The economy is in the midst of a strong expansion (Figure A). Improved global economic developments have led to solid export growth. In turn, high domestic and external demand and still favourable financial conditions have stimulated private investment. Positive labour market developments, supportive fiscal policy and a stronger housing market have boosted private consumption growth.

Underpinned by high confidence, growth is projected to remain robust. Household consumption growth should contribute strongly to economic activity, notably as the unemployment rate falls further below 4% (Table A). Although moderating from a strong 2017, business investment growth is set to remain elevated. A tighter labour market is projected to put upward pressure on wages. Consumer price inflation is set to rise from very low levels to 2½ per cent in 2019.

There are important risks to the outlook. Low interest rates have hampered the profitability of financial institutions and the life insurance sector faces severe stress. Rapidly rising house prices point to a potential risk to the growth outlook in case of a turnaround. Rising global protectionism would be a major shock to economic activity, given the Netherlands’ position as a major European and global trading hub. In case Brexit results in significant trade barriers, the impact would be felt disproportionately in some Dutch sectors, such as agriculture and food, while other sectors, such as financial services, would potentially benefit from diverted trade in the European Union.

The fiscal balance is set to remain in surplus in the medium term. The government plans a slightly stimulatory stance in the near term, but strong growth and fiscal surpluses are setting the public-debt-to-GDP ratio firmly on a downward trend. In the context of high economic uncertainties, potential economic shocks could lead to a significant fall in fiscal revenues. It is important to continue to increase fiscal buffers in good times.

Population ageing raises debt sustainability challenges, which are manageable. Older workers have increased their workforce participation in response to a higher minimum retirement age. The Netherlands is set to see a further rise in the retirement age, reflecting its link with life expectancy (Figure B). Older workers should enjoy greater flexibility in tasks and hours worked to sustain their employment.

The tax system should support growth and be adapted to a changing global and digital environment. Progress in implementing measures to avoid tax base erosion and profit shifting (BEPS) should continue. The Dutch government recently announced a new policy agenda to tackle tax evasion and avoidance, which is welcome. With this policy agenda, the government wants to overturn tangibly the Netherlands’ image as a country that makes it easy for multinationals to avoid taxation. The government has announced that an expansion to non-EU countries of the zero tax rate on outbound dividend distributions will be accompanied by measures that deny the zero rate in case of abusive situations or of distributions to low-tax jurisdictions. The dual rates for the VAT should be streamlined to reduce inefficiencies in the tax system by phasing out the lower rate and, if need be, compensating the potential monetary losses incurred by low-income households. The number of tax exemptions or tax expenditures needs to be reduced.

Wage growth is slower than productivity developments. The level of labour productivity is high by international standards and growing but this has not translated into higher real wages to the fullest extent (Figure C).

Social partners and the government should work together to support a better sharing of productivity gains. One avenue would be to lower the tax wedge of low-income employees by scaling down social security contributions. Another avenue would be to review incentives for non-standard forms of employment, which may exert a downward pressure on wages.

Non-standard work has risen considerably in the Netherlands. Temporary contracts and self-employment have become more pervasive (Figure D). Minimum wage requirements do not apply to self-employed, which could also hold back wage growth. Moreover, growing ranks of self-employed raise competition on the labour market and may reduce the ability of dependant workers to obtain pay rises.

The development of self-employment could also result in lower job quality. The self-employed do not contribute to sickness and invalidity insurances, where coverage is mandatory for employees. Consequently they are exposed to greater financial losses associated with health-related risks.

Self-employed should be supported in a more balanced way. Self-employed take risk and could bring benefits to the society by developing entrepreneurship. This justifies some support from public policies, but not to the extent it deteriorates job quality. However, generous tax incentives for the self-employed do little to spur genuine entrepreneurship, but contribute to a large difference in taxation compared to employees (Figure E). Introducing minimum social security coverage for self-employed workers, and gradually reducing the size of the tax incentives would diminish the gap in tax treatment between worker types.

Regulatory reform in the labour market should continue. The strictness of employment protection of permanent contracts should be lowered to reduce dualism and increase labour market flexibility. The dismissal system should be made more flexible by lowering severance pay for employees dismissed under reasonable grounds, as unemployment benefits already provide adequate income support to these workers.

Part-time work is widespread, notably among women. High rates of part-time employment to some extent reflect personal preferences. However, women dispropor-tionately work part-time throughout their careers when compared to men. As women work fewer hours than men, their earnings are lower and the gap in pension entitlements between men and women is amongst the highest in the OECD (Figure F). Greater gender equality in using part-time work could be achieved by introducing a longer paid paternity leave entitlement than planned by the government.

Activation policies need to be better targeted. The national government should work toward a more coordinated approach in delivering support across regions. Disadvantaged groups should also benefit from stronger activation policies to raise their job prospects.

Skills investment is strong, except for disadvantaged groups. Low-skilled workers, older workers and individuals with migrant backgrounds are under-represented in different learning programmes. This situation can be improved by targeting the planned individual lifelong learning accounts to low-skilled workers to increase their qualifications and job opportunities. Older workers should receive more training to support them in adapting to dynamic workplace changes. New migrants, particularly refugees and asylum-seekers with low skills, should receive targeted and front-loaded training to better improve their ability to integrate into society.