## _cr11142

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---

### Overview
- Recovery has commenced but is still frail; upturn fueled by strong exports.
- Inflation has remained muted but is now picking up because of rising oil prices.
- External competitiveness is adequate.
- Subdued continuation of the recovery is projected for 2011–12, with output remaining below potential and somewhat higher inflation.
- Risks appear tilted downwards and are primarily from external sources.
- The authorities broadly agreed with staff; their forecast is only slightly more optimistic.
- Consensus that housing market vulnerabilities must be addressed promptly; staff urged deeper reforms.

### Recent economic developments and outlook
- Real GDP fell by 4 percent in 2009.
- Growth of 1¾ percent in 2010; staff forecast real GDP to expand by 1½ percent in 2011 and 2012 (later revised to 1.9 percent for 2011 and 1.7 percent for 2012 in staff updates).
- Unemployment peaked at 4½ percent in 2010; unemployment anticipated to come down in 2011.
- Inflation: less than1 percent in 2010; recently about 2 percent; projections CPI (HICP) 2011 (Proj.) 2.3; 2012 (Proj.) 2.2.
- Wage growth about 1¼ percent in 2010.
- House prices: contracted by 5 percent between mid-2008 and mid-2009, steadied through late 2010, then resumed a slow downward drift.

### Financial sector soundness and reform priorities
- Banking sector indicators:
  - Banking sector CAR 13.9 percent as of end-2010 (comprised mostly of core Tier 1 capital).
  - Regulatory capital-to-risk-weighted assets (2009): 14.9.
  - Regulatory Tier I capital-to-risk-weighted assets (2009): 12.4.
  - NPL ratio less than 3 percent (as of June 2010).
  - Return on assets: 2009: -0.4; 2010: 0.0; 2011 (value shown): 0.3.
  - Banks’ assets (percent of GDP) in 2010: 382.8.
- Exit from policy support and restructuring:
  - Authorities ended access to the bank credit guarantee program at beginning of 2011.
  - AEGON, SNS Reaal and ING have paid back part of capital support provided in 2008–09.
  - State guarantee for ABN Amro’s mortgage portfolio terminated in October 2010; ABN Amro expected to complete merger with Fortis Bank Nederland by end-2011.
- FSAP follow-up and supervisory improvements needed:
  - Authorities concurred capital buffers appear adequate but progress toward meeting Basel III requirements is warranted.
  - Areas for improvement: rule-making authority and legal protection of supervisors; adequacy of data reporting requirements; resource limitations; crisis resolution framework.
  - Efforts underway to develop macro-prudential instruments, but further action is needed.
- FSAP update stress tests:
  - No bank has Tier 1 capital falling below 6 percent under CEBS methodology.
  - Under shocks twice the CEBS size, all banks remain above regulatory minimum of 4 percent tier 1 capital and the CEBS 6 percent.

### Housing market vulnerabilities and macro‑prudential instruments
- Household vulnerabilities and asset indicators:
  - Household debt over 270 percent of disposable income in 2010.
  - LTV of new mortgages exceeded 120 percent in 2010.
  - Liberal mortgage interest tax deductibility (MID) has contributed to larger mortgage sizes and proliferation of interest-only non-amortizing mortgages.
- DNB proposals for new mortgages:
  - Limit the maximum LTV ratio to 110 percent.
  - Require that 50 percent of principal be amortized before expiration.
- Staff recommendations on housing and macro-prudential policy:
  - Further tightening of LTV ratios and principal repayments (DNB plans welcome but insufficient).
  - Set greater risk weights on high LTV mortgages.
  - Give DNB power to impose further LTV restrictions if macro-prudential conditions signal need.
  - Issue a credible statement that MID will be gradually reduced to eliminate uncertainty.
- MID specifics:
  - The implicit subsidy to homeowners represents around 7 percent of total revenues.
  - Staff argued eliminating MID would benefit growth and the budget long run but should be implemented gradually; recommended a clear credible statement of gradual reduction.
  - Authorities noted coalition agreement constraints preventing near-term action on MID.

### Fiscal policy stance, sustainability, and contingency planning
- Short-term fiscal plan (authorities’ intent 2011–15):
  - Strong and distinctly front-loaded fiscal adjustment; measures envisaged to reduce headline deficit to 3¾ percent of GDP in 2011, and 1¼ percent of GDP by 2015 under staff projections.
  - Structural tightening envisaged: 1 percent of GDP for 2011 and 2012; about ¾ percent of GDP for 2013; ½ percent of GDP for 2014 and 2015.
- Staff position and contingency:
  - Welcome consolidation but advocate flexible handling of marked front-loading if the recovery stalls.
  - Automatic stabilizers should operate unhindered; develop contingency plans to moderate discretionary adjustment if recovery stalls.
  - Under existing rules, automatic stabilizers would be capped if the deficit exceeded the plan by 1 percent of GDP.
- Medium- and long-term sustainability:
  - General government (GG) headline balance worsened by six percentage points to a deficit of 5½ percent of GDP in 2009; 2010 deficit 5¼ percent of GDP (source sections vary slightly).
  - General government debt rose to almost 64 percent of GDP in 2010.
  - Staff estimates a fiscal sustainability gap of 7½ percent of GDP.
  - Aging-related spending expected to increase by nine percent of GDP over 2011–60 (pensions, health- and old-age care).
  - Reasonable calibration suggests adjustment of about ¾ percent of GDP per annum would be desirable and close the sustainability gap by 2021.
- Measures to achieve sustainability:
  - Limited scope to raise direct tax rates; focus on expenditure retrenchment and base broadening (for example curtailing MID) and shifting from labor to less distortionary consumption/property taxation.
  - Expenditure priorities: increase effective retirement age; restrain growth in demand for health- and long-term care.

### External sector, competitiveness, and spillovers
- Current account and trade:
  - Current account balance (percent of GDP) 2010 = 7.1; 2016 = 6.0; CA Norm = 2/4.6.
  - Current account surplus increased significantly to over 7 percent of GDP in 2010.
  - Exports of goods and nonfactor services (nominal 2009): 395.9 (In billions of euros); 69.2 (In percent of GDP).
  - Export growth expanded around 15½ percent during 2002–08.
- Export destinations:
  - 77 percent of Dutch exports are directed to European countries.
  - About 15 percent goes to emerging markets and developing countries.
  - Less than 3 percent of total exports go to Asia.
- Spillover and default simulations:
  - Fiscal consolidation in Netherlands’ trading partners likely to reduce GDP growth by close to ½ percentage points in 2012.
  - Fiscal consolidation in Germany, France, the United States, and the UK accounts for 78 percent of adjustment spillovers to the Netherlands.
  - A default on 10 percent of international claims on the US could generate a loss of 3.1 percent of GDP for Dutch lenders; corresponding values for the UK, Germany, and Spain are 1.6, 1, and 0.9 percent of GDP, respectively.
  - Claims abroad decreased from 315 percent of GDP in 2007 to 160 percent in mid-2010.

### Macro‑financial linkages and credit conditions
- Staff estimates cumulative contribution of deteriorating financial conditions from 2008–09 to GDP growth at 2½–3 percentage points (Financial Conditions Index approach).
- A credit crunch peaked at an estimated 6 percent in 2009Q2 as credit supply fell faster than demand.
- Excess demand for credit appears to be over; credit supply recovered with improved access to capital and increased bond market financing for large corporations.
- Household sector loans to total loans (2009): 43.4.

### Pensions, insurance, and crisis resolution
- Pension funds:
  - Average coverage ratio of pension funds dropped under 95 percent in Q3 of 2010 and has since recovered to just above the statutory minimum of 105 percent.
  - DNB ordered preparation of recovery plans for several pension funds; proposals to reassess benefits face difficulties.
  - Authorities agree reducing retirement benefits (lowering replacement rate or raising retirement age) is required to re-establish solvency; increasing contributions not considered desirable.
- Insurance sector:
  - Average solvency ratios of life insurers have decreased significantly; profitability threatened by collapse in sales of individual life policies in 2009.
- Crisis management and Deposit Guarantee Scheme recommendations:
  - Reform DGS so it is (i) ex ante funded, (ii) authorized to fund bank resolution operations, and (iii) enjoys depositor preference.
  - Strengthen crisis management by shifting decision-making power from the Judiciary to DNB in bank resolution and specifying roles of MoF and DNB.
  - Improve official financial support framework by establishing a standing budgetary authorization for Government to fund solvency support that avoids moral hazard.
  - Improve bank resolution framework: establish a single regime for resolving banks under official control and provide mechanisms for rapid transfer of deposits and assets.

### Structural reforms and labor market measures
- Structural reform needs:
  - Raise labor force participation and productivity to offset demographic pressures and facilitate fiscal consolidation.
  - Participation of the elderly relatively low; effective average retirement age close to 4 years below statutory rate of 65 years.
  - Authorities considering raising statutory retirement age to 66 (previously envisaged to 67) and possible linkage of retirement age to life expectancy.
  - Policies to encourage greater female labor supply and reduce disincentives to longer working hours.
- Model-based estimated impacts (OECD source, preserved values):
  - Statutory retirement age + 1 year → + 0.3 percent GDP per capita
  - Unemployment benefits, replacement rate + 10 percentage points → + 3 percent GDP per capita
  - Business R&D + 1 percent → + 0.13 percent TFP growth
  - Public R&D + 1 percent → + 0.17 percent TFP growth
  - Investment in traffic infrastructure - 10 percent congestion → + 0.22 percent GDP

### Policy recommendations and contingency triggers
- Near-term: balance supporting activity and preventing budget deterioration; recommend relatively gradual pace of consolidation to avoid jeopardizing upturn (¶s24–27).
- If recovery stalls:
  - Allow automatic stabilizers to operate freely (recommend excluding unemployment benefits from expenditure ceilings).
  - Develop contingency plans to moderate discretionary adjustment; triggers for easing: (i) domestic growth falters markedly below envisaged rates; or (ii) high frequency indicators and adverse international financial developments indicate recovery is coming to a standstill.
- Financial sector vigilance:
  - Proactive efforts to raise capital toward Basel III levels, restraint on dividend payments, and maintenance of strong capital and liquidity buffers.
  - Intensify supervisory intrusiveness, thematic inspections, better data and top-down stress testing capabilities.
- Housing market:
  - Further tighten LTV ratios and minimum principal repayments; set greater risk weights on high LTV mortgages; reduce MID over time with a credible announcement; reform private rental and social housing sectors and cut house sales tax.
- Fiscal sustainability:
  - Continue consolidation beyond 2015; calibration of about ¾ percent of GDP per annum desirable to close sustainability gap by 2021.
  - Emphasize expenditure-based measures to address aging (increase retirement age, restrain health and long-term care cost growth) and base-broadening revenue measures (limit MID).

### Key statistics (preserved exactly as in source)
- Real GDP fell by 4 percent in 2009.
- Growth of 1¾ percent in 2010.
- Staff forecast real GDP to expand by 1½ percent in 2011 and 2012 (later staff revisions: 2011 = 1.9 percent; 2012 = 1.7 percent).
- Unemployment peaked at 4½ percent in 2010.
- Inflation at less than1 percent in 2010; recently about 2 percent.
- Wage growth about 1¼ percent in 2010.
- Banking sector CAR 13.9 percent as of end-2010.
- NPL ratio less than 3 percent (as of June 2010).
- Foreign loans to total loans fell from 71 percent (pre-crisis) to 46 percent (end-2010).
- Household debt over 270 percent of disposable income in 2010.
- LTV of new mortgages exceeded 120 percent in 2010.
- Pension fund coverage ratio dropped under 95 percent in Q3 of 2010 and recovered to just above 105 percent (statutory minimum).
- Current account balance (percent of GDP) 2010 = 7.1; 2016 = 6.0; CA Norm = 2/4.6.
- Claims abroad decreased from 315 percent of GDP in 2007 to 160 percent in mid-2010.
- Staff estimates fiscal sustainability gap of 7½ percent of GDP.
- Output permanent decline of 6¾ percent by 2015 (when the output gap closes).
- Projection: potential growth expected to rise to 1¾ percent over the medium term.

*IMF staff summary of CR11142 content unit.*

### EXECUTIVE SUMMARY

### _cr11142 - EXECUTIVE SUMMARY

### Overview
- Recovery has commenced but is still frail; upturn fueled by strong exports.
- Inflation has remained muted but is now picking up because of rising oil prices.
- External competitiveness is adequate.
- Subdued continuation of the recovery is projected for 2011–12, with output remaining below potential and somewhat higher inflation.
- Risks appear tilted downwards and are primarily from external sources.
- The authorities broadly agreed with staff; their forecast is only slightly more optimistic.
- Consensus that housing market vulnerabilities must be addressed promptly; staff urged deeper reforms.

### Recent economic developments and outlook
- The Netherlands emerged from a deep recession in mid-2009; real GDP fell by 4 percent overall in 2009.
- Growth in 2010 was 1¾ percent, stimulated by recovery of international trade and restocking.
- Unemployment peaked in 2010 at 4½ percent.
- Inflation fell sharply in mid-2009 and stayed low, at less than1 percent in 2010; in recent months inflation has risen sharply to about 2 percent.
- Wage growth contracted to about 1¼ percent in 2010.
- Household vulnerabilities and asset indicators:
  - Household debt rose to over 270 percent of disposable income in 2010.
  - Loan-to-value (LTV) ratio of new mortgages exceeded 120 percent in 2010.
  - Liberal mortgage interest tax deductibility (MID) has contributed to larger mortgage sizes and proliferation of interest-only non-amortizing mortgages.
- Pension and insurance sector:
  - Average coverage ratio of pension funds dropped under 95 percent in Q3 of 2010 and has since recovered to just above the statutory minimum of 105 percent.
  - Average solvency ratios of life insurers have decreased significantly; profitability threatened by collapse in sales of individual life policies in 2009.

### Financial sector soundness and reform priorities
- Banking sector indicators:
  - Banking sector capital adequacy ratio (CAR) stood at 13.9 percent as of end-2010, comprised mostly of core Tier 1 capital.
  - Nonperforming loan (NPL) ratio remained at manageable levels (less than 3 percent of total loans) as of June 2010.
  - Bank profitability recovered slightly but remains weak; modest operating profit in 2009–10.
  - Foreign exposure (foreign loans to total loans) fell from 71 percent pre-crisis to 46 percent by end-2010.
- Exit from policy support and restructuring:
  - At beginning of 2011, authorities ended access to the bank credit guarantee program.
  - AEGON, SNS Reaal and ING have paid back part of capital support provided in 2008–09.
  - State guarantee for ABN Amro’s mortgage portfolio terminated in October 2010; ABN Amro expected to complete merger with Fortis Bank Nederland by end-2011.
- FSAP follow-up and supervisory improvements needed:
  - Authorities concurred bank capital buffers appear adequate but progress toward meeting Basel III requirements is warranted.
  - Areas for improvement: rule-making authority and legal protection of supervisors; adequacy of data reporting requirements; resource limitations; crisis resolution framework.
  - Efforts underway to develop macro-prudential instruments, but further action is needed.

### Housing market vulnerabilities — recommendations
- Authorities’ plans to limit the maximum LTV ratio and impose minimum principal repayments are positive.
- Staff recommendations:
  - Further tightening of LTV ratios and principal repayments.
  - Set greater risk weights on high LTV mortgages.
  - Issue a credible statement that mortgage interest deductibility (MID) will be gradually reduced to eliminate uncertainty.
- Authorities noted a coalition agreement prevented action on MID in the near future.

### Fiscal policy stance and recommendations
- Authorities agreed flexible implementation of planned fiscal adjustment is desirable, but only for very severe shocks to the recovery.
- Staff position:
  - If the recovery stalls, automatic stabilizers should operate unhindered and contingency plans should be developed to moderate discretionary adjustment.
  - Discretionary action would only be justified by clear danger of another major recession.
  - Under existing rules, automatic stabilizers would be capped if the deficit exceeded the plan by 1 percent of GDP.
- Officials considered automatic stabilizers on revenues to be sufficiently large.
- Agreement that consolidation will need to continue beyond 2015 to ensure fiscal sustainability, including reassessment of pension fund benefits.

### External vulnerabilities and spillovers
- Export concentration and exposure:
  - 77 percent of Dutch exports are directed to European countries.
  - About 15 percent goes to emerging markets and developing countries.
  - Less than 3 percent of total exports go to Asia.
- Simulation results on fiscal spillovers:
  - Fiscal consolidation in the Netherlands’ trading partners is likely to reduce GDP growth by close to ½ percentage points in 2012.
  - Fiscal consolidation in Germany, France, the United States, and the UK accounts for 78 percent of the adjustment spillovers to the Netherlands.
- International banking exposures and default simulations (selected figures from Box 1):
  - A default on 10 percent of international claims on the US could generate a loss of 3.1 percent of GDP for Dutch lenders.
  - Corresponding values for the UK, Germany, and Spain are 1.6, 1, and 0.9 percent of GDP, respectively.
  - Claims abroad decreased from 315 percent of GDP in 2007 to 160 percent in mid-2010, reducing potential default losses.

### Macro-financial linkages and credit conditions
- Staff estimates cumulative contribution of deteriorating financial conditions from 2008–09 to GDP growth at 2½–3 percentage points (Financial Conditions Index approach).
- A credit crunch peaked at an estimated 6 percent in 2009Q2 as credit supply fell faster than demand.
- Excess demand for credit appears to be over; credit supply recovered with improved access to capital and increased bond market financing for large corporations.

### Structural reforms
- Authorities concurred structural reforms would alleviate adverse impacts of the crisis and population aging on growth.
- Concrete new initiatives, however, appear limited.

### Key statistics (preserved exactly as in source)
- Real GDP fell by 4 percent in 2009.
- Growth of 1¾ percent in 2010.
- Unemployment peaked at 4½ percent in 2010.
- Inflation at less than1 percent in 2010; recently about 2 percent.
- Wage growth about 1¼ percent in 2010.
- Banking sector CAR 13.9 percent as of end-2010.
- NPL ratio less than 3 percent (as of June 2010).
- Foreign loans to total loans fell from 71 percent (pre-crisis) to 46 percent (end-2010).
- Household debt over 270 percent of disposable income in 2010.
- LTV of new mortgages exceeded 120 percent in 2010.
- Pension fund coverage ratio dropped under 95 percent in Q3 of 2010 and recovered to just above 105 percent (statutory minimum).

*Source: EXECUTIVE SUMMARY, _cr11142 - EXECUTIVE SUMMARY*

### 9.      Vulnerability to a severe contraction of real estate prices is of medium intensity.

### 9.      Vulnerability to a severe contraction of real estate prices is of medium intensity.

### Real estate market assessment
- House prices contracted by 5 percent between mid-2008 and mid-2009, steadied through late 2010, and recently resumed a slow downward drift amid indications of increased unsold homes.
- Simple indicators of affordability have improved and stabilized (AN4) and remain comparatively high.
- Econometric models show few signs of overvaluation, consistent with relatively modest house price rises compared with other euro area economies.
- Limited land availability reduces downside risks.
- Commercial real estate prices fell significantly during the crisis but are stabilizing (Figure 10).

### Corporate sector vulnerabilities
- Dutch firms entered the crisis with robust finances but experienced a sharp decline in profitability and remain exposed to credit tightening.
- The number of bankruptcies is still large, though recently declining.
- Credit growth for nonfinancial corporations has decelerated markedly but remains positive (Box 2).
- Given comparatively high dependence on bank lending, the Dutch business sector is quite susceptible to a drop in corporate loans or tight credit conditions.

### Fiscal position and public finances
- The general government (GG) headline balance worsened by six percentage points to a deficit of 5½ percent of GDP in 2009.
- In 2010, stronger-than-expected tax receipts helped reduce the deficit slightly to 5¼ percent of GDP.
- Discretionary measures over 2009–10 included: (i) expansion of unemployment alleviation schemes; (ii) infrastructure and housing investment; and (iii) transfers, subsidies, and tax allowances for businesses, especially small- and medium-sized ones.
- In structural terms, the robust balance worsened by 2¾ percentage points over 2009–10 compared to 2008, to a deficit of 5 percent.
- General government debt rose to almost 64 percent of GDP in 2010.
- Population aging remains a challenge for long-term fiscal sustainability.

### External competitiveness and current account
- The current account surplus increased significantly to over 7 percent of GDP in 2010 as exports regained momentum and factor income bounced back from 2009 lows.
- The surplus is expected to remain significant over the medium term.
- REER measures—using CPI and unit labor cost indices—have fallen significantly in the past year, reflecting euro depreciation and decelerating wage and price pressures.
- Relative profitability in manufacturing has been broadly stable (proxied by the ratio of the CPI-based REER to the ULCM-based REER).
- Export growth expanded around 15½ percent during 2002–08, exceeding the euro area average of less than 12 percent; re-exports (about half of Dutch exports by value) have been important in driving overall market share growth.
- CGER methodologies suggest the real exchange rate is broadly in equilibrium; the medium-term CA surplus is close to the CA norm.
- Estimates of Competitiveness Margin Using CGER Methodologies (level relative to equilibrium in percent; minus indicates undervaluation): Macroeconomic balance approach 0.8; External sustainability approach -9.7; Equilibrium real exchange rate approach -5.8.
- Memorandum items: Current account balance (percent of GDP) 2010 = 7.1; 2016 = 6.0; CA Norm = 2/4.6.

### Macro outlook and projections
- Staff forecast real GDP to expand by 1½ percent in 2011 and 2012.
- Output will remain below potential, though the output gap will continue to decline.
- Private consumption and construction are expected to remain anemic; investment in machinery is predicted to grow robustly, stimulated by revival in global trade.
- Unemployment rate is anticipated to come down in 2011, while inflation is to stay somewhat elevated.
- Potential growth is expected to rise to 1¾ percent over the medium term, around the pre-crisis rate.
- A permanent decline in the level of potential output of 6¾ percent by 2015 (AN5) is expected, when the output gap closes.
- Long-term pressures: low and slowing population growth together with population aging will squeeze working-age cohorts and hold back trend productivity.

### Risks to the outlook
- Risks appear tilted downwards with heightened uncertainties; primary exposures are external given the Netherlands’ extensive trade and financial links.
- Downside risks include:
  - Heightened vulnerability to disruptions in sovereign debt markets and simultaneous fiscal tightening in several advanced European countries.
  - Lack of progress in resolving global imbalances, constraining global trade and export demand.
  - Unprecedented sovereign financing needs globally over a 12–24 month horizon could be highly disruptive, raising risk premia and impacting government debt finances and bank funding costs.
  - Fiscal consolidation typically has a sizable contractionary impact on growth; simultaneous tightening across Europe could produce sharper contraction than current estimates.
- Upside risks include:
  - Larger-than-anticipated impact of quantitative easing in the US, not offset by US dollar depreciation, and stronger-than-expected growth in emerging markets.
  - Further depreciation of the euro could boost Dutch exports.
- The probability of downside occurrences is deemed prevalent—with uncommonly pronounced dispersion.

### Policy discussions and recommendations
- Overarching objective: secure the recovery, mitigate lingering vulnerabilities, and start addressing long-term sustainability issues.
- Near-term fiscal policy: with monetary policy at its limits, fiscal policy must balance supporting economic activity and preventing further budget deterioration. A relatively gradual pace of consolidation is recommended to avoid jeopardizing the upturn (¶s24–27).
- Medium- and long-term policies:
  - Strengthen financial stability, ensure fiscal sustainability, and advance structural reforms to boost potential output.
  - Financial sector measures include:
    - Proactive efforts to raise capital to the levels envisaged under Basel III (¶17).
    - Implementation of recovery plans for pension funds together with a redefinition of retirement benefits (¶18).
    - Strengthening supervisory standards, including redefinition of rulemaking authority, legal protections, and data reporting (¶19).
    - Reinforcing macro‑prudential supervision (¶s20–21).
    - Refining crisis resolution procedures and dispositions (¶22).
  - Further fiscal adjustment beyond medium-term objectives is required to achieve long-term sustainability (¶s28–32).
  - Structural reforms to boost labor force participation and productivity are needed to offset demographic pressures and facilitate fiscal consolidation (¶s33–34).

### Financial stability: bank capitalization, pensions, and supervision
- Bank capitalization:
  - FSAP update stress tests for seven banks (more than 80 percent of the sector) indicated no bank has Tier 1 capital falling below 6 percent under CEBS methodology.
  - Under a more extreme scenario with shocks twice the CEBS size, all banks remain above the current regulatory minimum of 4 percent tier 1 capital and the CEBS 6 percent.
  - Banks appear in a good position to meet Basel III requirements, but proactive actions—restraint on dividend payments and raising additional capital—are desirable given comparatively high leverage ratios.
  - Strong capital and liquidity buffers will facilitate bank restructuring pursuant to EC competition directives.
- Public capital injection into the financial sector (September 2008–December 2009) shown in charts (values preserved in source).
- Pension funds:
  - DNB ordered preparation of recovery plans for several pension funds; proposals to reassess benefits face difficulties.
  - With interest rates not expected to return to pre-crisis levels and improved longevity, pension fund coverage ratios have declined markedly.
  - Authorities agree that reducing retirement benefits (lowering replacement rate or raising retirement age) is required to re-establish solvency; increasing contributions is not considered desirable.
  - Tripartite discussions on ensuring solvency have been laborious and slow-moving; legal opinions supporting grandfathering have complicated proposals.
  - Staff stressed that modifications in risk-sharing arrangements need transparent communication to ensure social acceptance and suitable changes in household saving.
- Supervision and regulation:
  - Supervisory standards are generally high; FSAP update identified areas for improvement.
  - Rulemaking authority is limited and should be enhanced; supervisors can issue sector-wide rules only in areas explicitly mentioned in law.
  - DNB is legally restricted from imposing broadly applicable intra-group exposure limits to insurance groups and has constrained authority over financial holding companies; limited powers to impose resolution tools.
  - Concerns about adequacy of legal protections may have induced DNB to rely excessively on moral suasion; FSAP recommends legal immunity for supervisors except in cases of gross negligence or willful misconduct.
  - Data routinely reported to supervisors lack sufficient granularity due to initiatives to reduce administrative burdens; supervisors are reviewing needed data and addressing deficiencies.
  - Authorities plan greater supervisory intrusiveness, including thematic inspections; FSAP emphasizes comprehensive oversight via on-site inspections and detailed off-site data. DNB should enhance understanding of Dutch financial institutions abroad and may need additional resources.
- The Ministry of Finance considers the present division between rule-making and implementation powers and the Minister's right to take back delegated powers consistent with supervisory independence and democratic accountability.

*Source: _cr11142 - 9.      Vulnerability to a severe contraction of real estate prices is of medium intensity.*

### 20.      The authorities are developing macro-prudential instruments to mitigate risks of

### 20.      The authorities are developing macro-prudential instruments to mitigate risks of

### Macro-prudential instruments and housing-market measures
- Work is underway to develop a comprehensive toolkit for macro-prudential supervision; instruments relating to the housing market will be key.
- For new mortgages, DNB intends to:
  - limit the maximum LTV ratio to 110 percent;
  - require that 50 percent of principal be amortized before expiration.
- Staff observations and recommendations:
  - Welcomed DNB’s plans as a useful first step, but noted these would permit new mortgages with LTV ratios of 110 percent indefinitely, a clear anomaly.
  - Encouraged additional measures, including:
    - tighter conditions (closer to international practice) on LTV ratios and minimum principal repayments;
    - setting greater risk weights on high LTV mortgages;
    - giving DNB the power to impose further LTV restrictions if macro-prudential conditions signal this need.
- MID (mortgage interest deductibility) considerations:
  - Authorities concurred MID’s generosity fuels housing market risks by inflating housing prices and balance sheets; distributional concerns exist as MID favors wealthier borrowers disproportionately.
  - Staff recommended lowering MID gradually (for example through capping it in nominal terms) and making a clear statement soon to eliminate uncertainty.
  - Broader regulatory reform recommended to lessen distortions in the private rental market and in social housing, together with reducing the house sales tax (described as high in international comparison).
  - Authorities noted coalition agreement constraints preventing near-term action on MID and concerns about impact on housing prices.

### Supervisory framework and stress testing
- FSAP update recommendations:
  - Broad supervisory discretion and enhanced legal protections should extend to macro-prudential instruments.
  - It would be helpful to assign DNB an explicit objective of ensuring financial stability.
  - DNB should further develop capability and data for top-down stress testing.

### Crisis resolution and Deposit Guarantee Scheme
- Crisis resolution arrangements proved effective during the crisis; authorities are considering steps to strengthen them further.
- Authorities announced plans for upgrading the Deposit Guarantee Scheme, aligned with FSAP update recommendations and welcomed by staff.
- Proposals on crisis intervention tools have been circulated for discussion; broadly consistent with FSAP advice.

Key FSAP Update Recommendations on Crisis Management and Bank Resolution (summarized)
- Deposit Guarantee Scheme:
  - Reform so that it is: (i) ex ante funded, (ii) authorized to fund bank resolution operations, and (iii) enjoys depositor preference.
- Crisis Management:
  - Strengthen structure by: (i) shifting decision-making power from the Judiciary to DNB in the context of bank resolution, and (ii) specifying more clearly the roles of the Ministry of Finance and DNB in bank resolution.
- Official Financial Support:
  - Improve system by establishing a standing budgetary authorization for the Government to fund solvency support in a manner that avoids risk of moral hazard.
- Bank Resolution:
  - Enhance framework:
    - Going concern: (i) establish a single regime for resolving banks under official control; (ii) set adequate objectives (including financial stability), tasks and powers for the administrators.
    - Gone concern: (i) introduce a consultative, if not steering, role for DNB and the AFM throughout the resolution process to ensure financial stability concerns are addressed; (ii) provide mechanisms that support the rapid simultaneous transfer of deposits and assets, and other essential functions (e.g., payment services).

### Short-Term Fiscal Policy (2011–15)
- Authorities’ plan:
  - Strong and distinctly front-loaded fiscal adjustment over 2011–15.
  - Under staff’s macro projections, measures envisaged by the new government will reduce the headline deficit to 3¾ percent of GDP in 2011, and 1¼ percent of GDP by 2015.
  - Structural tightening envisaged:
    - 1 percent of GDP for 2011 and 2012;
    - about ¾ percent of GDP for 2013;
    - ½ percent of GDP for 2014 and 2015.
  - The adjustment in 2011 is roughly equally split between revenue increases (with a significant hike in social contributions partly offset by lower taxes) and broad-based expenditure cuts.
  - Authorities’ intent: protect the AAA rating of Dutch sovereign bonds; acceleration opportune in light of the domestic political cycle.
- Staff view and risks:
  - Staff welcomed commitment to consolidation but advocated flexible handling of marked front-loading in case of a serious slowdown.
  - Historical experience indicates negative demand effects from consolidation are likely higher when monetary policy cannot accommodate tightening.
  - Staff analysis suggests spillovers to the Netherlands from concomitant fiscal retrenchment in Europe are sizable (AN2).
  - A significant downside risk: contractionary impact of simultaneous fiscal tightening in several advanced European countries could be sharper than currently estimated.
  - Despite sustainability concerns, no immediate fiscal credibility issue was identified; debt is lower than in many advanced economies.
  - Recommendation: allow flexibility in implementation and consider substituting part of headline tightening with structural measures (such as increasing further the retirement age) that improve fiscal sustainability but have modest short-run impact on government balance.

### Fiscal stance, automatic stabilizers, and contingency planning
- Staff recommended:
  - Allow automatic stabilizers to operate freely; this would require excluding unemployment benefits from expenditure ceilings.
  - Develop contingency plans to moderate adjustment if the recovery stalls; unexpected serious setbacks that cause the headline deficit to rise substantially above targeted levels should not trigger further discretionary retrenchment.
  - Contingency triggers for prompt easing: (i) domestic growth falters markedly below envisaged rates; or (ii) high frequency indicators and adverse developments in international financial markets and economic activity abroad suggest the recovery is coming to a standstill.
- Authorities’ position:
  - Agreed that only a very severe shock would warrant relaxation of fiscal plans; viewed automatic stabilizers on revenues as sufficiently large.
  - Noted under existing fiscal rules, operation of automatic stabilizers would be capped if the deficit exceeded the plan by 1 percent of GDP.
  - Concerned that public articulation of contingency plans could lead to pressure for more spending even if recovery continues.

### Medium-Term Fiscal Policy and Sustainability
- Long-term position and sustainability gap:
  - The long-term GG position remains weak (AN7 and AN8), reflecting in part the impact of the crisis.
  - Staff estimates a fiscal sustainability gap of 7½ percent of GDP.
  - Crisis-related factors inflating the sustainability gap include:
    - marked structural fiscal relaxation in 2009–10;
    - large operations in support of the financial sector, which added to public debt;
    - weaker potential output.
  - Aging-related spending expected to increase by nine percent of GDP over 2011–60 (pensions, health- and old-age care).
- Path for consolidation:
  - Agreement that consolidation will need to continue beyond 2015.
  - Reasonable calibration suggests adjustment of about ¾ percent of GDP per annum would be desirable and close the sustainability gap by 2021.
  - Authorities aim for a more frontloaded consolidation in 2011–12, with a slower pace thereafter; staff urged that supporting measures beyond 2011 be adopted promptly.

### Measures to achieve sustainability
- Revenue-side constraints:
  - Consensus that scope for increasing the tax burden is limited (Figure 11); expenditure retrenchment must play a key role.
  - Direct tax rates have little upward room given international competition and relatively large tax wedges on earned income.
  - Mission advised revenue-side focus on base broadening (for example curtailing generosity of MID) and a shift from labor to less distortionary taxation of consumption and property, including by reducing the number of items on reduced VAT rates.
- Expenditure-side priorities:
  - Priority should be reducing the impact of aging on fiscal expenditures through increases in the effective retirement age and measures to restrain growth in demand for health- and long-term care (Table 7).
- Staff concerns:
  - While authorities’ focus on outlays was apt, staff expressed concern at the limited structural content of the correction.
  - Deep broad-ranging cuts over 2011–15 envisage restraining growth of public wages, curtailing the size of the civil service, slowing down health care costs, and reducing grants and transfers.
  - Staff stressed ambitious fiscal objectives through 2015 should not come at the expense of progress in structural reforms with beneficial budgetary implications, which appear to have limited prominence in the new government’s program.

_Italic: IMF staff summary of CR11142 content unit._

### 31.      Staff argued that eliminating the costly MID scheme would benefit both growth

### _cr11142 - 31.      Staff argued that eliminating the costly MID scheme would benefit both growth

### Mortgage Interest Deduction (MID) reform
- The implicit subsidy to homeowners represents around 7 percent of total revenues.
- Staff argued that eliminating the costly MID scheme would benefit both growth and the budget in the long run, but should be implemented gradually.
- Phasing out the deduction could have considerable long-run benefits.
- A gradual reduction that allows households time to adjust and does not affect existing mortgage contracts greatly is desirable.
- To realize the benefits of the reform quickly, a credible commitment to eventual elimination or radical curtailment of the subsidy is needed (AN9 and ¶20).
- Despite much public discussion, the momentum to tighten the MID regime appears to have lost steam.
- Recommendation: A clear and credible statement that MID will be gradually reduced should be made to eliminate uncertainty and minimize the possible impact on the housing market. This should be accompanied by deep regulatory reform of the housing sector and a cut of the house sales tax.

### Structural reforms to support growth and labor supply
- Demographic context: stagnating population amid aging pressures—policies need to encourage greater work effort to maintain potential growth (Table 8).
- Labor market and retirement:
  - The participation rate of the elderly is relatively low by international standards and the effective average retirement age is close to 4 years below the statutory rate of 65 years.
  - Hours worked by women are low.
  - Officials are considering steps to:
    - increase the minimum age—together with steeper penalties—for early retirement; and
    - further curtail disincentives in taxation or social benefits to longer working hours by females.
  - It had been envisaged to lift the statutory retirement age by two years to 67, but this has now been reduced to 66.
  - The authorities noted that a majority in parliament—not coinciding with that supporting the government—could vote for linking the retirement age to life expectancy, a measure in line with staff recommendations.
- Unemployment benefits:
  - Unemployment benefits are fairly generous and may discourage job search, lifting the duration of unemployment.
  - Lowering the benefits and limiting their length, however, are not included in the government program.
- R&D and congestion:
  - Gross domestic expenditure on R&D, public and private, is fairly modest.
  - More support for R&D could fuel productivity through innovation and improve incentives for higher education by building up demand for top-skilled workers.
  - Various estimates put the Netherlands among the countries with the highest costs of congestion.
  - Stepped up investment in roads and railways, relaxation of strict zoning regulations, road pricing, and opening the transportation sector to more competition could alleviate congestion and spur productivity.
  - The authorities are considering options in these areas; their Europe 2020 plan focuses on increasing efficiencies in current arrangements.

- Model-based estimates of impacts of relevant structural policy reforms on growth (Source: OECD)
  - Statutory retirement age + 1 year → + 0.3 percent GDP per capita
  - Unemployment benefits, replacement rate + 10 percentage points → + 3 percent GDP per capita
  - Business R&D + 1 percent → + 0.13 percent TFP growth
  - Public R&D + 1 percent → + 0.17 percent TFP growth
  - Investment in traffic infrastructure - 10 percent congestion → + 0.22 percent GDP
  - Note: Assessments of the impact of structural reform on growth or GDP should be taken with great caution.

### Staff appraisal — macroeconomic outlook and risks
- Growth and inflation:
  - The Dutch economy is on the mend, but the recovery still frail.
  - The upturn has been fueled by strong exports.
  - Unemployment has risen only modestly and is the lowest in Europe.
  - With output still well below potential, inflation has remained subdued, even if it is now picking up because of rising oil and commodity prices.
  - A subdued continuation of the recovery is projected for 2011–12, with output remaining below potential and modest inflation.
  - Risks—primarily from external sources—appear tilted downwards.
  - The crisis has led to a permanent loss of output aggravating the problems posed by aging, not least to fiscal sustainability.

### Financial sector vigilance and housing market vulnerabilities
- Banking sector:
  - Lingering risks require continued vigilance on bank capital and liquidity, given increasingly robust regulatory requirements.
  - FSAP update stress tests outcomes and spillovers are benign, with banks’ capital and liquidity positions able to withstand even quite severe scenarios.
  - With relatively high leverage ratios and tighter capital standards to be phased in under Basel III, proactive measures are desirable to prevent emergence of any capital or liquidity shortcomings.
  - Such steps will also smooth the phasing out of government equity from intervened banks and bank restructuring.
- Housing market and macroprudential measures:
  - It is crucial to address promptly housing market vulnerabilities and distortions due to heavy exposure of the financial system to the housing market.
  - Authorities’ plans to limit the maximum LTV ratio and impose a fractional minimum principal repayment are welcome, but insufficient.
  - Further tightening of LTV ratios and minimum principal repayments, setting greater risk weights on high LTV mortgages, and giving DNB the authority to impose further LTV restrictions if required would be useful.

### Supervision, crisis resolution, and insurance sector
- Despite improved supervisory practices, effectiveness of supervision and crisis resolution mechanisms can be further buttressed.
- Concerns include rule-making authority and legal protections of supervisors; adequacy of data reporting requirements; banking supervision culture; resource limitations; and the crisis resolution framework.
- Recommendations:
  - DNB and the AFM should be provided with broad supervisory discretion over macro-prudential instruments, in line with their respective responsibilities.
  - Create a single regime for resolving banks under official control.
  - Intensify and coordinate supervision of large international financial institutions and improve reporting requirements.
- The insurance sector warrants careful monitoring, given its tarnished reputation and the financial pressures under which it is operating.

### Pensions, fiscal adjustment, and aging-related policy priorities
- Pensions:
  - To restore pension fund viability, second-pillar pension benefits should be recalibrated.
  - Persistently low interest rates and rising longevity have put pressure on the coverage ratios of many funds.
  - Lower retirement benefits (including through further raises of the retirement age) or higher contributions are thus required.
  - The public should be made fully aware of risk-sharing modifications to induce fitting changes in saving behavior.
- Fiscal policy and sustainability:
  - The planned strong fiscal adjustment should be implemented flexibly in case of a sharp and prolonged slowdown to prevent harming the recovery.
  - It remains appropriate to close the fiscal sustainability gap within 10–15 years.
  - The front-loaded adjustment is expected to benefit fiscal sustainability considerably, with potential positive effects on consumer and investor confidence on the long-run prospects of the economy.
  - If the recovery were to stall, automatic stabilizers ought to function unhindered and contingency plans developed to moderate the adjustment.
- Policy mix to address aging:
  - Measures that directly reduce the impact of aging on public expenditures or broaden the tax base must be a key plank of adjustment.
  - Expenditure-based consolidations have generally been more successful than tax-centered ones and there is not much scope to raise tax rates.
  - Revenues could only be augmented by expanding the base—for example by limiting MID, a large tax expenditure—and a further move away from labor to less distortionary indirect taxation.
  - Concerning fiscal outlays, the priority is to increase the effective retirement age and to restrain growth in demand for and costs of health- and long-term care, also by raising co-payments and user fees.
  - Renewed emphasis should be placed on structural fiscal reform efforts.

*Source: IMF staff report content provided in the input PDF excerpt.*

### 42.      It is recommended that the next Article IV consultation be held on the standard

### It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Article IV timing and Fund relations
- Recommendation: next Article IV consultation on the standard 12-month cycle.
- Article IV discussions for 2011 were held in Amsterdam and The Hague from March 17 to 28, 2011.
- IMF membership and resources:
  - Quota: 5,162.40 (SDR Million; Percent of Quota 100.00)
  - Fund holdings of currency: 3,728.73 (SDR Million; Percent of Quota 72.23)
  - Reserve position in Fund: 1,433.68 (SDR Million; Percent of Quota 27.77)
  - Net cumulative SDR allocation: 4,836.63 (SDR Million; Percent of Allocation 100.00)
  - SDR holdings: 4,865.60 (SDR Million; Percent of Allocation 100.60)
- Exchange rate arrangements: currency is the euro, which floats freely and independently.
- Projected obligations to the Fund (Charges/interest): 0.06 (each year 2011–2015, SDR million).

### Demographics and health indicators
- Land area (2007): 41.5 thousand sq. km.
- Population (2006): 16.3 million
- Life expectancy at birth (2006): 76.4 (male), 81.7 (female)
- Fertility rate (2006): 1.7 children/woman
- Infant mortality rate (2006): 4.96 per 1,000 live births
- Population per sq. km. of land area (2006): 483 persons

### Key macroeconomic aggregates (2009; nominal)
- Private consumption: 262.6 (In billions of euros); 45.9 (In percent of GDP)
- Public consumption: 162.7; 28.4
- Gross fixed investment: 108.9; 19.0
- Stockbuilding: -3.5; -0.6
- Exports of goods and nonfactor services: 395.9; 69.2
- Imports of goods and nonfactor services: 354.6; 62.0
- Nominal GDP (at market prices): 572.0; 100.0

### Selected national accounts growth and projections (annual percent change / percent of GDP where indicated)
- Real GDP (gross domestic product growth rates shown in table): 2008: 1.9; 2009: -3.9; 2010: 1.7; 2011 (Proj.): 1.5; 2012 (Proj.): 1.5
- Output gap (in percent of potential output): 2008: 2.2; 2009: -2.5; 2010: -1.6; 2011 (Proj.): -0.9; 2012 (Proj.): -0.6
- Consumer price index (HICP): 2008: 2.2; 2009: 1.0; 2010: 0.9; 2011 (Proj.): 2.3; 2012 (Proj.): 2.2
- Unemployment rate (in percent): 2008: 3.4; 2009: 4.5; 2010: 4.4; 2011 (Proj.): 4.4

### External sector and balances
- Merchandise balance (percent of GDP): 2008: 6.4; 2009: 7.2; 2010: 8.4; 2011 (Proj.): 8.7
- Current account balance (percent of GDP): 2008: 4.6; 2009: 7.1; 2010: 7.9; 2011 (Proj.): 8.2
- Exports goods and services (annual percent change, in U.S. dollars): 2009: -19.9; 2010: 6.6

### General government accounts (percent of GDP)
- Revenue (2009): 45.4; projections: 2010: 45.4; 2011: 45.1; 2012: 45.9; 2012 (additional line) 46.8 (table shows multiple years/projections)
- Expenditure (2009): 50.8; 2010: 50.3; 2011: 49.7; 2012: 49.5
- Net lending/borrowing: 2008: 0.6; 2009: -5.4; 2010: -5.2; 2011 (Proj.): -3.8; 2012 (Proj.): -2.7
- Primary balance: 2008: 2.7; 2009: -3.3; 2010: -3.3; 2011 (Proj.): -1.7; 2012 (Proj.): -0.5
- Structural balance (in percent of potential GDP): 2008: -1.0; 2009: -4.4; 2010: -4.1; 2011 (Proj.): -3.2; 2012 (Proj.): -2.2
- Robust balance (in percent of potential GDP): 2008: -2.2; 2009: -5.2; 2010: -5.0; 2011 (Proj.): -4.2; 2012 (Proj.): -3.1
- General government gross debt: 2008: 58.2; 2009: 60.8; 2010: 63.7; 2011 (Proj.): 65.6; 2012 (Proj.): 66.5

### Financial sector interventions and recapitalizations (summary of state interventions)
- ABN AMRO / Fortis interventions included:
  - Acquisition of Fortis’ Dutch operations, including Fortis’ share of ABN AMRO for €16.9 billion.
  - Short term bridge loan to Fortis of €34 billion.
  - Long term bridge loan to Fortis of €16 billion.
  - State guarantee of €5 billion bond issue by Fortis.
  - Assumption of credit risk in a mortgage portfolio of €19 billion (capital release instrument of €1.7 billion and mandatory convertible note of €0.8 billion under Basel 1 rules).
  - Additional capital strengthening actions of €4.4 billion, of which €1.4 billion was a debt to equity swap.
  - Of roughly €50 billion in bridge loans, €39.8 billion has since been repaid, including all the short term loans.
- ING Bank interventions:
  - Capital infusion of €10 billion through 8.5 percent nonvoting preferred shares.
  - Facility transferring 80 percent of profits or losses on ING’s illiquid Alt-A MBS portfolio to the state for a fee.
  - ING can issue up to €10 billion in government-guaranteed bonds (€2 billion placed in March 2009).
  - ING repurchased €5 billion of Core tier 1 securities in December 2009 and announced plans to repurchase another €2 billion by May 2011.
- SNS REAAL:
  - Capital injection of €750 million by way of interest-bearing securities with equity-like features (€185 million repaid in December 2009).
- Aegon NV:
  - Indirect capital infusion: state lent €3 billion to Association AEGON; Association AEGON purchased 750 million nonvoting securities at €4 per security. AEGON repaid €1.5 billion and planned full repayment by mid-2011.

### Financial soundness and sector indicators (selected values)
- Banks: Assets (percent of GDP) in 2010: 382.8
- Pension funds assets (percent of GDP) 2010: 135.7
- Regulatory capital-to-risk-weighted assets (2009): 14.9
- Regulatory Tier I capital-to-risk-weighted assets (2009): 12.4
- Nonperforming loans net of provisions to capital (selected high values shown): 2008: 51.8; 2009: 47.1
- Return on assets: 2009: -0.4; 2010: 0.0; 2011 (value shown): 0.3
- Household sector loans to total loans (2009): 43.4

### FSAP Update: Main recommendations (Table 6; timeframes and priorities preserved)
- Macroprudential Management
  - Assign priority to developing macro-prudential instruments. (Short Term; High)
  - Announce maximum loan-to-value (LTV) ratios for new lending, and consider linking higher LTVs to higher capital ratios. (Short Term; High)
  - Provide supervisors with powers to vary level of designated macroprudential instruments in response to developments. (Short Term; Medium)
  - Announce plans to reduce mortgage interest deductibility — Immediate announcement; Implementation over the medium term. (High)
- Twin Peaks (regulatory framework)
  - Afford legal protection to DNB and AFM for official actions except gross negligence or willful misconduct. (Short Term; High)
  - Provide DNB and AFM greater discretion to put in place enforceable rules. (Short Term; High)
  - Continue integration of DNB staff across banking, insurance, and pensions functions. (Medium Term; Medium)
- Microprudential bank and insurance supervision
  - Establish routine reporting requirements to strengthen monitoring and risk modeling. (Short Term; High)
  - Intensify supervision of large international financial institutions with greater emphasis on group supervision and business model soundness. (Short Term; High)
  - Adopt more proactive and decisive supervisory approach, including timely off-site inspection and corrective actions. (Short Term; High)
- Securities market
  - Strengthen AFM’s ability to enforce issuers’ compliance with financial reporting standards. (Medium Term; High)
  - Strengthen regulatory and supervisory framework for management companies of collective investment schemes (CIS). (Medium Term; Medium)
- Pensions
  - Develop communication plan on recent and prospective changes in payouts. (Short Term; High)
  - Require professional Board members for pension funds beyond a minimum size and provide authority for direct supervision of core pension activities. (Medium Term; Medium)
- Crisis management and bank resolution
  - Reform the Deposit Guarantee Scheme so that it is: (i) ex ante funded, (ii) authorized to fund bank resolution operations, and (iii) enjoys depositor preference. (Short Term; High)
  - Strengthen institutional framework for crisis management by shifting decision-making power from the Judiciary to DNB in context of bank resolution, and specify roles of MoF and DNB. (Short Term; Medium)
  - Improve official financial support framework by establishing a standing budgetary authorization for Government to fund solvency support that avoids moral hazard. (Short Term; Medium)
  - Improve bank resolution framework by establishing a single regime for resolving banks under official control with clear objectives and powers for administrators. (Short Term; High)

### Proposed structural fiscal measures (Table 7; measures, rationale, authorities’ view)
- Further pension reform:
  - Measures: Raising retirement age; Lowering accrual rate for pension benefits; Tightening early retirement.
  - Rationale: State pension unchanged since 1957; life expectancy increased by more than 6 years; state pension relatively generous ~31 percent of average earnings vs average 22 percent for neighboring countries.
  - Authorities’ view: Do not dispute need; abolished tax incentives for early retirement; plans to raise statutory retirement age scaled back to 66 years (previously 67 by 2025); ongoing discussion on linking retirement age to longevity.
- Savings in health and long-term care:
  - Measures: Increase in user fees; Tightening entitlements to long term care; Productivity increases; Benchmarking.
  - Rationale: Health-care spending projected to rise by 1 percent of GDP by 2060; long-term care by 4 percent of GDP by 2060 due to aging and technology; productivity increases of ½ percent a year would lower projected rises.
  - Authorities’ view: Major health care reforms in 2006 increased competition and dampened costs; further modest savings envisaged; considering increases in user fees and tighter entitlements but emphasize keeping extensive social services.
- Substantial reduction in mortgage interest tax deductibility:
  - Measure: Prompt announcement with an appropriately long phase in period.
  - Rationale: Very liberal deductibility increased house prices, mortgage size, LTV ratios and is a large tax expenditure (about 7 percent of fiscal revenues).
  - Authorities’ view: Political pressures imply cannot be implemented at least in the short run.

### Labor market policy responses (Table 8; timelines and policy actions)
- General: Reduce Unemployment Fund (AWF) premium for employees to 0 percent (2009).
- Women: Increase supplementary combination tax credit (ACK); Establish Part-time Plus Task Force; Convert ACK into income-based supplementary combination tax credit (IACK); Phase out transferability of general tax credit over 15-year period.
- Older workers: Convert premium exemption into targeted temporary premium discount for older unemployed; Introduce bonus for working after age 62; Increase statutory retirement age from 65 to 67.
- Vulnerable groups: Implement employment scheme for participation jobs; Agreements with 39 regions to address school drop-out; Stricter definition of ‘appropriate work’ in Unemployment Insurance Act (WW); Introduce earned income tax credit; Temporary wage cost subsidy STAP; Integrated regional services; Investment in the Young Act (WIJ); Adjust income benefits for young disabled under Wajong.
- 2010: Extension of premium reduction on education to encourage reintegration in the formal labor market (WVA).

### Statistical adequacy and data practices
- Data provision assessed as adequate for surveillance.
- Notable one-off reclassifications in 2006 due to health care insurance reform that shifted about euro 8.0 billion (1.5 percent of GDP) from private to public consumption.
- Netherlands subscriber to the Fund’s Special Data Dissemination Standard since June 11, 1996. Data ROSC available.
- Table of Common Indicators Required for Surveillance: latest observations and reporting frequencies provided (data as of May 16, 2011).

*Source: Staff Report for the 2011 Article IV Consultation—Informational Annex (Prepared by the European Department; May 19, 2011).*

### 1.      This statement summarizes developments in the Netherlands since the issuance

### _cr11142 - 1.      This statement summarizes developments in the Netherlands since the issuance

### Growth outlook
- Staff raised projections for GDP growth in 2011–12 following stronger than expected growth in 2011:Q1 and improved activity among important trading partners.
- Dutch GDP y-o-y growth in 2011:Q1 was 2.7 percent (0.9 percent with respect to the previous quarter), with investment surprising strongly on the upside.
- Staff revised 2011 GDP growth projection to 1.9 percent, from 1.5 percent previously.
- GDP growth for 2012 is expected at 1.7 percent (compared to 1.5 percent before).
- Statistics Netherlands (CBS) reported that the Dutch economy grew by 3.2 percent in the first quarter of this year on an annualised basis; quarter-on-quarter growth was 0.9 percent.

### Fiscal outlook and policy
- Faster cyclical upturn improved headline fiscal balance projections modestly.
- Deficit for 2011 is now estimated at 3½ percent of GDP (3¾ percent of GDP earlier).
- A balanced budget is now expected for 2016 (against a deficit of ½ percent of GDP earlier).
- Projected pace of annual structural fiscal tightening remains broadly unchanged.
- Government consolidation measures aim to ensure a total reduction of the budget deficit of €18 billion (nearly 3% of GDP) by 2015.
- Authorities prioritize immediate consolidation to bring debt back to pre-crisis levels and prepare for age-related spending pressures.
- Authorities state automatic stabilizers can function freely without reaching their ceilings even in a protracted period of zero-growth (Ministry of Finance estimates).

### Financial sector soundness, FSAP findings, and regulatory actions
- Banking system soundness improved significantly since 2008, but fragilities remain.
- Banks’ regulatory capital adequacy has risen markedly since 2008; nonperforming loans remain less than 3 percent of total loans.
- Pension funds’ coverage ratios are under pressure due to extended longevity and persistent low interest rates; insurance industry also under strain.
- FSAP update stress tests show resilience of bank capital and liquidity buffers under extreme scenarios; all banks are able to withstand even the most severe FSAP test.
- Authorities implementing gradual exit from extraordinary public support and restructuring of the financial sector.

Policy and supervisory initiatives (highlights):
- DNB’s Action Plan: new supervisory division since January 2011 with expertise centers and a department focused on early intervention.
- Strengthening the Crisis Management Framework: draft legislation to extend DNB powers for restructuring troubled institutions; Minister of Finance enabled to act when system stability is under serious and immediate threat; aimed date of entry into force is mid 2012. Deposit guarantee scheme to be reformed to an ex-ante funded risk-based scheme.
- Introduction of Solvency II: bring insurance supervision in line with IAIS core principles; formal quarterly reporting; strengthen group-wide supervision and intragroup transaction rules.
- Strengthening International Supervision: increase supervisory resources; broaden scope under Solvency II and review of the financial conglomerates directive.
- Macro-prudential analysis and policy: DNB developing a macroprudential framework and instruments; investigation into the need for a formal macroprudential mandate; roll out framework for Dutch SIFIs proportionately to all Dutch SIFIs.
- Other FSAP recommendations: improve data availability for micro- and macroprudential purposes; consider widening supervisors’ scope to set technical rules; legislate to limit liability of financial supervisors.

### Housing market and household balance sheets
- Housing and mortgage markets relatively stable, but household vulnerabilities rising.
- House prices steadied from mid-2009 to mid-2010, then resumed a slow downward drift.
- Household debt grew to over 270 percent of disposable income in 2010.
- Loan-to-value (LTV) ratio of new mortgages continued to rise and exceeded 120 percent in 2010 according to some measures.
- Authorities propose capping LTV-ratios for new mortgages at 110% combined with a requirement to build up savings to pay off at least 50 percent of the mortgage loan at maturity.
- National Mortgage Guarantee and low unemployment (4¼ percent in 2011 and 4 percent in 2012) cited as mitigating factors.
- CPB expects an increase in the number of households while housing production is currently far lower than long-term need.

### Labor market, pensions, and structural reforms
- Unemployment has risen only modestly and has been slightly declining since mid-2010.
- Authorities agree with staff on need for pension recalibration; tripartite consultations ongoing to link pension age to life expectancy.
- Government submitted a bill to raise the retirement age to 66 in 2020 and to tighten fiscal stimulation of second-pillar pensions.
- Authorities agree with staff that structural reforms should boost labor participation of women and older workers and facilitate job search.
- CPB’s medium-term forecast suggests participation-enhancing actions could lead to long-term employment increases of 1.1% in structural terms.

### Risks to the outlook and Fund advice
- Executive Directors noted risks skewed to the downside: disruptions in sovereign debt markets, simultaneous fiscal tightening in several advanced European countries, and lack of progress in resolving global imbalances.
- Directors supported ambitious and frontloaded fiscal consolidation plans but urged more flexibility in implementation if adverse external shocks slow economic activity; allow automatic stabilizers to operate freely and consider discretionary support if needed.
- Directors advised measures to reduce age-related spending impact and broaden the tax base; increase effective retirement age and restrain growth in health and long-term care costs.
- Directors recommended further strengthening of capital or liquidity buffers in banks given high leverage and upcoming Basel III standards.
- Directors encouraged consideration of further tightening of prudential regulation and granting the Netherlands Central Bank authority to impose additional restrictions if necessary.
- Directors called for improvements in rule-making authority and legal protection of supervisors; adequacy of data reporting; resource constraints; crisis resolution framework; and supervision of large international financial institutions.

### Key statistics (selected exact figures from table and text)
- Real GDP growth: 2006 3.4; 2007 3.9; 2008 1.9; 2009 -3.9; 2010 1.8; 2011 1.9 (staff projections).
- CPI (harmonized): 2006 1.7; 2007 1.6; 2008 2.2; 2009 1.0; 2010 0.9; 2011 2.3.
- Unemployment rate (in percent): 2006 3.9; 2007 3.2; 2008 2.8; 2009 3.4; 2010 4.5; 2011 4.4.
- Gross national saving (percent of GDP): 2006 29.3; 2007 27.1; 2008 25.3; 2009 23.3; 2010 25.4; 2011 26.4.
- General government balance (percent of GDP): 2006 0.5; 2007 0.2; 2008 0.6; 2009 -5.4; 2010 -5.1; 2011 -3.4.
- Structural balance: 2006 (blank); 2007 0.1; 2008 -1.2; 2009 -1.0; 2010 -4.4; 2011 -4.0; 2012 -2.9.
- General government debt (percent of GDP): 2006 47.4; 2007 45.3; 2008 58.2; 2009 60.8; 2010 63.7; 2011 64.9.
- Money market rate (percent): 2006 3.0; 2007 4.0; 2008 3.8; 2009 1.0; 2010 0.8.
- Government bond yield (percent): 2006 3.8; 2007 4.3; 2008 4.2; 2009 3.7; 2010 3.0.
- Trade balance (percent of GDP): 2006 7.0; 2007 7.3; 2008 7.1; 2009 6.4; 2010 7.2; 2011 8.3.
- Current account (percent of GDP): 2006 9.3; 2007 6.7; 2008 4.4; 2009 4.9; 2010 7.2; 2011 7.4.
- Exports of goods and services (percent of GDP): 2006 69.9; 2007 71.7; 2008 73.2; 2009 64.9; 2010 73.9; 2011 77.1.
- Exports volume, growth (in percent): 2006 7.3; 2007 6.4; 2008 2.8; 2009 -7.9; 2010 10.9; 2011 5.2.
- Imports of goods and services (percent of GDP): 2006 61.5; 2007 62.9; 2008 64.6; 2009 57.6; 2010 65.8; 2011 68.8.
- Imports volume, growth (in percent): 2006 8.8; 2007 5.6; 2008 3.4; 2009 -8.5; 2010 10.5; 2011 5.2.
- Net foreign direct investment: 2006 -8.4; 2007 8.1; 2008 -7.3; 2009 1.0; 2010 -3.5; 2011 -1.9.
- Official reserves, excl. gold (US$ billion): 2006 10.8; 2007 10.3; 2008 11.5; 2009 17.9; 2010 18.5.
- U.S. dollar per euro: 2006 1.32; 2007 1.46; 2008 1.36; 2009 1.46; 2010 1.32.
- Real effective rate (2000=100): 2006 99.1; 2007 99.7; 2008 103.7; 2009 101.3; 2010 98.3.

*Source: IMF staff report and Public Information Notice (PIN) for the 2011 Article IV Consultation with the Kingdom of the Netherlands—Netherlands (Executive Board concluded June 10, 2011).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11142.pdf_