OECD Economic Surveys: Netherlands 2018

Executive summary

Abstract

• Economic growth is strong, although there are significant near-term risks.

• Non-standard forms of work have risen, creating opportunities but also challenges for job quality.

• Labour markets can be made more inclusive by lowering the gender gap in part time work and supporting employment of vulnerable workers.

Growth is strong, although there are significant near-term risks

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.

Figure A. Growth remains vibrant

Source: OECD Economic Outlook database.

Statlink

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.

Table A. Economic outlook is robust

Annual percentage change, volume (2010 prices).

	2017	2018	2019
Gross domestic product (GDP)	3.3	3.3	2.9
Private consumption	1.9	2.7	2.5
Government consumption	1.2	3.0	2.6
Gross fixed capital formation	5.7	6.1	5.4
Exports of goods and services	6.4	4.0	3.8
Imports of goods and services	5.7	4.7	4.3
Unemployment rate	4.9	3.9	3.5
Consumer price index	1.3	1.6	2.4

Source: OECD Economic Outlook database.

Public finances are healthy, but the tax system could be improved.

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.

Figure B. Substantial increase in expected retirement age

Source: OECD (2017), Pensions at a Glance 2017: OECD and G20 Indicators.

Statlink

Wages have not grown one to one with productivity

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).

Figure C. Wages and productivity

Note: Labour productivity refers to real GDP per total hours worked. Wages of employees are divided by total hours worked by employees and deflated by GDP deflator.

Source: Statistics Netherlands (CBS).

Statlink

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 forms of work have risen, putting downward pressures on wages and job quality

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.

Figure D. Non-standard work has become more prevalent

Source: OECD Employment and Labour Market Statistics database.

Statlink

Reducing excessive incentives to self-employed

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.

Figure E. The tax incentives for self-employed are high

Note: Tax wedges for self-employed exclude pension and insurance contributions. “Average wage” represents the modal wage.

Source: NLD Government.

Statlink

Making the labour market more inclusive

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.

Figure F. Large gender gap in pension wealth

Note: The OECD aggregate is calculated as an unweighted average and it covers 25 countries.

Source: OECD (2017), The Pursuit of Gender Equality: An Uphill Battle.

Statlink

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.

 

MAIN FINDINGS	KEY RECOMMENDATIONS
Fiscal policy
Economic uncertainties are high (e.g. rising trade protectionism and Brexit). Potential economic shocks could lead to a significant fall in fiscal revenues.	Maintain the trend-based fiscal policy in order to continue to increase fiscal buffers in good times.
The tax system is overly complex and a broad reform of the tax system has not been implemented. The dual rate for the VAT contributes to inefficiencies in the tax system.	Reduce the number of exemptions and other tax expenditures. Phase out the dual rates for the VAT by raising the lower rate. If needed, introduce targeted income support to compensate low-income households for the potential income loss.
Despite progress to combat base erosion and profit shifting (BEPS), the Netherlands could still be seen as a conduit of BEPS by multinational corporations.	Carry out plans in the new policy agenda to tackle tax evasion and avoidance that has recently been sent to Parliament by the Dutch State Secretary for Finance. Ratify the BEPS multilateral instrument and impose a withholding tax on dividend, interest and royalty earnings transferred to low-tax and non-cooperative jurisdictions, as planned.
Financial stability
While macro-financial vulnerabilities have diminished significantly, household debt is still high by international standards and house prices have sharply increased, especially in large cities. As of yet, this has not been accompanied by an increase in credit growth.	Continue the gradual phasing out of mortgage interest deductibility. Consider taking appropriate macroprudential actions.
Making employment more inclusive
The self-employed pay less tax and social contributions, lowering the inclusiveness of social insurance and pension systems.	Phase out the permanent self-employment tax deduction. Introduce minimum coverage for sickness and disability insurance for workers regardless of their contract.
The tax burden on employees is high, particularly for the low-skilled, mainly due to high social security contributions.	Lower social security expenses, for instance by reducing the generosity for sickness insurance.
Despite recent reforms, severance pay remains high, especially when considering the generous unemployment benefits that workers can access following a dismissal.	Reduce severance pay for employees who are dismissed under reasonable grounds.
Spending on employment or reemployment support is low, notably to help properly disadvantaged individuals. Many activation programmes are carried out at the local level with little coordination.	Improve the targeting of employment support policies to vulnerable groups. Work toward a more coordinated approach, in implementing activation policies across regions
There exists a large gender disparity in part-time work with women accounting for most of the part-time positions.	Increase the period of paid paternity leave to encourage greater participation of fathers in childcare responsibilities. Maintain existing provisions to keep childcare affordable and ensure the high quality of services.
Overall investment in skills and workers’ training is high in the Netherlands. However, older workers, individuals with migrant backgrounds and low-skilled individuals do not have sufficient support to improve their job prospects.	Introduce individual lifelong learning accounts targeted specifically at vulnerable workers.
Addressing population ageing
Older workers face disincentives to remain in the labour market.	Allow more flexibility in tasks and hours worked for senior persons.
The Netherlands has an adequate supply of properly trained physicians, although population ageing and an official limit on new medical students could imply insufficient supply in the future.	Periodically assess the need for new health professionals and adjust the institutionalised limit on medical students accordingly.
The sustainability of most occupational pensions is at risk as depressed returns on investment do not match generous pension promises. The lack of harmonisation of pension parameters across funds also hinders labour mobility.	The government should encourage social partners to agree on a new pension contract to ensure pension funds’ sustainability and facilitate transfers of pension rights across funds.