Supply shortages led to an increase in inflation from mid-2021, like in most OECD countries, which was then amplified by surging energy prices due to Russia’s invasion of Ukraine from early 2022. High energy prices have been the main driver of inflation in 2022, but prices of goods and services have increased as well. While energy prices have receded, core inflation remains high.

Growth will be supported by private consumption, but is expected to moderate as private investment declines (Table 1). Inflation is expected to remain above the euro-area 2% target, but will gradually moderate owing to the Dutch energy price cap and tighter monetary conditions, although the removal of the price cap could add upward pressure on inflation in early 2024. The outlook is surrounded by risks as rapidly rising interest rates could increase macro-financial vulnerabilities.

The financial sector has shown few signs of stress so far, but higher interest rates could lead to an increase in credit losses. Households have high mortgage debt on average. While about 75% of loans are fixed for more than five years, households may still face difficulties to meet their mortgage obligations if high inflation continues to erode real incomes. Recent first-time buyers borrowed large sums relative to their income as house prices have seen a steep rise over the last years. The mortgage loan-to-value limit of 100% remains high in international comparison.

A solid fiscal position has enabled the government to provide substantial support to households and firms (Figure 2). In addition to a purchasing power package, which combines targeted and temporary lump-sum payments to help with higher energy costs, and structural measures, such as increases in the minimum wage and social benefits, households and other small users also benefit from an energy price cap in 2023. This exceptional support exceeds annual spending ceilings defined in the trend-based fiscal framework. Ageing-related fiscal pressures and rising interest rates call for fiscal policy to make the tax system more efficient and for prioritising spending needs to support debt sustainability over the longer run.

Population ageing, sluggish productivity growth and low investment weigh on the country’s growth potential. At about one fourth of the OECD average, average annual productivity growth over the past decade has been low. The complex tax system is debt-biased, favours illiquid investment and non-standard forms of employment, exerting a drag on productivity, and adds to wealth inequalities. Sustainable growth also calls for greater fossil fuel independence and advancing the green transition.

The tax system is complex and distorts investment and labour supply decisions. Owner-occupied housing enjoys favourable tax treatment compared to alternative investments and rental housing. Lower rates of income tax and social security contributions for the self-employed incentivises employers to resort to non-standard forms of employment. The complexity of income-dependent benefit schemes discourages labour market entry and working more for fear of losing benefits. Interaction effects of corporate and personal capital income taxation of individuals who own at least 5% of shares in a company favour the retention of earnings, which are only taxed at the corporate level and can benefit from a reduced corporate income tax rate for up to EUR 200 000. As such, the corporate tax system hampers firm growth and increases incentives of splitting into smaller units, weighing on aggregate productivity.

The Netherlands is set to fall short of its national 2030 target to reduce greenhouse gas emissions. To achieve emission reductions of 55% compared to 1990 levels, the government focuses on greater reductions across sectors, particularly in the electricity and industry sector (Figure 3) through higher use of renewables. Despite improvements, the Netherlands remains heavily reliant on fossil fuels, favoured by tax-exemptions and preferential rates leading to a price advantage over low-carbon technologies. Basic research for the development of green innovations is not explicitly targeted by government funding. A holistic policy strategy extending beyond 2030 is missing, risking a trade-off between short-term gains until 2030 and long-term efficiency.

The labour market is strong, but shortages weigh on growth prospects. The unprecedently fast post-pandemic recovery brought labour market tightness to all-time highs (Figure 4), adding to the contraction of the working-age population due to ageing, which cannot be addressed by labour-saving innovation alone.

Fast-changing skill demand, low hours worked, and labour market segmentation contribute to tightness. About 28 000 technical jobs need to be created and filled to meet the country’s 2030 climate objectives – more than the current total employment in the energy sector. The incidence of part-time work is the highest in the OECD, with three out of four women and one out of four men working less than 35 hours a week. The 1.7 million workers on flexible contracts with little career prospects have weak incentives to work more.

Training needs are massive and require the development of a stronger culture of lifelong learning. Total public spending on training falls short of estimated requirements by EUR 1.5-1.75 billion a year. Activation spending is high, but the share that goes towards training is low (Figure 5). The budget for the individualised training scheme introduced in 2021 (STAP) is too small, does not prioritise areas of skill shortages and lacks incentives for co-financing by employers.

Access to childcare is inadequate while looking after a child is the main reason for part-time employment. Low availability and affordability are important drivers of the unequal distribution of part-time work and ensuing gender inequalities. While urgent, implementing the reform to make childcare free for all working parents is challenging, as it is expected to strongly increase demand and worsen staff shortages in the short run. The repeal of the link between the amount of the childcare allowance and hours worked weakens work incentives.

Integration and the immigration system have responded little to labour market developments. The foreign-born have worse labour market outcomes. No migration scheme specifically targets medium-skill workers, despite their importance for the green transition. Hiring non-EU migrants currently requires labour market tests, even for shortage occupations.

Vocational education does not attract students, despite its strong potential to equip them with skills in high demand. Pre-vocational education faces declining enrolment and an image problem. Schools have no financial incentives to organise programmes across tracks or promote mobility between tracks. The existence of too many pre-vocational tracks complexifies education choices by students and their parents.

Cities and disadvantaged schools face acute teacher shortages, while inequalities in education are significant. The share of low-performing students increased from 14% to 24% over ten years. Even though one third of Dutch students attend schools with a lack of teachers, teaching in schools where shortages are significant is not rewarded with extra incentives.