OECD Economic Surveys: Netherlands 2023

Executive summary

High inflation weighs on the economy

Russia’s war of aggression against Ukraine disrupted a strong rebound from the COVID-19 pandemic. The cost of living has increased, spurred by rapidly rising energy prices. The government has acted swiftly to support households and firms, but should now shift from crisis mode to longer-term sustainability considerations.

GDP surpassed its pre-crisis level by mid-2021, faster than in most OECD economies (Figure 1). GDP growth in 2022 continued to be strong at 4.5% despite a slowdown from mid-2022 due to high energy prices, declining producer sentiment and slowing global trade. In the first quarter of 2023, GDP contracted on the back of declining exports and a reduction in gas inventories.

Figure 1. Economic growth has been robust

Real GDP, Q1 2015 = 100

Source: OECD Economic Outlook: Statistics and Projections (database).

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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.

Table 1. Private investment will slow

Annual growth rates, % unless specified

	2022	2023	2024
Gross domestic product	4.5	0.9	1.4
Private consumption	6.5	1.7	0.7
Government consumption	1.6	2.8	1.4
Gross fixed capital formation	2.5	2.2	0.0
Exports	4.7	1.0	2.8
Imports	4.2	1.1	2.1
Unemployment rate (%)	3.5	3.7	4.0
Consumer price index	11.6	3.2	2.2
Current account balance¹	4.4	5.3	6.0
General government fiscal balance¹	0.0	-1.0	-0.7
General government gross debt (Maastricht)¹	51.0	50.5	50.3

1. % of GDP.

Source: OECD Economic Outlook: Statistics and Projections (database).

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.

Figure 2. The budget deficit and public debt remain moderate

% of GDP

Source: OECD Economic Outlook: Statistics and Projections (database).

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Reforms are needed to boost sustainable growth

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.

Figure 3. Planned GHG emission reductions are largest in the industry and electricity sector

Megaton CO2-equivalent

Note: Targets displayed are the lower bounds.

Source: OECD Environment Statistics (database); and PBL (2022).

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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.

Lifting labour supply is required to tackle staff shortages

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.

Figure 4. The labour market is historically tight

Vacancies per 100 unemployed

Source: Eurostat; and OECD Labour Force Statistics (database).

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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.

Figure 5. Activation spending on training is low

Public spending on training, % of total, 2019

Source: OECD Labour Market Programmes (database).

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MAIN FINDINGS	KEY RECOMMENDATIONS
Supporting the economy through the energy crisis while maintaining macro-financial stability and debt sustainability
Fiscal policy is expansionary. Rapidly rising energy prices and cost of living triggered a substantial fiscal support package.	Tighten the fiscal policy stance and target fiscal energy support at the most vulnerable households and ensure it remains temporary.
Exceptions to the national budget rules have been made since 2020, as the COVID-19 pandemic and the energy crisis required fast implementation of fiscal support to prevent permanent damage to the economy.	Clearly justify exceptions to the budget rules and return to the rules as quickly as possible.
Rising mortgage rates could lead to an increase in non-performing loans and to price corrections in the housing market.	Maintain recently tightened macroprudential measures, including higher capital buffers. Lower the maximum loan-to-value ratio to 90%.
Ageing and health-related expenditure are set to rise in the longer term.	Design a multi-year fiscal plan drawing on existing expertise with spending reviews to define priorities.
Streamlining the tax system to reduce distortions holding back productivity growth
Owner-occupied housing enjoys favourable tax treatment compared to alternative investments and rental housing.	Phase out the favourable tax treatment of owner-occupied housing.
Labour income of workers, self-employed, and business owners is treated unequally. Differences in the tax treatment of work contracts incentivise self-employment and have led to a rise in non-standard form of employment over the past years, which leaves many less well-off and hampers transitions into regular employment and productivity.	Continue to align tax rates and social security contributions between contract types for workers doing similar jobs.
The tax system is complex. The government aims to simplify it and reduce wealth inequalities introduced by distortions in the tax system. The tax system is biased towards retaining earnings over profit distribution for private limited companies, weighing on aggregate productivity. The reduced corporate income tax (CIT) rate on profits up to EUR 200 000 deters firm growth and incentivises firms to split into smaller units to avoid taxation at the statutory CIT rate.	Abolish the reduced CIT rate and move towards a single uniform VAT rate so reforms are revenue neutral within each tax domain.
The complexity of the tax and benefits system discourages labour market entry or working more for fear of losing benefits.	Streamline existing income-dependent benefits into a system of fewer allowances and tax credits based on a limited number of household characteristics.
Advancing the green transition to increase energy independence
Greenhouse gas emissions reduction targets will not be met under current policies. Uncertainty regarding future policy stringency holds back investment.	Expand the current Climate Strategy beyond 2030, with further concrete deadlines, policies and priorities in line with legal targets.
The country remains reliant on fossil fuels. Although the share of renewables in the energy mix has been increasing in recent years, it remains below the EU average. Only little support is available in the scale-up phase.	Provide specific support to green technologies at early stages of development, including public investment in green infrastructure, and the development and deployment of green technologies, such as carbon capture, utilisation and storage.
Lifting labour supply to tackle staff shortages
Spending on lifelong learning falls far short of estimated needs given massive skill demand related to the green and digital transitions. The outcomes of lifelong learning activities are not systematically assessed, and concerns have surfaced regarding the quality and relevance of some trainings.	Shift the composition of active labour market policies towards training, especially green and digital. Ensure quality control of lifelong learning programmes and prioritise sectors with the most pressing labour needs.
High effective taxation on increasing hours worked reduces work incentives for middle-income mothers, compounding cultural norms regarding childcare responsibilities.	Keep lowering the effective tax rate on moving from part-time to full-time employment while delivering on the childcare overhaul.
The reform to make childcare free for all working parents is expected to strongly increase childcare demand and worsen staff shortages, raising doubts about feasibility.	Phase in the childcare reform gradually, monitor access and evaluate the repeal of the link between hours worked and the amount of the childcare support.
Most highly educated foreign-born work in jobs that require a lower level of formal education than what they hold or are not in employment. The immigration system is not responsive to labour market needs and no migration scheme exists for medium-skill workers, despite their importance for the green transition.	Streamline and accelerate the existing processes of recognition and validation of qualifications acquired abroad for shortage skills. Consider eliminating the labour market test for shortage occupations.
Teacher shortages are acute in cities and disadvantaged schools, while teachers have low salaries compared to similarly educated workers.	Reward teaching in locations and schools where shortages are the most significant with extra financial incentives or priority transfer to a school of choice after a given tenure.
Enrolment in pre-vocational education is declining, despite the strong potential of vocational education to provide the skills needed in tight occupations.	Increase mobility between academic and vocational tracks by merging some of the existing pre-vocational tracks and providing schools with incentives to organise programmes across tracks.
Few Dutch students pursue STEM degrees, and the share of ICT graduates is low in international comparison.	Provide higher education establishments with financial incentives to increase enrolment in STEM fields.