The current account balance has generated increasing interest since the crisis. The European Commission uses it as an indicator for potential macroeconomic imbalances. Averaging 9.2% in the past three years, the Dutch surplus is at a high level by both historical and international standards and exceeds the Brussels threshold of 6%. A high current account balance is reflected in a high savings surplus, as it implies that not all income is used for consumption and domestic investment. To explain the increase in the current account balance, it helps to analyse the savings surplus in detail with a view to identifying the contributions made by households and those made by non-financial corporations.
Households are saving less
If we only look at the rising savings deposits, we might be tempted to conclude that Dutch households are thrifty savers. But the answer to the question whether households are net savers depends on changes in all financial claims and liabilities rather than savings deposits alone. Looking at it this way changes the perspective. Dutch households indeed saved considerably in the 1980s. This changed with the sharp increase in mortgage debts in the mid-1990s, with the savings surplus of households even turning into a savings deficit for a few years after the turn of the century.
Although the savings of households have been gradually increasing since the crisis, the current savings surplus is still well below the level of the 1980s. The most significant explanation for the lower savings balance of households can be found in the release of home equity. Seeing the value of their homes rise, households were able to take out additional loans. At the same time, collective savings for their pensions came down. Although pension contributions have risen, pension benefits have also gone up in the face of population ageing. In addition, lower interest and dividend income has pushed down pension funds’ investment income. It should be noted, however, that this investment income (and, consequently, the current account balance) is distorted downwards by profit retention by non-financial corporations in which pension funds hold shares. This is because price gains are ignored in the set-up of the balance of payments.
Non-financial corporations are saving more
Conversely, Dutch non-financial corporations have been saving more since the late 1990s. This increase is a reflection of lower domestic investment as well as higher retained earnings. Multinationals play an important role in the high savings surplus. In countries where the corporate sector has major investments abroad, such as the Netherlands, the corporate sector is known to save more. This is mainly related to the statistical convention of designating profits generated by foreign subsidiaries of multinationals to the parent company in full. This applies even if they are retained locally to fund investments. In the Netherlands, earnings from non-domestic investments mainly flow to listed companies, which are largely in foreign hands. To the extent that these earnings are paid out in the form of dividends, they largely flow to foreign investors, while contributing to a higher Dutch savings surplus to the extent that they are retained.
Economic structure affects savings surplus
The Dutch financial and economic structure is exceptional. Households have long balance sheets as a result of tax incentives encouraging mortgage borrowing and pension asset accumulation. The Netherlands has substantial pension assets relative to the size of its economy and has therefore largely invested these assets abroad. In addition, the country has historically been home to a relatively large number of multinationals. Coupled with growing trade and income flows in an increasingly globalised economy, these circumstances impede an unambiguous interpretation of the current account balance.
This is shown in Figure 1, which includes adjustments for earnings not paid out to foreign investors (by multinationals) and for earnings not paid out to Dutch investors (regarding pension assets). The effects combined drove up the current account balance considerably in the years before the crisis. Although these effects have virtually cancelled each other out in recent years, the balance is distorted by other specific factors including the procyclical effect of the pension system and the housing market. This illustrates first and foremost that the current account balance must be interpreted with caution.