OECD Economic Surveys: Netherlands 2021

Report

OECD Economic Surveys: Netherlands

16 June 2021

1. Key policy insights

Abstract

The Netherlands has weathered the economic shock from COVID-19 relatively well thanks to structural strengths and emergency policies put in place. Continued fiscal support is needed to support the recovery, but it should become more targeted to allow structural change. Policy reforms to the labour and housing markets and investments in the green and digital transitions can contribute to make the economic rebound stronger, fairer and more sustainable.

The Netherlands is emerging from an economic contraction without precedent in modern peace-time, and is set for a gradual recovery as people are vaccinated, restrictions are gradually lifted and confidence returns. Even though the virus outbreak was a major shock to people and the economy, the Netherlands has escaped the COVID-19 crisis with limited economic damage compared to most OECD countries, partly thanks to structural and institutional strengths and a high level of digitalisation.

In the short term, containing the virus and a successful vaccination campaign are essential to safeguard activity, people’s incomes and well-being as well as public finances. Still, the virus will also leave a lasting legacy, by lost time in education and long-term joblessness, as well as a reduction in the quality of life for those who find that their skills are no longer in demand.

Several long-standing challenges are set to affect the strength of the recovery and its long-term sustainability: i) Non-standard employment is high, driven to a large extent by lower labour costs for the self-employed and other non-standard workers than for regular employed. Women are overrepresented among non-standard workers and typically work shorter hours. ii) Households’ balance sheets, inflated by tax-subsidised housing debt and mandatory pension savings, create macroeconomic vulnerabilities and underpin inequality of assets (Box 1.4). iii) Landmark court rulings limiting nitrogen and greenhouse gas emissions (Box 1.5) have slowed down investments in infrastructure, buildings and agriculture and led to earlier than planned closures of polluting economic activities.

The first chapter of this Survey argues that these challenges and measures to address them will set the premises for long-term inclusive and sustainable growth in the Netherlands. Illustrative quantifications of the fiscal cost and GDP effects of selected recommendations are included in (Box 1.7), at the end of the chapter. The second chapter, based on an in-depth analysis of productivity with a special focus on digitalisation, concludes that embracing digitalisation is key to raise living standards further, but the social costs of skill-biased structural change, in many cases accelerated by COVID-19, must be handled firmly, notably by boosting skills and ensuring equal access to social protection. Against this background, this Survey conveys three main policy messages:

Continued targeted fiscal support is appropriate in the short term. Fiscal adjustment needed for long-term sustainability should wait until the recovery is well under way. Long-term priorities include boosting skills and education, environmental sustainable activities, digitalisation, and addressing cost pressures from ageing.
Reducing labour market duality and reforming the housing market would boost growth, increase macroeconomic and financial resilience and reduce inequalities.
Reducing air pollution and greenhouse gas emissions are prerequisites for prosperity and well-being, calling for national action, as well as enhanced regional and international cooperation.

The COVID-19 pandemic has dragged down the economy

The Netherlands recorded its first wave of COVID-19 between March and June 2020. The second wave of COVID-19 infections surged in September 2020. Daily new confirmed cases during the second wave outpaced cases during the first wave, but the daily death rate has been lower (Figure 1.1, Panel A). During both waves, the Netherlands closed schools and restaurants and restricted public gatherings. International travel controls were in place and it was advised to limit travel as far as possible. Many economic activities, such as construction and retail trade, could continue during the first wave, subject to distancing and hygiene measures. Restrictions on group sizes and mask wearing were tightened during the second wave. Moreover, public places and non-essential businesses were closed and a night-time curfew was introduced, which is also reflected in lower mobility towards these places from mid-December until end-April (Figure 1.1, Panel B). Vaccination of the population started in January 2021, prioritising nursing home and frontline workers in hospitals, gradually extending to younger age-cohorts and people with pre-existing specific serious conditions. By end-May, about 45% of the adult population had received at least one dose of the vaccine (Figure 1.1, Panel C).

Figure 1.1. Recent COVID-19 developments in the Netherlands

Economic output contracted by 3.7% in 2020, ending a six year period of strong growth and recording the largest post-war quarterly decline of 8.5% as the virus and containment measures took hold in the second quarter (Figure 1.2, Panel A). Household consumption and exports collapsed (Figure 1.2, Panel B). Still, the contraction was less pronounced than in most EU countries, where GDP dropped on average by 11.4% in the second quarter (Eurostat, 2021[1]). The decline in Dutch GDP was not as pronounced as in neighbouring countries due to less stringent restrictions on economic activity. A high degree of digitalisation and teleworking already before the pandemic further dampened the blow (see Chapter 2). After a strong rebound in the third quarter, quickly rising COVID-19 infections in the autumn outpaced available resources to test, track, trace and isolate and prompted the government to react. Even though measures were stricter than during the first wave, the economic downturn was less pronounced in the fourth quarter, as businesses and workers were able to adapt swiftly by relying more on alternative work and sales modes, including teleworking, click-and-collect and home delivery (Figure 1.2, Panel C).

Figure 1.2. The economy contracted less than elsewhere

The government quickly implemented a comprehensive support package to protect jobs and firms during the two waves, allowing a quick restart in most sectors (Box 1.1). The main policy instruments for firms included financial support in the form of wage subsidies and coverage of fixed costs, as well as loan guarantees and deferred tax payments preventing a wave of bankruptcies. The total number of businesses and institutions filing for bankruptcy in 2020 stood at the lowest level in two decades (CBS, 2021[2]), suggesting that measures have also prevented the exit of firms that were not viable even before the pandemic. Bankruptcies are set to increase when measures are phased out. This is necessary, as the business structure has to adapt to post-pandemic demand. However, support measures to firms should only be phased out as the health situation is brought under control, and should be accompanied by a supportive fiscal policy stance to secure sufficient demand to allow viable businesses to thrive.

Box 1.1. Measures to support the economy during the COVID-19 pandemic

The government put a comprehensive recovery and support package in place for businesses and employees in March, which was extended multiple times, with the latest extension running until end September 2021. Eligibility thresholds and support parameters were adjusted reflecting economic circumstances. The current package includes:

Temporary emergency scheme for job retention (NOW): a grant, which compensates at most 85% of an employer’s wage costs (rate applicable for the first half of 2021), conditional on at least 20% fall in turnover. Employers commit to retaining current jobs and paying 100% of the wages of the employees involved.
Self-employment income support and loan scheme (TOZO): a temporary support scheme for self-employed workers (without employees) hit by the COVID-19 crisis. They are to receive a EUR 1 050 monthly allowance, up to EUR 1 500 in the case of married couples or couples with children. Moreover, municipalities provide extra services to the self-employed, including retraining, and help upgrading existing skills and exploring new careers.
Fixed Costs Grant scheme (TVL): Businesses that have suffered a turnover loss of more than 30% are eligible. The scheme allows for a compensation of up to 85% of their costs, depending on the turnover loss. The maximum grant amount is EUR 330 000 for SMEs and EUR 400 000 for larger firms.
Further measures include tax measures and support for specific sectors particularly hard hit by the pandemic and the extension of existing state guarantee schemes for business loans: the Business loan guarantee scheme (GO-C); the Small Credits Corona Guarantee Scheme (KKC); and the Credit Guarantee scheme for Agriculture (BL-C).
The Dutch support package is scheduled to expire in autumn 2021. Further support in some form is likely.
To aid the recovery, a social package was developed allocating EUR 1.4 billion to help mitigate job-losses, increase training and retraining efforts, combat youth unemployment and to support poverty and debt reduction efforts.

Macroprudential measures:

De Nederlandsche Bank (DNB) allowed temporary relief by lowering the systemic buffers of the three major banks.

Source: Government of the Netherlands (2020, 2021), https://www.government.nl/topics/coronavirus-covid-19/news/

High uncertainty following the COVID-19 outbreak, reflected in plummeting producer confidence, contributed to low investment in 2020 (Figure 1.3, Panel A). Business investment fell sharply, and although it will be held back by lingering uncertainty, it is set to slowly recover as the economy re-opens. Private consumption has dropped during the pandemic, due to the restrictions on mobility and the rise in precautionary savings related to economic uncertainties of households (Figure 1.3, Panel B). These developments, in addition to structural drivers supporting household and corporate savings, contribute to a strong, albeit declining, current account surplus. Thus, in recent years high household savings in pension funds have been increasingly invested abroad and the non-financial corporate sector only partially matched higher profits by higher profit distribution (OECD, 2018[3]), a trend that is likely to resume once the economy recovers. Although government investment increased substantially during the COVID-19 crisis, the downward pressure on the current account balance was limited (Table 1.1). Boosting private and public investment (see below), for example as done through the National Growth Fund, has the potential to increase the growth rate, strengthen domestic demand and thus lead to a more sustained reduction in the current account surplus.

Figure 1.3. Investment is recovering, reflecting improving confidence

Unemployment rose steadily from 3% at the start of 2020 peaking at 4.6% in August before falling to 3.5% by March 2021 (Figure 1.4, Panel A). The job retention scheme (NOW), which provides a wage cost subsidy for employers (Box 1.1), helped to cushion the increase in unemployment. During the first round of the NOW (March-May), almost 140 000 companies made use of the scheme, benefiting 2.6 million employees (28% of the labour force). During the second round of the NOW (June-September), usage fell by half and the scheme still provided a wage cost subsidy for approximately 1.3 million employees. By comparison, during the financial crisis of 2009, the special short-time working scheme supported 37 000 employees and the subsequent part-time unemployment benefit up to 77 000 employees (DNB, 2020[4]).

The number of workers on freelance or on-call contracts declined sharply during the second quarter (Figure 1.4, Panel B). These workers are less protected against job loss than permanent employees who enjoy among the highest employment protection in the OECD (OECD, 2018[3]; OECD, 2020[5]). Flexible contracts are highly prominent in sectors affected by the COVID-19 crisis, such as hospitality, arts, entertainment and recreation. These contracts are also more frequent for individuals in low-skilled occupations and young workers (OECD, 2018[3]). Employers can get support for flexible workers through NOW, but cancelling or not renewing contracts is a low-cost option. This is reflected by a sharp increase in unemployment among the young during the pandemic (Figure 1.4, Panel A). Labour market duality has a range of negative effects, as discussed below.

Figure 1.4. Unemployment has fallen back somewhat after the first COVID-19 wave

House prices have continued to increase, outpacing price developments in the Euro Area and the OECD (Figure 1.5, Panel A). The COVID-19 crisis aggravated the already existing housing shortage in part connected to a recent environmental ruling on nitrogen emissions that slowed down the permitting process (see below). Hygiene measures and a decline in available labour, as many foreign workers in the construction industry returned home, led to delays in the construction chain. Despite income uncertainties following the COVID-19 crisis, households’ demand for owner-occupied dwellings in 2020 was high, supported by low mortgage interest rates. Additions to the housing stock have not kept pace with the formation of new households (OECD, 2018[3]), and the excess demand (Figure 1.5, Panel B) pushed up prices in 2020 by 7.8% on average relative to the previous year (CBS, 2021[6]).

Figure 1.5. House prices continue to rise

As a small open economy, the recovery is sensitive to global trade developments. A decline in global demand reduced Dutch exports by 4.3% in 2020 (Table 1.1). The Netherlands is still one of the largest gas producers in Europe (Figure 1.6, Panel A); however, gas exports are rapidly declining as production from Groningen is being phased out by mid-2022. European countries account for the majority of exports (Figure 1.6, Panel B). Health developments in major trading partners affected demand and lowered exports.

The Netherlands has important trade and investment linkages with the United Kingdom. In 2019, about 9% of goods and services exports went to the United Kingdom, and imports from the United Kingdom accounted for about 8% of the total. As the United Kingdom exited the EU single market, new administrative procedures, rules and additional checks at the border came into effect at the beginning of 2021. Exports of food and livestock have been particularly affected as quick customs clearances and fast transportation are essential for fresh deliveries. There might be some positive effects of Brexit for the Netherlands, such as firms relocating to facilitate trade with the EU. Recent examples include some financial services migrating to Amsterdam, but the effects of such dynamics on growth and tax revenues are so far small, and are likely to remain limited compared to the cost to the Netherlands of a hard border with the United Kingdom. The negative medium-term impact of Brexit for the Netherlands is estimated to around 0.5% of GDP (Arriola et al., 2020[7]).

Figure 1.6. Exports of goods by commodity and destination

The recovery will be gradual and subject to risks

The economic recovery will be gradual and continue to depend on developments of the health situation and measures implemented to contain further outbreaks. The distribution of vaccines, which is crucial for the recovery, started in January 2021, and aims to have the wider population vaccinated by the end of 2021. Under the assumption that vaccines will be effective against virus mutations in circulation and further outbreaks can be avoided, output is projected to gradually improve in 2021 and 2022 (Table 1.1). Spending of forced and precautionary savings will boost consumption and drive the pick-up. However, rising unemployment, as the job retention scheme is phased out, and increasing pension premiums will hold back private consumption growth over 2021-22. Wage growth is expected to fall sharply due to labour market slack, and apart from a temporary increase due to higher oil prices, inflation pressures will be weak in 2021-22. Inflated household balance sheets pose a further risk to the recovery of consumption.

Business investment will recover somewhat as financing costs are low and earnings expectations improve, but the increase will be moderate due to continued uncertainty and considerable spare capacity. Increasing business leverage over the crisis poses an additional risk to private investment going forward. Government investment is projected to grow, reflecting higher construction and infrastructure investment and additional capital spending from the National Growth Fund, a new publicly funded investment set to disburse EUR 20 billion over five years, and from the EU Next Generation Fund. The economic outlook is particularly sensitive to further outbreaks that could be caused by vaccine-resistant virus strains (Table 1.2).

Annual percentage change, volume (2015 prices)
	2017	2018	2019	2020	Projections
	Current prices (EUR billion)	2018	2019	2020	2021	2022
Gross domestic product (GDP)	738.8	2.3	1.6	-3.7	2.7	3.7
Private consumption	327.3	2.1	1.5	-6.4	-0.4	6.1
Government consumption	179.6	1.7	1.6	0.6	2.1	1.4
Gross fixed capital formation	148.8	3.5	4.5	-3.6	6.3	3.8
Housing	33.0	9.3	1.6	-2.7	9.5	3.3
Business	90.5	1.8	6.7	-4.7	1.9	4.1
Government	25.4	2.3	1.0	-0.9	5.4	3.5
Final domestic demand	655.6	2.3	2.2	-3.8	1.9	4.1
Stockbuilding1	3.5	0.1	-0.2	0.1	0.0	0.0
Total domestic demand	659.3	2.4	1.9	-3.7	1.9	4.1
Exports of goods and services	616.3	4.2	2.6	-4.3	4.7	3.8
Imports of goods and services	536.8	4.6	3.1	-4.3	4.0	4.2
Net exports1	79.5	0.2	-0.1	-0.4	1.0	0.1
Other indicators (growth rates, unless specified)
Potential GDP		1.5	1.5	1.4	1.3	1.2
Output gap2		0.7	0.8	-4.3	-3.1	-0.7
Employment		2.3	2.0	0.0	0.2	0.3
Unemployment rate		3.8	3.4	3.8	4.1	4.7
GDP deflator		2.4	2.9	2.4	2.3	1.6
Consumer price index (harmonised)		1.6	2.7	1.1	1.8	1.5
Core consumer prices (harmonised)		1.0	1.9	1.9	1.9	1.5
Household saving ratio, net3		9.1	10.0	17.2	17.7	12.2
Current account balance4		10.8	9.9	7.8	8.8	8.9
General government fiscal balance4		1.4	1.8	-4.3	-6.1	-2.5
Underlying general government fiscal balance2		1.1	1.3	-1.4	-4.1	-2.1
Underlying government primary fiscal balance2		1.8	1.9	-0.9	-3.7	-1.8
General government gross debt (Maastricht)4		52.4	48.7	54.5	58.5	58.8
General government net debt4		34.3	30.6	35.8	40.1	40.5
Three-month money market rate, average		-0.3	-0.4	-0.4	-0.5	-0.5
Ten-year government bond yield, average		0.6	-0.1	-0.4	-0.3	-0.3

1. Contribution to changes in real GDP.

2. As a percentage of potential GDP.

3. As a percentage of household disposable income.

4. As a percentage of GDP.

Source: OECD (2021), OECD Economic Outlook 109: Statistics and Projections (database)

Uncertainty	Possible outcomes
Multiple COVID-19 outbreaks over several years	Reduction of activities where distancing is a concern could lead to firm failures and increased unemployment. Consumer and business uncertainty could hold back consumption and investment, while depressed global demand weighs on exports.
Financial amplification of COVID-19 crisis	Declines in commercial real estate prices could deteriorate pension funds financing, leading to pension cuts and rises in premiums. Increases in bankruptcies and unemployment could lead to a significant increase in non-performing loans, putting pressure on financial stability.
Intensification of global trade tensions	Prolonged weakness in external demand and disruptions in supply chains would limit exports and investment.
Pent-up demand	Excess savings and pent-up demand could boost consumption more than expected.

Solid public finances allow continued fiscal support in the medium term

The country entered the COVID-19 pandemic with strong public finances, allowing the free operation of automatic stabilisers and generous discretionary support measures. As a result, a fiscal surplus of 1.8% of GDP in 2019 turned into a deficit of 4.3% of GDP in 2020 (Figure 1.7). The current fiscal stance is strongly expansionary, with around EUR 31.5 billion (4.2% of 2019 GDP) of discretionary spending and tax cuts in 2020 and another EUR 20.6 billion in 2021 (2.7% of 2019 GDP), which is broadly in line with countries such as France, Sweden and the United Kingdom. Most of the spending is allocated to wage subsidies under the NOW scheme, income support for self-employed entrepreneurs (TOZO) and compensation of companies’ fixed costs (TVL). An additional EUR 25 billion in liquidity support is estimated to be provided through deferred tax payments. Consequently, the debt-to-GDP ratio (Maastricht definition) increased by 5.8 percentage points from 48.7% in 2019 to 54.5% in 2020, and is expected to rise further to 58.8% of GDP by 2022. Given the available fiscal space, the government should maintain fiscal support until the recovery is well established.

Figure 1.7. The budget deficit and public debt have increased substantially

In the longer run, the Netherlands faces rising fiscal pressures mostly driven by ageing, including health and pension expenditures. Given the recent pension agreement linking the retirement age to life expectancy and the fully funded pillar two pensions, these pressures are relatively mild in a cross-country comparison (Figure 1.8). Still, in order to maintain the current debt-to-GDP ratio constant, subject to the assumptions of the OECD long-term model (Guillemette, 2021[8]), the structural primary revenue would have to increase by 5.8% of GDP, or corresponding savings would need to be implemented in the longer term. Long-term fiscal sustainability will depend on prudent policies and the implementation of reforms. Under a baseline scenario where fiscal consolidation of one percentage point of GDP in the years 2023 to 2025 is assumed and no further reforms are implemented, ageing related costs are projected to push the public debt ratio to the 130% (Figure 1.9). To preserve intergenerational equity and put public debt on a downward path once the recovery is self-sustained, the government should prepare a multi-year fiscal strategy. Implementing labour market reforms that increase the employment rate, such as increasing spending on active labour market policies and improving the availability of early childcare (see below), would significantly reduce the public debt ratio in the long term. Future fiscal consolidation will likely need to entail expenditure cuts. There is also room to increase the efficiency of the tax system by improving tax neutrality between owner-occupied housing, rental housing and other capital. The recently introduced differentiation of the transfer tax between first-time buyers under the age of 35, owner-occupiers and landlords is an additional tax incentive for home-ownership, and should be reconsidered.

Figure 1.8. Future expenditure increases will be driven by population ageing

Revenue increases needed to maintain a constant debt to GDP ratio from 2021 to 2060, by spending category

The government has introduced a number of measures to counter the use of the Netherlands as a conduit jurisdiction for base erosion and profit shifting (BEPS). The country is an important jurisdiction for multinational corporations, which in the past was supported by leniency towards BEPS by multinationals creating a reputational issue linked to aggressive tax planning. Dutch tax rules, designed for avoiding double taxation, were used by companies that engage in tax planning, as suggested by high levels of dividend, royalty and interest payments made via the Netherlands (Suyker and Wagteveld, 2019[9]; European Commission, 2018[10]). In recent years, the Netherlands has been a strong supporter of the OECD BEPS project, and is active in its implementation (OECD, 2018[3]). A withholding tax on interest and royalty payments to low-tax jurisdictions took effect from 2021.

Figure 1.9. Illustrative public debt trajectories

Recommendations in previous Surveys	Action taken since the previous 2018 Survey
Reduce the number of exemptions and other tax expenditures	The deduction of maintenance costs for listed buildings was abolished in 2019. From 2020 onwards, the self-employed allowance will be reduced in eight steps of EUR 250 and one step of EUR 280 to EUR 5 000 in 2028.
Phase out the dual rates for the VAT by raising the lower rate	In 2019, the lower VAT rate was raised from 6% to 9%.
Ratify the BEPS multilateral instrument and impose a withholding tax on dividend, interest and royalty earnings transferred to low-tax and non-cooperative jurisdictions.	The BEPS multilateral instrument is ratified, and the 2021 Withholding Tax Bill introduces a conditional withholding tax as of 2021 on interest and royalty payments to low-tax jurisdictions and in misuse situations.

The COVID-19 crisis has exacerbated some macro-financial vulnerabilities

The capitalisation of the banking sector has improved significantly in recent years, providing space to absorb the effects of the pandemic and continue to provide credit. While banks are still highly leveraged in gross terms, risk-weighted capital is well above the OECD average (Figure 1.10, Panel A and B). Profitability falls in the middle of the OECD range (Figure 1.10, Panel C), but is under pressure from persistently low interest rates. The share of non-performing loans was low as of mid-2020 (Figure 1.10, Panel D), even though the probability of default is expected to increase in some segments as a result of the COVID-19 crisis once government emergency measures are phased out. Banks have increased their provisions to compensate deteriorating asset quality (DNB, 2020[11]). The pandemic stress test of De Nederlandsche Bank (DNB) suggests that banks are sufficiently shock-resistant and can continue to fulfil their lending role. To prevent the economic crisis from spreading to the financial sector, DNB and ECB have allowed banks to use capital buffers to keep lending to firms and households. This is a welcome step. Banks should eventually be required to tighten capital ratios, but only when the economy is solidly on a path to recovery. However, the longer the pandemic lasts the greater will be the potential impact on financial institutions. With structurally low profitability, it will be more difficult to set aside provisions or, when necessary, restore buffers in the future.

The COVID-19 crisis also affects financial stability through its impact on the commercial real estate market. Prices of retail real estate fell by around 14% in the second quarter of 2020 compared to the previous quarter, and office prices by around 2% (DNB, 2020[11]). As people are more likely to shop and work from home in the future, expectations for future rental income and future commercial real estate values have fallen. In a recent stress test, DNB (2020[12]) shows that banks are able to absorb even a severe commercial real estate shock, while this is not the case for pension funds with large exposure to commercial real estate. Losses on commercial real estate investments will have a direct impact on pension funds’ balance sheets, which have been under pressure from low interest rates for a long time. This could force pension funds to increase contributions or reduce pensions. The pension reform will help when fully phased in in 2026 by re-defining pension promises as defined contribution, as discussed later in this chapter.

Households have high mortgage debt on average. Assets are also high on average, but to a large extent consist of housing and illiquid pension savings (see below). Highly indebted households primarily pose a macroeconomic risk through the consumption channel. Both first-time buyers and existing homeowners are borrowing more relative to their income than before. The emergency support scheme allowing to suspend monthly mortgage payments has been used particularly by the self-employed and flexible workers who have seen their income fall as a result of the COVID-19 crisis (DNB, 2020[11]). Making up for arrears might not be possible for everyone. A continued increase in house prices bears the risk of a rapid credit expansion, although so far, mortgage growth has remained subdued. Current loan-to-value ratios for mortgage loans are lower than during the 2008 financial crisis, but a maximum loan-to-value on new mortgages of 100% is still high in an international context. Continuing to gradually tighten the maximum loan-to-value ratio could further support financial stability. A national mortgage guarantee scheme put in place after the global financial crisis insuring households against selling their house at a loss following unemployment, divorce or disability also reduces the macroeconomic risk. A floor for mortgage risk weights announced in October 2020 is a further welcome step to improve banks’ resilience.

Dealing with environmental priorities and risks provides investment opportunities, but may also put additional pressures on financial institutions, notably in the transition phase. The rapid closure of coal plants following the December 2019 ruling could lead to losses on banks’ asset positions. A stress test developed by the DNB (DNB, 2018[13]) showed that climate change policy, technological developments and changing consumer preferences could lead initially to significant losses for the financial sector. Climate change increases the scale and frequency of natural disasters such as floods and storms, raising the claims burden for insurers and re-insurers, even though this will be reflected in premiums over time. DNB has mainstreamed stress testing of the financial system to include these types of risks, which is a timely innovation.

Figure 1.10. Financial stability indicators are in the mid-range of other OECD countries

2020Q3 or latest quarter

Recommendations in previous Surveys	Action taken since the previous 2018 Survey
Continue the gradual phasing out of mortgage interest deductibility.	The gradual phasing out of the mortgage interest deduction is continued.
Continue to gradually reduce the maximum loan-to-value on new mortgages from 100% in 2018 to 90% in 2028.	No action taken.

Investments for sustainable growth

Weak private investment has contributed to lacklustre productivity gains since the Global Financial Crisis (Figure 1.11). This is a pattern shared with many OECD countries. Slow productivity may reflect both cyclical weakness in capital accumulation and long-term trends, notably demographics. Product market regulations in the Netherlands are lean and favourable to productivity growth, but procedures to set up companies are somewhat cumbersome and ICT specialist skills complementary to digital investments are in short supply (Chapter 2).

Figure 1.11. Weak investments have contributed to lacklustre labour productivity growth

The recent economic downturn has further dampened investment activity, and COVID-19-related support programmes are set to affect the quality of investment going forward. The job retention scheme protects workers, and generous loan schemes and grants have helped businesses to stay afloat during the height of the crisis (Box 1.1). Keeping these programmes in place until COVID-19-related restrictions are largely lifted and the recovery is well under way is an insurance against wiping out otherwise healthy companies and thus reduces unnecessary scrapping of productive capital. In the process, these policies also temporarily keep low-productivity firms afloat, thereby constraining the effective reallocation of resources to most productive firms.

As the immediate health crisis is brought under control over the course of 2021, polices aimed at preserving existing companies and jobs need to be phased out. These policies should be replaced by more general demand support and policies targeted at easing structural change to facilitate that viable businesses absorb workers and capital. Temporarily higher unemployment and bankruptcies should be expected as part of this necessary process of reallocation. Ensuring sufficient capacity for swift in-court and out-of-court insolvency procedures and settlements, along with well-resourced career services and the possibility to participate in well-tailored training activities for the unemployed, can help speed up the reallocation process, and reduce the economic and human cost (OECD, 2020[14]).

Meeting public investment needs

Public investment as a share of GDP has fallen, despite considerable investment needs. In general, the Netherlands has excellent transport infrastructure. More than 33 000 kilometres of dedicated cycling lanes facilitate sustainable living and well-being. Efficiency of train services, seaport services, air transport services and the quality of roads all score highest among EU countries and top global performers. Electricity and water infrastructures are also ranked highly (WEF, 2019[15]). The Netherlands is in a good position to reap the potential of digitalisation, but should continue to invest in digital infrastructure, skills and services complementary to the adoption of digital technologies. Further deployment and take-up of even faster fibre networks and next generation 5G wireless networks is a prerequisite for the adaptation of the latest digital technologies such as cloud computing (Sorbe et al., 2019[16]), self-driving vehicles and the Internet of Things (OECD, 2019[17]; OECD, 2019[18]). The private sector will provide much of these investments, but there is a role for the public sector to regulate in order to maximise private sector efforts and to invest directly in cases where private incentives to invest are too weak (Chapter 2). Bold greenhouse gas emission reduction targets and environmental rulings (Box 1.5) call for increased investments in energy efficiency, renewable energy and reduced emissions from agriculture and industry, as discussed below.

The recently launched EUR 20 billion National Growth Fund subsidises projects in the areas of knowledge development, research and development, innovation and infrastructure. Projects should be complementary to private investment and existing public support policies. To be eligible, they should also have a positive effect on GDP and social returns. An independent committee of experts assesses the proposals and gives their recommendations before the government makes the final decision. The first EUR 4 billion tranche of the National Growth Fund was allocated in April 2021, fully in accordance with the recommendations from the fund’s independent advisory committee. EUR 650 million was freed directly, while the rest of the tranche was allocated conditional on further substantiation of the projects. Around EUR 2.5 billion was reserved for low-carbon public transit infrastructure projects, EUR 600 million for quantum computing, EUR 300 million for artificial intelligence, and EUR 300 million to promote innovation in production and application of hydrogen (Box 1.2) (Government of the Netherlands, 2021[19]). The National Growth Fund, and to a lesser extent the Next Generation EU Funds, are important answers to the needs to invest in the environment and digitalisation. The quality of advice from the committee of experts, their continued independence and the transparency of the selection process are key to select projects beneficial to society. The Next Generation EU Fund will also provide funding to speed up the transition towards a green and digital economy (Box 1.3).

Box 1.2. The Dutch Hydrogen Strategy

The Netherlands aims for low-carbon hydrogen to play a major role in supporting the achievement of emission reduction targets and has taken measures to promote low-carbon hydrogen through the Hydrogen Strategy. Under this strategy, the government is developing a broad policy framework to scale up low-carbon hydrogen production, infrastructure and demand.

The Netherlands has numerous assets that could be leveraged to support rapid progress on low-carbon hydrogen. Already, there is significant hydrogen production (from natural gas) linked to strong hydrogen demand in the Dutch chemical, petrochemical and refining sectors. The government plans to rapidly scale up low-carbon hydrogen production in industrial clusters via carbon capture and storage (CCS) and electrolysis powered by renewable energy. The Netherlands is also taking an integrated approach with electricity and gas infrastructure development, with a clear intention to support the production, transport and storage of hydrogen, including by leveraging existing natural gas infrastructure. The country’s central location in Europe, extensive cross-border energy infrastructure and large port facilities also support the potential for the country to play a role in developing a robust regional and global market for low-carbon hydrogen.

Source: IEA (2020[20]).

Box 1.3. National and EU funds for a sustainable recovery and growth

The Dutch National Growth Fund

In September 2020, the Dutch government launched the National Growth Fund, making available EUR 20 billion as a grant over the next 5 years.

The fund is intended for investments that contribute to economic growth, such as knowledge development, infrastructure, research and innovation.
The fund has its own budget and an independent committee of experts who will assess the project proposals.
Details about investment plans were announced in April 2021: EUR 650 million was freed directly, while the rest of the tranche was allocated conditional on further substantiation of the projects. Around EUR 2.5 billion was reserved for low-carbon public transit infrastructure projects, EUR 600 million for quantum computing, EUR 300 million for artificial intelligence, and EUR 300 million to promote innovation in production and application of hydrogen

The Next Generation EU Fund

The Next Generation EU Fund is a EUR 750 billion temporary recovery instrument to help repair the immediate economic and social damage brought by the coronavirus pandemic (Figure 1.12). It consists of following programmes:

The Recovery and Resilience Facility is the centrepiece with EUR 672.5 billion in loans and grants available to support reforms and investments undertaken by EU countries. The aim is to mitigate the economic and social impact of the COVID-19 pandemic and make European economies and societies more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transition. To speed up the green and digital transition, each national recovery and resilience plan will have to include at least 37% of expenditure on climate investment and reforms, and at least 20% of expenditure to foster the digital transition.
The maximum grant available for the Netherlands is EUR 6 billion (0.7% of 2019 GDP).
Next Generation EU also includes EUR 47.5 billion for REACT-EU - a new initiative that continues and extends the crisis response and crisis repair measures delivered through the COVID-19 Response Investment Initiative and the Coronavirus Response Investment Initiative Plus. It will contribute to a green, digital and resilient recovery of the economy.
The Netherlands’ allocation from React EU amounts to EUR 443 million (0.1% of 2019 GDP).
Next Generation EU will also bring additional money to other European programmes and funds such as Horizon 2020 (EUR 5 billion), Invest EU (EUR 5.6 billion), rural development (EUR 7.5 billion of which EUR 15.5 million (2021) and EUR 36.9 million (2022) are allocated to the Netherlands) and the Just Transition Fund (EUR 10 billion of which EUR 324 million (2018 prices) will be allocated to the Netherlands).

Figure 1.12. Maximum grant under the Recovery and Resilience Facility

% of 2019 GDP

Promoting a better functioning housing market

Housing policies contribute to high housing prices, inflated household balance sheets and misallocation of capital (Box 1.4) (OECD, 2018[3]). Housing supply has not kept pace with demand since the Global financial crisis. The private rental sector is small, squeezed by a considerable tax-favoured owner-occupied housing stock and rent controls for housing defined as social housing scoring below a threshold in a points-based system. Households with limited savings and ability to obtain a sufficient mortgage and that do not qualify for social housing are left with limited housing options. The current system may hinder labour mobility, slow down the post-COVID-19 recovery and hamper productivity. The structure of the housing market is also a barrier to the inflow of foreign workers who could alleviate skill shortages, as foreign workers and internal migrants typically prefer renting housing on arrival.

The need for new homes is estimated to 845 000 from 2020 to 2030, driven by population growth, changing family patterns and slow construction in the aftermath of the Global financial crisis. More than 80 000 homes were built in 2019 (including conversions of existing buildings), but supply is expected to have been set back to approximately 50 000 units a year in 2020 and 2021 as construction permits were held back by the nitrogen ruling and a shortage of workers (see above). The nitrogen issue is now partly resolved, as nitrogen emissions during the construction phase of a project are exempt from the obligation to obtain an emission permit. Emissions generated during the use phase still need to be offset. Competing spatial uses and local opposition continue to complicate the planning process. Uncertainty caused by the COVID-19 crisis may to continue to weigh on housing investment. Labour shortages in the construction sector before the crisis could also be aggravated by reduced labour mobility due to COVID-19.

Improving the decision-making process for land use is needed, not only for housing, but also for infrastructure, agriculture, energy production and nature. Better coordination between municipalities, provinces and the central government and with the industry could help provide necessary infrastructure and the timely release of land and construction permits (Government of The Netherlands, 2020[21]). Reducing the favourable tax treatment of owner-occupied housing could reduce excess demand for housing and thus help ease supply constraints over time. Allowing rents to be set more in line with the market would also release housing supply by making better use of the existing housing stock, since rent controls strongly discourage tenants from moving out of their existing housing even if it no longer fits their needs. Loosening rent controls would also increase incentives to build rental housing.

Box 1.4. Assets and liabilities of households

Household debt is, at more than 200% of disposable income, among the highest in the OECD, and mostly consists of mortgages. Rising mortgage debt over the past decades has been more than outweighed by increasing assets, so that households hold a strong net asset position on average (Figure 1.13). Assets mostly consist of tax-subsidised owner-occupied housing and second-pillar pension fund savings that are mandatory for around 90% of regular employees through collective agreement and are only accessible after retirement. Both are relatively illiquid asset classes. Inflated balance sheets with illiquid assets have created some vulnerabilities:

High debt and relatively illiquid assets create macroeconomic and financial vulnerabilities: fluctuations in interest rates and asset prices have a large impact on households’ wealth, thereby increasing financial risks and amplifying business cycles through the consumption channel. Low interest rates increase the value of pension liabilities, forcing pension funds to increase premiums.
Tax subsidies and rent regulations distort capital allocation by making saving in owner-occupied housing more profitable than investments with higher pre-tax returns.
Tax subsidies on housing entail a fiscal cost. Postponed taxation of second-pillar pension savings along with their exemption from imputed capital income taxation create a bias in favour of pension savings.

The current system underpins considerable inequalities in wealth and savings, where owner-occupiers, who are also typically in regular employment and members of pension funds tend to over-save. To benefit from the mortgage tax reduction, mortgages have to be fully amortised over a 30-year horizon, contributing to over-saving. Those who rent their dwelling and fall outside mandatory pillar 2 pensions, notably flexible workers, tend to under-save for retirement.

Figure 1.13. Dutch households hold high assets and high debt on average

Household assets and liabilities per capita, 2018 or 2019

The housing sector consists to a large extent of owner-occupied housing, which enjoys a significant tax subsidy compared to non-housing investments and rental housing. Individuals who live in their own housing pay income tax (“Box 1” of the Dutch tax code) on imputed rents (0.5% of the market value), amounting to a maximum 0.25% marginal tax on housing wealth, significantly lower than (imputed) capital income taxation on other savings and investments (“Box 3”), which in practice amounts to a 1.24% tax on net wealth in the highest tax bracket (Figure 1.14, Panel A). Municipal property taxes and service charges of 0.1-0.3% do not depend on whether the accommodation is rented or owner-occupied. Capital gains on owner-occupied housing are also not taxed. In addition, home-owners can deduct mortgage interest payments from their personal income tax liabilities at a rate of 43% in 2021 (Figure 1.14, Panel B) (Tax and Customs Administration, 2021[22]; Jansen, 2019[23]). The on-going gradual reduction of the mortgage rate deductibility, from 52% in 2018 to 37% in 2023, is welcome, but affects the tax subsidy only marginally when a parallel reduction of imputed rents, from 0.7% of the housing value in 2018 to 0.45% in 2023, is taken into account. The reduction in imputed rents partly reflects that housing prices have increased more than rents lately. The reform marginally reduces the profitability wedge between debt-financed homeownership and debt-financed buy-to-let investments, while increasing it for cash-financed investments (Figure 1.14, Panel C).

Figure 1.14. Home-ownership tax bias continues after housing tax reform

Putting investments in housing on a more equal footing with other investments would bring several benefits. It would free resources to more productive uses, help curb housing price growth and boost supply in the free rental segment, as the value of a house purchase or housing investment would be less dependent of its planned use. It would increase fairness between home-owners and renters, who are more likely to be young, of immigrant background and self-employed, and typically have lower incomes (Figure 1.15). Taxing owner-occupied housing in line with other wealth would imply a simpler and more efficient capital taxation regime, and it would allow lowering distortive taxes on labour and capital.

The weak economy and strong vested interest of current home-owners call for phasing in tax adjustments over time, and for offsetting part of the increased taxation on owner-occupied housing. One targeted way to compensate home-owners for taxing imputed housing income like other imputed capital income (in Box 3 of the tax code) would be to use the additional revenue to significantly raise the capital income tax allowance. This would shield home-owners with low to modest overall wealth from tax increases from the reform. Reducing the current capital income tax rate of 30% to the 25% tax rate on income from substantial business interests, which are taxed in a separate regime today (Box 2 of the tax code), could further soften the impact of the reform, and lay the ground to merge the two capital taxation regimes. Reducing the mortgage rate deductibility beyond current plans, seizing the opportunity of low interest rates and buoyant housing prices would be less beneficial than increasing imputed rent taxation from both an efficiency and fairness point of view. However, it would be a considerable improvement over the current situation, and could be a politically more palatable option (DNB, 2019[24]).

Figure 1.15. The home-ownership gap between high and low income households is large

Percentage of owner households by income quintile

Private rental investment is also held back by the large rent-controlled social housing segment. At 36%, the share of social housing is by far the highest in the OECD (Figure 1.16). Only Sweden has a rent-controlled housing sector of comparable size, although not officially defined as social housing (OECD, 2020[25]). As in the Netherlands, rent controls in Sweden lead to a number of inefficiencies, including rationing (OECD, 2019[26]). In the Netherlands, rental dwellings, regardless of ownership, are subject to rent regulations if they score below a pre-defined threshold in a points based system, taking into account size, quality and the tax valuation of housing in the area. Regulations limit the maximum rent and annual rent increases. The cap on annual rent increases during tenancy is inflation plus one percentage point, which can be increased in cases where the income of a tenant has risen above the social housing income threshold. Stringent tenant protection in the regulated rent segment ensures that a dwelling once rented at, or below, the regulated rent stays in the regulated rent sector until the tenant voluntarily moves out, regardless of its score in the points system (OECD, 2016[27]). This system holds back private investment as returns for landlords are low, in particular in single-person housing, as most of it will fall below the rent control threshold given its size.

Figure 1.16. The private rental market is underdeveloped

Share of households, by tenure type

Non-profit housing corporations own approximately 75% of regulated rentals. Their strong capabilities, non-profit nature and public service mandate make them important providers in different rental segments such as elderly and student housing. They are obliged to contribute to green, safe and diverse neighbourhoods, they are overseen by a supervisory agency to ensure that public funds are allocated in an equitable and efficient manner and they pay a tax (“landlord levy”) related to their regulated rental activities. However, housing corporations are supported by a state guarantee for their investments in the rent-controlled sector, municipalities can sell them land below market level and prioritise them in land-use decisions. In combination with regulated rents, this undermines private supply in the rent-controlled sector.

Social housing does not always benefit those most in needs. The corporations allocate regulated dwellings to households below an income threshold following the queuing principle. The state guarantee enables them to charge below-market rents even for housing units scoring above the rent-regulation threshold (OECD, 2016[27]). Municipalities can allocate a proportion of the corporations’ housing units based on specific needs. Since 2017, corporations have been obliged to separate non-commercial activities in social housing from their commercial activities. However, a high household income threshold, under which housing supply is defined as “Services of General Economic Interest” under EU law, makes about half of the Dutch population eligible for social housing (OECD, 2020[25]). A share of existing tenants surpass income limits, and corporations can let 10% of their annual available housing stock to households not qualifying for social housing. Considerable barriers to entry thus remain in a market segment that would not be defined as social housing in any other OECD country.

Several steps should be gradually phased in to create a better balance between supply of and demand for housing, and make rental housing available to people when and where they need it. These policy measures are best understood as a coherent package of mutually reinforcing policies, while measures taken in isolation or in the wrong sequence can be less effective or even counterproductive (OECD, 2019[26]). First steps in a coherent housing reform package should include reducing the favourable tax treatment of owner-occupied housing to create room for private rental investments, and speeding up planning procedures to boost housing supply. These two reforms would contribute to increased supply and lower price pressures on existing housing and market rents, and thus facilitate subsequent reform of rent controls and housing corporations. A comprehensive reform package could also help overcome resistance from vested interests, for example by replacing favourable taxation of housing with lower taxation of assets in general, and by replacing rent controls with sufficient rental supply to maintain reasonable price levels.

To support the supply of market rental housing, the size of the regulated rental housing sector should be reduced by limiting rent controls to a narrower segment of the market and targeting social housing to those most in need. Compensating or protecting existing tenants in a transition period could be part of such a reform. An unconditional cash payment, initially equal to the rent increase and potentially financed by taxing the windfall profits for landlords, would shield tenants from an income shock, while incentivising those who live in too large housing units to move to smaller units and free up housing supply. Alternatively, rent increases in existing rent-controlled contracts could be phased in over time.

Housing corporations could have a more limited public service mission, in order to give room to a wider set of actors and more competition in rental supply. One option would be to lower income thresholds for social housing and municipal allocation based on individual needs, for example tied to social assistance benefit eligibility. The public guarantee and access to public land below market prices should be limited to a new and more narrowly defined public service mission to provide social housing.

The Netherlands has back-tracked on reforming the housing sector since the start of the COVID‑19 crisis. Housing corporations received a EUR 1 billion landlord levy reduction to build an additional 80 000 regulated housing units over five years. Rent increases have been temporarily capped in the rental segment without price controls, and evictions halted in agreement with housing corporations. A recent change to the transfer tax, exempting first-time buyers under the age of 35 from the 2% standard rate and increasing the rate to 8% for housing investors, is exacerbating the bias towards home-ownership. In a further bid to ease market entry for first-time buyers, the government is preparing legislation to allow municipalities to ban buy-to-let investments for a five-year period. If implemented, this is likely at best a zero-sum game policy. Potential gains for groups of home-owners purchasing at a lower price and landlords already renting out property in a particular local market would most likely be matched by losses for others, including existing home-owners in the area and those dependent on renting in the already small market-based rental segment.

Recommendations in previous *Surveys*	Action taken since the previous 2018 Survey
Support the supply of rental housing by further limiting strict rent regulation in the private market.	The government has back-tracked by implementing new rental regulations and further subsidising housing corporations.

Investments are needed to reduce local pollution and greenhouse gas emissions

Over the past two decades, the Netherlands has made important advances in dealing with environmental pressures, managing to decouple greenhouse gas (GHG) emissions, all major pollutants and waste generation from economic growth (OECD, 2015[28]). Even so, per capita nitrogen and GHG emissions are among the highest in the EU, not least because of the country’s dense population, being home to Europe’s main seaport and high industrial and agricultural production. The COVID-19 pandemic reduced emissions as mobility and economic activity were depressed (Figure 1.17). These improvements are set to reverse despite a likely permanent increase in teleworking. Environmental court rulings have held back investment projects and will likely lead to early scrapping of capital, notably coal-fired power plants (Box 1.5), and major investments are needed to tackle environmental pressures going forward.

Figure 1.17. Air quality only improved temporarily during the pandemic

% difference in air pollution per month compared to average of 2018 & 2019¹

Nitrogen oxide and ammonia from traffic, industry and the agricultural sector are major pollutants of nature, air, soil and water. The Netherlands has 162 Natura 2000 areas, which are special preservation zones covering about 15% of the country and protected by the European Habitat Directive. Of these areas, 129 are sensitive to nitrogen and 118 exceeded the critical limits for nitrogen in 2018 (Remkes Commission, 2020[29]). As such, new nitrogen emitting developments are constrained by the limited nitrogen space available and solutions have to focus on using the existing nitrogen space as efficiently as possible. The 2019 Council of State ruling that the policy in vigour to control nitrogen emissions was in conflict with EU laws halted many housing, infrastructure and agricultural projects to allow for a re-evaluation of permits. In March 2021, the law on Nitrogen reduction and nature improvement was adopted stating that 74% of nitrogen-sensitive hectares in Natura 2000 areas have to be brought back below critical nitrogen deposition loads, which equals a 50% reduction in emissions by 2035 (Box 1.5). The COVID-19 pandemic somewhat reduced the nitrogen emissions from traffic and industry activity compared to previous years (Figure 1.17), though these effects are likely to be temporary.

Box 1.5. Environmental rulings in the Netherlands

May 2019 ruling on nitrogen

Background: In 2015, the government introduced the Programma Aanpak Stikstof (PAS). The PAS aimed at simultaneously cutting back nitrogen deposition in nature, and offering some scope for new economic activities that involve nitrogen emissions. Applicants for nitrogen emitting projects, such as expanding livestock farms or construction projects near vulnerable Natura 2000 areas, received a permit against a promise to implement emission-restricting measures in the future.

The ruling: In May 2019, the Council of State ruled that PAS did not provide the required assurance that the nitrogen deposition would not negatively affect the natural features of the Natura 2000 sites, and was therefore in conflict with EU law. The Council of State also found that many of the programme's measures were not suitable to be used to offset emissions from new economic activities causing nitrogen deposition on the Natura 2000 sites. For one, a large part of the measures were necessary as a minimum requirement to fulfill the goals set out in the Habitats Directive. Second, the effects of many of the measures were still uncertain at the time the permits would be issued.

Implications and subsequent actions: As an immediate result of the ruling, many projects were halted as permits had to be re-evaluated. This affected construction and operating permits for livestock farms, zoning plans for road construction and industrial estates, as well as housing construction and climate projects.

A special committee, the Remkes Commission, advised the government to take several steps to reduce nitrogen emissions and deposits. Subsequently a number of short-term solutions were implemented, such as reducing maximum speed limits during daytime from 130km/h to 100km/h, as well as buy-out schemes for farmers near Natura 2000 areas. Long-term solutions are outlined in a new nitrogen law that was approved by the Senate in March 2021. It comprises: i) a legally binding obligation to ensure that the share of nitrogen-sensitive hectares in Natura 2000 areas below the critical deposition load is brought back to 40% by 2025, to 50% by 2030 and to 74% by 2035, ii) a comprehensive programme with nitrogen reduction measures, iii) a nature improvement programme, and; iv) a system of regular monitoring and adjustment. It further includes a partial exemption from the emission permit requirement for activities during their construction and demolition phase, in which emissions are temporary and limited. A EUR 6 billion package through 2030 for nitrogen reducing measures in agriculture, construction and industry and for nature recovery is planned to give room to issue new permits for construction and infrastructure projects. Since March 2020, it has also been possible to submit permit applications for housing infrastructure projects that wish to make use of deposition space in the nitrogen registration system (SSRS), a system which manages nitrogen space that becomes available due to reduction measures. The government further wants to introduce fiscal incentives for the purchase and use of electric cars, in line with its goals for 2030 when all new cars need to be zero emission.

December 2019 ruling on cutting greenhouse gas emissions

Background: Article 2 of the European Convention on the Protection of Human Rights and Fundamental Freedoms (ECHR) protects the right to life, and Article 8 of the ECHR protects the right to respect for private and family life. The Netherlands is obliged by these provisions to take suitable measures if a real and immediate risk to people's lives or welfare exists, including long-term environmental hazards, and the state is aware of that risk.

The ruling: At the end of 2019, the Dutch Supreme Court ruled in the Urgenda Foundation v the State of the Netherlands case that the government must reduce emissions immediately in line with its human rights obligations. The ruling forced the Netherlands to speed up climate change measures in order to cut CO₂ emissions by 25% from 1990 levels by the end of 2020. This was the first time a nation has been required by its courts to take action against climate change.

Implications and subsequent actions: Following the ruling, a 65% reduction in capacity at the country’s coal-fired power stations was announced for 2020. Further measures include EUR 2 billion for rooftop solar panels and other forms of renewable energy, and about EUR 375 million for household energy saving measures.

Source: National Institute for Public Health and the Environment (2021), https://www.rivm.nl/en/nitrogen; Spier, J. (2020), ‘The “Strongest” Climate Ruling Yet’: The Dutch Supreme Court’s Urgenda Judgment. Netherlands International Law Review, 67(2), pp.319-391.

Short-term responses to the ruling included reducing the maximum speed limit during daytime from 130km/h to 100km/h and a buy-out scheme for pig farmers near Natura 2000 areas. These measures freed up some space for nitrogen emitting activities, and the corresponding nitrogen emission rights are managed through the Nitrogen Registration System allowing crucial housing construction and infrastructure projects to resume. Further, the government presented in April 2020 a structural approach to address the nitrogen problem by focusing on preservation and restoration of Natura 2000 areas and habitats. This structural approach is important for the Netherlands to comply with the obligations of the EU Bird and Habitat Directives, but also to gradually allow the permitting of projects enabling social developments and economic growth. This approach also includes a set of measures addressing agricultural sector emissions, such as providing farmers with support to adapt to low-emission or circular farming. For example, stall systems will be redesigned into low-emissions ones and improvements will be made in feed or manure processing. The approach is complemented by the buying up of livestock farms around nature areas. Nitrogen is a regional issue that does not stop at borders. The Netherlands is therefore in dialogue with the Belgium Flanders region and the German states North Rhine-Westphalia and Lower Saxony to establish cross-border cooperation in tackling the common nitrogen problem, which is a welcome step.

The Dutch senate approved a new law in March 2021 anchoring the structural approach to limit nitrogen. It introduces legally binding commitments for the government to gradually reduce nitrogen deposition and emissions in sensitive areas. By 2035, 74% of the nitrogen-sensitive areas should be brought back below critical deposition loads, which is equivalent to halving nitrogen emissions. Several instruments to manage nitrogen emissions are in place. For example, the so-called “external offsetting” allows the transfer of up to 70% of the nitrogen emission rights that become available due to the termination of an activity to the creation or expansion of a new activity. The remaining 30% is withdrawn to reduce environmental pressures. Further, the government is developing several new instruments, such as the regional nitrogen registration system to pool available nitrogen space that becomes available for example as result of external offsetting and (provincial) reduction measures. The steps taken so far are welcome, but there is scope to use the scarcely available nitrogen space more efficiently by further facilitating standardisation and the transfer of rights.

The Netherlands is particularly vulnerable to climate risks, such as rising sea levels and more frequent natural disasters like storms and flooding, since about a fifth of its land is below the sea-level. The Dutch government has played a leadership role in many multilateral settings to raise awareness and advance international initiatives, including on oceanic issues. In 2010, it also became one of the first countries to integrate environment and economic policies in the ministerial structure in what is currently the Ministry of Economic Affairs and Climate Policy. The National Climate Act of 2019 sets targets to reduce greenhouse gas (GHG) emissions by 49% by 2030 compared to 1990 levels and by 95% by 2050. Over 100 stakeholders, from the electricity, industry, construction and housing, transport and logistics, and agriculture and land use sectors, negotiated and agreed to specific emission reductions measures to support the achievement of the 2030 target. Measures include an emission tax for industry, subsidies to stimulate housing insulation, a ban on coal fired power plants and a major push for sustainable sources of energy.

The government intensified its measures to reduce GHG emissions to comply with the 2019 Urgenda judgement mandating a 25% reduction compared to 1990 levels by the end of 2020 (Box 1.5). Coal-fired power was reduced by 65% and several other measures focussing on energy efficiency in industry, construction, buildings and agriculture were introduced. The COVID-19 pandemic supported the reduction in GHG emissions, and initial estimates suggest that overall reductions have been sufficient to meet the Urgenda target (CBS, 2021[30]). Still, simulations by Netherlands Environmental Assessment Agency show that the Netherlands is not yet on track to meet climate targets for 2030 (PBL, 2020[31]). Policies and plans outlined by mid-2020 are expected to reduce GHG emissions by 34% compared to 1990 levels, 15 percentage points short of the target set out in the 2019 Climate Act. In reaction to the report, the government is developing a number of measures that have the potential to further reduce GHG emissions to reach 43% compared to 1990 levels. While this would be a significant improvement, it would still fall short of the 2030 target of 49% (Figure 1.18). The government should quickly adapt its measures to achieve the 2030 target, supported by a green recovery package, the new National Growth Fund and the Next Generation EU Fund.

Figure 1.18. The Netherlands is not yet on track to meet its medium term emission targets

To get back on track towards its transition to a carbon neutral economy by 2050, a change in energy production is essential (OECD, 2021[32]). Energy-related CO₂ emissions accounted for 83% of total GHG emissions in 2018. The Netherlands is heavily reliant on fossil fuels and has a high concentration of energy- and emission- intensive industry (IEA, 2020[20]). The share of renewables in the energy mix has more than doubled between 2008 and 2019, supported by an increase in subsidies awarded through the Stimulation of sustainable energy production scheme (SDE+) and a comprehensive policy framework for offshore wind power deployment. However, a renewable share of 7.2% (in 2019) remains lower than the OECD average of 10.9% and significantly below the national 2020 target of 14% set out under the EU’s Renewable Energy Directive (2009/28/EC). In 2020, SDE+ was expanded into the Stimulation of sustainable energy production and climate transition scheme (SDE++), granting subsidies not only to renewable energy production but also to CO₂ reducing projects, which is a welcome step. Funding is available for renewable electricity, renewable heat, renewable gas, low-carbon heat and low-CO₂ production for companies and organisations (non-profit and otherwise) in sectors such as manufacturing, transport and logistics, electricity, agriculture and the built environment (Netherlands Enterprise Agency, 2020[33]).

The Netherlands aims to significantly boost its resource efficiency and become a circular economy by 2050 in a bid to reduce material extraction and processing that are behind 71% of global GHG emissions (OECD, 2019[34]). The Netherlands recycles 80% of its municipal waste, which is high in international comparison (Figure 1.19, Panel A). Despite the high municipal recycling rate, 92% of Dutch production is still based on primary materials, with very little progress since 2010. Primary raw materials are often cheaper than recycled materials (PBL, 2021[35]). To boost the transition to a closed system, in which raw materials are reused and waste does not exist, the government should ensure that the environmental damage is reflected in the prices of products, and that legislation and regulations are conducive to circular initiatives. Introducing digital passports for products as part of Ecolabel and Ecodesign regulation could support the development of markets for recycled materials by providing information on a product’s origin, composition, and end of life handling, and thereby encourage the recycling, reuse and repair of materials (European Commission, 2019[36]).

Green taxes are relatively high (Figure 1.19, Panel B), but could reduce emissions more at a lower cost if they were better designed. Environmental taxes include a mix of carbon taxes and levies and indirect taxation of emissions through the energy tax and other fiscal measures. The energy tax covers consumption of gas, electricity and district heating. In addition, consumers pay a Surcharge for Sustainable Energy (ODE), which provides funding for the Stimulation of Sustainable Energy Production scheme (SDE+ and SDE++). A carbon levy establishes a direct taxation of industrial emissions. A separate carbon pricing mechanism for electricity sector emissions is also in place and currently acts as a floor price for the Emission Trading System (ETS). No direct taxation of CO₂ emissions exists for the residential, commercial and agricultural sector.

Tax policy can further support the transition towards a carbon neutral economy by encouraging an efficient use of resources and investment in sustainable technology. The price of emissions covered by the EU emissions trading scheme (EU-ETS) is a function of the supply of allowances to the scheme, ultimately decided collectively by EU member states. However, the difference in the implicit tax rate across sectors outside of the EU-ETS does not incentivise emissions reductions where they are the most cost efficient (IEA, 2020[37]). Effective taxes are notably high on gasoline, but also diesel, which together contributed about 16% to CO₂ emissions from energy use (OECD, 2019[38]), while the agricultural sector and industrial emissions not covered by the EU-ETS are subject to lower effective tax rates (OECD, 2021[39]). The government should regularly assess the effectiveness of environmental taxes and levies, broaden the sectoral coverage of carbon and energy pricing and strengthen price signals for non-ETS sectors (OECD, 2021[32]). Recent policy changes in this direction, such as increasing the tax rate on gas and decreasing the tax rate on electricity, are welcome. Additional tax revenue could for example be used to increase investment in infrastructure to protect the country against the rising sea level, increase the childcare tax credit, or to lower income taxes and thus improve work incentives.

Figure 1.19. Environmental taxes are high and resource efficiency has improved

Recommendations in previous *Surveys*	Action taken since the previous 2018 Survey
Ensure stronger investment in renewable energy and energy efficiency by improving cost-effectiveness of existing instruments and possibly increasing their scale.	A number of initiatives have been taken to scale up environment policy instruments, for example under the SDE++ framework.

Skills and labour market reforms to build social capital

The Netherlands enjoys a high level of social capital, with people trusting each other and trusting the government (Figure 1.20). Such general trust reduces frictions and transaction costs and acts like a lubricant to the economic engine. Trust is reinforced by fairness of opportunity and outcomes, kept promises, and solid institutions fostering dialogue and negotiation between representative social partners (Blanchard et al., 2013[40]; OECD, 2015[41]). Trust needs to be built and maintained over time. Revelations that thousands of families were wrongly accused of child welfare fraud and had to pay money back were unfortunate. Steps are being taken to compensate those affected, and the government collectively resigned in early 2021 as a consequence of this affair. Tri-partite cooperation between social partners and the government in the consensus-building “Polder model” is of great importance to anchor major economic reforms, such as the on-going pension reform. The Borstlap Commission (Box 1.6), which aims at reducing labour market duality, is also anchored in this model.

Figure 1.20. Trust in people and government are high

Perceived corruption is low in the Netherlands (Figure 1.21, Panel A), but some public procurement contracts may have been awarded through exceptional procedures at the height of the health crisis (Beuter, 2020[42]). Transparency of such contract awards and evaluations ex-post is a way to reduce the risk of cronyism or the perceptions thereof. The country scores well above the OECD average in each sector covered by the World Bank Control of Corruption indicator (Figure 1.21, Panel B).

Reducing labour market duality

Income inequality is lower than the OECD average, and has stayed relatively constant since the mid-1990s. The relative poverty rate, measured as the share of households earning less than 50% of median earnings (OECD, 2018[3]), remains low at around 6% and below the OECD average of around 11%. The country further ranks highly in a number of areas of social progress, with teenage pregnancy and early school dropout rates being the lowest in the European Union (OECD, 2018[43]; OECD, 2019[44]). The government support package has to a large extent mitigated the direct impacts of the COVID-19 crisis on households’ income. Households’ incomes and savings increased on average in 2020, and fewer households had to draw on savings or take on debt to make ends meet in January 2021 than in January 2020 (CBS, 2021[45]). However, some groups including young, low-skilled and ethnic minorities have been more affected by the COVID-19 crisis, and job losses will likely increase going forward, as support aimed at preserving current businesses and jobs is scaled back.

Inequalities in income, assets, access to training and a considerable gender wage-and pension-gap follow the dual structure of the labour market. Workers on regular contracts are highly protected, while protection for workers on non-standard contracts is limited (Figure 1.22). The 1.4 million workers with short-term temporary contracts, temporary agency contracts, on-call contracts or variable hours are at greater risk of losing their jobs and income than workers on regular contracts and other temporary workers (CBS, 2021[45]). These workers earn less, save less, have less social protection, are less likely to engage in training and to own their house than the regular employed.

Figure 1.22. Regular workers are highly protected, while temporary workers are not

Employment protection by contract type (index, 2019)

The share of the employed in non-standard employment was, at 21.5% in 2018, almost twice as high as the OECD average. In particular, “on call’ or “zero hour” contracts have been increasing over recent years (Figure 1.23). Employers have been obliged to give four days prior notice of working hours since 2020. Differences in the tax treatment of work contracts play a key role in this development. Some tax relief is available only for the self-employed, although it will gradually be reduced by 2028. The self-employed do not pay some social security contributions, notably for disability and pillar two pensions (Figure 1.24). This leaves them less protected, and the resulting tax wedge incentivises employers to hire own-account workers (OECD, 2018[3]; OECD, 2020[5]).

Figure 1.23. The share of flexible workers has increased over the past decade

Figure 1.24. The self-employed pay less pension and social security contributions

Non-standard types of work can reflect new opportunities and individual preferences for more flexibility in working relationships, and they provide a flexible labour margin. However, they can also result in a deteriorating quality of work with weaker job and income security and greater wage inequality. Temporary work relationships in the Dutch labour market are more common for youth, women, people of immigrant background and the low skilled. Flexible workers earn less, have less wealth and are less likely to own a house on average, while they are more exposed to job loss (OECD, 2018[3]). The wide use of non-standard jobs can hold back productivity over the long-term, as non-standard contracts provide little incentive for employers and employees to invest in skill improvement (OECD, 2020[5]).

The Commission for Work Regulation recommended in its 2020 report to reduce labour market duality by increasing flexibility of regular employment contracts, reducing tax and social security incentives favouring flexible workers and encouraging life-long learning (Box 1.6), for consideration by social partners and the government. The Commission’s proposals to align incentives between contract types and banning regulatory arbitrage, where de facto employed are defined as independent contractors, would to a large extent ensure that the characteristics of the job determine the type of contract, as opposed to differences in tax treatment and employer responsibility. The proposed loosening of regulations on regular contracts implies that employers would have more leeway to adapt tasks, work hours and location in line with the economic situation, rather than allowing easy dismissals. These proposals address the main weaknesses of the current system in a balanced way, and should be implemented. Mandatory disability insurance for the self-employed, which has been agreed as part of the pension reform, will pull in the same direction. Falling short of recommending pension fund membership for flexible workers will nonetheless leave an incentive for employers to hire flexible workers despite the announced change to actuarially neutral pension accrual.

Box 1.6. Main recommendations of the Commission for Work Regulation

In November 2018, the government established the Commission for Work Regulation (Commissie Regulering van Werk or “Borstlap Commission”) to analyse how to make the labour market more inclusive and fit for the digital age. The Commission’s final report, supported by inputs from the OECD, provides the following recommendations:

Increase the flexibility of regular employment contracts

Employers should be able to adapt jobs, workplace and working hours of regular employees in line with the demands of the economy.
Introduce part-time redundancy up to a certain percentage of working hours if economic conditions warrant it.

Reduce tax and other incentives for hiring flexible workers

Temporary agency workers, freelance and gig workers should be entitled to the same terms of employment as regular employees, unless companies can prove that they are really self-employed.
Phase out the tax deduction for the permanent self-employed.
Introduce minimum disability insurance coverage for all workers regardless of their contract.
Incentivise employers to hire regular employees by reducing the duration of mandatory sickness pay to one year, from currently two years.
Introduce a higher minimum wage for employees with flexible employment contracts to compensate the additional risk.

Encourage lifelong learning

Support all workers with career planning.
Introduce individual training budgets for all workers, regardless of their employment contract, with monthly contributions by the employer.
Make retraining accessible for all workers who are made redundant, funded by their individual training budgets.

Source: Commission for the Regulation of Work (2020[46]) and OECD (2019[47]).

Recommendations in previous *Surveys*	Action taken since the previous 2018 Survey
Phase out the permanent self-employment tax deduction. Introduce minimum coverage for sickness and disability insurance for workers regardless of their contract.	The permanent self-employment tax deduction is gradually reduced from €7030 in 2020 to €3240 in 2036. Plans to introduce minimum disability coverage regardless of contract type are not yet legislated.
Lower social security expenses, for instance by reducing the generosity for sickness insurance.	No action taken.
Reduce severance pay for employees who are dismissed under reasonable grounds	No action taken.

Second-pillar occupational pensions are ripe for reform

The Dutch three-pillar pension system is renowned internationally for the large population coverage, adequate retirement income, strong capitalisation and long-term sustainability. As a result, old-age poverty is very low and stable over time (Figure 1.25). The first pillar is a public flat-rate pay-as-you-go benefit available to residents above the statutory retirement age. The second pillar occupational pensions provide supplementary pensions, in most cases on a defined-benefit legal basis. Membership is regulated by collective agreements and mandatory for 90% of employees. The third pillar, consisting of voluntary, tax-favoured pension savings contracts, is still limited at about 10% of total pension assets, but is growing (Karpowicz, 2019[48]; Brouwer, 2020[49]).

The government and social partners reached an agreement in 2020 to address a number of weaknesses that had accumulated over time in the second pillar. The move from defined-benefit to defined-contribution pension rights will remove the need for large solvency buffers and allow investment risk profiles adapted on an age-cohort basis. Actuarial pension accrual rates will remove the subsidy from young to old members, thus increasing intergenerational fairness and reducing the incentives to work as self-employed. Legislation is set to take effect from 2023, while the reform will likely be fully phased in by 2027 (Brouwer, 2020[49]).

As a part of the pension compromise, the adjustment of the legal retirement age to life expectancy was frozen for two years and the rate of adjustment slowed. The legal retirement age will reach 67 in 2024, and will increase by eight months for each year of increased life expectancy thereafter. Previous plans to increase the retirement age one to one with rising life expectancy would increase years in work relative to years in retirement, keep average years in retirement constant over time and thereby reduce healthy years in retirement. The reduced pace of longevity adjustment strikes a better balance between fiscal sustainability and welfare over the life cycle. However, making sure the effective retirement age rises in line with the legal retirement age is essential to avoid mounting fiscal pressures going forward.

Some pension funds will need to improve their capitalisation in the short term. Solvency regulations before the reform, based on the principle that annuities are fully guaranteed, called for solvency buffers corresponding to a 125% funding ratio (assets divided by liabilities). New rules applicable for the transition period (2023 to 2026) require a minimum funding ratio of 95% and mandate social partners and the governing boards of pension funds to set a funding ratio allowing a fair and balanced transition towards the new pension contract. Funding ratios have weakened since the financial crisis, as low interest rates pushed up the present value of pension fund liabilities (DNB, 2019[24]). Funds were granted temporary leniency to avoid nominal cuts to annuities when more than half of pension funds had a funding ratio below 105% by the end of 2019, and again when the COVID-19 crisis pushed the average funding ratio below 100% for the first time (DNB, 2021[50]). Pension funds facing a funding shortfall can in principle adjust by reducing pensions or increasing premiums. Increasing premiums is usually the preferred option, and a number of funds are expected to increase premiums going forward. Pension premiums, including employer and employee contributions, are levied on incomes above a threshold, and accounted for approximately 14% of aggregate gross labour income before the COVID-19 crisis (European Commission, 2017[51]).

Recommendations in previous *Surveys*	Action taken since the previous 2018 Survey
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.	The tri-partite pension agreement will ensure funds’ sustainability when fully implemented by 2027.

Providing the skills needed to weather the crisis and embrace the future of work

Human capital is high in the Netherlands. The population is highly educated in general but some are left behind. About 40% of the population aged 25 to 64, and 49% of 25-34 year olds has a tertiary degree (OECD, 2020[52]). High educational attainment is coupled with the third highest average adult skills in literacy and numeracy in the OECD after Japan and Finland. Still, one in ten of the adult population has low skills in literacy and numeracy, which are essential for learning new skills and are often required to perform jobs in modern society. People with higher digital skills have 4-6% higher hourly wages and are 10% more likely to be employed (Non, Dinkova and Dahmen, 2021[53]). A third of all adults report having problems using computers (OECD, 2018[43]).

Technological advances and automation shift the Dutch labour market towards higher skilled employment. Jobs that involve many routine tasks are exposed to automation, for example jobs in the transportation and storage sectors and jobs in administrative and support service activities. Continuing structural change will likely increase skill mismatches and thus reduce the value of some workers’ skills. The COVID-19 crisis likely accelerated this development in some hard-hit sectors (Figure 1.26). This is notably the case for middle-skilled jobs in administrative and support service activities and in transportation and storage. Accommodation and food services, which are somewhat less vulnerable to automation, have also been very strongly affected by COVID-19. The COVID-19 crisis is also affecting human capital accumulation, as containment measures affect physical and psychological health, the quantity and quality of schooling, opportunities for on-the-job training, and reinforces traditional gender roles (OECD, 2020[5]).

An increased impetus on adult training is needed. The pandemic has seen a renewed interest in online learning (OECD, 2020[54]), but on-the-job training and skill accumulation suffered during the COVID‑19 crisis, as working hours dropped by 5% in the second quarter of 2020 compared to the previous year. Policy efforts should be strengthened to provide workers with effective training to facilitate the reallocation of workers from sectors hit hard by the pandemic and automation to new and more promising activities. Thus, active labour market policies should target low-skilled and disadvantaged workers, including individuals already in work, who are less likely to receive training, in cooperation with social partners.

Initiatives are underway to offer employer-provided individual training accounts to all regular employees. The new Personal Learning and Development Budget (STAP) is an innovative approach to fund individual life-long learning activities for any adult, independent of their employment status, thereby complementing individual learning accounts (Box 1.7). The envisaged 2022 budget of EUR 200 million is likely too low to cover currently un-met upskilling needs, but the initiative is open to co-financing by employers and easily scalable if initial experiences are positive. In order to produce the desired outcomes and avoid fraud, the system needs to be accompanied by a strong quality assurance system, including certification of education providers, monitoring quality of activities and making this information available (OECD, 2019[44]).

Figure 1.26. Some hard-hit sectors are also exposed to automation pressures

Box 1.7. The Personal learning and development budget (STAP): a new platform for adult learning

The Personal learning and development budget (Stimulering Arbeidsmarkt Positie, STAP) is to be implemented in 2022 with an initial annual funding of EUR 200 million. STAP replaces a former tax deduction scheme, and is part of the 2018 action plan aiming to help and encourage people to take more responsibility in managing their personal working life and career.

Any person between the age of 18 and the statutory retirement is eligible for a maximum training subsidy of EUR 1000 per year. The subsidy is allocated through a registry containing approximately 700 pre-approved educational institutions and 20 000 educational activities, including both formal and non-formal education. Users apply through an on-line application form. Training slots and funding are reserved in real time on a first-come-first-served basis. Funding is allocated directly to the education provider to reduce the risk of misuse and fraud.

The initiative does not separate between groups of people and types of training at the outset, but the infrastructure could allow targeting extra funding to certain groups or specific types of activities in the future, for example within the digital and/or green transition. The system also allows for co-financing, for example by employers.

Alongside the STAP initiative, policies will be in place to help groups that engage less in adult training. Such activities will include targeted communication and campaigns, additional guidance and counselling services to medium and low skilled workers.

Source: Kingdom of the Netherlands (2020), An updated EU skills agenda, Non-paper by The Netherlands Permanent Representation to the EU.

15-year-olds in the Netherlands perform above the OECD average in mathematics and science, according to the OECD’s Programme for International Student Assessment (PISA) (OECD, 2020[52]). However, declining performance in the latest PISA vintages is a concern, notably in reading (Figure 1.27, Panel A). Differences in results between schools are high, partially because of early tracking, with pupils in the academic track performing better than those in vocational tracks. However, these differences are rising, as the weakest pupils are falling further behind the average, notably in reading (Figure 1.27, Panel B). Students of immigrant background perform considerably below natives, and immigrant pupils in Dutch schools have the second-lowest absolute performance in the OECD (Figure 1.27, Panel C) (OECD, 2018[43]). Reversing the downward trend and raising the performance of Dutch schools would require investing in teachers, promoting collaboration among school leaders, teachers and school boards and fostering a culture of accountability and continuous improvement (OECD, 2016[55]).

Tweaks to the school choice design could help social integration. The Netherlands has a highly decentralised school system with school choice and a high share of publicly funded schools run by private foundations or associations with a basis in religion, philosophy of life or educational vision. Money follows the pupil, with higher funding for pupils from immigrant and disadvantaged socio-economic backgrounds. Despite such compensatory funding, school choice may contribute to a concentration of pupils according to their social backgrounds. This is not a result of school choice in itself, but has multiple causes, notably income inequality, spatial segregation and information asymmetries for families from different socio-economic status. Sweden, with free school choice, has seen considerable concentration of similar socio-economic backgrounds in schools, as has Finland with very limited choice (OECD, 2019[26]). However, the framework for application and assignment of pupils to schools can contribute to such concentration unless properly designed, as strong pupils with native-born and well-educated parents may self-select away from weak schools.

A unified application system with simultaneous application to all schools on one single platform, as in Amsterdam and the one being developed and piloted in Utrecht, is a way to reduce information asymmetries between families of different backgrounds. Participation should be mandatory to all publicly-funded schools in the relevant area, and be combined with easily and transparently available information on school performance. Oversubscribed schools should assign pupils in ways that, at a minimum, do not discriminate against children from socially disadvantaged backgrounds, including by lottery (as in Amsterdam and Utrecht). Alternatively, assignment could facilitate social mixing by giving priority to pupils from underrepresented socio-economic backgrounds, although such positive discrimination often prove politically controversial.

Figure 1.27. PISA performance is high but declining, and the weakest fall further behind

During the COVID-19 crisis, Dutch schools closed and provided classes online 12 weeks in 2020, and closed again in early 2021. Despite a less heavy-handed approach to school closures than many peer countries, with a shorter interval of mandatory school closures (Figure 1.28), along with relatively high capabilities for on-line teaching, the effect of eight weeks of online classes in the Netherlands in the spring was equivalent to missing out on education for these eight weeks on average; the negative impact was up to 60% larger than average among students from less-educated homes (Engzell, Frey and Verhagen, 2021[56]). Unequal facilities of schools and pupils to go digital, including the necessary digital equipment, high-speed internet connections, private space at home and parents who can assist and follow up, tend to disadvantage students from weaker socio-economic backgrounds (OECD, 2020[57]). To reduce the growing learning gaps, the government made EUR 8.5 billion for activities including after-school hours and vacation catch-up classes available.

Figure 1.28. School closures and reduced activity can hold back human capital accumulation

Recommendations in previous *Surveys*	Action taken since the previous 2018 Survey
Introduce individual lifelong learning accounts targeted specifically at vulnerable workers.	No action taken, but the planned STAP budget will be an important step to address this issue once implemented.
Improve the targeting of employment support policies to vulnerable groups.	No action taken.
Work towards a more coordinated approach, in implementing activation policies across regions.	No action taken.

A more equal sharing of paid and unpaid work would allow a better use of human capital

The Netherlands performs well on many, though not all, measures of gender equality. Women’s labour market participation has increased spectacularly, from 30% to 70% since the 1970s (Figure 1.29, Panel A), and is today one of the highest in the OECD. However, nearly 60% of women work part-time, roughly three times the rate for men and three times the OECD average for women (Figure 1.29, Panel B). This represents an inefficient use of human capital, as young women are more likely than men to complete both secondary and tertiary education (OECD, 2020[52]) and they enter the labour market at similar rates after graduating.

The gender wage gap is narrow before partners become parents, but widens dramatically thereafter, as women and men tend to transition to more traditional gender roles (OECD, 2019[58]) and the gender gap in part-time work widens. It leads to large gender gaps in earnings, wealth and pensions, slower progression of women into management roles, and it corresponds with unequal division of unpaid work at home (OECD, 2019[58]). The gender wage gap is at the OECD average (Figure 1.29, Panel C). The pension gap is the third-highest in the OECD, with women aged 65 years and older receiving much lower pension than men (Figure 1.29, Panel D). The large gender gap in part-time work shows little sign of abating. Indeed, the crisis likely amplified gender inequalities, as women picked up much of the additional unpaid work caused by widespread school and childcare facility closures (OECD, 2020[5]).

Figure 1.29. Unequal sharing of family work lead to gender gaps in pensions and income

The choice of what form of care is best for their children ultimately lies with the parents, but the government can do more to ensure that parents have the choice to pursue gender equal sharing of responsibilities at home and in professional life. Surveys find that the incidence of involuntary part-time work is low in international comparison (OECD, 2018[3]), but people’s choices are conditional on institutions, such as parental leave arrangements, access to high-quality flexible childcare, after school care and associated costs and barriers. A majority of mothers and fathers in the Netherlands report wanting an equal distribution of care work, but less than 40% say that this happens in practice (OECD, 2019[58]). Parental leave entitlements and high-quality affordable childcare enable parents to pursue both career and family, while incentives to split parental leave between mothers and fathers help foster a more equitable distribution of paid and unpaid work within a family also after the parental leave period. Incentives for both partners to reduce hours in connection with childbirth, like the “partner bonus” to part-time parental leave in Germany (Eurofound, 2021[59]), should be considered.

Parental leave entitlements will be made more generous but more should be done. Maternity leave is, at 16 weeks, short in OECD comparison. Fathers are entitled to 6 weeks leave at a 75% average replacement rate, lower than the 100% available to mothers. Following up the European directive on work-life balance, the first 9 weeks of an additional 26 weeks unpaid leave entitlement available to each parent will be paid up to 50% from mid-2022 (Government of the Netherlands, 2021[60]) (Figure 1.30). This extension is welcome, and plans to earmark nine weeks paid leave to each partner should incentivise a more gender-balanced sharing of care responsibilities. However, a replacement rate of 50% of wages up to a ceiling might be an insufficient incentive to overcome entrenched gender norms and earnings shortfalls in those families where the father is the main family income earner.

Figure 1.30. Relatively short maternity leave is set to increase

Reforming childcare and after-school care should be a priority. Enrolment in centre-based childcare is well above the OECD average, but total hours spent in childcare is low. Likewise, participation rates in centre-based out-of-school-hours care services are around the OECD average. The quality of centre-based care is typically good, but the cost to parents is relatively high in OECD comparison and social norms dictate that it is better for toddlers to stay at home with their mothers (OECD, 2019[58]).

Facilitating access to high-quality and affordable childcare would likely boost the uptake of childcare and facilitate gender equality directly, and would likely contribute to changing attitudes in the longer term, as take-up increases. Early childhood education and care has a positive effect on children’s learning outcomes, notably children with low-educated and/or immigrant parents (OECD, 2020[61]). A legal right to childcare would provide certainty to women combining careers with motherhood. Prioritising childcare provision to parents in work or studies could reduce the net cost of childcare provision and boost work incentives. However, there might also be lock-in effects in segments of non-working women, and adverse effects on learning outcomes for children not participating, notably for children from immigrant families and weaker socio-economic backgrounds.

Box 1.8. Quantifying the impact of selected recommendations

This box summarises potential long-term impacts of selected structural reforms included in this Survey on GDP (Table 1.10) and fiscal balance (Table 1.11). The quantified impacts are merely illustrative. The estimated fiscal effects include only the direct impact and exclude behavioural responses that may occur due to a policy change.

Policy	Scenario	Impact
Reduce employment protection (EPL) on regular contracts	Reduce EPL by 10%	2.1% increase in GDP per capita after 10 years

Source: OECD calculations using the OECD Economics Department's long-term model; OECD calculations based on the framework in Égert and Gal (2017), “The Quantification of Structural Reforms in OECD Countries: A New Framework”, OECD Economics Department Working Papers, No. 1354.

Measure	Description	Additional fiscal cost/revenue, percentage points of GDP
Expenditures
Reduce user prices of childcare	Increase child care available to families by 10% to close the gap with the OECD average.	-0.1
Increase leave replacement rates after the birth of a child for fathers to the level available to mothers	Increase cash benefits for parental leave to reach the OECD average	-0.2
Increased spending on training subsidies	Increase ALMP by 10% to bring up spending on training to the OECD average	-0.1
Taxes
Reducing favourable tax treatment of owner-occupied housing	The fiscal impact reflects additional tax revenue from scrapping mortgage interest rate deductions.¹	1.0

Note: Estimations for selected reforms showing only direct budget impact. 1. CPB estimates indicate that mortgage interest deductions result in a budgetary loss of about by EUR 10 billion in 2025 (about 1% of CBP’s estimated GDP for 2025) (CPB, 2020b), https://www.cpb.nl/sites/default/files/omnidownload/CPB-Kansrijk-belastingbeleid-2020.pdf and CPB, (2020c), https://www.cpb.nl/sites/default/files/omnidownload/collected-appendices-nov-2020-mlt.xlsx; Source: OECD calculations.

International experience suggest that improved access and reduced cost of childcare can improve women’s labour supply. A reform expanding access and reducing the cost of childcare in Norway in the 2000s facilitated the increased uptake of one- and two-year-olds from 40% in 2002 to 80% in 2012. The reform boosted women’s employment and earnings and enabled more women living in couples to move into full-time work (Eckhoff Andresen and Havnes, 2019[62]). Attitudes also changed considerably since the start of the reform, with the share of mothers stating that full-time centre-based childcare is the best type of care for three-year-olds increasing from 41% to 72% from 2002 to 2010 (Kitterød, Nymoen and Lyngstad, 2012[63]). Sweden is another country where expansion of centre-based childcare happened in tandem with both an increase in women’s employment and a steady increase in the share of women working full-time. On average, under-2-year-olds in Sweden spend 30 hours per week in childcare, compared to just 16 hours for children of the same age in the Netherlands (OECD, 2019[58]). Increasing childcare subsidies has boosted women’s participation and hours worked also in the Netherlands. It is an effective policy instrument to increase labour supply, as women with young children react relatively strongly to economic incentives, but the direct fiscal cost outstrips the additional revenue attributable to the reform, at least when measured in a static short-term framework (de Boer and Jongen, 2020[64]; Bettendorf, Jongen and Muller, 2015[65]). This was also the case in the Norwegian reform (Eckhoff Andresen and Havnes, 2019[62]).

Recommendations in previous Surveys	Action taken since the previous 2018 Survey
Increase the period of paid paternity leave to encourage greater participation of fathers in childcare responsibilities.	An increase of nine weeks for each parent, paid at 50% (up to a ceiling) is announced to take place in 2022.

FINDINGS	RECOMMENDATIONS (key recommendations in bold)
Supporting the economy through COVID-19
Fiscal policy is highly expansionary and a too quick fiscal consolidation could derail the economic recovery. COVID-19-support policies have helped businesses to stay afloat during the height of the crisis, but constrain reallocation and productivity growth. Ageing- and health-related expenditure pressures are set to rise in the longer term. Debt accumulated today will need to be repaid by future generations.	Provide targeted fiscal support until the economic recovery is well underway. Phase out polices aimed at preserving existing companies and jobs when the health crisis is brought under control. Design in advance a multi-year plan for fiscal adjustment once the recovery is self-sustained.
COVID-19 and automation increase the need for re-skilling and up-skilling.	Increase training subsidies to jobseekers and workers with high up-skilling and re-skilling needs.
A tri-partite pension agreement is set to increase sustainability and intergenerational fairness of occupational pensions.	Fully implement the tri-partite occupational pension agreement moving to defined contributions.
The pandemic stress test of De Nederlandsche Bank suggest that banks are sufficiently shock-resistant and can continue to fulfil their lending role. Banks have been allowed to use capital buffers to keep lending to firms and households.	Tighten regulatory capital buffers only when the economy is solidly on its path of recovery.
Reducing household leverage and re-balancing the housing market
Housing construction has not kept up with population growth and changing family formation patterns. Population density is high and land faces competing uses and coordination challenges.	Increase the supply of housing by speeding up land use planning and building procedures, designating housing construction locations, and making binding agreements with all parties involved.
The Dutch housing sector consists of a large part of owner-occupied housing, which enjoys a favourable tax treatment compared to alternative investments and rental housing.	Gradually reduce favourable tax treatment of owner-occupied housing beyond current plans.
Reasonably-priced rental housing is only available after a period of queuing due to price controls on one third of the housing stock.	Gradually limit rent controls to a narrower part of the market.
The government is preparing legislation to allow municipalities to ban buy-to-let investments, further limiting rental supply.	Cancel proposed legislation allowing municipalities to ban buy-to-let housing investments.
Housing corporations with state guaranteed debt dominate the rental market.	Evaluate how housing corporations affect the overall housing market and ensure that enough space is left for a private rental market.
The Netherlands has capped rent increases, halted evictions and automatically extended temporary leases.	Reverse additional rental regulations implemented since the start of the COVID-19 crisis.
Investing in the environment for growth and well-being
Greenhouse gas emissions reduction targets will not be met under current policies. CO₂ prices vary by emission sources and for different fuels.	Make emission pricing more consistent across sectors and fuels not covered by the EU emissions trading scheme.
A lack of information on used materials and product characteristics holds back the capacity of markets to recycle, reuse and use goods for longer.	Introduce digital passports as part of Ecolabel and Ecodesign regulation to encourage the recycle, reuse, and repair of materials.
Nitrogen emissions need to be reduced to comply with national and European Union law. Multiple instruments are being put in place. The transfer of emission permits is allowed.	Consolidate instruments to manage transferable nitrogen emission rights to further facilitate standardisation and transfer of rights. Further enhance cross-border cooperation to tackle the nitrogen problem.
Reducing labour market duality and inequalities, boosting trust
Employment protections for regular employed are strict. Self-employed workers earn less, save less, pay less income tax and social security contributions, incentivising their use while leaving them less protected. The Commission for the Regulation of Work has proposed a comprehensive reform package to reduce labour market duality and boost life-long learning.	Implement the Commission for the Regulation of Work recommendations, including: Allow employers to adapt jobs, workplace and working hours of regular employees in line with the needs of the economy. Align tax rates and social security contributions between contract types for workers doing similar jobs. Clarify the legal distinction between employees and the self-employed.
Nearly 60% of women work part-time, roughly three times the rate for men and the OECD average for women. The large gap in part-time work widens when partners become parents.	Go further than current plans in reserving leave entitlements following childbirth for partners. Increase leave replacement rates after the birth of a child for partners to the level available to mothers.
Enrolment in centre-based childcare is well above the OECD average in the Netherlands, but time spent in childcare is low.	Reduce user prices for childcare.
PISA results have been falling over time. Differences in PISA results between schools are high and rising, as the weakest pupils are falling further behind the average.	Implement simultaneous application to all primary schools within the municipality on one single platform. Strengthen teacher professionalism and further develop their career structure. Promote professional collaboration and a culture of continuous improvement in the school system.

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