## 1. The 2019 Budget

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### Context and recent developments
- Real GDP growth in 2018: estimated 2.6 percent.
- Growth slowed to 0.2 percent (q-o-q) in Q3 2018 due to weaker investment and net exports.
- Unemployment rate: historical low of 3.8 percent (2018).
- Wage growth: 0.2 percent in 2018 Q3.
- Headline inflation: 1.8 percent (November 2018).
- Core inflation: 1.2 percent (November 2018).
- Public debt: estimated 54.6 of GDP in 2018.
- Overall fiscal balance: estimated surplus of 1 percent of GDP in 2018 (third consecutive surplus).
- Structural balance: expected deterioration by about 0.7 percentage point of potential GDP.
- Bank credit to non-financial corporations: contracted by about 1 percent y-o-y in November 2018.
- Average return on equity: 13 percent in 2018 Q3.
- Current account (CA) surplus: estimated 9.8 percent of GDP in 2018.
- Corporate savings: about 6 percent of GDP on average since 2000.
- Household net savings: about ½ percent of GDP on average since 2000.
- REER appreciation: 1.4 percent in the first eleven months of 2018, relative to the 2017 average.

### Outlook and risks
- Real GDP growth projection for 2019 under current policies: 2.2 percent.
- Inflation and wage growth: likely to pick up gradually with continued labor market tightening.
- Medium- and long-term constraints: unfavorable demographic developments and slow productivity growth weighing on potential growth.
- CA surplus projection: staff projects a modest 2½ percentage points of GDP decline in CA surplus by 2024.
- Risks (tilted to the downside):
  - Rising global protectionism, threats to global demand, disruptions to the global trade system.
  - Uncertainties around fiscal policies in other euro area countries.
  - Possible no-agreement Brexit.
  - Weaker-than-expected global growth.
  - Sharp tightening of global financial conditions.
- Domestic risks:
  - High household leverage and large household balance sheets.
  - Volatility from housing market developments.
  - Potential strain on banks from wholesale funding reliance.

### The 2019 Budget: fiscal measures and composition
- Overall revenue effect: revenue neutral (-€0.2 billion).
- Corporate tax: temporary increase despite planned reductions in high and low rates (by 0.7 and 1 percentage points respectively) because of base broadening through progressive elimination of corporate interest rate deductibility.
- Personal income tax: revenues to decline as four income brackets are replaced by two and tax credits are raised.
- VAT: increase in the basic VAT from 6 to 9 percent.
- Withholding tax: new withholding tax on interest, royalties and dividends to be introduced as planned to address compliance issues.
- Dividends tax elimination: planned elimination with full effect starting in 2020 is no longer considered.
- Expenditures increase in structural terms:
  - Reestablishment of the Department of Agriculture, Nature, and Food Quality (LNV).
  - Additional funds for the Netherlands Food and Consumer Product Safety Authority (NVWA).
  - Supplementary allocations for primary education; higher teachers’ wages (an 8.5 percent increase).
  - Regional transfers and gas sector: additional budget transfers and allocations to the Groningen region on top of medium-term plan for restructuring the gas sector.
- Investment spending: budgeted higher in 2019 by about ½ percentage point of GDP; implementation obstacles may challenge execution.
- Offsetting savings: lower-than-expected healthcare and social security expenditure, and lower interest charges on public debt will help cover part of additional expenditures.

### Brexit impact and preparedness
- Trade link: UK was the third largest trading partner in 2017 in goods and services.
- Net exports with UK: about 4 percent of GDP.
- Bilateral investment positions (end-2016): direct investment and portfolio investment positions at 125 percent of GDP and 32 percent of GDP, respectively.
- Estimated long-run reduction in Netherlands output from Brexit: about 0.7 percent under a standard free trade agreement; 1 percent in the case of WTO rules.
- Government 2019 Brexit preparedness allocation: about €92 million reserved for enhancing capacity at Customs and NVWA.

### Diagnosing imbalances and external position
- Cyclically adjusted CA surplus: estimated at 10 percent of GDP in 2018, 6.6 percent of GDP above the EBA norm.
- REER assessment: undervalued by 7–13 percent (Annex II).
- Identified fiscal policy gap contribution to CA gap: 0.9 percentage point.
- Unexplained CA gap: 5.4 percentage points of GDP, likely partly related to large activities of Netherlands-domiciled MNCs.
- MNC influence:
  - High corporate savings concentrated in large MNCs.
  - Favorable international corporate taxation regime and “double participation exemption” contribute to attraction of MNCs.
- Statistical recording issue: retained earnings attributable to ultimate (mostly foreign) investors are not fully recorded as Dutch outflows in the CA, potentially overstating the CA surplus.
- Conduit activity: Netherlands used to transfer interest and royalties to low-tax jurisdictions; a withholding tax on such transfers is being implemented but unlikely to affect the CA much.
- SME sector: weak domestic investment reflects low dynamism in SMEs constrained by skill shortages, lack of innovation and access to finance.

### Policy recommendations and fiscal space assessment
- Use of fiscal space:
  - Staff views the Stability and Growth Pact’s MTO of a structural deficit of 0.5 percent of GDP as appropriate.
  - Projected structural balance: stabilize at 0 percent of GDP over the medium term, leaving substantial space of ½ percent of GDP annually.
- Recommendation: fully use fiscal space to address internal and external imbalances, and raise long-term productivity growth by:
  - Boosting household disposable income.
  - Repairing private sector balance sheets.
  - Strengthening the SME sector (details in Section B and Section D).
- Rationale: although pro-cyclical, expansion is not judged to jeopardize debt consolidation or macro-economic stability given depressed wage growth and low inflation (Annex III).

### Labor market structure, part-time work, and wages
- Part-time employment: 37 percent of total employment in 2017; mainly driven by women (around 60 percent).
- Share of self-employment: about 15.7 percent in 2017.
- Wage differentials (DNB household survey):
  - Gross hourly wage is about 3 euros lower for part-timers compared to full-time workers.
  - Self-employed have an estimated net hourly wage about 6 euros lower compared to regular contracts, on average.
- These differences are statistically significant after controlling for workers and job characteristics.
- Wage growth is lower for part-timers and self-employed compared to average wage growth in regular contracts.
- Labor income bears the largest share of the burden of taxes and social security contributions.

### Pension sustainability and reform implications
- Only a fifth of self-employed participate in the second- or third-pillar pension system, compared with nearly 90 percent for employees in regular contracts.
- Proposed reform: new pension contract based on personal pension accounts and envisaged abolishment of the system of uniform premium and constant accrual rates.
- Staff analysis: greater choice in pensions could help lower the share of self-employment by addressing pension-related determinants.
- Recommendation: clarify the cost of redistribution during transition and use fiscal space to compensate individuals made worse off to expedite agreement.

### Policies to increase households’ disposable income and female full-time employment
- Findings:
  - Dutch households’ disposable income and consumption as a share of GDP have declined by 2½ and 1½ percentage points, respectively, since 2009.
  - Contributing factors: weak labor productivity growth, increased labor market duality.
- Recommendations to raise household disposable income:
  - Use available fiscal space to further lower the labor tax wedge by focusing support on low-income workers and second earners.
  - Partly finance measures by equalizing the tax rate on retirement income to the rate at which deductions were made to improve progressivity.
- Policies to increase female full-time employment:
  - Expand availability and affordability of childcare.
  - Reform parental leave policies.
  - Reduce tax disincentives for second-earners in full-time jobs.

### Housing affordability, household debt, and macroprudential measures
- Household debt: stabilized at about 250 percent of net disposable income; second highest among OECD countries.
- Historical driver: generous mortgage interest deductibility (MID) boosted house prices and indebtedness.
- Policy recommendations:
  - Increase housing supply (liberalize rent controls for higher-income households; improve means-testing for social housing).
  - Encourage private investment by relaxing zoning restrictions and simplifying building permits.
  - Consider lowering maximum loan-to-value (LTV) ratio to no more than 90 percent (from 100 percent currently).
  - Consider capping debt service to income (DSTI) ratio to limit procyclicality.
  - Phase down MID by 3 percentage points per year starting from 2020 until the basic rate of 37.05 percent is reached; further phasing to neutral level vs. other assets would reduce debt bias and raise revenues.
- Authorities’ stance: focus on increasing housing supply; not following IMF recommendation to lower LTV below 100 percent due to concerns for younger households; acknowledge DSTI framework has procyclical elements.

### Policies to support SMEs and boost business investment
- Challenges:
  - SMEs employ the majority of workers and contribute largest share of value added but face barriers after start-up (tight/complex labor regulation, skill shortages, lack of innovation and access to finance).
  - Loan rejection rate: 2.7 percent in the first half of 2018.
- Recommendations:
  - Expand direct public spending on R&D and target start-ups and young SMEs.
  - Invest in digitalization and lifelong learning.
  - Establish a business credit bureau to improve information and access to finance.
  - Develop financial technologies as alternative financing sources.
- Authorities’ view: sustaining and increasing public R&D over the medium term is a priority; improved data availability would benefit SMEs.

### Financial sector vulnerabilities and regulatory priorities
- Banks:
  - Mortgage loans represent about 90 percent of long-term lending.
  - Aggregate loan-to-deposit ratio is above 120 percent (compared to below 100 for the euro area).
  - Short-term market funding represents about 28 percent of total.
  - 2018 EBA stress test: large banks are well capitalized but one bank falls below the 3 percent leverage ratio limit in the adverse scenario.
  - Leverage ratio is below the euro area average for significant institutions and should be strengthened.
- Insurance:
  - Low interest rates increase liabilities; 67 percent of insurers’ liabilities consist of guaranteed return policies.
  - New national recovery and resolution framework for insurance companies is welcomed.
- AML/CFT:
  - AML/CFT is a key financial stability and integrity issue; recent large fines underscore need for comprehensive compliance.
  - Fintech and cryptocurrencies pose new laundering and financing risks.
  - Recommendation: stronger coordination between national authorities, investigators, and international stakeholders; remove legal and operational barriers to information sharing with European authorities.
- Authorities’ view: bank buffers and leverage ratio need strengthening; AML/CFT is a priority with emphasis on international coordination.

### Fiscal outlook and key projections (selected figures)
- Real GDP (percent): 2016: 2.2; 2017: 2.9; 2018: 2.6; 2019: 2.2; 2020: 2.1; 2021: 2.1; 2022: 2.0; 2023: 1.8; 2024: 1.8
- Consumer price index (year average): 2016: 0.1; 2017: 1.3; 2018: 1.6; 2019: 2.4; 2020: 2.0; 2021: 2.1; 2022: 2.2; 2023: 2.3; 2024: 2.4
- Unemployment rate (ILO definition): 2016: 6.0; 2017: 4.9; 2018: 3.9; 2019: 3.8; 2020: 3.7; 2021: 3.6; 2022: 3.5; 2023: 3.4; 2024: 3.3
- Current account balance (percent of GDP): 2016: 8.0; 2017: 10.5; 2018: 9.8; 2019: 9.5; 2020: 8.9; 2021: 8.6; 2022: 8.2; 2023: 7.7; 2024: 7.3
- Revenue (percent of GDP): 2016: 42.8; 2017: 43.7; 2018: 43.6; 2019: 44.0; 2020: 43.6; 2021: 43.4; 2022: 43.1; 2023: 43.1; 2024: 43.1
- Expenditure (percent of GDP): 2016: 42.8; 2017: 42.6; 2018: 42.5; 2019: 43.0; 2020: 42.8; 2021: 42.6; 2022: 42.3; 2023: 42.3; 2024: 42.3
- General government balance (percent of GDP): 2016: 0.0; 2017: 1.2; 2018: 1.1; 2019: 1.0; 2020: 0.8; 2021: 0.8; 2022: 0.8; 2023: 0.8; 2024: 0.8
- Structural balance (percent of potential GDP): 2016: 0.8; 2017: 1.2; 2018: 0.5; 2019: -0.1; 2020: 0.0; 2021: 0.0; 2022: 0.0; 2023: 0.0; 2024: 0.0
- General government debt (percent of GDP): 2016: 61.9; 2017: 57.0; 2018: 54.6; 2019: 51.6; 2020: 49.1; 2021: 46.4; 2022: 43.6; 2023: 41.0; 2024: 38.3
- Nominal GDP (billions of euros): 2016: 708.3; 2017: 737.0; 2018: 770.9; 2019: 806.5; 2020: 839.0; 2021: 873.2; 2022: 907.9; 2023: 944.4; 2024: 983.2

### Public Debt Sustainability and alternative scenarios (headlines)
- Nominal gross public debt (selected series): 62.2 57.1 54.6 51.7 49.3 46.5 43.9 41.4 38.9
- Key DSA contributions (selected figures):
  - Cumulative change in gross public sector debt (projection period): -15.8
  - Identified debt-creating flows (cumulative): -14.8
  - Primary deficit (cumulative): -8.3
  - Automatic debt dynamics (cumulative): -6.5
  - Residual, including asset changes (cumulative): -1.0
- Alternative scenarios include Historical scenario, Constant Primary Balance scenario, and Contingent Liability Shock scenario (detailed assumptions in source).

### Annex I — Risk Assessment Matrix (selected)
- I. Rising protectionism and retreat from multilateralism.
  - Relative likelihood: High
  - Impact: High
  - Policy response: Automatic stabilizers and discretionary fiscal expansion within fiscal rules; consider invoking the escape clause under the SGP if output gap widens significantly.
- IV. Sharp tightening of global financial conditions.
  - Relative likelihood: High
  - Impact: Medium
  - Policy response: Financial supervisors to press large banks to reduce high leverage; accelerate macroprudential measures to lessen household vulnerabilities.

### Annexes on external positions and REER
- NIIP estimated at 63 percent of GDP at end-2018 (gross assets and liabilities totaling 1234 and 1162 percent of GDP, respectively).
- Net FDI stock: 1,091 billion euro (141 percent of GDP) at end-2018.
- TARGET2 assets on the euro system: around 100 billion euro.
- REER assessment:
  - EBA REER models: preliminary overvaluation between 1.3 percent and 13.8 percent in 2018.
  - Staff-assessed REER undervaluation: around 10 percent within a range of 7–13 percent.

### Annex V — FSAP recommendations (selected)
- Macroprudential and supervisory priorities:
  - Enforce industry-wide approach to informing IO mortgagors of repayment shortfalls (Time: I).
  - Continue to build capital buffers to meet leverage thresholds (Time: NT).
  - Strengthen the FSC by establishing it under primary law with “comply-or-explain” powers (Time: NT).
  - Accelerate the phase-out of MID and reduce the final tax rate to a neutral level (Time: NT).
  - Continue gradually reducing maximum LTV limits to no more than 90 percent after 2018 and set prudential ceilings on DSTI limits (Time: NT).
- Data, supervision, and crisis management:
  - Ensure reliable and complete data for off-site supervision (Time: NT).
  - Augment supervisory resources for CCP oversight (Time: I).
  - Develop adequate arrangements for systemic crisis management and complement legacy frameworks with the SRM (Time: NT).
- Insurance and pensions:
  - Monitor VA and UFR impacts on insurers’ solvency and take Pillar 2 actions where needed (Time: I).
  - Harmonize laws on advice quality and suitability of products and provide authority for group supervision in pension law (Time: NT).

_Source: IMF staff (Annex I, Annex II, Annex III and Annex IV as presented in the provided content)._

### 1. The 2019 Budget _________________________________________________________________________________6

### 1. The 2019 Budget

### Context and recent developments
- Real GDP growth in 2018: estimated 2.6 percent.  
- Growth slowed to 0.2 percent (q-o-q) in Q3 2018 due to weaker investment and net exports.  
- Unemployment rate: historical low of 3.8 percent (2018).  
- Wage growth: 0.2 percent in 2018 Q3.  
- Headline inflation: 1.8 percent (November 2018).  
- Core inflation: 1.2 percent (November 2018).  
- Public debt: estimated 54.6 of GDP in 2018.  
- Overall fiscal balance: estimated surplus of 1 percent of GDP in 2018 (third consecutive surplus).  
- Structural balance: expected deterioration by about 0.7 percentage point of potential GDP.  
- Bank credit to non-financial corporations: contracted by about 1 percent y-o-y in November 2018.  
- Average return on equity: 13 percent in 2018 Q3.  
- Current account (CA) surplus: estimated 9.8 percent of GDP in 2018.  
- Corporate savings: about 6 percent of GDP on average since 2000.  
- Household net savings: about ½ percent of GDP on average since 2000.  
- REER appreciation: 1.4 percent in the first eleven months of 2018, relative to the 2017 average.

### Outlook and risks
- Real GDP growth projection for 2019 under current policies: 2.2 percent.  
- Inflation and wage growth: likely to pick up gradually with continued labor market tightening.  
- Medium- and long-term constraints: unfavorable demographic developments and slow productivity growth weighing on potential growth.  
- CA surplus projection: staff projects a modest 2½ percentage points of GDP decline in CA surplus by 2024.  
- Risks (tilted to the downside): rising global protectionism, threats to global demand, disruptions to the global trade system, uncertainties around fiscal policies in other euro area countries, possible no-agreement Brexit, weaker-than-expected global growth, sharp tightening of global financial conditions.  
- Domestic risks highlighted: high household leverage, large household balance sheets, volatility from housing market developments, and potential strain on banks from wholesale funding reliance.

### Box 1 — The 2019 Budget: fiscal measures and composition
- Overall revenue effect: revenue neutral (-€0.2 billion).  
- Corporate tax: temporary increase despite planned reductions in high and low rates (by 0.7 and 1 percentage points respectively) because of base broadening through progressive elimination of corporate interest rate deductibility.  
- Personal income tax: revenues to decline as four income brackets are replaced by two and tax credits are raised.  
- VAT: increase in the basic VAT from 6 to 9 percent.  
- Withholding tax: new withholding tax on interest, royalties and dividends to be introduced as planned to address compliance issues.  
- Dividends tax elimination: planned elimination with full effect starting in 2020 is no longer considered.  
- Expenditures increase in structural terms: new mandates for 2019 include reestablishment of the Department of Agriculture, Nature, and Food Quality (LNV); additional funds for the Netherlands Food and Consumer Product Safety Authority (NVWA); supplementary allocations for primary education; and higher teachers’ wages (an 8.5 percent increase).  
- Regional transfers and gas sector: additional budget transfers and allocations to the Groningen region on top of medium-term plan for restructuring the gas sector.  
- Investment spending: budgeted higher in 2019 by about ½ percentage point of GDP; implementation obstacles may challenge execution.  
- Offsetting savings: lower-than-expected healthcare and social security expenditure, and lower interest charges on public debt will help cover part of additional expenditures.

### Box 2 — Impact of Brexit on The Netherlands
- Trade link: UK was the third largest trading partner in 2017 in goods and services.  
- Net exports with UK: about 4 percent of GDP.  
- Bilateral investment positions (end-2016): direct investment and portfolio investment positions at 125 percent of GDP and 32 percent of GDP, respectively.  
- Estimated long-run reduction in Netherlands output from Brexit: about 0.7 percent under a standard free trade agreement; 1 percent in the case of WTO rules.  
- Government 2019 Brexit preparedness allocation: about €92 million reserved for enhancing capacity at Customs and NVWA (hiring staff for goods inspections and customs formalities).

### Policy discussions — diagnosing imbalances
- Cyclically adjusted CA surplus: estimated at 10 percent of GDP in 2018, 6.6 percent of GDP above the EBA norm.  
- REER assessment: undervalued by 7–13 percent (Annex II).  
- Identified fiscal policy gap contribution to CA gap: 0.9 percentage point.  
- Unexplained CA gap: 5.4 percentage points of GDP, likely partly related to large activities of Netherlands-domiciled MNCs.  
- MNC influence: high corporate savings concentrated in large MNCs; favorable international corporate taxation regime and “double participation exemption” contribute to attraction of MNCs.  
- Statistical recording issue: retained earnings attributable to ultimate (mostly foreign) investors are not fully recorded as Dutch outflows in the CA, potentially overstating the CA surplus. Improvements in statistics of special purpose vehicles underway.  
- Conduit activity: Netherlands used to transfer interest and royalties to low-tax jurisdictions; a withholding tax on such transfers is being implemented but unlikely to affect the CA much.  
- SME sector: weak domestic investment reflects low dynamism in SMEs constrained by skill shortages, lack of innovation and access to finance.

### Policy recommendations and fiscal space assessment
- Use of fiscal space: staff views the Stability and Growth Pact’s MTO of a structural deficit of 0.5 percent of GDP as appropriate.  
- Projected structural balance: stabilize at 0 percent of GDP over the medium term, leaving substantial space of ½ percent of GDP annually.  
- Recommendation: fully use fiscal space to address internal and external imbalances, and raise long-term productivity growth by boosting household disposable income, repairing private sector balance sheets, and strengthening the SME sector (details in Section B and Section D).  
- Rationale: although pro-cyclical, expansion is not judged to jeopardize debt consolidation or macro-economic stability given depressed wage growth and low inflation (Annex III).

### Authorities’ views
- Agreement with identified international risks (e.g., no-agreement Brexit, trade war).  
- On sharp tightening of global financial conditions: authorities stressed banks are resilient and most new mortgage loans have fixed rates.  
- Main domestic risks: developments in housing market due to close relationship between consumption and house prices; household debt increases could weigh on consumption and GDP growth.  
- On corporate saving explanations: authorities stressed Fund’s EBA models do not provide good explanations and called for further research; central bank’s preliminary firm-level research shows high net saving dominated by a few MNCs, but inconsistencies between macro- and micro-level data are under investigation.  
- On fiscal space: authorities disagreed that space is available for additional measures, citing the national budgetary framework and long-term fiscal costs from population aging; they prefer holding buffers and consider planned measures growth-friendly and structural.

### Section B — Policies to increase households’ disposable income (introductory findings)
- Dutch households’ disposable income and consumption as a share of GDP have declined by 2½ and 1½ percentage points, respectively, since 2009.  
- Contributing factors: weak labor productivity growth, increased labor market duality.  
- Labor market trends: self-employment and part-time employment are among the highest in the developed world; share of self-employment in total employment has picked up by more than 4 percentage points since 2005.

*IMF country report excerpt: 1. The 2019 Budget*

### 15.7 percent in 2017. The part-time work is

### 1nldea2019001 - 15.7 percent in 2017. The part-time work is

### Labor market structure, part-time work, and wages
- Part-time employment reached 37 percent of total employment in 2017, more than twice the average in OECD or EU countries, and mainly driven by a higher prevalence for women (around 60 percent).
- The share of self-employment was about 15.7 percent in 2017.
- Part-time and self-employment increase labor force participation (especially for women) and provide flexibility, but are associated with lower wages and weaker career progression.
- Dutch National Bank household survey (DHS) findings:
  - Gross hourly wage is about 3 euros lower for part-timers compared to full-time workers.
  - Self-employed have an estimated net hourly wage about 6 euros lower compared to regular contracts, on average.
  - These differences are statistically significant even after controlling for workers and job characteristics.
- Wage growth is lower for part-timers and self-employed compared to average wage growth in regular contracts.
- Labor income bears the largest share of the burden of taxes and social security contributions.

### Risks to pension sustainability and pension reform implications
- Only a fifth of self-employed participate in the second- or third-pillar pension system, compared with nearly 90 percent for employees in regular contracts.
- Proposed pension reform introduces a new pension contract based on personal pension accounts and envisages abolishment of the system of uniform premium and constant accrual rates.
- Staff analysis: greater choice in pensions could help lower the share of self-employment in total employment by addressing pension-related determinants of self-employment.
- Recommendation: clarify the cost of redistribution during transition and use fiscal space to compensate individuals made worse off to expedite agreement.

### Tax policy and the labor tax wedge
- Planned measures: decrease in the labor tax wedge and harmonization of VAT rates are welcomed, but labor income taxes will remain comparatively high after the reform.
- Policy recommendation: use available fiscal space to further lower the labor tax wedge by focusing support on low-income workers and second earners; partly finance measures by equalizing the tax rate on retirement income to the rate at which deductions were made to improve progressivity.
- Note: revenue measures proposed would not jeopardize the expenditure ceilings fixed under national fiscal rules for the four-years-ahead period.

### Policies to increase female full-time employment
- Measures required:
  - Expand availability and affordability of childcare.
  - Reform parental leave policies.
  - Reduce tax disincentives for second-earners in full-time jobs.

### Household debt, housing affordability, and macroprudential measures
- Household debt stabilized at about 250 percent of net disposable income; second highest among OECD countries.
- Historical context: generous mortgage interest deductibility (MID) boosted house prices and indebtedness.
- Policy recommendations:
  - Increase housing supply (liberalize rent controls for higher-income households; improve means-testing for social housing).
  - Encourage private investment by relaxing zoning restrictions and simplifying building permits.
  - Consider lowering maximum loan-to-value (LTV) ratio to no more than 90 percent (from 100 percent currently).
  - Consider capping debt service to income (DSTI) ratio to limit procyclicality.
  - Phase down MID by 3 percentage points per year starting from 2020 until the basic rate of 37.05 percent is reached; further phasing down to neutral level vs. other assets would reduce debt bias and raise revenues.
- Authorities’ stance: focus on increasing housing supply; not following IMF recommendation to lower LTV below 100 percent due to concerns for younger households; acknowledge DSTI framework has procyclical elements.

### Policies to support SMEs and boost business investment
- SMEs: employ majority of workers and contribute largest share of value added but face barriers after start-up (tight/complex labor regulation, skill shortages, lack of innovation and access to finance).
- Loan rejection rate was 2.7 percent in the first half of 2018.
- Policy recommendations:
  - Expand direct public spending on R&D and target start-ups and young SMEs.
  - Invest in digitalization and lifelong learning.
  - Establish a business credit bureau to improve information and access to finance.
  - Develop financial technologies as alternative financing sources.
- Authorities’ view: sustaining and increasing public R&D over the medium term is a priority; improved data availability (credit, invoices, securities) would benefit SMEs.

### Financial sector vulnerabilities and regulatory priorities
- Banking sector characteristics and risks:
  - Mortgage loans represent about 90 percent of long-term lending.
  - Aggregate loan-to-deposit ratio is above 120 percent, compared to below 100 for the euro area.
  - Short-term market funding represents about 28 percent of total.
  - The 2018 EBA stress test: large banks are well capitalized but one bank falls below the 3 percent leverage ratio limit in the adverse scenario.
  - Leverage ratio is below the euro area average for significant institutions and should be strengthened.
- Insurance sector:
  - Low interest rates increase liabilities; 67 percent of insurers’ liabilities consist of guaranteed return policies.
  - New national recovery and resolution framework for insurance companies is welcomed.
- AML/CFT:
  - AML/CFT is a key financial stability and integrity issue; recent large fines underscore need for comprehensive compliance.
  - Development of fintech and cryptocurrencies poses new laundering and financing risks.
  - Recommendation: stronger coordination between national authorities, investigators, and international stakeholders; remove legal and operational barriers to information sharing with European authorities.
- Authorities’ view: bank buffers and leverage ratio need strengthening; AML/CFT is a priority with emphasis on international coordination.

### Staff appraisal and recommended policy priorities
- Economic context:
  - Growth remains strong and above the euro area average; labor market tightened; unemployment at lowest level in a decade.
  - Slow productivity growth constrains wage and income growth.
  - Households highly leveraged; consumption constrained by stagnating disposable income.
  - Corporate sector dominated by MNCs: low investment and high corporate savings; SMEs stagnant.
  - Large current account surplus assessed as substantially stronger than consistent with medium-term fundamentals.
- Staff recommendations:
  - Policies to reduce imbalances in household and corporate sectors to help lower the large current account surplus.
  - Reduce labor market duality, include all categories of workers into social protection and insurance, and lower overall protection in regular employment contracts while increasing flexibility.
  - Use fiscal space to lower labor taxation concentrated on low-income and second earners and to facilitate pension reform transition costs.
  - Strengthen bank capital and liquidity buffers and address household debt vulnerabilities through housing supply and macroprudential measures.

*Source: IMF staff analysis and Netherlands country report excerpt.*

### 35.      Risks to the outlook are tilted to the downside. Disruptions to the global trade system,

### 35.      Risks to the outlook are tilted to the downside. Disruptions to the global trade system,

### Macroeconomic and external risks
- Risks to the outlook are tilted to the downside.
- Potential shock channels:
  - Disruptions to the global trade system.
  - Uncertainties surrounding fiscal policies in other euro area countries.
  - A possible no-agreement Brexit.
  - Weaker-than-expected global growth affecting exports and investment negatively.
  - A sharp tightening of global financial conditions could:
    - Weigh on the financial positions of highly leveraged households both directly and indirectly through reduced consumption.
    - Lead to heightened stress in banks due to their heavy reliance on wholesale funding.

### Fiscal policy, fiscal space, and recommended use
- Strong economic growth and prudent fiscal policy have boosted fiscal space in recent years.
- The authorities’ 2019 budget plan implies a stimulus.
- Substantial space would become available over the medium term.
- Staff recommendation:
  - Fully use available fiscal space to address imbalances by:
    - Reducing labor taxation.
    - Further investing in public R&D and lifelong learning.
  - Rationale: Such expansionary fiscal policy would support growth potential without undermining fiscal sustainability.

### Labor market, wages, and policy to reduce duality
- Issues:
  - Weak labor productivity growth.
  - A high labor tax wedge contributing to moderating wage growth and pressure on household’s disposable income.
  - Labor market duality dampens wage growth.
- Policy recommendations:
  - Greater harmonization of the tax and social protection treatment of permanent employees, temporary workers, and the self-employed while increasing overall flexibility.
  - Expected effects: improve equity and efficiency and support household disposable income.

### Pension reform
- Context:
  - Returns on pension fund assets have improved in recent years.
  - Persistent growth in self-employment and population aging will continue to challenge the defined-benefit second-pillar pension system.
- Government proposal and assessment:
  - Proposed reform: replace collective defined-benefits schemes by personal accounts, complemented by provisions aimed at preserving appropriate risk pooling.
  - Expected benefits: greater predictability and transparency and might help bring more self-employed into the system.

### Housing affordability and household debt
- Causes:
  - A lack of affordable rental housing has contributed to excessive household debt.
- Recommended measures:
  - Liberalize rent controls.
  - Improve means-testing for social housing.
  - Reduce restrictions on zoning plans.
  - Simplify administrative procedures for building permits.
  - Improve coordination at the subnational government level.
  - Set the maximum LTV ratio at no more than 90 percent.
  - Cap the DSTI ratio to avoid pro-cyclicality in borrowing.
  - Continue the accelerated phasing down of the mortgage interest deductibility by 3 percent starting from 2020 and pursue it beyond its planned end-point in 2023.

### SME dynamism and financing
- Challenges:
  - SMEs growth has stagnated.
  - Firms face difficulties in hiring due to rigid regulation, tight labor market, and skill shortages.
  - Financing is limited to bank loans and borrowing costs for small firms remain higher than in peer countries.
- Policy recommendations:
  - Create a credit bureau to improve information and facilitate SMEs’ access to finance.
  - Invest further in the digital economy.
  - Implement programs to support lifelong learning to help SMEs adapt and reduce costs.
  - Expand direct public spending on R&D to create positive spillovers to start-ups and young SMEs with growth potential.

### Banking and insurance sector vulnerabilities
- Banks:
  - Banks are profitable but still highly dependent on wholesale funding.
  - Continued building of capital and liquidity buffers should remain a priority.
  - The leverage ratio is below the euro area average for significant institutions and should be strengthened.
- Insurance:
  - Insurance sector solvency has improved.
  - Life insurers remain vulnerable in the low-interest environment given the still large share of guaranteed-return policies that need to be further reduced.
  - Continued supervisory attention in this area is warranted.

### AML/CFT supervision
- Context:
  - AML/CFT supervision is challenging, given the Netherlands’ position as a financial and corporate center.
- Recommendations:
  - Enhance cooperation between supervisors, law enforcement, and other stakeholders, including at the regional and global level, to effectively tackle money laundering and terrorist financing risks.
  - Remove legal and operational barriers to information sharing among prudential and national AML/CFT supervisors.
  - Establish a European-level institution responsible for AML/CFT supervision is also critical for effective banking supervision.

*Source: IMF staff assessment and recommendations as presented in the provided chapter excerpt.*

### 43.      It is recommended that the next Article IV consultation take place on the regular

### 1nldea2019001 - 43.      It is recommended that the next Article IV consultation take place on the regular

### Real growth, demand, and investment
- Growth has been strong, driven by consumption, investment, and net exports; also reflecting increasing activity in the business services sector.
- Contributions to GDP growth (quarter-on-quarter, percent): chart shows consumption, investment, change in inventories, net exports; GDP growth, % change series from Mar-16 to Sep-18.
- Domestic and foreign demand (2 quarters average, percent change): domestic demand and exports of goods (RHS) series, Mar-16 to Sep-18.
- Industrial production and manufacturing: Manufacturing (RHS) and Mining and quarrying series (Index, 2005M1=100) from Jan-16 to Oct-18.
- Investment growth (year-over-year growth rate) contributions: Construction, Equipment, Other; series show equipment sector trending down.
- Specific medium-term projections (Table 1, Real GDP and components, percent):
  - Real GDP: 2016: 2.2; 2017: 2.9; 2018: 2.6; 2019: 2.2; 2020: 2.1; 2021: 2.1; 2022: 2.0; 2023: 1.8; 2024: 1.8
  - Domestic demand: 2016: -0.7; 2017: 2.2; 2018: 2.7; 2019: 2.8; 2020: 2.8; 2021: 2.4; 2022: 2.3; 2023: 2.2; 2024: 2.2
  - Private consumption: 2016: 1.1; 2017: 1.9; 2018: 2.4; 2019: 2.4; 2020: 2.4; 2021: 2.3; 2022: 2.0; 2023: 2.0; 2024: 2.0
  - Gross fixed investment (total): 2016: -7.3; 2017: 6.1; 2018: 4.9; 2019: 4.7; 2020: 4.5; 2021: 3.1; 2022: 3.1; 2023: 3.0; 2024: 3.0
  - Exports goods and services: 2016: 1.7; 2017: 5.4; 2018: 5.1; 2019: 4.4; 2020: 3.9; 2021: 3.8; 2022: 3.4; 2023: 3.0; 2024: 3.0
  - Output gap: 2016: -1.2; 2017: -0.1; 2018: 0.7; 2019: 1.2; 2020: 1.2; 2021: 1.2; 2022: 1.2; 2023: 1.2; 2024: 1.2
  - Potential output growth: 2016: 1.5; 2017: 1.7; 2018: 1.9; 2019: 1.7; 2020: 2.1; 2021: 2.1; 2022: 2.0; 2023: 1.8; 2024: 1.8
  - Gross investment (percent of GDP): 2016: 20.5; 2017: 20.7; 2018: 21.1; 2019: 21.6; 2020: 22.1; 2021: 22.3; 2022: 22.6; 2023: 22.9; 2024: 23.2
  - Gross national saving (percent of GDP) 1/: 2016: 28.5; 2017: 31.2; 2018: 30.9; 2019: 31.0; 2020: 31.0; 2021: 30.9; 2022: 30.8; 2023: 30.6; 2024: 30.5

### Labor market and inflation
- Employment growth has been strong alongside rising vacancy rates.
- The share of part-time contracts is rising and wage growth has been subdued.
- Productivity gains have outpaced real wage growth, contributing to muted inflation.
- Key indicators (Table 1, Prices and employment):
  - Consumer price index (year average): 2016: 0.1; 2017: 1.3; 2018: 1.6; 2019: 2.4; 2020: 2.0; 2021: 2.1; 2022: 2.2; 2023: 2.3; 2024: 2.4
  - GDP deflator: 2016: 0.5; 2017: 1.2; 2018: 1.9; 2019: 2.3; 2020: 1.9; 2021: 1.9; 2022: 2.0; 2023: 2.1; 2024: 2.2
  - Employment (percent): 2016: 1.3; 2017: 2.1; 2018: 1.6; 2019: 0.6; 2020: 0.6; 2021: 0.6; 2022: 0.6; 2023: 0.6; 2024: 0.6
  - Unemployment rate (national definition) 2/: 2016: 7.3; 2017: 5.9; (dots thereafter)
  - Unemployment rate (ILO definition) 3/: 2016: 6.0; 2017: 4.9; 2018: 3.9; 2019: 3.8; 2020: 3.7; 2021: 3.6; 2022: 3.5; 2023: 3.4; 2024: 3.3

### Fiscal developments and public finances
- Primary surpluses and declining interest payments are driving the overall fiscal surplus up; structural balance will deteriorate somewhat.
- Public debt has decreased rapidly and is the lowest among peer countries.
- Public investment is recovering but direct spending on R&D is comparatively low.
- Key fiscal projections (Table 1 and Table 2a, percent of GDP):
  - Revenue: 2016: 42.8; 2017: 43.7; 2018: 43.6; 2019: 44.0; 2020: 43.6; 2021: 43.4; 2022: 43.1; 2023: 43.1; 2024: 43.1
  - Expenditure: 2016: 42.8; 2017: 42.6; 2018: 42.5; 2019: 43.0; 2020: 42.8; 2021: 42.6; 2022: 42.3; 2023: 42.3; 2024: 42.3
  - General government balance: 2016: 0.0; 2017: 1.2; 2018: 1.1; 2019: 1.0; 2020: 0.8; 2021: 0.8; 2022: 0.8; 2023: 0.8; 2024: 0.8
  - Structural balance (percent of potential GDP): 2016: 0.8; 2017: 1.2; 2018: 0.5; 2019: -0.1; 2020: 0.0; 2021: 0.0; 2022: 0.0; 2023: 0.0; 2024: 0.0
  - General government debt (percent of GDP): 2016: 61.9; 2017: 57.0; 2018: 54.6; 2019: 51.6; 2020: 49.1; 2021: 46.4; 2022: 43.6; 2023: 41.0; 2024: 38.3
- Nominal GDP (billions of euros): 2016: 708.3; 2017: 737.0; 2018: 770.9; 2019: 806.5; 2020: 839.0; 2021: 873.2; 2022: 907.9; 2023: 944.4; 2024: 983.2

### Credit, banking, and housing market conditions
- Average lending rates to firms have been trending downwards but not accompanied by significant loosening of collateral requirements.
- Overall credit to the private sector is subdued while lending to the non-financial corporate sector is still contracting.
- The housing market continues to tighten and rising prices have departed from levels consistent with fundamentals.
- House price and affordability indicators:
  - House price inflation, y-o-y growth and Price-to-income / Price-to-rent series show tightening from Mar-16 to Mar-18.
  - House Price Indices (Index, 2010=100) series from Mar-70 to Mar-16; House Prices and Value Added in Construction (Index, 2010=100) series Jan-05 to Jan-18.
- Bank lending standards and loan demand:
  - Change in Bank Standards for Lending to Enterprises: Non-interest rate charges and Collateral requirements series (net percentage balance w/r to 3m; negative is looser standard) Mar-03 to Mar-18.
  - Change in Loan Demand (Percent balance, w/r to 3m ago): Loans to all enterprises, Loans to households for house purchase, Loans to small & medium enterprises series Mar-03 to Mar-18.
- Banks’ lending rates on new loans to non-financial corporations: DEUFRA, ITAESP, NLD series Jan-07 to Apr-18.

### Current account and external sector
- The current account surplus has been hovering at elevated levels for decades, reflecting increasing commercial integration within the euro area.
- The saving-investment imbalance is mostly accounted for by the non-financial corporate sector; total investment has been weak.
- External assets and liabilities are extremely large even after excluding stock holdings by Special Financial Institutions (SFIs).
- Current account and trade balances (Table 3, percent of GDP):
  - Balance on Current Account: 2016: 8.0; 2017: 10.5; 2018: 9.8; 2019: 9.5; 2020: 8.9; 2021: 8.6; 2022: 8.2; 2023: 7.7; 2024: 7.3
  - Trade Balance: 2016: 9.3; 2017: 9.6; 2018: 9.1; 2019: 8.6; 2020: 8.0; 2021: 7.8; 2022: 7.4; 2023: 7.1; 2024: 6.7
  - Exports of goods (percent of GDP): 2016: 59.4; 2017: 62.7; 2018: 66.5; 2019: 66.1; 2020: 66.4; 2021: 66.4; 2022: 65.9; 2023: 65.2; 2024: 64.3
  - Imports of goods (percent of GDP): 2016: 50.1; 2017: 53.1; 2018: 57.4; 2019: 57.5; 2020: 58.3; 2021: 58.7; 2022: 58.5; 2023: 58.1; 2024: 57.7
  - Direct investment, net (percent of GDP): 2016: 14.5; 2017: 1.9; 2018: 7.2; 2019: 6.6; 2020: 7.9; 2021: 7.6; 2022: 6.2; 2023: 7.1; 2024: 7.1
  - Direct investment abroad (percent of GDP): 2016: 35.1; 2017: 39.9; 2018: 33.7; 2019: 31.0; 2020: 34.5; 2021: 34.9; 2022: 34.8; 2023: 33.8; 2024: 33.8
  - FDI in Netherlands (percent of GDP): 2016: 20.6; 2017: 38.0; 2018: 26.6; 2019: 24.4; 2020: 26.7; 2021: 27.3; 2022: 28.6; 2023: 26.7; 2024: 26.7

### Medium-term macroeconomic and fiscal tables (selected figures)
- Table 1 (selected):
  - Current account balance (percent of GDP): see Current account section above.
  - Employment and unemployment: see Labor market section above.
- Table 2a / 2b (general government statement of operations, percent of GDP and billions of euros):
  - Revenue (percent of GDP): 2016: 42.8; 2017: 43.7; 2018: 43.6; 2019: 44.0; 2020: 43.6; 2021: 43.4; 2022: 43.1; 2023: 43.1; 2024: 43.1
  - Revenue (billions of euros): 2016: 303.2; 2017: 322.2; 2018: 336.2; 2019: 354.6; 2020: 365.8; 2021: 378.9; 2022: 391.5; 2023: 407.2; 2024: 424.0
  - Expenditure (percent of GDP): 2016: 42.8; 2017: 42.6; 2018: 42.5; 2019: 43.0; 2020: 42.8; 2021: 42.6; 2022: 42.3; 2023: 42.3; 2024: 42.3
  - Expenditure (billions of euros): 2016: 303.1; 2017: 313.7; 2018: 328.0; 2019: 346.5; 2020: 359.1; 2021: 371.9; 2022: 384.2; 2023: 399.6; 2024: 416.1
  - Net lending/borrowing (percent of GDP): 2016: 0.0; 2017: 1.2; 2018: 1.1; 2019: 1.0; 2020: 0.8; 2021: 0.8; 2022: 0.8; 2023: 0.8; 2024: 0.8
  - Primary balance (percent of GDP): 2016: 1.1; 2017: 2.1; 2018: 1.4; 2019: 1.6; 2020: 1.4; 2021: 1.4; 2022: 1.4; 2023: 1.4; 2024: 1.4
  - Gross debt (billions of euros): 2016: 438.4; 2017: 419.8; 2018: 420.6; 2019: 416.0; 2020: 412.0; 2021: 404.9; 2022: 396.1; 2023: 387.0; 2024: 376.9

### Financial soundness indicators and labor market econometrics
- Core financial soundness indicators for banks (Table 4, selected, percent):
  - Regulatory Capital to Risk-Weighted Assets: 2011: 13.5; 2012: 14.2; 2013: 14.9; 2014: 17.9; 2015: 20.1; 2016: 22.4; 2017: 22.0; 2018Q3: 22.2
  - Regulatory Tier 1 Capital to Risk-Weighted Assets: 2011: 11.8; 2012: 12.2; 2013: 12.5; 2014: 15.0; 2015: 16.2; 2016: 17.7; 2017: 18.4; 2018Q3: 18.5
  - Non-performing Loans to Total Gross Loans: 2011: 2.7; 2012: 3.1; 2013: 3.2; 2014: 3.0; 2015: 2.7; 2016: 2.5; 2017: 2.3; 2018Q3: 1.9
  - Return on Assets: 2011: 0.4; 2012: 0.3; 2013: 0.3; 2014: 0.3; 2015: 0.6; 2016: 0.6; 2017: 0.7; 2018Q3: 0.8
  - Return on Equity: 2011: 9.6; 2012: 7.4; 2013: 6.2; 2014: 6.6; 2015: 10.8; 2016: 10.1; 2017: 12.8; 2018Q3: 12.7
- Labor market flexibility and wages (Table 5, econometric ATT results based on propensity score matching, DHS 2013–17):
  - ATT (Part-time vs Full time), Kernel matching and nearest neighbour variants: ATT estimates include -3.537**, -2.942**, -3.192**, -2.616**, -2.948**, -2.861**, -2.873** (t-statistics in parentheses).
  - ATT (Self-employment vs Others): estimates include -8.950**, -7.138**, -6.532**, -5.674**, -5.666**, -5.736**, -5.792** (t-statistics in parentheses).
  - Observations: 1,406 for part-time comparisons, 1,458 for self-employment comparisons.
  - Note: ATT is the average treatment effect on the treated (impact of part-time or self-employment on hourly wage). ** indicates statistical significance at 5 percent levels.

*Sources: CBS, DNB, Haver Analytics, IMF staff calculations, EC, Eurostat, OECD, CPB, Ministry of Finance, IMF BoP database, IMF DOTS.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Risks to the economic outlook
- I. Rising protectionism and retreat from multilateralism.
  - Relative likelihood: High
  - Impact: High: "As a small highly open economy, the Netherlands is sensitive to global demand."
  - 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."
- II. Uncertainties surrounding fiscal policies in other euro area countries.
  - Relative likelihood: Medium
  - Risk description: "Expansionary fiscal plan in other euro area countries poses risks to debt sustainability and could trigger adverse market reactions. The risk of a confidence crisis is high, with the potential for adverse global and regional spillovers."
- III. Weaker-than-expected global growth.
  - Relative likelihood: Low/Medium
  - Components:
    - Weak growth in key advanced economies including euro area and U.S.
    - Slowdown in China

### Risks to the financial sector
- IV. Sharp tightening of global financial conditions.
  - Relative likelihood: High
  - Impact: Medium: "The Netherlands is still in the process of deleveraging and prone to boom-bust cycles."
  - Risk channels: higher debt service and refinancing risks; stress on households and vulnerable sovereigns; broad-based downturn.
  - Triggers: sharper-than-expected increase in U.S. interest rates (prompted by higher-than-expected inflation) or materialization of other risks.
  - 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."

*Foreign asset and liability position and trajectory*

### Background and projections
- NIIP:
  - "Net international investment position (NIIP) is estimated at 63 percent of GDP at the end of 2018 (with gross assets and liabilities totaling 1234 and 1162 percent of GDP, respectively), rising from almost balanced NIIP at end-2009."
- Net FDI:
  - "The largest component of the NIIP comes from the net FDI stock, which is estimated at 1,091 billion euro (141 percent of GDP) at the end of 2018."
- TARGET2:
  - "TARGET2 assets on the euro system is estimated at around 100 billion euro."
- Medium-term outlook:
  - "Over the medium term, the NIIP is expected to continue growing to above 100 percent of GDP, in line with projected sizable current account (CA) surpluses."

### Assessment and policy responses
- 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 2018 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 envisaged expansionary fiscal policy, progress in household and corporate rebalancing, and the strengthening of the banking system could support domestic demand and adequately contribute to reducing excess external imbalances."
  - "Higher wage growth, consistent with tighter labor market conditions, would however be needed to help rebalancing within the monetary union."
  - Structural reforms to reduce the CA surplus: supporting SMEs (expand direct support to R&D, invest in digitalization and lifelong learning, establish a business credit bureau) and pension reforms to reduce precautionary saving.

*Current account*

### Background
- "The CA surplus is estimated at 9.8 percent of GDP in 2018 (10 percent cyclically adjusted), driven by continued strong net exports."
- "The CA has been in surplus since 1981—a reflection of a positive goods and services balance."
- Drivers:
  - "Non-financial corporate net saving has been the main driver of the surpluses since 2000, with large corporate saving financing substantial FDI outflows."
  - "Households net saving is low reflecting high mandatory contributions to the second-pillar pension funds and high mortgage borrowing."
  - "The Netherlands’ status as a trade and financial center and natural gas exporter likely contributes to the strong structural position."

### Assessment (EBA and staff)
- EBA estimates:
  - "The EBA CA model estimates a preliminary CA norm of 3.4 percent of GDP and a CA gap of 6.6 percent of GDP in 2018, with an unexplained residual of 5.4 percent of GDP 1/."
- Staff assessment:
  - "Taking these factors into account, staff assesses the norm in a range of 1.4-5.4 percent of GDP, and a corresponding CA gap of 4.6-8.6 percent of GDP."
  - "The CA gap is expected to narrow moderately over the medium term, supported by continued strong domestic demand and expedited phasing-out of gas production."

### Key CA figures (as presented)
- Actual CA: 9.8
- Cycl. Adj. CA: 10
- EBA CA Norm: 3.4
- EBA CA Gap: 6.6
- Staff Adj.: 0.0
- Staff CA Gap: 6.6

*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 1.4 percent through November 2018, relative to the 2017 average."

### Assessment
- EBA REER models:
  - "Indicate a preliminary overvaluation between 1.3 percent (level model) and 13.8 percent (index model) in 2018, largely attributable to unexplained residuals."
- Staff view:
  - "The staff-assessed CA gap implies a REER undervaluation of 9.2 percent (elasticity of 0.73)."
  - "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; FX intervention and reserves*

### Flows and assessment
- 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. 2/"
- 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
- 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."

*Public Debt Sustainability Analysis (DSA) — key highlights*

### Baseline projections and indicators
- Nominal gross public debt (selected excerpt as presented): 62.2 57.1 54.6 51.7 49.3 46.5 43.9 41.4 38.9
- Sovereign spreads (noted labels): "EMBIG (bp) 3/8" and "5Y CDS (bp)13"
- Real GDP growth (selected years): 0.6 2.9 2.6 2.2 2.1 2.1 2.0 1.8 1.8
- Inflation (GDP deflator, in percent) (selected years): 0.9 1.2 1.8 2.2 1.8 1.8 1.9 2.0 2.1
- Nominal GDP growth (in percent) (selected years): 1.5 4.1 4.5 4.5 3.9 4.0 3.9 3.9 4.0
- Effective interest rate (in percent) (selected years): 3.1 1.9 1.7 2.3 2.2 1.4 1.3 1.4 1.3

### Contributions to change in gross public sector debt (selected figures)
- Cumulative change in gross public sector debt (projection period): -15.8
- Identified debt-creating flows (cumulative): -14.8
- Primary deficit (cumulative): -8.3
- Primary (noninterest) revenue and grants (selected series): 41.5 43.5 43.2 43.6 43.6 43.3 43.0 43.0 43.0   259.5 (cumulative label present)
- Primary (noninterest) expenditure (selected series): 43.0 41.3 41.5 42.0 42.2 41.9 41.7 41.7 41.7   251.3 (cumulative label present)
- Automatic debt dynamics (cumulative): -6.5
- Of which: real interest rate (selected series): 1.3 0.4 -0.1 0.0 0.2 -0.2 -0.3 -0.3 -0.3   -0.9 (cumulative label present)
- Of which: real GDP growth (selected series): -0.4 -1.7 -1.4 -1.2 -1.0 -1.0 -0.9 -0.8 -0.7   -5.6 (cumulative label present)
- Residual, including asset changes (cumulative): -1.0

### Alternative scenarios (headlines)
- Historical scenario, Constant Primary Balance scenario, and Contingent Liability Shock scenario are presented with differing assumptions for Real GDP growth, Inflation, Primary Balance, and Effective interest rate. (Detailed scenario tables and charts provided in the source.)

*Past IMF Policy Recommendations (IMF 2018 Article IV) and authorities’ responses*

### Fiscal policy
- Recommendation: "Use available fiscal space under the Stability and Growth Pact (SGP) rules for further growth-enhancing expenditures or tax cuts aimed at increasing labor force participation."
  - Authorities’ response: "The fiscal stance was expansionary in 2018, with the structural fiscal balance declining by about 1 percentage point of potential GDP compared to 2017. The 2019 budget plan includes further spending on the infrastructure, and education and research."
- Recommendation: "Phase out mortgage interest deductibility for households to reduce the current debt bias in the tax system."
  - Authorities’ response: "The mortgage interest deductibility is planned to be phased down by 3 percentage points per year, starting in 2020, until the basic rate of 36 percent is reached."

### Structural reforms
- Wages and labor market:
  - Recommendation: "Place more emphasis on increasing wages to better reflect domestic fundamentals."
  - Authorities’ response: "Wages growth remains subdued, mainly due to lower productivity growth."
- Pension system:
  - Recommendation: "The second pillar of the pension system should be overhauled to ensure more clarity for participants through setting up notional personal accounts while preserving some risk sharing and financial security at retirement."
  - Authorities’ response: "The planned reform of the pension system failed in November 2018, as different parties could not reach an agreement. However, the discussions will continue, and an agreement could be reached in the near future."

### Financial sector policies
- Housing market:
  - Recommendation: "Reform the housing market to rebalance housing supply and demand, and reduce household indebtedness."
  - Authorities’ response: "Measures to boost housing supply are contemplated, including by improving coordination among main stakeholders involved in various projects."
- Macroprudential measures:
  - Recommendation: "Tighten macroprudential measures to reduce households financial vulnerabilities"
  - Authorities’ response: "Tightening macroprudential policies (loan-to-value and debt-service-to-income limits) should go hand-in-hand with measures to boost housing supply, to avoid undermining housing affordability for younger households."
- Banking sector capitalization:
  - Recommendation: "Continued building capital buffers in the banking sector to prepare for likely new regulatory requirements."
  - Authorities’ response: "Banks capitalization has improved, and most of the largest Dutch banks will meet the new Basel III.5 requirements, if implemented."

*Italicized source attribution line:* _Source: IMF staff (Annex I, Annex II, Annex III and Annex IV as presented in the provided content)._

### Annex V. FSAP Recommendations

### Annex V. FSAP 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 together set up a working group that has set actions into motion to ensure an industry-wide approach to informing IO mortgagors about their estimated repayment shortfalls. Steps towards this goal will continue in 2019.
- 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 government has mentioned in its coalition agreement 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 Ministry of Finance has drafted, in close cooperation with the other members of the FSC, a legislative proposal to explicitly vest the FSC into the Banking Act. This provides the FSC with a clear legal basis to give advice and provide recommendations on issues related to financial stability. The legislative proposal is planned to be submitted to Parliament in the course of 2019.
- Accelerate the phase-out of MID and reduce the final tax rate to a neutral level.
  - Time: NT
  - Status: The government states that phasing down the mortgage interest deductibility will be accelerated from 0.5 to 3 percentage points annually starting in 2020 until the base tax rate level of 37.05% is reached in 2023. An evaluation of the tax treatment of owner occupied housing is scheduled for 2019.
- 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 maximum LTV-ratio was reduced to 100% in 2018. 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
- Further enhance supervisory oversight of loan classification and strengthen internal model validation by providing Joint Supervisory Teams more support from risk specialist divisions.
  - Time: I
  - 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 mortgage lenders are significantly loosening their underwriting standards.
- Ensure that reliable and complete data is available on a timely basis to support off-site supervision.
  - Time: NT
  - Status:
    - 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.
    - 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. The first new initiatives on Data Driven Supervision that DNB has taken have been implemented, aiming at supporting quality of data.
    - 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. DNB is also stimulating the usage of article 104 CRD to allows competent authorities to intervene an entity’s provisioning policy is not adequate. Regarding internal model validation: actions are currently in place 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: No mechanisms have been introduced to ensure pension participants receive financial advice. The required supervisory powers to allow for effective supervision of risks stemming from service providers of pension funds are being investigated.

### Securities Supervision and Regulation
- Broaden the supervisory authority of the AFM with regard to loan-based crowd-funding platforms.
  - Time: NT
  - Status: 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: The prompt public disclose of auditor changes or resignations is already sufficiently covered by existing rules and regulations. No actions currently foreseen to require additional public disclosure of auditor changes or resignations.

### 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. More generally, the staff resources devoted to ICE Clear Netherlands supervision have been expanded from 1 FTE to 3 FTE, bringing the total for CCP supervision to 6 FTE.
- EuroCCP to strengthen its review of its stress testing and margin models methodology and develop a comprehensive recovery plan.
  - Time: I
  - Status: EuroCCP has enhanced 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. Its margin model methodology has also been improved. Sensitivity analyses have been developed to examine how the parameters and assumptions affect the outcome of its stress tests. EuroCCP has developed a comprehensive recovery plan ahead of the EU legislation on CCP recovery and resolution, EuroCCP.

### 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: measures at the domestic level have focused on updating DNB own internal crisis management manual to align with the SRB crisis management manual. At the European level, the role and responsibilities of SRB, ECB and Dutch Authorities a managing systemic crisis are formalized in the SRB and DNB crisis management manuals, the Cooperation Framework (CoFra) and horizontal policy guidance.
    - Regarding legacy legal frameworks: a proposal has been put forward in the context of the legislative proposal for a resolution regime for insurance companies to rescind the ‘Emergency proceedings’ and transfer some of the powers of DNB to the administrator. This legislative proposal has been accepted by the parliament and is expected to be in force as of 1 January 2019, after ratification by the Senate.
- Allow the deposit guarantee scheme to finance deposit transfers in resolution and insolvency.
  - Time: NT
  - Status: Since 2017 it is possible to finance the gross amount of deposits that are transferred in resolution. 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.

*Annex V. FSAP Recommendations — IMF staff report excerpt*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1nldea2019001.pdf_