## cr18130

## Source details

**Canonical URL:** [cr18130](https://www.imf.org/-/media/files/publications/cr/2018/cr18130.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2018/cr18130.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2018/cr18130.pdf.json)

---

### Real Growth and Outlook
- Real growth was above 3 percent in 2017 owing to strong domestic demand and resilient net exports.
- Growth is estimated at just above 3 percent in 2017 and is forecast to continue at about the same rate in 2018.
- Output gap is estimated to have closed in 2017 and is projected to remain positive over the medium term as macroeconomic policies remain supportive and adverse demographics limit potential growth.
- Potential growth is expected to be capped below 2 percent in the medium term by unfavorable demographic developments, limited capital deepening in line with declining public investment, and sluggish productivity developments.
- Key projections (Real GDP, percent):
  - Real GDP: 2015: 2.3; 2016: 2.2; 2017: 3.2; 2018: 3.1; 2019: 2.4; 2020: 2.1; 2021: 2.0; 2022: 1.9; 2023: 1.9
  - Potential output growth: 2015: 1.5; 2016: 1.7; 2017: 2.2; 2018–2023: 1.9 (each year)

### Labor Market and Inflation
- Employment and unemployment:
  - Employment has been on the rise since 2015 with stable participation.
  - Unemployment rate was down to 4.4 percent in 2017:Q4 (ILO series: 2017: 4.9; 2018: 4.7; 2019: 4.6; 2020: 4.5; 2021: 4.4; 2022: 4.3; 2023: 4.2).
- Wage developments:
  - Wage growth subdued at around 1 percent in recent years.
  - Netherlands experienced a decline in nominal wage growth from above 6 percent in early 2000 to about 1 percent in recent years, entailing real wage growth close to zero.
  - Factors contributing to moderation: slowdown of trend productivity growth, subdued inflation expectations, remaining labor market slack (including long-term unemployed), rising share of temporary workers, and rising self-employment.
- Price developments:
  - Inflation rose to 1.3 percent at end-2017.
  - CPI (year average): 2015: 0.2; 2016: 0.1; 2017: 1.3; 2018: 1.7; 2019: 2.2; 2020: 2.3; 2021–2023: 2.4 (each year).
- Competitiveness:
  - ULC-based REER depreciated by about 7.5 percent since the peak reached in mid-2008.
  - Labor share in national income declined from 51 to 48 percent over the same period.

### Credit and Housing Market Conditions
- Housing market developments:
  - House prices increased by 6.7 percent y-o-y in 2017 H1; nation-wide average about 7.5 percent y-o-y in the first ten months of 2017.
  - House prices are 17.4 percent higher than the low point reached in 2013, but still 6.9 percent below the peak reached in 2008 H2; staff estimated modest overvaluation of about 5 percent as of end-2016.
  - Prices particularly high in major cities: about 10 percent y-o-y in Amsterdam and Rotterdam in 2017:Q3.
  - Transaction volumes almost doubled in 2016; transaction volumes have exceeded the pre-crisis highs.
  - Affordability and debt metrics:
    - Household debt relative to GDP around 118 percent in 2016.
    - Household debt as a share of net disposable income stood at 270 percent at end-2016.
    - Share of mortgages in negative equity declined to 9 percent in 2017Q4.
    - Interest-only mortgages stood at 55 percent of total mortgages at end-2015.
- Credit developments:
  - Credit to households strengthening with a slight pickup in nominal mortgage lending after two years of deleveraging.
  - Credit to non-financial corporates still contracting by 1.2 percent y-o-y in November 2017; total outstanding bank loans to non-financial corporates dropped from about 59 percent of GDP in 2013 to less about 43 percent of GDP in 2017:Q3.
  - Interest rate spread between small and large loans appears high compared to other euro area countries; interest rate margins on small loans remain much higher than euro area averages.
  - Banks deleveraging: aggregate loan-to-deposit ratio of 136 percent at end-2017.
  - About 30 percent of new mortgages were issued by pension funds and insurers in 2016.

### Fiscal Developments and Plans
- Fiscal stance and measures:
  - Spending increases and revenue cuts announced by the new government provide for a fiscal expansion of almost 2 percent of GDP over the next four years.
  - Total government revenue is forecast to diminish by about 0.8 percent of GDP due to corporate and income tax cuts, partially offset by an increase in the reduced VAT rate (from 6 to 9 percent).
  - Total public spending would increase by 1 percent of GDP, notably in health care, security, defense, education, and climate change mitigation.
  - Structural balance reduction by about 0.8 percent of GDP; staff estimate MTO of structural deficit of 0.5 percent of GDP for general government.
  - If fiscal space re-emerges, prioritize growth-enhancing expenditures or tax cuts aimed at increasing labor force participation.
- Tax reform details:
  - Personal income tax: introduction of two brackets (instead of four) with reduced marginal rates; personal income tax revenue expected to fall by slightly less than 1 percent of GDP over 2018–21.
  - Corporate income tax: statutory normal and reduced rates to be reduced from 25 to 21 percent and 20 to 16 percent, respectively, by 2021; compensation via reduced interest payment deductibility.
  - Planned abolition of dividend tax will increase regressivity in capital income taxation.
  - Partial phasing out of mortgage interest deductibility (MID) planned.
- Fiscal aggregates (percent of GDP and euros):
  - Revenue (percent of GDP): 2015: 42.8; 2016: 43.8; 2017–2023: 43.8 (table consistency).
  - Expenditure (percent of GDP): 2015: 44.9; 2016: 43.4; 2017: 43.2; 2018: 43.2; 2019: 43.1; 2020: 43.0; 2021: 42.9; 2022: 42.8; 2023: 42.7
  - General government balance (percent of GDP): 2015: -2.0; 2016: 0.4; 2017: 0.5; 2018: 0.5; 2019: 0.7; 2020: 0.8; 2021: 0.9; 2022: 1.0; 2023: 1.0
  - Nominal GDP (billions of euros): 2015: 683.5; 2016: 702.6; 2017: 733.2; 2018: 765.4; 2019: 796.1; 2020: 822.1; 2021: 850.0; 2022: 878.0; 2023: 907.1
  - Revenue (billions): 2015: 292.7; 2016: 307.8; 2017: 320.9; 2018: 334.9; 2019: 348.4; 2020: 359.8; 2021: 372.0; 2022: 384.2; 2023: 397.0
  - Expenditure (billions): 2015: 306.7; 2016: 305.2; 2017: 316.9; 2018: 330.8; 2019: 343.0; 2020: 353.3; 2021: 364.4; 2022: 375.6; 2023: 387.6

### External Position and Current Account Assessment
- Current account and drivers:
  - Current account surplus at above 10 percent of GDP in 2017; CA balance series: 2015: 8.7; 2016: 8.4; 2017: 10.2; 2018: 9.9; 2019: 9.2; 2020: 9.0; 2021: 8.6; 2022: 8.3; 2023: 8.0 (percent of GDP).
  - High surplus largely reflects high corporate savings and liquidity of Netherlands-based multinationals, partly due to some favorable tax treatment for corporate income.
- External assessment (staff):
  - Staff assessed external position in 2017 as substantially stronger than the level consistent with fundamentals and desirable policy settings.
  - Current account gap: 4.8 to 8.8 percent of GDP (based on a CA norm of 1.5 to 5.5 percent of GDP).
  - REER gap: -13 to -7 percent; staff assesses REER remained undervalued by around 10 percent within a range of 7–13 percent.
  - CPI-based REER had appreciated by about 2.7 percent since end-2016; annual average CPI- and ULC-based REER appreciated 1 percent and 1.7 percent, respectively, in 2017; REER appreciated by an additional 2 percent through March 2018, relative to the 2017 average.
- NIIP and external balance sheet:
  - NIIP increased to 74 percent of GDP at end-2017 (gross assets and liabilities totaling 1251 and 1177 percent of GDP, respectively).
  - Net FDI stock reached 956 billion euro (130 percent of GDP) at end-2017.
  - NIIP expected to continue growing to about 100 percent of GDP over the medium term.
- Policy levers to reduce surplus:
  - Expansionary fiscal policy supporting domestic demand, progress in repairing household balance sheets, strengthening banking system, higher wage growth, structural reforms to raise productivity of small domestic firms, pension reforms to reduce precautionary savings.

### Risks, Spillovers, and Policy Recommendations
- Risks to the outlook:
  - Downside risks: dampened foreign demand due to unresolved crisis legacies in EU countries, low productivity growth in the U.S., the euro area, and Japan, a “hard” Brexit, and rising protectionist pressures.
  - Financial risks: tighter global financial conditions, pressure on traditional bank models (including from new “Basel III.5” requirements), and reliance on wholesale funding.
  - Upside risk: domestic drivers of growth could pick up, improving labor market conditions, house prices and disposable income, supporting consumption and investment.
- Authorities’ views (summarized):
  - Authorities acknowledged uncertainties (Brexit, external growth), consider banks resilient, and agree house price growth in big cities deserves attention; emphasize fiscal consolidation over medium term for sustainability.
  - Authorities noted limited scope to reduce CA surplus through domestic policies and that much is contributed by corporate savings; DNB conducting research.
- Staff policy recommendations:
  - Use improved macro conditions to lessen private sector financial vulnerabilities and unlock potential growth.
  - If fiscal space is available, prioritize growth-enhancing measures: higher expenditure on education and public R&D, or tax cuts aimed at increasing labor force participation.
  - Continue tax and pension reforms, structural reforms in housing and labor markets to reduce vulnerabilities and enhance productivity.
  - Monitor and assess international corporate taxation reform plans and continue participation in tax transparency and anti-avoidance efforts.
  - Address health care cost containment challenges associated with an aging population.

### Coalition Agreement Policy Proposals: Labor, Housing, Financial Sector, and Pensions
- Labor market reforms (staff assessment and recommendations):
  - Staff view: proposals to reduce labor market dualism and increase flexibility are welcome if they reduce net rigidity.
  - Supported directions: align employment protection for temporary and permanent contracts; facilitate transitions to open-ended positions; curtail “false” self-employment; harmonize arrangements for genuine self-employed.
  - Complementarities: ensure wage formation better reflects productivity and inflation expectations; allow flexible employment arrangements to organize and bargain; require agreement with unions and employers.
- Housing policy proposals and staff recommendations:
  - Staff recommends phasing down MID by 3 percentage point per year as of 2020 per coalition agreement.
  - Improve housing supply responsiveness by easing building aesthetics criteria, restrictive zoning, and permitting processes; address impediments to urban redevelopment and improve public transportation.
  - Phase out rent control gradually while protecting vulnerable households; temporarily allow partial use of pension savings for housing purchases for first-time buyers.
  - Better means-testing of social housing rents; sell some units to fund additional affordable social housing.
  - Macroprudential: gradually lower maximum LTV limits by at least 1 percentage point per year to no more than 90 percent by 2028 and to 80 percent thereafter; note coalition agreement sets LTV to decline to 100 percent by 2018.
  - Staff estimates and metrics:
    - Staff estimate modest overvaluation of about 5 percent as of end-2016.
    - Average cost of a home relative to median household income relatively high; household debt/net disposable income 270 percent at end-2016.
- Financial sector and supervision:
  - Banking sector: adequately capitalized on RWA basis but high leverage; loan-to-deposit ratio 136 percent at end-2017; regulatory capital to RWA: 2017: 22.0; Tier 1: 2017: 18.4; NPLs to gross loans: 2017: 2.3; ROA: 2017: 0.7; ROE: 2017: 12.8.
  - Staff recommends continued capital buffer buildup, cost reduction, earnings retention, and strengthened supervision focusing on evolving business models and risk management.
  - Insurance sector: under stress from low interest rates; recommend preparatory crisis plans under Recovery and Resolution of Insurers Act coming into force in 2018.
- SME financing:
  - Policy measures: enhance credit information, broaden financing instruments for SMEs to spur investment and potential growth.
  - Credit stock: total outstanding bank loans to non-financial corporates about 43 percent of GDP in 2017:Q3.
- Pension system vulnerabilities and reform options:
  - By end-2016, about 90 percent of pension funds had recovery plans; recovery plans rely on optimistic return assumptions; potential benefit curtailments affecting up to 10 million members by 2020–21 (DNB, 2017).
  - Staff recommends overhaul of the second pillar toward notional personal accounts or mandatory personal DC contracts complemented by pooling micro longevity risk and some financial risks; preserve some risk sharing and financial security.
  - Authorities support moving to new contracts designed by social partners; government willing to relax temporarily tax deductibility framework on contributions.

### Debt Profile, DSA Baseline, and Stress Tests
- Baseline DSA projections (selected):
  - Nominal gross public debt (percent of GDP): 2016: 60.1; 2017: 61.8; 2018: 56.5; 2019: 53.3; 2020: 50.7; 2021: 48.9; 2022: 47.3; 2023: 44.8 (alternate cell: 42.3).
  - Public gross financing needs (percent of GDP): 2016: 2.8; 2017: -0.4; 2018: -0.5; 2019: -0.5; 2020: -0.7; 2021: -0.8; 2022: -0.9; 2023: -1.0.
  - Primary deficit (percent of GDP): 2016: 1.6; 2017: -1.2; 2018: -1.3; 2019: -1.1; 2020: -1.2; 2021: -1.3; 2022: -1.4; 2023: -1.5 (alternate cell: -1.6).
  - Effective interest rate (percent): 2016: 3.2; 2017: 1.7; 2018: 1.6; 2019: 1.4; 2020: 1.5; 2021: 1.6; 2022: 1.6; 2023: 1.7 (alternate cell: 1.8).
- Stress-test outcomes (high-level):
  - Growth shock: a negative one standard deviation shock lowering growth by about 2 ¼ percentage points in 2017–18 would push public debt to 55 percent of GDP in 2020 before declining to 48 percent by 2023; gross financing needs peak at 3.1 percent of GDP in 2020.
  - Contingent liability shock: bail-out of 10 percent of the banking sector combined with lower growth and higher interest rates would push public debt to 72 percent of GDP in 2020 and gross financing needs to 20 percent of GDP in 2020; debt would be 65 percent by 2023.
  - Overall baseline: public debt expected to decline toward 42 percent of GDP by end of projection period owing to favorable growth and contained expenditure, while remaining above 50 percent until end-2019.
- Debt-profile vulnerabilities and indicators:
  - External Financing Requirement = 12 (percent of GDP)
  - Public Debt Held by Non-Residents = 47 percent (of total)
  - Bond spread = 8 bp
  - Annual Change in Short-Term Public Debt = -9% (percent of total)
  - Public Debt in Foreign Currency = 0% (percent of total)

### FSAP Key Recommendations (selected, with timing/status)
- Macroprudential and supervisory:
  - Strengthen the FSC by establishing it under primary law and vest it with “comply-or-explain” powers. Time: NT. Status: under consideration; decision anticipated in FSC's May meeting.
  - Accelerate phase-out of MID and reduce final tax rate to neutral level. Time: NT. Status: coalition agreement: MID phased out with annual 3 percentage point reductions until base tax level of 36.93% reached.
  - Continue reducing maximum LTV limits to no more than 90 percent after 2018 and place prudential ceilings on DSTI limits. Time: NT. Status: coalition agreement states maximum limit on LTV ratio will not be reduced further after it reaches 100 percent in 2018.
- Bank and insurance supervision:
  - Continue to build capital buffers and prepare for Basel III.5; enhance supervisory oversight of loan classification and internal model validation. Time: NT–I. Status: various steps underway; full actions pending.
  - Require insurers to prepare crisis plans under Recovery and Resolution of Insurers Act. Time: I. Status: preparatory measures recommended; implementation timeline linked to Act coming into force in 2018.
- Market infrastructure and crisis management:
  - Augment supervisory resources for EuroCCP and strengthen stress testing and recovery planning. Time: I. Status: staff resources increased from 2 FTE to 3 FTE; recovery plan actions in progress.
- Data and oversight:
  - Ensure timely, reliable, and complete data for off-site supervision; continue enhancements for banks, insurers, pension funds, and collective investment schemes. Time: NT. Status: ongoing checks and examinations.

### International Corporate Taxation Reform (Annex VI summary)
- Objectives: prevent Netherlands being used as a conduit for tax optimization involving SPVs; increase transparency and anti-abuse measures in line with BEPS.
- Major measures and timelines:
  - Adoption of ATAD1 by 2019: earnings stripping rule limiting interest deductibility to 30 percent of gross operating result; implementation of CFC rules.
  - Implementation of ATAD2 by 2020 to neutralize hybrid mismatches.
  - Introduction of withholding tax on dividends (by 2020) and on interest and royalty outflows (by 2021) to entities in low-tax jurisdictions; implementation conditional on treaty renegotiations.
  - Abolition of dividend withholding tax for all corporations except those failing substantive economic activity test (payroll €100,000 and office space for at least 24 months).
  - Government signed the Multilateral Instrument (MLI); supports principle purpose test and BEPS-related transparency measures.
- Limitations and caveats:
  - Earnings stripping rule effectiveness limited for SPVs with very small tax bases (often <1 percent).
  - Substantive economic activity test may be insufficiently restrictive and relatively easy to satisfy.
  - Withholding tax implementation may require treaty renegotiations; Netherlands lacks treaties with traditional tax havens, which may limit constraints to implementation.

*cr18130 — INTERNATIONAL MONETARY FUND (excerpted content unit).*

### 1. Real Growth ____________________________________________________________________________________ 20

### 1. Real Growth

### Macroeconomic developments and outlook
- Real growth was above 3 percent in 2017 owing to strong domestic demand and resilient net exports.
- Private consumption supported by rising disposable income and positive wealth effects from the continued house price recovery.
- Investment growth continued, notably in the construction sector, with capacity utilization toward its long-term average.
- Inflation rose to 1.3 percent at end-2017.
- The output gap is estimated to have closed; over the forecast horizon real GDP will continue to grow faster than potential due to supporting macroeconomic policies and vigorous domestic demand.
- Potential growth is expected to be capped below 2 percent in the medium term by unfavorable demographic developments, limited capital deepening in line with declining public investment, and sluggish productivity developments.

### 2. Labor Market and Inflation

### Labor market conditions and wage developments
- Employment has been on the rise since 2015 with stable participation.
- Unemployment rate was down to 4.4 percent in 2017:Q4, slightly below NAIRU estimates.
- Labor market tightening evidenced by higher vacancies and increasing hours worked, but most jobs appear to have been created under temporary contracts or self-employment, pointing to increasing duality.
- Wage growth has been subdued despite tighter labor market conditions; the Netherlands has had the slowest nominal wage growth among its peers, declining from above 6 percent in early 2000 to about 1 percent in recent years, entailing a real wage growth close to zero.
- ULC-based REER depreciated by about 7.5 percent since the peak reached in mid-2008.
- Labor share in national income declined from 51 to 48 percent over the same period.
- Factors contributing to wage moderation: slowdown of trend productivity growth, subdued inflation expectations, remaining labor market slack not captured by unemployment rates (including the long-term unemployed), rising share of temporary workers, and rising self-employment.

### 3. Credit and Housing Market Conditions

### Housing market
- House prices increased by 6.7 percent y-o-y in 2017 H1.
- House prices are now 17.4 percent higher than the low point reached in 2013, although still 6.9 percent below the peak reached in 2008 H2.
- Transaction volumes almost doubled in 2016.
- Staff’s analysis suggests that real house prices have risen somewhat above the level implied by fundamentals.
- Overheating particularly affects the main cities of the Randstad area, reflecting supply shortages and low interest rates.
- Commercial real estate recovery more sluggish after a 20 percent price drop experienced during the crisis.

### Credit developments
- Credit to households strengthening, reflecting a slight pickup in nominal mortgage lending after two years of deleveraging.
- Household debt relative to GDP remained on a slightly declining path, reaching around 118 percent in 2016.
- Credit to the non-financial corporate sector was still contracting by 1.2 percent y-o-y in November 2017, reflecting tight lending standards for small and medium enterprises.
- Interest rate spread between small and large loans appears high compared to other euro area countries.
- Banks continued to deleverage, making room for new entrants (insurers, pension funds) on the mortgage market, while preserving net interest margins, but remain vulnerable to increasing funding costs given large reliance on the wholesale funding market.

### 4. Fiscal Developments

### Fiscal stance and plans
- Spending increases and revenue cuts announced by the new government provide for a fiscal expansion of almost 2 percent of GDP over the next four years.
- Total government revenue is forecast to diminish by about 0.8 percent of GDP due to corporate and income tax cuts, partially offset by an increase in the reduced VAT rate.
- Total public spending would increase by 1 percent of GDP, notably in health care, security, defense, education, and climate change mitigation.
- These measures will result in a reduction of the structural balance by about 0.8 percent of GDP, but will not entirely exhaust the space relative to the medium-term budgetary objectives (MTOs) of a structural deficit of 0.5 percent of GDP for the general government based on staff estimates.
- Authorities’ calculations using the European Commission methodology imply little or no fiscal space once the fiscal expansion is implemented.
- Should fiscal space re-emerge, it should be used for growth-enhancing expenditures or tax cuts aimed at increasing labor force participation.

### Tax reforms and distributional effects
- Personal income tax revenue is expected to fall by slightly less than 1 percent of GDP over 2018–21 through the introduction of two brackets (instead of four) with reduced marginal rates.
- Statutory normal and reduced rates of corporate income tax will be incrementally reduced from 25 to 21 percent and 20 to 16 percent, respectively, by 2021, as compensation for an expansion in the tax base achieved by reducing interest payment deductibility.
- Increase in the reduced VAT rate from 6 to 9 percent.
- Planned abolition of the dividend tax will increase regressivity in capital income taxation.
- Further progress in reducing the debt bias will be achieved through partially phasing out mortgage interest deductibility for households.

### Health care spending risks
- Public spending on health and long-term care standing at about 6 percent and 4 percent of GDP, respectively, representing the highest shares in the budget among OECD countries.
- 2006–07 health care reform moved the system toward “regulated competition” with mandatory private insurers financed through flat rate premiums and income-related contributions; mixed effects on overall costs observed.
- Characteristics of the population, health insurers and financial flows before and after the 2006–07 health care reform:
  - Population covered (million)10.1 2010 16.5 2015 16.8
  - Number of health insurers212825
  - Number of health policy choices215771
  - Average annual premium (euro)37811181168
  - Annual premiums/total costs (percent)225050
  - Number of switchers across insurers (percent)4.24.37.3

### 5. Current Account Developments and External Assessment

### External position and drivers
- Current account surplus at above 10 percent of GDP in 2017.
- Current account surplus strengthened in 2017, supported by positive trade balance developments.
- High CA surplus largely reflects high corporate savings and liquidity of Netherlands-based multinationals, partly due to some favorable tax treatment for corporate income.
- As of December 2017, the CPI-based REER had appreciated by about 2.7 percent since end-2016.
- Staff assessed the external position in 2017 as substantially stronger than the level consistent with medium-term fundamentals and desirable policy settings, with:
  - current account gap of 4.8 to 8.8 percent of GDP (based on a CA norm of 1.5 to 5.5 percent of GDP)
  - REER gap of -13 to -7 percent
- In the short term, a more expansionary fiscal policy stance, progress in repairing households’ balance sheets and strengthening the banking system should bolster domestic demand and lower the surplus.
- In the medium-to-long run, the surplus expected to gradually diminish as the country turns a net importer of natural gas due to the phase-out of natural gas production and as baby boomers start drawing down accumulated pension savings; however, the savings-investment balance would remain large and positive owing to strong profit generation and retained earnings by foreign and domestic multinationals (absent fundamental changes in the tax treatment of corporate income).

### 6. Risks, Spillovers, and Policy Recommendations

### Risks to the outlook
- Downside risks: dampened foreign demand due to unresolved crisis legacies in EU countries, low productivity growth in the U.S., the euro area, and Japan, a “hard” Brexit, and rising protectionist pressures.
- Tighter global financial conditions and pressure on traditional bank models, including from new “Basel III.5” requirements, may stress leveraged firms and households and raise the risk of distress in major banks due to heavy reliance on wholesale funding.
- Upside risk: domestic drivers of growth could pick up, improving labor market conditions, house prices and disposable income, supporting consumption and investment, bolstering productivity gains and potential growth.

### Authorities’ views (summarized)
- Authorities acknowledged uncertainties associated with Brexit and growth outlook in major trading partners.
- Authorities consider Dutch banks resilient and expect they will accommodate revisions of the internal model approach in the near future.
- Authorities agreed that house price growth in big cities deserves attention and emphasized that procyclical fiscal policies increase the risk of overheating; fiscal consolidation over the medium term remains critical for fiscal sustainability.
- Authorities noted limited scope to reduce the current account surplus through domestic policies and emphasized that a large part is contributed by high net savings in the corporate sector, mostly by multinational corporations; De Nederlandsche Bank is conducting research to seek further explanations.
- Authorities supported higher wage growth and labor market reforms but were unsure these would reduce the current account surplus significantly.

### Policy recommendations (staff view)
- Use improved macroeconomic conditions to focus on measures aimed at lessening financial vulnerabilities in the private sector and unlocking potential growth.
- If fiscal space is available, prioritize growth-enhancing measures: higher expenditure on education and public R&D, or tax cuts aimed at increasing labor force participation.
- Continue tax and pension reforms, and structural reforms in the housing and labor markets to reduce financial vulnerabilities, improve market efficiency, and enhance productivity and potential growth.
- Monitor and assess the announced reform plan for international corporate taxation and continue participation in efforts to increase tax transparency and combat tax avoidance at the global and European levels.
- Address health care cost containment challenges associated with an aging population.

*KINGDOM OF THE NETHERLANDS—NETHERLANDS, INTERNATIONAL MONETARY FUND*

### 18.      Policy proposals in the coalition agreement to reduce dualism and increase flexibility

### 18.      Policy proposals in the coalition agreement to reduce dualism and increase flexibility

### Labor market reforms: staff assessment and recommendations
- Staff view: proposals in the coalition agreement to reduce labor market dualism and increase flexibility are welcome provided they reduce rather than increase the rigidity of labor market arrangements on net.
- Key policy directions supported by staff:
  - More closely align employment protection regulations in temporary and permanent contracts.
  - Facilitate employees’ transition from temporary to open-ended positions.
  - Curtail “false” self-employment (i.e., de facto employees reclassified as self-employed).
  - Harmonize arrangements for the genuinely self-employed with other employment arrangements toward a more flexible arrangement on balance.
- Conditions and complementarities:
  - Measures should allow the wage formation process to better reflect productivity and inflation expectations to the extent that they can be made more flexible on net.
  - Ensure those in more flexible employment arrangements can organize and bargain effectively.
  - Progress would require some agreement with unions and employers.
- Macroeconomic rationale:
  - Staff supports ongoing communication efforts, including by the central bank, to highlight the desirability of stronger wage growth at the present juncture.
  - Higher wage growth, consistent with tighter labor market conditions, would help rebalancing within the monetary union.

### Authorities’ views on wage growth and labor market proposals
- Authorities’ diagnosis of slow wage growth:
  - Largely driven by remaining slack in the labor market, lower productivity growth and subdued inflation expectations.
  - In the longer term, rising labor market flexibility (more temporary and self-employed workers) may have contributed to slower wage growth, though not necessarily causally.
- Expectations regarding coalition measures:
  - Proposed measures aiming at reducing labor market duality should make hiring on open-ended contracts more attractive.
  - Authorities have encouraged social partners to support higher wage growth where appropriate.

### Housing market developments and vulnerabilities
- Recent house price and transaction dynamics:
  - House prices rose nation-wide at an average pace of about 7.5 percent y-o-y in the first ten months of 2017―up from 5 percent in 2016.
  - Prices particularly high in major cities: about 10 percent y-o-y in Amsterdam and Rotterdam in 2017:Q3.
  - House price levels are now over 20 percent higher than their post-crisis lows in 2013, and transaction volumes have exceeded the pre-crisis highs.
- Staff estimates and drivers:
  - Staff’s cross-country econometric analysis suggests the uptrend in real housing prices is driven by growing incomes, low interest rates, generous tax treatment for mortgages, stringent rent control, and low-price elasticity of housing supply.
  - Staff estimate a modest overvaluation of about 5 percent as of end-2016.
- Affordability and debt metrics:
  - The average cost of a home relative to the median household income is relatively high compared to peer countries.
  - Household debt as a share of net disposable income stood at 270 percent at end-2016.
  - Share of mortgages in negative equity declined to 9 percent in 2017Q4.
  - New mortgages with loan-to-value (LTV) ratios over 90 percent have decreased since mid-2016.
  - Interest-only mortgages stood at 55 percent of total mortgages at end-2015, implying significant rollover risks when many mature in the early 2030s.

### Housing market policy recommendations
- Comprehensive reforms suggested to reduce household indebtedness, rebalance demand and supply, and promote labor mobility:
  - Implement the phasing down of mortgage interest deductibility (MID) by 3 percentage point per year as of 2020 as per the coalition agreement, to ultimately bring it to a neutral level relative to the taxation of other assets.
  - Improve housing supply responsiveness in large cities by streamlining and relaxing stringent building aesthetics criteria, restrictive zoning plans, and cumbersome permitting processes; address impediments to urban redevelopment and improve public transportation.
  - Phase out rent control: gradually raise rents on regulated rental housing to align with market rates while protecting vulnerable households through targeted housing allowances.
  - Temporarily allow for a partial use of pension savings for housing purchases to ease liquidity constraints for first-time home buyers (e.g., meeting part of the down payment).
  - Better means-testing of social housing rents, and sale of some units into the private market with proceeds used to build additional affordable social housing.
- Macroprudential recommendations:
  - Gradually lower the maximum limit on LTV ratios by at least 1 percentage point per year to no more than 90 percent by 2028 and to 80 percent thereafter.
  - Note: Since 2013, LTV limits have been incorporated into law and set to decline to 100 percent by 2018. In 2015, the Dutch Financial Stability Committee (FSC) recommended lowering maximum LTV ratios to 90 percent between 2018 and 2028.

### Authorities’ views on housing policy
- Authorities note:
  - Reduction of mortgage interest deductibility set out in the coalition agreement will go a long way toward reducing the bias for home ownership and containing household debt.
  - The coalition agreement does not address previous IMF recommendations and FSC advice on further lowering LTV limits beyond the 100 percent ratio achieved in 2018.
  - Further lowering the LTV-limit calls for better private rental opportunities as an affordable alternative for young households.
  - Debt-service-to-income ratios modulated by income categories since 2013 have helped contain leverage.
  - Amortization requirement introduced in 2013 will reduce the debt bias and mortgage debt levels in the long run.
  - Priority should be given to developing the non-regulated rental market; government started a platform in 2017 to identify and resolve bottlenecks and zoning regulations now enable municipalities to create a specific category for non-regulated rental houses.
  - Coalition agreed on removing unnecessary barriers for social housing corporations to invest in middle range residential activities where commercial parties are unable or unwilling to do so.

### Financial sector stability: banks and insurers
- Banking sector resilience and vulnerabilities:
  - Dutch banking sector appears adequately capitalized on a risk weighted basis, but leverage remains high.
  - Heavy reliance on wholesale funding: aggregate loan-to-deposit ratio of 136 percent at end-2017.
  - About 30 percent of new mortgages were issued by pension funds and insurers in 2016, reflecting intensified competition.
  - Net interest margins have proven resilient so far, but profitability may come under pressure with persistently low interest rates and increased competition.
- Staff recommendations for banks:
  - Continue building up capital buffers to prepare for new regulatory requirements on internal risk models and the introduction of new risk-weight floors on mortgages under the Basel III.5 framework.
  - Continue cost reduction and earnings retention to strengthen buffers, acknowledging potential future profitability challenges.
  - Strengthen bank supervision with a focus on evolving business models and risk management frameworks to guard against excessive risk taking encouraged by low interest rates and shadow banking competition.
- Insurance sector vulnerabilities:
  - Insurance sector under financial stress from low interest rates and heightened competition.
  - Life insurers’ financial position undermined by very low interest rates and increasing duration mismatch while average guaranteed rates remain high.
  - Recommendation: swift elaboration of preparatory crisis plans by insurers under the Recovery and Resolution of Insurers Act to come into force in 2018.

### Authorities’ views on financial sector regulation
- Authorities’ perspective:
  - Basel III.5 agreement contributes to harmonizing capital buffer calculation and making capital ratios more comparable across banks.
  - Banks have capacity to comply with required capital increases before the implementation date of 2022-27, owing to solid net interest margins.
  - Authorities concur that profitability might come under pressure with interest rate normalization and call for strengthening banks’ business models to improve cost-to-income ratios.
  - Higher interest rates would ease the financial position of insurers, but monitoring of insurers requires continued vigilance.

### Credit developments and SME financing
- Credit trends:
  - Total outstanding bank loans to non-financial corporates dropped from about 59 percent of GDP in 2013 to less about 43 percent of GDP in 2017:Q3.
  - Credit to the corporate sector remains weak due to both demand and supply factors; most sectors are still deleveraging.
  - Interest rate margins on small loans remain much higher than euro area averages.
  - Higher financing costs for small loans reflect tightened lending standards and weaker financial conditions of firms, especially SMEs.
- Policy measures to foster credit growth and SME financing:
  - Enhance credit information to reduce information asymmetries and credit scoring costs, improving supply and stimulating competition.
  - Broaden the range of financing instruments available to SMEs over the medium term.
  - Additional SME financing would help shift toward more investment and boost potential growth.

### Authorities’ views on SME financing
- Authorities’ observations:
  - Financing conditions for SMEs are improving but challenges remain.
  - Interest rate differences between small and large loans raise concerns about the efficiency of credit allocation.
  - Reasons behind the rising spread are not fully understood; could partially reflect relatively weak competition between banks in the market for SME loans.
  - Consider developing a credit bureau to enhance credit information and improve credit supply.
  - Additional SME financing would support domestic investment.

### Pension system: vulnerabilities and reform options
- Current vulnerabilities:
  - Financial situation of defined benefit second pillar pension funds remains fragile.
  - By end-2016, about 90 percent of pension funds had been forced to adopt recovery plans to bring solvency ratios above minimum regulatory coverage requirements.
  - Recovery plans rely on excessively optimistic return assumptions; premium contributions might not fully cover accrued benefits under the new supervisory framework.
  - This could trigger benefit curtailments affecting up to 10 million members by 2020–21 (DNB, 2017).
  - 2017 EIOPA stress tests reveal Dutch pension funds are more vulnerable to financial market shocks than European peers.
  - In absence of a sponsor, funds combine disadvantages of defined benefit and defined contribution schemes, with most investment risk borne by participants.
- Staff recommendation for pension reform:
  - Overhaul the second pillar to ensure more clarity for participants by setting up notional personal accounts while preserving some risk sharing and financial security at retirement.
  - Consider a system with mandatory personal DC contracts complemented with provisions for pooling micro longevity risk and some financial risks.
  - Benefits of reform: greater transparency, portability across employment contracts, better tailoring of investment strategies, elimination of pro-cyclical bias and ex ante redistribution mechanisms.
  - Key design challenges: payout options and control of costs; collective asset management by social partners could allow risk sharing and economies of scale.
  - Movement requires agreement of unions and employers.
- Authorities’ stance on pension reform:
  - Authorities highlight merits of abolishing uniform contributions and accruals rates and adopting a new pension contract.
  - Design of new contract is left to social partners based on coalition agreement guidelines; government willing to relax temporarily the tax deductibility framework on contributions to alleviate effects on participants.
  - Future personal defined contribution schemes should include mandatory participation and could include buildup of limited financial buffers to allow sharing macro longevity risks and some financial risks; buffers should never be allowed to become negative.

*Source: cr18130 - 18.      Policy proposals in the coalition agreement to reduce dualism and increase flexibility*

### 36.      The Dutch economy is in a positive phase. Growth is estimated at just above 3 percent in

### 36.      The Dutch economy is in a positive phase. Growth is estimated at just above 3 percent in

### Economic outlook and recent developments
- Growth is estimated at just above 3 percent in 2017 and is forecast to continue at about the same rate in 2018, supported by strong domestic demand and resilient exports.
- Wage growth has been modest at around 1 percent in recent years although trending upwards, reflecting slow productivity growth, subdued inflation expectations, and remaining slack in the labor market.
- Inflation only picked up moderately, to 1.3 percent in 2017.
- Credit developments have remained contained due to continued deleveraging by banks, firms, and households.
- The output gap is estimated to have closed in 2017 and remain positive over the medium term as macroeconomic policies remain supportive and adverse demographics limit potential growth.

### External position and rebalancing
- The external position is assessed substantially stronger than the level consistent with fundamentals and desirable policy settings.
- The high current account surplus reflects high domestic net savings, especially in the corporate sector, and the pick-up in global trade.
- Policies that could help reduce the current account surplus include:
  - Expansionary fiscal policy supporting domestic demand (planned by the new government).
  - Progress in repairing household balance sheets.
  - Strengthening of the banking system.
  - Higher wage growth, consistent with tighter labor market conditions, to help rebalancing within the monetary union.
  - Structural reforms to raise the productivity of small domestic firms and encourage domestic productive investment.
  - Pension reforms to reduce precautionary savings.

### Risks to the outlook
- Risks are tilted to the downside:
  - Foreign demand dampened by growth uncertainties in major trading partners and intensification of the risks of fragmentation/security dislocation.
  - Rising protectionist pressures in a highly open economy.
  - Monetary policy normalization may add pressures to already leveraged firms and households and increase the risk of distress in major banks.
- Upside possibilities:
  - Improvements in labor and housing markets might support consumption and investment.
  - Growth could turn out to be stronger than expected.

### Fiscal policy stance and recommendations
- Policies of the new government aim to reduce financial vulnerabilities in the private sector and unlock potential growth.
- Using fiscal space for growth-enhancing measures is appropriate and helpful for external rebalancing.
- Past policies created substantial fiscal space; part is now used for both tax cuts and expenditure increases.
- Revenue-side changes: lower corporate and personal income taxes will partly be compensated by raising the low VAT rate. Shifting further from direct to indirect taxation would increase work incentives and raise potential output.
- Expenditure-side: higher spending is allocated to security, defense, and education.
- Recommendation: devoting a larger share of any additional spending to education and public R&D would have a stronger impact on potential growth.
- Current fiscal plans would result in a pro-cyclical fiscal stance in 2018 and, to a less extent, in 2019. However, inflation and wage growth are still subdued and most measures are expected to raise potential growth and help reduce external imbalances.

### Taxation of multinational activity
- Authorities are encouraged to contribute to international efforts to improve the taxation of international activities of multinational corporations.
- The recently announced reform of corporate taxation aims at reducing the scope of the Netherlands being used as a conduit for tax optimization schemes involving low-tax jurisdictions.
- Authorities should monitor effects of the reform while continuing active participation in global and European initiatives to increase tax transparency and combat tax avoidance.

### Labor market dualism and wage growth
- Policy actions should aim at reducing dualism in the labor market and supporting wage growth.
- Government plans welcomed:
  - Relax stringent employment protection regulation on permanent contracts.
  - Facilitate transitions from temporary to more permanent contracts.
  - Better regulate the registration of self-employed workers to reduce labor market dualism.
- Recommendations:
  - Reduce tax exemptions for self-employed people and require acquisition of some appropriate social insurance (e.g., disability insurance).
  - Social partners should build consensus on making wages more responsive to domestic macroeconomic conditions so wage formation better reflects productivity and inflation expectations.
  - Authorities’ open public communications to encourage higher wages, including in the coalition agreement, are welcome.

### Housing market and household vulnerabilities
- Rapid increases in house prices and highly indebted households reflect structural weaknesses in the Dutch housing market.
- Large subsidies for social housing and owner-occupied homes have crowded out investment in the unregulated rental sector.
- Supply shortage of private rental houses, especially in large cities, limits housing market functioning, leading to higher housing prices and lower labor mobility.
- Recommended comprehensive housing market reforms should:
  - Rebalance housing supply and demand.
  - Reduce household indebtedness.
  - Promote labor mobility.
- Specific measures:
  - Authorities’ plan to accelerate the phasing down of mortgage interest deductibility (MID) by 3 percentage points instead of the 0.5 percentage point reduction per year thus far to ultimately limit deductibility to the lowest income tax rate is welcome.
  - Distortions to home ownership due to tax incentives will remain large even after full phasing down.
  - To further reduce household financial vulnerabilities, gradually lowering the maximum limit on loan-to-value (LTV) ratios from 100 percent remains critical.
  - Actions to develop affordable houses in the private rental sector need to be taken in parallel.

### Banking and insurance sector resilience
- Dutch banks remain highly leveraged and exposed to refinancing risk due to reliance on wholesale funding.
- Banks should continue to improve leverage ratios and build up capital buffers to adjust to new regulations on internal risk models, which result in higher capital requirements.
- Strengthened bank supervision (national and SSM) should focus on banks’ evolving business models and risk management frameworks.
- Low interest rates and increased competition from shadow banking activities may encourage excessive risk taking.
- Insurance sector under financial stress due to low interest rates and heightened competition.
- Support for swift elaboration of preparatory crisis plans by insurers, which will become mandatory this year, and continuous efforts to streamline insurers’ business models.

### Pension reform
- Transition to a transparent, individualized, sustainable pension system is welcome and should be expedited.
- With protracted low interest rates and continued population aging, defined benefit second pillar pension funds remain under financial stress and lead to intergeneration tensions.
- Staff supports the pension reform in the government coalition agreement:
  - Replace collective defined benefits schemes with personal defined contributions contracts.
  - Complement reforms with provisions aimed at preserving appropriate risk pooling among participants and financial security at retirement.

*Source: IMF staff report excerpt on the Netherlands.*

### 46.      It is proposed that the next Article IV consultation take place on the standard

### 46. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

### Real growth and demand
- Growth has been strengthening, driven by consumption, investment, and net exports; services activity increasing.
- Consumption supported by improved confidence and rising disposable income.
- Investment growth has resumed in equipment and construction sectors.
- Table highlights (Real GDP and demand projections, percent):
  - Real GDP: 2015: 2.3; 2016: 2.2; 2017: 3.2; 2018: 3.1; 2019: 2.4; 2020: 2.1; 2021: 2.0; 2022: 1.9; 2023: 1.9
  - Domestic demand: 2015: 3.4; 2016: 1.8; 2017: 2.3; 2018: 3.1; 2019: 2.7; 2020: 2.3; 2021: 2.0; 2022: 1.9; 2023: 1.9
  - Exports goods and services: 2015: 6.5; 2016: 4.3; 2017: 6.1; 2018: 6.0; 2019: 4.6; 2020: 4.0; 2021: 3.2; 2022: 3.0; 2023: 3.0
  - Imports goods and services: 2015: 8.4; 2016: 4.1; 2017: 5.4; 2018: 6.7; 2019: 5.3; 2020: 4.5; 2021: 3.4; 2022: 3.2; 2023: 3.2
- Output gap and potential:
  - Output gap: 2015: -1.4; 2016: -0.9; 2017: 0.0; 2018: 1.2; 2019: 1.7; 2020: 1.9; 2021: 2.0; 2022: 2.0; 2023: 2.0
  - Potential output growth: 2015: 1.5; 2016: 1.7; 2017: 2.2; 2018–2023: 1.9 (each year)

### Labor market and inflation
- Employment growth strong; vacancy rates rising; increasing share of flexible contracts.
- Productivity gains have outpaced real wage growth, contributing to muted inflation.
- Key labor and price indicators (percent and levels):
  - Employment: 2015: 1.0; 2016: 1.3; 2017: 2.1; 2018: 0.8; 2019–2023: 0.6 (each year)
  - Unemployment (ILO definition): 2015: 6.9; 2016: 6.0; 2017: 4.9; 2018: 4.7; 2019: 4.6; 2020: 4.5; 2021: 4.4; 2022: 4.3; 2023: 4.2
  - Consumer price index (year average): 2015: 0.2; 2016: 0.1; 2017: 1.3; 2018: 1.7; 2019: 2.2; 2020: 2.3; 2021: 2.4; 2022: 2.4; 2023: 2.4
  - GDP deflator: 2015: 0.8; 2016: 0.6; 2017: 1.1; 2018: 1.2; 2019: 1.6; 2020: 1.2; 2021: 1.4; 2022: 1.4; 2023: 1.4

### Credit and housing market conditions
- Average lending rates to firms trending down; collateral requirements gradually relaxing.
- Credit recovery mainly in households; lending to non-financial corporate sector still contracting.
- Housing market recovered from 2013 trough; rising prices have started to depart from levels consistent with fundamentals.
- Indicators (selected):
  - Lending by MFIs (year-over-year growth): contributions from loans to households and NFCs drive total (chart-based; no single numeric series in text besides visuals).
  - House price indices (Index, 2010=100): house price inflation y-o-y and price-to-income, price-to-rent ratios indicate rising rents and prices relative to fundamentals.

### Fiscal developments
- Revenue broadly flat as a proportion of GDP; consolidation mainly on current expenditure.
- Interest expenditure reached record low levels; structural balance improved beyond MTO levels, enabling rapid decrease in public debt.
- Key fiscal projections and aggregates (percent of GDP):
  - Revenue: 2015–2023: 42.8 (2015) and 43.8 (2016–2023 each year reported as 43.8 or 43.8/43.8 consistent in tables)
  - Expenditure: 2015: 44.9; 2016: 43.4; 2017: 43.2; 2018: 43.2; 2019: 43.1; 2020: 43.0; 2021: 42.9; 2022: 42.8; 2023: 42.7
  - General government balance: 2015: -2.0; 2016: 0.4; 2017: 0.5; 2018: 0.5; 2019: 0.7; 2020: 0.8; 2021: 0.9; 2022: 1.0; 2023: 1.0
  - Structural balance (percent of potential GDP): 2015: -1.4; 2016: 0.8; 2017: 0.5; 2018: 0.0; 2019–2021: 0.0; 2022: 0.1; 2023: 0.2
  - General government debt (% of GDP): 2015: 64.6; 2016: 61.8; 2017: 56.5; 2018: 53.3; 2019: 50.7; 2020: 48.9; 2021: 47.3; 2022: 44.8; 2023: 42.3
- Fiscal tables (billions of euros, selected):
  - Nominal GDP: 2015: 683.5; 2016: 702.6; 2017: 733.2; 2018: 765.4; 2019: 796.1; 2020: 822.1; 2021: 850.0; 2022: 878.0; 2023: 907.1
  - Revenue (billions): 2015: 292.7; 2016: 307.8; 2017: 320.9; 2018: 334.9; 2019: 348.4; 2020: 359.8; 2021: 372.0; 2022: 384.2; 2023: 397.0
  - Expenditure (billions): 2015: 306.7; 2016: 305.2; 2017: 316.9; 2018: 330.8; 2019: 343.0; 2020: 353.3; 2021: 364.4; 2022: 375.6; 2023: 387.6
  - Net lending/borrowing (billions): 2015: -14.0; 2016: 2.6; 2017: 4.0; 2018: 4.2; 2019: 5.4; 2020: 6.4; 2021: 7.6; 2022: 8.7; 2023: 9.3

### Current account and external sector
- Current account surplus has hovered at elevated levels for decades; savings-investment imbalance largely driven by non-financial corporate sector.
- Trade balance strengthening owing to increasing commercial integration within the euro area.
- Households net savers with large pension assets abroad; NFCs record important excess savings.
- Key external numbers (percent of GDP):
  - Current account balance: 2015: 8.7; 2016: 8.4; 2017: 10.2; 2018: 9.9; 2019: 9.2; 2020: 9.0; 2021: 8.6; 2022: 8.3; 2023: 8.0
  - Trade balance: 2015: 11.5; 2016: 11.9; 2017: 12.3; 2018: 12.2; 2019: 11.9; 2020: 11.6; 2021: 11.4; 2022: 11.2; 2023: 10.9
  - Exports of goods: 2015: 64.4; 2016: 63.7; 2017: 67.1; 2018: 69.0; 2019: 70.2; 2020: 71.5; 2021: 72.1; 2022: 72.6; 2023: 73.2
  - Imports of goods: 2015: 52.9; 2016: 51.8; 2017: 54.8; 2018: 56.8; 2019: 58.3; 2020: 59.8; 2021: 60.7; 2022: 61.5; 2023: 62.3
  - Direct investment (net): 2015: 11.8; 2016: 12.8; 2017: -2.6; 2018: 6.2; 2019: 5.3; 2020: 6.1; 2021: 5.0; 2022: 3.7; 2023: 4.7

### Financial soundness of banks
- Capital and profitability indicators (percent, 2010–2017):
  - Regulatory Capital to Risk-Weighted Assets: 2010: 13.9; 2011: 13.5; 2012: 14.2; 2013: 14.9; 2014: 17.9; 2015: 20.1; 2016: 22.4; 2017: 22.0
  - Regulatory Tier 1 Capital to Risk-Weighted Assets: 2010: 11.8; 2011: 11.8; 2012: 12.2; 2013: 12.5; 2014: 15.0; 2015: 16.2; 2016: 17.7; 2017: 18.4
  - Non-performing Loans to Total Gross Loans: 2010: 2.8; 2011: 2.7; 2012: 3.1; 2013: 3.2; 2014: 3.0; 2015: 2.7; 2016: 2.5; 2017: 2.3
  - Return on Assets: 2010: 0.4; 2011: 0.4; 2012: 0.3; 2013: 0.3; 2014: 0.3; 2015: 0.6; 2016: 0.6; 2017: 0.7
  - Return on Equity: 2010: 8.9; 2011: 9.6; 2012: 7.4; 2013: 6.2; 2014: 6.6; 2015: 10.8; 2016: 10.1; 2017: 12.8

*Source: IMF staff calculations and official Dutch sources as presented in the content unit.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Sources of Risks — Global growth and policy uncertainty
- Weaker-than-expected global growth
  - Structurally weak growth in key advanced economies: Low productivity growth (U.S., the Euro Area, and Japan), a failure to fully address crisis legacies and undertake structural reforms, and persistently low inflation undermine medium-term growth in the Euro Area. As a small highly open economy, the Netherlands is sensitive to sluggish growth in the region.
  - Relative Likelihood: H
  - Impact: M
  - Policy response:
    - Automatic stabilizers and discretionary fiscal expansion to the extent allowed by the fiscal rules could soften the constraints.
    - If the output gap widens significantly, depending on the size and nature of the shock to the economy, invoking the escape clause under the SGP could be appropriate to support growth.
- Significant U.S. slowdown and its spillovers
  - As the current recovery ages and vulnerabilities build up, the risks of a sharper-than-expected slowdown increase. The proximate causes could be a fiscal contraction associated with the eventual planned withdrawal of the tax stimulus or market fears of overheating. A sharp adjustment necessitated by relatively limited fiscal policy space would create global spillovers.
  - Relative Likelihood: M
  - Impact: M
- Policy and geopolitical uncertainties
  - Policy uncertainty: Two-sided risks to U.S. growth with uncertainties about the positive short-term impact of the tax bill on growth and the extent of potential medium-term adjustment to offset its fiscal costs; uncertainty associated with negotiating post-Brexit arrangements and NAFTA and associated market fragmentation risks; and evolving political processes, including elections in several large economies, weigh overall on global growth. As a small highly open economy, the Netherlands is sensitive to sluggish growth in the region.
  - Relative Likelihood: M
  - Impact: M
  - Policy response:
    - Maintain broad political dialogue and focus on social and demographic policies that diminish socioeconomic fragmentation, improve employment opportunities to reduce labor market duality and encourage migrant integration.
    - Consider a discretionary fiscal expansion to the extent allowed by the fiscal rules if EU growth is impacted by a potential Brexit fallout.
- Intensification of the risks of fragmentation/security dislocation
  - Intensification of conflicts in the Middle East and Africa could lead to sharp rises in migrant flows into Europe. The lack of a common cooperative policy to deal with asylum seekers and other migrants to the EU could deepen political divisions. Limited integration of asylum seekers into the labor force could raise unemployment rates, put pressure on national budgets, and put social cohesion at risk.
  - Relative Likelihood: H
  - Impact: M
  - Policy response:
    - Consider discretionary fiscal expansion to the extent allowed by the fiscal rules if EU growth is impacted by a potential Brexit fallout.

### Risks to the financial sector
- Tighter global financial conditions
  - Against the backdrop of continued monetary policy normalization and increasingly stretched valuations across asset classes, an abrupt change in global risk appetite (e.g., due to higher-than-expected inflation in the U.S) could lead to sudden, sharp increases in interest rates and associated tightening of financial conditions. Higher debt service and refinancing risks could stress leveraged firms, households, and vulnerable sovereigns, including through capital account pressures in some cases.
  - Relative Likelihood: H
  - Impact: M
  - Policy response:
    - Financial supervisors should continue pressure on large banks to reduce their high leverage, and make full use of the more stringent supervisory guidelines under Solvency II and Basel III.
    - Accelerate the implementation of macroprudential measures aimed at lessening household financial vulnerabilities.
- Further pressure on traditional bank business models
  - Legacy problems, and potential competition from non-banks curtail banks’ profitability globally. Loss of confidence if such profitability challenges are not addressed could increase the risk of distress at one or more major banks with possible knock-on effects on the broader financial sector and for sovereign yields in vulnerable economies. Migration of activities outside of the traditional banking sector, including provision of financial services by fintech intermediaries, raises competitive pressures on traditional banks, making risk monitoring and mitigation more difficult.
  - Relative Likelihood: M
  - Impact: M
  - Policy response:
    - Strengthening the macroprudential framework as well as bank and insurance supervision could provide considerable precautionary dividends.
    - Special attention should be paid to major financial institutions where maintaining O-SII buffers could prevent an eventual distress from contaminating the rest of the financial system and ensure ample liquidity provision.

### External Sector Assessment — Foreign asset and liability position and trajectory
- Background
  - The Netherlands’ net international investment position (NIIP) increased to 74 percent of GDP at the end of 2017 (with gross assets and liabilities totaling 1251 and 1177 percent of GDP, respectively), rising from almost balanced NIIP at end-2009.
  - The largest component of the NIIP comes from the net FDI stock, which reached 956 billion euro (130 percent of GDP) at the end of 2017.
  - Over the medium term, the NIIP is expected to continue growing to about 100 percent of GDP, in line with projected sizeable current account (CA) surpluses.
- Assessment
  - The Netherland’s safe haven status and its sizeable foreign assets limit risks from its large foreign liabilities.
- Overall Assessment
  - The external position in 2017 was substantially stronger than the level consistent with medium-term fundamentals and desirable policy settings.
  - The Netherlands’ status as a trade and financial center and natural gas exporter make an external assessment more uncertain than usual.
- Potential policy responses
  - The expansionary fiscal policy planned by the new government, progress in repairing household balance sheets, and the strengthening of the banking system could support domestic demand and contribute to reducing excess external imbalances.
  - Higher wage growth, consistent with tighter labor market conditions, would help rebalancing within the monetary union.
  - Structural reforms aimed at raising the productivity of small domestic firms and encouraging domestic productive investment, as well as pension reforms to reduce precautionary savings, would also reduce the CA surplus.

### Current account
- Background
  - The CA surplus increased to 10.2 percent of GDP in 2017 (10.3 percent cyclically adjusted), contributed by continued strong net exports.
  - The CA has been in surplus since 1981—a reflection of a positive goods and services balance—and until 2000 was mainly driven by household savings.
  - Since 2001 however, non-financial corporate net savings have progressively taken over as the main driver of the surpluses, with large and global corporate savings financing substantial FDI outflows.
  - Households savings have nonetheless also risen since mid-2008 as a result of deleveraging following the sharp declines in housing prices and increases in mandatory contributions to the second-pillar pension funds.
- Assessment
  - The EBA CA model estimates a CA norm of 3.5 percent of GDP and a CA gap of 6.8 percent of GDP in 2017.
  - As the CA surplus essentially reflects the high corporate savings and liquidity of Netherlands-based multinationals, partly due to some favorable tax treatment for corporate income, as well as more recent but possibly long-lasting increases in household saving rates, the assessment of the EBA estimated current account gap is particularly uncertain.
  - Taking these factors into account, staff assesses the norm in a range of 1.5–5.5 percent of GDP and a corresponding CA gap of 4.8–8.8 percent of GDP.
  - In the short term, a more expansionary fiscal stance will put some downward pressure on the surplus, while over the medium to long term further declines in the surplus will be supported by progress in private sector deleveraging, declining gas exports, and demographic trends, including divestment by pension funds.

### Real exchange rate (REER)
- Background
  - The real effective exchange rate (REER) has been on an appreciation path since April 2015.
  - The annual average CPI-based and ULC-based REER appreciated 1 percent and 1.7 percent, respectively, in 2017.
  - The REER appreciated by an additional 2 percent through March 2018, relative to the 2017 average.
- Assessment
  - The EBA REER models indicate a range of overvaluation of 9.8 percent (index model) to slight undervaluation of 2.2 percent (level model) in 2017, largely attributable to unexplained residuals.
  - Taking into account all estimates and the uncertainty surrounding the EBA REER results, staff assesses that the REER remained undervalued by around 10 percent within a range of 7–13 percent.

### Capital and financial accounts: flows and policy measures
- Background
  - Net FDI and portfolio outflows dominate the financial account. FDI outflows are driven by the investment of corporate profits abroad.
  - On average, gross FDI outflows largely match corporate profits.
- Assessment
  - The strong external position limits vulnerabilities from capital flows.
  - The financial account is likely to remain in deficit as long as the corporate sector continues to invest substantially abroad.

### FX intervention and reserves level
- Background
  - The euro is a global reserve currency.
- Assessment
  - Reserves held by the Euro area are typically low relative to standard metrics, but the currency is free floating.

### Technical notes and uncertainties
- In comparison with last year, the EBA-estimated CA gap in 2017 (unexplained residual plus the contribution of identified policy gaps) widened by 3.2 percent of GDP, reflecting increasing unidentified residuals.
- The larger gap reflects a higher cyclically adjusted CA surplus (from 8.9 to 10.3 percent of GDP) and a lower CA norm (from 5.3 to 3.5 percent of GDP).
- The larger external balance sheet, presence of large international corporations, and issues related to the measurement of the current account add uncertainty to this assessment.
- According to the DNB, half of the positions in assets and liabilities are attributable to subsidiaries of foreign multinationals.

*Source: cr18130 - Annex I. Risk Assessment Matrix*

### Annex IV. FSAP Key Recommendations

### Annex IV. FSAP Key Recommendations

### Financial Risks and Stability Analysis
- Enforce an industry-wide approach to informing IO mortgagors of estimated repayment shortfalls. Time: I. Status: AFM and SSM (DNB/ECB) have set up a working group together that has set action plans to ensure an industry-wide approach to informing IO mortgagors about their estimated repayment shortfalls.
- Continue to build capital buffers to ensure all banks remain above minimum leverage ratio thresholds in the case of severe adverse events. Time: NT. Status: The coalition agreement of the new government mentions that national requirements on the leverage ratio will be aligned with European requirements when the Basel III.5 leverage ratio requirements come into force. Basel III.5 will contribute to increased leverage ratios of all Dutch systemically important credit institutions, due to the increase in risk-weighted capital requirements.

### Macroprudential Policy Framework
- Strengthen the FSC by establishing it under primary law and vest it with “comply-or-explain” powers. Time: NT. Status: The FSC-members acknowledge that vesting the FSC in primary law could enhance its position. The Minister of Finance is supportive to the request of DNB to create a legal basis for the FSC in primary law and is currently consulting with the FSC members, also taking into account possible legal obstacles. It is also being examined whether and to what extent a "comply-or-explain" mechanism will improve the functioning of the FSC. A decision on this topic is anticipated in the FSC's May meeting.
- Accelerate the phase-out of MID and reduce the final tax rate to a neutral level. Time: NT. Status: The coalition agreement states that mortgage interest deductibility is phased out with an annual percentage of 3 percentage points until the base tax level of 36.93% has been reached.
- Continue gradually reducing maximum limits on LTV ratio to no more than 90 percent after 2018, and place prudential ceilings above which DSTI limits (by income group) cannot be relaxed. Time: NT. Status: The coalition agreement states the maximum limit on LTV ratio will not be reduced further after reaches 100 percent in 2018. Moreover, no actions are currently foreseen to set prudential ceilings on DSTI limits that would prevent them from being relaxed through the cycle.

### Cross-cutting Supervisory Issues
- Enhance the DNB and AFM powers to introduce technical regulations (consistent with the SSM) and to conduct examinations using outside expertise. Time: NT. Status: The powers of DNB and AFM to introduce technical regulations have not been enhanced. No actions to do so are currently foreseen. DNB and AFM already have the ability to involve outside expertise in conducting their supervisory examinations.
- Exclude the DNB and AFM from the proposed salary cap, and provide them with greater autonomy in setting their supervisory budgets. Time: I. Status: The Ministry of Finance has not provided DNB and AFM with greater autonomy in setting their supervisory budgets. No actions to do so are foreseen.
- The DNB and AFM to undertake a cross-sectoral review of credit underwriting standards of mortgages. Time: I. Status: Several on-site examinations in financial institutions’ mortgage portfolios have been carried out in recent years. Moreover, DNB collects loan level data on the mortgage exposures of banks, insurers, and pension funds. Based on the latest data available, DNB has no signals that underwriting standards are being relaxed. As such a cross-sectoral review of underwriting standards is currently not deemed necessary.
- Ensure that reliable and complete data is available on a timely basis to support off-site supervision. Time: NT. Status: Regarding insurers and pension funds: DNB will continue to conduct rigorous checks on the consistency and plausibility of the data it receives from insurers and pension funds. Regarding banks: This is done through rigorous checks on the consistency and plausibility of data, on-site examinations that target data quality as well as extended on-site inspections, in which data quality is addressed. Regarding collective investment schemes: Several actions have been taken by DNB and AFM to ensure reliable and complete data is available on a timely basis.

### Banking Supervision and Regulation
- Further enhance supervisory oversight of loan classification and strengthen internal model validation by providing Joint Supervisory Teams more support from risk specialist divisions. Time: NT. Status: Regarding supervisory oversight of loan classification: DNB has requested the Ministry of Finance to allow imposing binding requirements on the size of banks’ impairment charges. In the intermediate, DNB is stimulating the usage of article 104 CRD to the extent possible. Regarding internal model validation: No actions are currently foreseen to provide Joint Supervisory Teams with more support than they already receive from specialist divisions.
- Encourage a more active role of the Supervisory Board of Dutch banks via ongoing engagement. Time: NT. Status: Engaging the SB is part of ongoing supervision through e.g. periodic interviews and the annual SB self-assessment. Furthermore, DNB discusses the outcomes of the annual Supervisory Review and Evaluation Process (SREP) with the SB’s of all LSI’s it supervises. In addition, the SSM wide Targeted Review of Internal Models (TRIM) will put the supervisory findings on banks' internal models on the SB agenda.

### Insurance and Pension Supervision and Regulation
- Monitor closely and take a series of well-defined actions, under Pillar 2, at different levels of VA and UFR impact on insurers’ solvency position. Time: I. Status: Several actions have been taken by DNB regarding the impact of the VA and UFR on insurers’ solvency position. In order to monitor the effects of elements that limit the economic valuation of liabilities, DNB requested life insurers to report additional data on their solvency position. In 2016, DNB asked insurers to explicitly take into account the effects of an economic valuation of liabilities in their capital policy. In order to address the solvency position of ‘economically insolvent’ insurers, DNB is using a so called internal signaling value as a point of reference. For insurers whose solvency position falls below this internal signaling value, DNB will actively engage to discuss their solvency position (moral suasion).
- Harmonize the relevant laws on the quality of advice and suitability of products and provide authority for group supervision in the pension law. Time: NT. Status: In its coalition agreement the new government puts forward the context within which the Social-Economic Council will develop the details of a new structure for the pension system.

### Securities Supervision and Regulation
- Broaden the supervisory authority of the AFM with regard to loan-based crowd-funding platforms. Time: NT. Status: AFM requested the Ministry of Finance to introduce general provisions regarding loan-based crowd-funding be added to the Act on Financial Services. The Ministry of Finance has published a consultation on how a concrete legislative proposal should take shape in the very near term. A feedback statement is planned to be published in the near future.
- Require prompt public disclose of auditor changes or resignations. Time: NT. Status: AFM acknowledges the intended purpose of the recommendations. However, the prompt public disclose of auditor changes or resignations is already sufficiently covered by existing rules and regulations.

### Financial Market Infrastructure
- Augment the supervisory resources devoted to the oversight of European Central Counterparty (EuroCCP). Time: I. Status: The staff resources devoted to EuroCCP supervision have been expanded from 2 FTE to 3 FTE. In addition, a broader involvement of management is achieved through the department head of the FMI Oversight Department attending the quarterly supervisory meetings with EuroCCP.
- EuroCCP to strengthen its review of its stress testing and margin models methodology and develop a comprehensive recovery plan. Time: I. Status: Regarding the stress testing methodology: EuroCCP is currently enhancing its reverse stress testing approach to consider a wider set of market price scenarios and combinations of participant defaults that would exhaust its financial resources. Regarding the margin model methodology: EuroCCP has provided documentation on the changes that has been made to address this recommendation. Regarding the recovery plan: Ahead of the EU legislation on CCP recovery and resolution, EuroCCP has already developed a recovery plan based on the CPMI-IOSCO guidelines. In Q1 2018 EuroCCP will provide its action plan to set up a comprehensive recovery plan in anticipation of the enactment of European legislation.

### Crisis management and bank resolution
- Develop adequate arrangements for systemic crisis management, and make legacy frameworks for managing failing banks complementary to the new SRM framework and more transparent. Time: NT. Status: Regarding adequate arrangements for systemic crisis management: On a domestic level, DNB has focused on updating its own internal crisis management manual and bringing it in line with the SRB crisis management manual. Regarding legacy legal frameworks:
  - Complementarity of the national- and SRM framework: The premise of the recommendation that there is legal uncertainty is not valid.
  - Transparency of the legal framework: The ministry of Finance is considering a legislative recast of the Act on Financial Supervision. More clarity on the process of this project is expected early 2018.
- Allow the deposit guarantee scheme to finance deposit transfers in resolution and insolvency. Time: NT. Status: The legislative process to allow funding by the DGS of a transfer of covered deposits in insolvency is ongoing. DNB and the Ministry of Finance are currently looking into the technical feasibility of such techniques.

*Immediately (I) is within one year, near term (NT) is 1–3 years.*

### Public Debt Sustainability Analysis (Annex V)
- Summary: The Netherlands have moderate public debt and low financing needs. Public debt is expected to remain sustainable, decreasing from 57 percent of GDP in 2017 to 42 percent of GDP by 2023, owing to favorable growth developments. The largest risks to the baseline scenario are a negative growth shock and a contingent liability shock, which could push up the debt-to-GDP ratio to 55 percent and 72 percent by 2020, respectively.
- Baseline scenario assumptions:
  - Real GDP growth is forecast to stabilize around 2 percent over the projection period, driven by dynamic non-residential investment and strengthening private consumption supported by improving housing prices, while external demand would remain subdued. This is slightly higher than the medium-term growth potential.
  - Inflation is projected to nominally increase to around 1.6 in 2019 and then stabilize at 1.4 percent over the medium run reflecting stronger domestic demand.
  - Public debt would decline toward 42 percent of GDP by the end of the projection period owing to strong revenue collection and contained expenditure, but remain above 50 percent until end-2019.
- Realism of baseline assumptions:
  - Over 2007–15, staff projections have remained close to the median within the 25–75 interquartile range vis-à-vis other surveillance countries, except for inflation in 2008. On average, real growth and primary balance forecasts appear to have been relatively conservative, while inflation forecasts have been slightly optimistic.
  - Under the baseline scenario, public debt would rapidly decrease from 57 percent of GDP in 2017 to about 43 percent by the end of the projection period, under the joint effects of steady nominal growth and the pursuit of expenditure-based fiscal consolidation. Public debt would increase up to 59 percent of GDP in the historical scenario, due to conservative growth and primary balance assumptions. It would steadily decrease over the medium term in all other scenarios.
  - Under the baseline scenario, the primary balance would continue to decrease, reducing debt over time. The contribution of the interest rate-growth differential will become more favorable, reflecting steady growth and very low effective interest rates, especially from 2018 onwards. The gross financing needs-to-GDP ratio is forecast to decline to less than zero percent of GDP by the end of the projection period.
- Baseline scenario and stress tests:
  - Growth shock: Assuming a negative one standard deviation shock on the real growth rates in 2017–18, lowering them by about 2 ¼ percentage points compared to the baseline scenario, associated with inflation rates lower by 0.4 percentage points, public debt would increase to 55 percent of GDP in 2020 before gradually decreasing to 48 percent by 2023. Gross financing needs would peak at 3.1 percent of GDP in 2020 and remain at that level until the end of the projection period.
  - Primary balance shock: A deterioration of the primary balance by 1 percentage point in 2017 and 0.8 percentage point in 2018 would lead to decreasing debt-to-GDP ratios to around 44 percent until the end of the projection period, with gross financing needs decreasing to 1.7 percent of GDP by 2023 after peaking at 1.9 in 2020.
  - Contingent liability shock: A non-interest expenditure shock arising from the need to bail out 10 percent of the banking sector, accompanied with lower growth rates by one standard deviation, lower inflation, and higher interest rates, would push up gross financing needs to 20 percent of GDP in 2020 and public debt to 72 percent of GDP in 2020. Public debt would decrease somewhat to 65 percent of GDP by 2023 but gross financial needs would remain high through the end of the projection period.
- Additional points:
  - The fan charts show low uncertainty around the baseline. The width of the symmetric fan chart, estimated at around 25 percent of GDP, illustrates the degree of uncertainty for equal probability upside and downside shocks. But given strong demand, upside shocks to growth and primary balance are unconstrained in the asymmetric fan chart, resulting in a downward sloping debt path.
  - On average, the balance of risks is skewed to the upside with low debt weaknesses. While external financing needs are well below warning benchmarks, there is a sizeable share of foreign liabilities that is above the upper warning threshold and constitutes a potential risk. However, overall debt levels are below the lower-risk assessment early warning benchmarks.

*Source: Annex IV and Annex V of the provided IMF document.*

### 7.      The Netherlands’s debt profile reveals some weaknesses. While external financing needs

### 7. The Netherlands’s debt profile reveals some weaknesses. While external financing needs

### Debt-profile findings and headline vulnerabilities
- External financing needs are well below the lower risk-assessment early warning benchmark.
- Public debt held by nonresidents is above the upper risk-assessment early warning benchmark.
- Spreads and the change in short-term debt are below the lower-risk assessment early warning benchmarks.
- Public-debt heat-map indicators (as reported): Bond spread = 8 bp; External Financing Requirement = 12 (percent of GDP); Annual Change in Short-Term Public Debt = -9% (percent of total); Public Debt in Foreign Currency = 0% (percent of total); Public Debt Held by Non-Residents = 47% (percent of total).

### Baseline DSA key projections and statistics (selected series, in percent or percent of GDP as indicated)
- Nominal gross public debt (percent of GDP)
  - 2016: 60.1
  - 2017: 61.8
  - 2018: 56.5
  - 2019: 53.3
  - 2020: 50.7
  - 2021: 48.9
  - 2022: 47.3
  - 2023: 44.8
  - 2023 (alternate cell): 42.3
- Public gross financing needs (in percent of GDP)
  - 2016: 2.8
  - 2017: -0.4
  - 2018: -0.5
  - 2019: -0.5
  - 2020: -0.7
  - 2021: -0.8
  - 2022: -0.9
  - 2023: -1.0
  - 2023 (alternate cell): -1.0
- Public debt (in percent of potential GDP)
  - 2016: 59.7
  - 2017: 61.2
  - 2018: 56.5
  - 2019: 53.9
  - 2020: 51.6
  - 2021: 49.8
  - 2022: 48.3
  - 2023: 45.7
  - 2023 (alternate cell): 43.2
- Real GDP growth (in percent)
  - 2016: 0.8 percent
  - 2017: 2.2 percent
  - 2018: 3.2 percent
  - 2019: 3.1 percent
  - 2020: 2.4 percent
  - 2021: 2.1 percent
  - 2022: 2.0 percent
  - 2023: 1.9 percent
  - 2023 (alternate cell): 1.9 percent
- Inflation (GDP deflator, in percent)
  - 2016: 1.1 percent
  - 2017: 0.6 percent
  - 2018: 1.1 percent
  - 2019: 1.2 percent
  - 2020: 1.6 percent
  - 2021: 1.2 percent
  - 2022: 1.4 percent
  - 2023: 1.4 percent
  - 2023 (alternate cell): 1.4 percent
- Nominal GDP growth (in percent)
  - 2016: 1.9 percent
  - 2017: 2.8 percent
  - 2018: 4.3 percent
  - 2019: 4.4 percent
  - 2020: 4.0 percent
  - 2021: 3.3 percent
  - 2022: 3.4 percent
  - 2023: 3.3 percent
  - 2023 (alternate cell): 3.3 percent
- Effective interest rate (in percent; defined as interest payments divided by debt stock at end of previous year)
  - 2016: 3.2
  - 2017: 1.7
  - 2018: 1.6
  - 2019: 1.4
  - 2020: 1.5
  - 2021: 1.6
  - 2022: 1.6
  - 2023: 1.7
  - 2023 (alternate cell): 1.8
- Change in gross public sector debt (cumulative)
  - 2016: 2.2
  - 2017: -2.8
  - 2018: -5.3
  - 2019: -3.2
  - 2020: -2.6
  - 2021: -1.9
  - 2022: -1.6
  - 2023: -2.5
  - cumulative (to 2023): -14.2
- Identified debt-creating flows (cumulative)
  - 2016: 2.4
  - 2017: -1.8
  - 2018: -3.0
  - 2019: -2.7
  - 2020: -2.5
  - 2021: -2.2
  - 2022: -2.3
  - 2023: -2.3
  - cumulative (to 2023): -14.1
- Primary deficit (in percent of GDP)
  - 2016: 1.6
  - 2017: -1.2
  - 2018: -1.3
  - 2019: -1.1
  - 2020: -1.2
  - 2021: -1.3
  - 2022: -1.4
  - 2023: -1.5
  - 2023 (alternate cell): -1.6
- Primary (noninterest) revenue and grants (in percent of GDP)
  - 2016: 42.7
  - 2017: 43.6
  - 2018: 43.5
  - 2019: 43.5
  - 2020: 43.5
  - 2021: 43.5
  - 2022: 43.5
  - 2023: 43.5
  - cumulative (to 2023): 261.2
- Primary (noninterest) expenditure (in percent of GDP)
  - 2016: 44.3
  - 2017: 42.4
  - 2018: 42.3
  - 2019: 42.4
  - 2020: 42.3
  - 2021: 42.2
  - 2022: 42.1
  - 2023: 42.0
  - cumulative (to 2023): 253.0
- Automatic debt dynamics (cumulative)
  - 2016: 0.8
  - 2017: -0.7
  - 2018: -1.7
  - 2019: -1.6
  - 2020: -1.3
  - 2021: -0.8
  - 2022: -0.8
  - 2023: -0.7
  - cumulative (to 2023): -5.9
- Interest rate/growth differential (cumulative)
  - 2016: 0.8
  - 2017: -0.7
  - 2018: -1.6
  - 2019: -1.6
  - 2020: -1.3
  - 2021: -0.8
  - 2022: -0.8
  - 2023: -0.7
  - cumulative (to 2023): -5.9
- Residual, including asset changes (cumulative)
  - 2016: -0.1
  - 2017: -0.9
  - 2018: -2.3
  - 2019: -0.5
  - 2020: -0.1
  - 2021: 0.3
  - 2022: 0.7
  - 2023: -0.2
  - cumulative (to 2023): -0.1

### Alternative scenarios and stress-test structure (summary)
- Alternative scenarios presented include: Baseline, Historical Scenario, Constant Primary Balance Scenario, and Contingent Liability Shock.
- Selected underlying assumptions used across scenarios (examples reported):
  - Baseline Real GDP growth: 3.1, 2.4, 2.1, 2.0, 1.9, 1.9 (2018–2023)
  - Historical Scenario Real GDP growth: 3.1, 0.9, 0.9, 0.9, 0.9, 0.9 (2018–2023)
  - Constant Primary Balance Scenario Primary Balance: 1.1, 1.1, 1.1, 1.1, 1.1, 1.1 (2018–2023)
  - Contingent Liability Shock Effective interest rate: 1.4, 1.7, 3.3, 2.1, 2.3, 2.4 (2018–2023)
- Macro-fiscal stress tests carried out include: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock. Selected scenario assumptions reported for the Combined Shock:
  - Real GDP growth: 3.1, 0.4, 0.0, 2.0, 1.9, 1.9 (2018–2023)
  - Inflation: 1.2, 1.1, 0.7, 1.4, 1.4, 1.4 (2018–2023)
  - Primary balance: 1.1, 0.2, -0.8, 1.4, 1.5, 1.6 (2018–2023)
  - Effective interest rate: 1.4, 1.5, 1.7, 1.9, 2.1, 2.2 (2018–2023)

### Realism and forecast track record
- Forecast track-record metrics versus surveillance countries are shown (distribution of forecast errors for Real GDP Growth, Primary Balance, Inflation).
  - Netherlands median forecast error for Real GDP Growth (2008–2016): -0.36 (percent, actual-projection), percentile rank: 46%.
  - Netherlands median forecast error for Primary Balance (2008–2016): -0.05 (percent of GDP), percentile rank: 46%.
  - Netherlands median forecast error for Inflation (Deflator) (2008–2016): -0.12 (percent), percentile rank: 30%.
- Assessment of projected fiscal adjustment realism (3-year CAPB adjustment and 3-year average CAPB level):
  - 3-year CAPB adjustment percentile rank for Netherlands: 53%.
  - 3-year average CAPB level percentile rank for Netherlands: 58%.

### Stress-test outcomes (high-level)
- Stress tests produce projected trajectories for Gross Nominal Public Debt and Public Gross Financing Needs under each shock (Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Macro-Fiscal Shock).
- Visual results indicate debt and financing needs increase under adverse shocks; detailed series and charts are provided in the DSA.

### Annex VI — Reform plans of the international corporate taxation regime (analysis and issues)
- Purpose of reform: prevent the Netherlands being used as a ‘conduit’ for tax optimization schemes involving tax havens, while reinforcing attractiveness for foreign direct investment from multinationals.
- Main features of the international corporate taxation regime under domestic law:
  - A ‘double participation exemption’: non-taxation of both dividends paid by foreign subsidiaries and capital gains on disposal of foreign equity. Features include 100 percent exclusion on foreign earnings, a very low ownership share threshold for exemption, and absence of controlled foreign corporations (CFC) rules.
  - A favorable innovation box regime: companies typically benefit from an effective tax rate of 5 percent (to be raised to 7 percent as per the recent coalition agreement) for income from intangible assets for which R&D tax credit is received.
  - Advanced tax rulings and pricing agreements: entered into by the Dutch Tax Authority, offering multiyear tax certainty; individual cases typically confidential, including vis-à-vis Parliament.
- As part of international tax agreements:
  - No withholding tax rates on outward payments of interests, royalties and fees to foreign subsidiaries, including those located in non-EU countries.
  - A comprehensive network of double taxation treaties (about 90 countries) allowing reduced withholding taxes on inbound payments and often low rates on interest, royalties and dividends.
- Identified abuse mechanisms and policy concern:
  - Combination of zero withholding tax rates on outbound payments and low tax burden on inbound payments (via treaties) enables substantial profit shifting by multinationals from source countries to residence countries of ultimate investors, using the Netherlands as a conduit (earnings stripping).
  - Advanced tax rulings and pricing agreements can lock in low effective tax outcomes for years and have been used to safeguard transfer pricing and treaty benefits without expanding the Dutch tax base.

*Source: IMF staff (as presented in the Netherlands Public Sector Debt Sustainability Analysis and Annex VI).*

### 3.      The Dutch authorities have recently announced measures to protect the domestic

### 3.      The Dutch authorities have recently announced measures to protect the domestic

### Scope and objectives of announced measures
- Protect the domestic corporate income tax base and prevent the Netherlands being used as conduit through special purpose vehicles (SPVs) as part of tax avoidance schemes.
- Increase transparency, exchange of information, and anti-abuse provisions in line with the Base Erosion and Profit Shifting (BEPS) project.

### Adoption and implementation of ATAD1 (by 2019)
- Main aim: limiting interest deductibility.
- Measures included:
  - An ‘earnings stripping rule’ limiting interest deductibility to 30 percent of the gross operating result. The Dutch authorities will not seek a ‘group escape’ clause.
    - Effectiveness for conduits depends on the extent to which the initial tax base has been previously reduced (in a typical ruling, the tax base is commonly found to represent less than 1 percent of the amount flown through the SPV).
  - Implementation of controlled foreign corporation (CFC) rules to determine when foreign subsidiaries are considered controlled entities (typically if they operate in countries listed as non-cooperative by the EU or that feature very low statutory rates), and to ensure income they generate is appropriately accounted for as part of the parent’s profits.
    - Specific requirements for a foreign entity to be recognized as carrying on a “substantive economic activity” (thus being considered as having a ‘permanent establishment’ abroad) will be enforced by Dutch authorities, in line with those allowing for the planned abolition of the dividend withholding tax.
    - These requirements may arguably be considered insufficiently restrictive.
    - CFC rules are aimed at protecting the Dutch tax base and are by nature ineffective to address subsidiaries in high tax jurisdictions shifting profits to the Netherlands at the detriment of other source countries.

### Implementation of ATAD2 and neutralization of hybrid mismatches (by 2020)
- ATAD2 aimed at curtailing the use of hybrid instruments for profit shifting.
- Will entail amendments to Dutch tax laws to neutralize the tax impact of hybrid mismatched arrangements allowed by some bilateral treaties (whereby some costs are considered deductible in some countries whereas they are not included as income in the tax base of other countries).

### Withholding taxes on outflows and dividend withholding tax abolition
- Introduction of a withholding tax on dividends (by 2020), and on interest and royalty outflows (by 2021) to entities operating in low tax jurisdictions.
  - These measures would go a long way to lessening the benefit for foreign MNEs of using the Netherlands as a conduit for tax avoidance purposes.
  - Implementation remains conditional on the renegotiation of existing bilateral treaties.
  - The Netherlands does not have tax treaties with traditional tax haven countries, which may limit constraints to implementation.
- Abolition of the dividend withholding tax:
  - The dividend withholding tax, hitherto perceived at a rate of 15 percent, will be abolished for all corporations, except those considered CFC after failing the test of “substantive economic activity”.
  - The substantive economic activity test largely comprises that a payroll of €100,000 be disbursed and some office space be held for at least 24 months—fixed costs that may be particularly low relative to financial gains for large MNEs.

### Multilateral Instrument (MLI) and principle purpose test
- Government has recently signed the Multilateral Instrument (MLI) adopted by Parliament.
- The MLI provides for a ‘principle purpose test’ to curtail treaty abuse where the Netherlands is used as a conduit country.
- It heavily relies on substance requirements and some judicial interpretation of specific facts and circumstances.

### BEPS-related transparency and anti-abuse measures
- Authorities announced measures aligned with BEPS actions, including:
  - Neutralizing the tax impact of hybrid instruments (action 2).
  - Strengthening CFC rules (action 3).
  - Preventing corporate tax base erosion through the use of interest expenses (action 4).
  - Expressed support for the Commission’s proposal for a directive on mandatory disclosure of aggressive tax planning schemes (action 12).
  - Support for the EU initiative to prompt MNEs to publish information on their operations and profits broken down by countries (covered by action 13 regarding transfer pricing documentation).
- Based on parliamentary committee findings:
  - Statutory rights of non-disclosure enjoyed by lawyers and civil law notaries in tax matters would be amended to impose fines for participation in illegal tax schemes.
  - Government intends to establish a register for ultimate beneficial owners and to tighten legislation on trusts.
  - Government will keep Parliament better informed of developments pertaining to advance tax rulings.

### Limitations, caveats, and potential weaknesses
- Earnings stripping rule effectiveness is limited when initial tax bases for SPVs are already reduced (often to less than 1 percent).
- CFC rules and the substantive economic activity test may be considered insufficiently restrictive and relatively easy for MNEs to satisfy (payroll €100,000 and office space for 24 months).
- CFC rules do not address profit shifting into the Netherlands from high-tax jurisdictions that harms other source countries.
- Implementation of withholding taxes is conditional on treaty renegotiations; although the Netherlands lacks treaties with traditional tax havens, renegotiation may still be required.

### Contextual macro and policy points from related sections of the report
- Growth and labor market forecasts and figures:
  - Dutch economy growth figures cited: 3.2% in 2018 and 2.7% in 2019.
  - Authorities forecast unemployment at 3.9% in 2018 and 3.5% in 2019 (noted as more than a percentage point lower than the Fund’s estimations).
- Current account assessment:
  - Staff notes the current account (CA) surplus has been consistently high for more than 45 years.
  - Authorities contest a CA gap estimate range cited by staff: 4.8-8.8 percent of GDP.
- Environmental policy cost/revenue estimates:
  - Staff’s analysis of costs of envisioned CO2 mitigation policies: 0.6% of GDP.
  - Possible new revenues from additional or alternative reforms: close to 2% of GDP.

*Prepared By: European Department — STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18130.pdf_