Netherlands: Staff Concluding Statement of the 2015 Article IV Mission
IMF News, November 10, 2015
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- Published: November 10, 2015
Outlook — A Strengthening Recovery but not Without Risks
- Growth and projections:
- "We expect growth to be roughly 2 percent in both 2015 and 2016."
- Expectation over the rest of the decade: continued growth, a decline in unemployment, and a gradual reduction in the current account surplus as domestic investment and consumption take over from net exports.
- Macro risks:
- Risks are "mixed, but skewed to the downside."
- External risk: "Weaker-than-expected growth in the euro area or emerging markets could slow the Dutch economy given its high dependence on exports."
- Housing risk: "A reversal of the recent recovery in house prices could weaken household balance sheets and dampen domestic demand."
- Fiscal composition: a shift from external to domestic growth would "improve the tax composition of growth, leading to stronger structural consolidation and debt reduction."
- Migration: "The Netherlands is also a target country for many refugees and economic migrants... Costs ... are expected to be substantial." Potential long-term demographic and growth dividends contingent on effective integration.
- Financial conditions:
- "ECB quantitative easing has increased liquidity, but it has not yet spurred lending."
- Credit trends: "Credit has continued to decline, although credit to households appears to have bottomed out in early 2015."
- Lending demand: "Lending surveys have been reporting increased demand from households and large enterprises since early 2014," and "the most recent lending survey reported stable rather than declining credit demand from SMEs for the first time since early 2009."
- Banking sector:
- "The Dutch banking system is gradually emerging from its restructuring."
- Banks' capital: "Banks’ capital levels are well above minimum requirements now, and comfortably on track to meet the Basel III requirements."
Fiscal Policy — Making Use of Fiscal Space
- Recent stance and near-term:
- "Fiscal policy was supportive in 2015 and is expected to be roughly neutral in 2016."
- Headline deficit: "relatively stable in the 2.1–2.3 percent of GDP range in 2013-15."
- Structural balance: "eased by half a percentage point."
- Draft 2016 budget: reduces labor and income taxes by "€ 5 billion (about 0.7 percent of GDP)" and pursues expenditure-based consolidation.
- Debt and compliance:
- Staff projection: "general government debt will decline from 69 percent to 67 percent of GDP."
- "Both the headline deficit and the pace of debt reduction are comfortably within the Stability and Growth Pact (SGP) limits."
- Policy space and recommendations:
- Structural balance: "well within the medium-term objective (MTO) of -0.5."
- Authorities' view: "the space vis-à-vis the MTO is fully used under the European Commission approach."
- Recommendation: "Should this change or if there is still a significant output or employment gap in 2017, we would urge the authorities to make use of this space to support the recovery."
- Medium/long term: "consolidation should resume to rebuild buffers, including by reducing public debt to below 60 percent of GDP."
Structural Policies — Important Reforms Implemented, but a Large Outstanding Agenda
- Sources of vulnerability:
- Tax biases favor debt over equity for households and firms.
- High pension savings and high labor tax wedge can leave younger households cash-constrained.
- Tax incentives for home ownership, absence of well-functioning private rental market, and regulatory features promote premature home ownership and high household leverage.
- Policy interactions:
- "There is merit in pursuing the reforms in tandem" given interrelated effects across housing, tax, pensions, and labor policies.
- Recent government actions: steps to address housing market inefficiencies, support indebted households, address financial sector problems, and implement pension and labor reforms — but "there is more to be done."
Tax Reform — Promoting Growth and Employment
- Objectives:
- Increase potential growth, enhance fairness, and improve efficiency by shifting tax burden away from labor toward consumption and capital income, particularly residential property ownership.
- Recent measures and their focus:
- Gradual phasing out of large subsidies on housing investment and pension savings.
- Rollback of some regressive features of taxation of capital income.
- "Next year’s €5 billion labor tax cut package is mainly targeted at female workers and low-wage earners."
- Further recommendations:
- Phase out large subsidies on home ownership and pension income more quickly than currently envisaged to enable a budget-neutral and growth-enhancing rapid reduction of the labor tax wedge.
- Harmonize fragmented capital income and value-added tax schemes to secure revenue and efficiency gains.
- Offset corporate tax revenue shortfalls via broadening the VAT base and unifying VAT rates.
- Debt bias:
- Interest deductibility has favored debt over equity, contributing to excessive leverage.
- Recommendation: introduce an allowance for corporate equity (ACE) calibrated to make equity and debt finance fiscally neutral; similar allowances could be considered in housing.
The Second Pillar Pension System
- Strengths:
- First pillar: basic retirement income with "a very low rate of old-age poverty."
- Second pillar: "fully-funded, mostly defined-benefit" plans ensuring high replacement rates and pooled longevity risk.
- Financial Assessment Framework: requires adjustments whenever solvency ratio threatens full funding.
- Problems:
- Plans are "increasingly combining the disadvantages of both defined benefit and defined contribution schemes while failing to capture many of the virtues of either."
- Frequent ad hoc adjustments to contributions, accrual rates, indexation, and nominal benefit reductions have reduced predictability.
- Adjustments tend to be procyclical, reducing disposable income in weak economic times.
- Absence of individual accounts and opaque intergenerational redistribution reduce transparency.
- Government reform proposals and staff views:
- Individual accounts could "improve transparency and provide greater choice."
- A full defined contribution system could still allow collective asset management and protection against poor choices and longevity risk.
- If limited reforms retain defined benefit elements, actuarial fairness between cohorts remains a key issue:
- Government proposal: level contribution rate with age, decreasing accrual rate as retirement age approaches.
- Staff argument: keep a constant accrual rate with escalating contribution rates with age to address intergenerational fairness.
- Transition issues will be complicated; easier the closer reforms move to defined contribution.
- Current system fragmentation penalizes occupation mobility; redesign should increase pension portability and labor market flexibility.
Housing Market Policies
- Current and recommended measures:
- Appropriate policies: gradually reducing LTV ratios on new mortgages to 100 percent by 2018; allowing mortgage interest deductibility only for new fully amortizing loans.
- Reinstatement of higher gift tax exemption is "welcome for reducing mortgage debt."
- Assessment: "The Netherlands LTV limit is high even at 100 percent."
- Recommendation: adopt Financial Stability Committee recommendation to continue annual reduction in LTV limits between 2019 and 2028 to reach 90 percent; "A faster pace would be welcome for both LTV and mortgage interest deductibility reduction."
- Complementary reforms:
- Accelerate reform of social housing to make it more market oriented.
- Promote a larger and more robust private rental market (e.g., deregulation of rents on small apartments).
- Clarify the LTV path after 2018 "sooner rather than later" to help buyers build savings and allow market participants to plan.
The Rapid Rise of the Self Employed
- Observations:
- Rapid rise in self-employment has increased labor market flexibility and likely helped contain unemployment.
- Suggestive of an overly rigid regulatory regime for regular employment.
- Issues and incentives:
- Self employed receive large tax exemptions and pay lower social contributions, lowering labor costs relative to regular labor.
- Costs include budgetary impact and potential threats to pension schemes' viability.
- Some self employed work under conditions resembling employment relationships.
- Policy recommendations:
- Tighter enforcement of existing regulations under new 2015 legislation and new criteria (e.g., presumption of employment when hours and work location are set by payer).
- Address lack of retirement, sickness, and disability coverage:
- Introduce a collectively-managed pillar III system with contributions roughly equivalent to average Pillar II plans for employees.
- Default enrollment for the self employed with opt-out down to a minimum contribution level.
- Make sickness and disability insurance obligatory, with collectively managed insurance pool to control costs.
- Consider liberalizing the regulatory regime for employees and move toward more equal tax treatment between employees and the self employed.
Mission and Publication Information
- Mission dates: "An IMF team visited The Netherlands from October 29 – November 10, 2015, for the 2015 Article IV consultation."
- Publication date: "November 10, 2015."
- Closing note: "The mission team would like to thank the authorities and other colleagues for their frank discussion, support, and warm hospitality."
Netherlands: Staff Concluding Statement of the 2015 Article IV Mission (November 10, 2015).