Mission Concluding Statement 

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments. The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

October 6, 2014

“Strengthening the Dutch Recovery”

Important measures taken by the authorities have strengthened confidence and supported the recovery. Building on these and other reforms to reduce household indebtedness, strengthen the financial system, and improve the efficiency of the housing market will be key to sustaining a robust recovery and enhancing long-term growth potential.

Outlook—A Moderate Recovery

The Dutch economy continues to improve, supported by exports, rising house prices, and improving sentiment. Based on these trends, we project growth to pick up in 2015 but at a gradual pace as household deleveraging continues to weigh on consumption. The risks to the outlook are on the downside and are mainly external, stemming from low inflation and growth in the euro area and geopolitical turmoil. On the domestic side, a tightening of credit conditions for small and medium enterprises (SMEs) could weaken investment.

The key challenge to sustaining a robust recovery is addressing the large household debt overhang. The loss of wealth from the housing downturn was significant and concentrated mainly among younger cohorts whose sharp decline in spending contributed to the prolonged recession in the Netherlands. Progress in household deleveraging has been slow with household debt ratios still among the highest in the euro area. The risk remains that the household debt overhang will continue to weigh on growth, leaving the economy vulnerable to shocks, and damage long-term growth prospects.

The government has taken important steps to address the housing problem, support indebted households, implement pension and labor reforms, and consolidate the fiscal position. In particular, the policy measures regarding mortgages have stabilized expectations and supported a gradual pickup in housing prices and transactions. These and other reforms to strengthen the financial system and assist SMEs have helped boost confidence, increase policy certainty, and support the nascent recovery.

To secure a robust recovery, it will be important to build on these reforms to reduce household indebtedness, enhance the resilience of the financial system, and improve the efficiency of the housing market. At the same time, accommodative macro policies and structural reforms to raise productivity, especially for smaller firms, should support the balance sheet adjustment and improve the economy’s growth potential.

I. Addressing the Household Debt Overhang

Addressing the household debt problem among the young would lift overall spending. Net wealth in the Netherlands is high but is concentrated among older generations who have high pensions and low mortgage debt, while younger households who purchased homes at the peak of the crisis, remain heavily in debt. Policies to assist younger cohorts with a higher propensity to consume would lift overall spending and could include:

• Increasing intergenerational transfers. A temporary tax exemption for monetary gifts up to €100,000 was used by more than 50,000 people and likely contributed to the nascent housing recovery. The authorities could consider increasing the €50,000 limit for tax-free transfers, allowing gifts to all family members to be used to repay mortgage debt. To help lower income groups, individuals could be allowed to spread payments over several years up to the limit.



• Reducing pension contributions for the young. Under the Dutch system, most younger workers contribute in excess of the present value of their pension benefits. Rebalancing pension contributions of the young to an actuarially fair level would boost disposable incomes. Such a measure could be the start of a broader pension reform that could include the introduction of individual accounts to allow earlier access to pension savings.



• Encouraging reprofiling of underwater mortgages. Banks have taken steps to renegotiate mortgages with distressed borrowers, but progress on reprofiling debt has been slow. Supervisors should encourage banks to remove restrictions and limits on prepayment and sequestered savings accounts to facilitate reprofiling into longer-term, amortizing mortgages. Regulatory measures, such as higher risk weights on interest-only loans, could lead to greater price differentiation in favor of traditional annuity mortgages.

II. Strengthening the Resilience of the Financial Sector

A more resilient financial sector would support the recovery and reduce risk of future housing cycles. Dutch banks continue to have large housing exposure and have downsized, primarily by reducing overseas assets. Here, policies should focus on:

• Strengthening capital buffers. Dutch banks have strengthened their capital base and announced plans to meet Basel III capital requirements by 2019 mainly through retained earnings. Supervisors should encourage banks to frontload their capital raising plans by tapping private sources and suspending dividend payments rather than reducing credit.



• Reducing housing vulnerabilities. Macro prudential policies face the tradeoff between safeguarding financial stability and supporting the housing recovery. The authorities’ policies to gradually reduce loan-to-value ratios (LTVs) on new mortgages to 100 percent by 2018 and allow mortgage interest deductibility (MID) only for new fully amortizing loans are appropriate to mitigate housing risks and were accompanied by a gradual housing recovery. Beyond 2018, the authorities could aim for a faster pace of LTV reduction, eventually reaching 80 percent. Clarifying now the LTV path after 2018 would enhance regulatory certainty and give buyers time to build savings. The average LTV for new mortgages has declined to around 90 percent, suggesting that many borrowers are already accepting lower LTV loans. Lower LTVs should also be part of comprehensive housing reforms to promote intergenerational transfers, improve debt monitoring, and expand the private rental market.

III. Building a More Competitive, Flexible Housing Market

Expanding the private rental market would ease pressures on home ownership and reduce vulnerabilities from the housing cycle. Compared to other European countries, the Dutch private rental market is small, squeezed between an oversized social housing sector which owns nearly one in every three dwellings and strong ownership demand fueled by generous mortgage interest deductibility and other fiscal support. Policies should focus on:

• Reforming the social housing corporations (SHCs). The size of the SHC sector should be scaled back to focus on its social mandate and allow the development of the private rental market. To shrink the SHC sector and improve its efficiency, the authorities should continue to raise taxes on SHC, apply more rigorous and frequent means testing to determine eligibility, and shift administered prices to market-based rents. To reduce fiscal contingent risks, public support of SHCs through loans and guarantees should be phased out and replaced with a more targeted system of direct subsidies to lower income groups. Price controls on rents should be lifted to help expand the private rental market.



• Reducing housing risks to the government. The government National Mortgage Guarantee (NHG) scheme has reduced the guarantee limit to pre-crisis levels and raised its premium. Shifting to more risk-based pricing and lowering further the limit to cover primarily lower income buyers would reduce distortions and contingent liabilities. The National Mortgage Institute should not expand fiscal risks beyond its packaging of NHG-backed bonds.



• Improving housing market finance. By offering preferential terms to long-term, low LTV amortizing loans, the NHG could help standardize mortgages and facilitate securitization.

IV. Supportive Macro Policies and Structural Reforms

Fiscal policies. Under difficult circumstances, the authorities have reduced the deficit and taken steps to contain spending on health and long-term care. For 2015-16, the budget should continue to aim for a neutral stance to support the recovery and avoid targeting headline balances in the face of adverse shocks. Moving back to a medium-term budget framework that is reviewed annually could enhance the predictability and responsiveness of fiscal policy.

Tax reforms. The authorities are planning several reforms in the coming years. To enhance growth and fairness, we would place priority on unifying the VAT system, lowering the high marginal rate on labor, and reducing the bias in favor of corporate debt over equity, for example through an allowance for corporate equity investment (ACE). Similarly for household debt, the mortgage interest deductibility should be reduced further and gradually phased out to mitigate housing risks.

Labor reforms. Recent measures to enhance labor participation, simplify and ease the cost of dismissal will help reduce labor duality and add to the economy’s productive capacity. Important challenges remain, particularly with regard to the rising number of self-employed. As many do not participate in the pension system, it will be important to design measures to ensure that the self-employed can contribute towards a supplementary pension.

Innovative SMEs. The authorities have undertaken several initiatives to support SMEs, such as expanding loan guarantees and developing equity funds. Shifting more support from credit guarantees to equity or quasi-equity initiatives could foster SME startups and innovation. Strengthening the infrastructure for investment in domestic alternative assets, such as venture capital and private equity, could also expand the availability of longer-term risk capital. Recent insolvency reform proposals on pre-packs and U.S. Chapter 11-style reorganization should support corporate restructuring.

Corporate credit information. Developing a credit registry to monitor loan exposures, collateral, and payment history could foster the development of a private credit bureau system to address information gaps, especially for SMEs. Such a system could contribute to greater standardization of SME loans and reporting and facilitate securitization. This could improve access to financing and encouraging risk-taking by providing an opportunity to rebuild credit history after a business failure.

The mission would like to thank the authorities and other colleagues for their frank discussions, support, and warm hospitality.

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¹ An IMF team visited The Netherlands from September 25-October 7, 2014, for the annual evaluation of the economy as part of the regular consultations under Article IV of the IMF’s Articles of Agreement. This statement describes the preliminary findings of the staff.