced to zero. The financial position of pension funds improved considerably due to profits made on the stock exchange.

Household income slightly down after correction for inflation rate

Corrected for the inflation rate (1.7 percent), real disposable household income declined by 0.7 percent in 2005. The non-inflation corrected household income rose by 1.0 percent, but household spending grew by 2.3 percent, causing household consumption expenditure to increase by 247 billion euro. Households withdrew 7.3 billion euro from their savings accounts, 3.2 billion euro more than in 2004. For the third year in a row, households paid less money into their savings accounts than they withdrew.

More income from property and pensions

Wages are the main source of income of households. Household incomes increased by a modest 0.7 percent in 2005, while employment fell marginally. Social benefits paid to households dropped by 0.4 percent. Income from property, in particular dividends, increased markedly (12.0 percent). Income receipts from pension funds rose by nearly 5 percent. Households spent more on taxes and premiums last year.

Sizeable increase mortgage debt

Overall household debt increased dramatically in 2005 from 58 to 589 billion euro. The increase is almost entirely caused by mortgages on houses. More newly built houses, rising house prices, house improvements and renegotiated mortgages play a part in this respect.

Households more wealthy

Although total household debt increased, the financial capital of households grew by 116 billion euro. The total amount households had in their savings accounts increased by 13 billion euro, but the increase was slightly below the level of the past two years. They were also more active on the stock market. On balance, households bought bonds worth 4.8 billion euro and stocks to the amount of 4.0 billion euro. Household stock ownership increased by 37 billion euro thanks to favourable stock market developments. The financial capital of pension funds and insurance companies grew by over 100 billion euro.

Net profits banks down, net profits insurance companies up

Credits granted to private individuals in 2005 increased considerably and mainly concerned mortgages. Yet, net profits made by banks declined by nearly 2 billion euro due to shrinking interest margins. The short-term interest rate rose marginally, wheras the long-term interest rate continued to fall. Subsidiary banking companies abroad saw profits decline. Insurance companies, on the other hand, made a fair profit in 2005. Their net profit increased by 1 billion euro compared with 2004.

Profits non-financial enterprises recovering

Non-financial enterprises recovered further in 2005. In real terms, the value added of non-financial enterprises grew by 2.9 percent, as against 2.6 percent in 2004 and 1.4 percent in 2003. Labour productivity increased considerably, wages rose modestly. As a result, wage costs per unit product fell for the second year in a row. This had a positive effect on profits. The labour-income ratio indeed fell by 1 percentage point. As foreign subsidiary companies generated less profit, the net pre-tax profit only increased by a modest 2.6 percent, whereas in 2004, there was a stunning increase by 19.2 percent. Profits retained a high level in 2005, as is shown by a sharp increase in dividend paid which rose by nearly half to 36.4 billion euro in 2005. Households, pension funds and enterprises abroad benefited from this development.

Distinct improvement financial position pension funds

Total stock ownership by pension funds increased by nearly 101 billion euro to 576 billion euro at the end of 2005. The increase was caused by the purchase of bonds and by sizeable profits on the stock market. Due to the strong improvement of their financial position, pension scheme contributions were hardly raised. The coverage rate only improved marginally, because the decrease of long-term interest caused the cash value of future obligations to rise as well.

Improving economy pushes down government deficit to 0.3 percent

The government deficit stood at 0.3 percent of the Gross Domestic Product (GDP). This is a substantial decrease on 2004, when the deficit stood at 1.8 percent. Government receipts rose notably, while the expenditure ratio dropped. The burden of taxes and social contributions continued to rise on account of the improving economy, accelerated tax payments and tax rate increases. The sale of defense equipment and more revenues from natural gas put an extra 2.1 billion in the coffers of the government.

Costs hardly increased. This applied to social benefits (including AWBZ and ZFW) and to wages of civil servants, the government’s two most important cost categories. Expenditure as a percentage of the GDP fell sharply. The EMU debt as a percentage of the GDP fell by 0.1 percentage points to 52.7 percent.

Growth national income lagging behind GDP growth

Despite a higher trade surplus, the balance on the current account of the Netherlands with other countries decreased by over 6 billion euro. The main cause is that interest paid to foreign countries and dividend payments rose stronger than revenues from abroad. As a result, gross national income (GNI) did not increase as much as the nominal GDP in 2005. Real national income even dropped by nearly 1 percent.