IMF Executive Board Concludes 2015 Article IV Consultation with Kingdom of the NetherlandsPress Release No. 16/54
February 11, 2016
On February 8, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Netherlands.
A strengthening but moderate recovery led by exports and investment is underway, after a double-dip recession that ended in early 2014, although lower production and exports of natural reduced gas reduced growth in the second quarter of 2015, without however interrupting its momentum. Unemployment is falling slowly and inflation is low, but positive. Credit has continued to decline, but demand for credit is gradually rebounding. The Dutch banking system is emerging from its restructuring. A turnaround in house prices has helped reduce the share of homeowners with negative equity.
The economy now appears set on a gradual path of recovery and growth is expected to reach 1.9 percent this year and in 2015, supported by an improving domestic demand. The current account surplus is projected to reduce gradually, as domestic investment and consumption take over from net exports as the main drivers of growth. Risks to the outlook are tilted to the downside, stemming mainly from weaker-than-expected growth in the euro area and emerging markets. The Netherlands is receiving many refugees, and there will be unpredictable but significant near term costs to accommodating them. However, in the longer term, there will be demographic and growth dividends if incoming refugees are effectively integrated.
With the economy having turned the corner, and public sector balance sheets now being repaired, it is now time to refocus the policy agenda on structural reforms. Key priorities for the Dutch authorities include: furthering tax reform to reorient the tax burden away from the labor tax wedge towards goods, services, and property; reforming the second-pillar pension system to ensure greater transparency and stability; better balancing the fiscal and social benefit treatment of regular employees vis-a-vis the self employed; and continuing the agenda of policies relating to the housing, mortgages, and household debt.
Executive Board Assessment2
Executive Directors noted that a recovery is underway, with moderate growth despite the decline in natural gas output. Unemployment is on a gradual downward trajectory, house prices are recovering, and the financial sector is strengthening. The current account surplus remains high, although it is expected to decline gradually over time. Directors observed that risks to the outlook are tilted to the downside, while population aging and the refugee influx pose some challenges. Against this background, policy priorities are to support demand and boost potential growth, including through reforms of taxation, and the labor and housing markets.
Directors considered that fiscal policy should support the recovery to the extent that there is fiscal space, which could be used in such areas as human capital, and research and development. A number of Directors, however, saw no available fiscal space under the Stability and Growth Pact (SGP), pointing to the need to rebuild fiscal buffers and reduce public debt further. Directors encouraged the authorities to use the available flexibility under the SGP to accommodate refugee related costs without cutting other priority spending.
Directors welcomed the recent reduction of labor taxes. They encouraged broader tax reforms, with a view to simplifying the tax system, enhancing its fairness and efficiency, as well as promoting labor force participation. It is also important that measures be taken to address the bias toward debt financing that has contributed to overly leveraged household and corporate balance sheets.
Noting some strains in the second pillar pension system, Directors welcomed the principles underpinning the government’s reform proposals to ensure greater transparency, individual choice, and actuarial fairness. In this regard, they recommended that the authorities consider an approach that would lessen the burden on younger families.
Directors underscored the importance of broad based reforms in the housing sector. They noted that a reform of the social housing sector, deregulation of the private rental market, and further reducing the maximum loan to value ratio and mortgage interest deductibility would help improve the housing market.
Directors noted that the rapid growth in self employment points to the need to address rigidities in the formal employment sector. In this context, they encouraged the authorities to consider liberalizing the regulatory regime for regular employees, and to review tax and other incentives for self employment to ensure equitable treatment between regular employees and the self employed.