Kingdom of the Netherlands: Concluding Statement of the 2015 IMF Staff Visit

June 15, 2015

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

June 15, 2015

Outlook—A Strengthening Recovery

The Dutch economy continues to improve, supported by investment and exports, rising house prices, and stronger consumption on the back of improving sentiment. Growth has picked up and the fiscal balance has improved significantly in line with the improvement in growth, and support for the recovery is now coming from domestic consumption and investment.

There are downside risks to the outlook including from reversals from recent exchange rate and oil price movements and the possibility of a period of prolonged uncertainty in the euro area. Competitiveness has been supported by the depreciation of the euro against the dollar, and household consumption has been boosted by the decline in oil prices. Any reversal of these movements could turn important supports for the recovery into a drag on it. Uncertainties related to developments in Greece would have little direct effect on the Netherlands, but a spillover into the broader euro area could also potentially affect the Netherlands.

Policies—Important Reforms Implemented, but a Large Outstanding Agenda

The government has taken important steps to address the inefficiencies in the housing market, support indebted households, address financial sector problems, implement pension and labor reforms, and consolidate the fiscal position. These and other reforms have strengthened the financial system and helped to consolidate the accelerating recovery. The mission noted these reforms and others in its October 2014 concluding statement for the Article IV mission, and this mission continues to support those comments. In this context, our further comments focus on subsequent developments and new policy reform opportunities, especially in the tax system and pension system, where the Dutch government is currently already exploring further reform possibilities, but also in the housing market.

I. Tax Reform

The Dutch tax system is in the early stages of a promising review. The government formulated several principles for reforms to buttress the recovery, improve potential growth, and promote higher employment. The mission broadly supports these principles, including unification of most VAT rates at the standard rate, reduced tax incentives for real estate, and a reduction in labor taxes. These and other reforms could potentially increase the efficiency of the tax system and promote higher employment. A substantial tax reform package could also be the vehicle to simplify areas of taxation that have become complicated and burdensome for both tax administration and taxpayers.

II. Pension Reform

The Dutch pension system has many virtues, but it is facing new challenges. The existing second pillar of the system has provided a funded system with wide coverage, and high replacement rates. However, changing demographics and labor market developments are straining the system with an increasing dependency ratio and an increasing number of self-employed or employees outside the pension system. In this context, a review of how to adapt the pension system to these changing realities is welcome, including considerations of how to ensure sustainability, increase intergenerational equity, and bring into the pension system those currently on its margins. The increasing numbers of the self-employed also raises broader questions about how to ensure equitable treatment of the self-employed and others in the tax, health, and disability systems.

III. Addressing the Remaining Risks from Housing and Housing Finance

Dutch households have high net wealth on average, but it is unevenly distributed and most of the assets are in illiquid real estate and pension assets. The 2014 Article IV mission took the view that there were a number of interlinked economic distortions relating to housing and household debt; in this context, the policies of gradually reducing the loan-to-value ratios (LTVs) on new mortgages to 100 percent by 2018 and allowing mortgage interest deductibility only for new fully amortizing loans are appropriate to mitigate housing risks among many other policy recommendations for the housing sector. The mission sees the recent recommendation of the Financial Stability Committee to continue the annual reduction in LTV limits between 2019 and 2028 to reach 90 percent as welcome, but would urge a faster pace of reduction and a lower ultimate target. An LTV limit of 100 percent is still very high relative to peer countries, and households need greater financial buffers to limit the macroeconomic volatility associated with very high household leverage. Clarifying the LTV path after 2018 sooner rather than later would also provide buyers more time to build savings and for all participants in the housing market to plan appropriately.

The mission looks forward to discussing the full range of economic developments and policies, including in particular developments and policies in tax and pension reform and tax and benefits reforms to ensure equitable treatment of the self-employed and others in new employment arrangements during the Article IV consultation later this year. The mission team would like to thank the authorities and other colleagues for their frank discussion, support, and warm hospitality.

1 An IMF team visited The Netherlands from June 8-11, 2015, for an interim staff visit between the annual Article IV consultations. This statement describes the preliminary findings of the staff.


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