Kingdom of the Netherlands–The Netherlands: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, December 9, 2022
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- Published: December 9, 2022
Overview
- IMF mission led by Mr. Bernardin Akitoby met with Dutch authorities on the Article IV consultation during November 28–December 9, 2022.
- Dutch economy showed greater resilience during and after the pandemic compared with the Euro area:
- Real GDP grew by 4.9 percent in 2021, surpassing its pre-pandemic level.
- Real GDP returned to its pre-pandemic trend in 2022:H1.
- Manufacturing capacity utilization returned to pre-pandemic levels by early 2022.
- Labor market: tight with low unemployment and high vacancies; wages have not picked up strongly so far.
- Inflation: headline inflation remains high amid rising core inflation.
- Output gap estimated at 1½ percent; overall economy appears to be overheating.
- Russia’s invasion of Ukraine poses new challenges; Netherlands suffered a smaller decline in terms of trade compared to the rest of the euro area.
- Government has taken several measures to address rising cost of living.
- Financial cycle has started to moderate; housing market is richly valued and cooling rapidly.
Economic Outlook and Risks
- Growth projections:
- Real GDP growth projected to slow to 0.6 percent in 2023 from 4.2 percent in 2022.
- 2023 fiscal stance projected to be expansionary while financial conditions expected to tighten.
- Drivers of slowdown: weaker external demand, eroded purchasing power, tighter financial conditions.
- Labor market: structural labor shortages may soften layoffs; no pandemic scarring expected.
- Medium-term growth support: public investment averaging 3¾ percent of GDP over the next 5 years and reforms in the National Recovery and Resilience Plan (NRRP).
- Inflation projections and drivers:
- HICP inflation estimated to have peaked at about 14 y/y percent in 2022:Q3.
- Average forecast about 11.8 percent in 2022.
- Implementation of a price cap on gas and electricity bills in January 2023 will notably reduce headline inflation to about 4.2 percent in 2023.
- Core inflation projected to peak in 2023 at about 7.3 percent on average.
- Risks:
- Downside risks to growth; upside risks to inflation.
- Main risks: escalation of the war, further increases in energy prices, energy disruptions in Europe, weaker external demand.
- Potential for persistent inflation if commodity prices rise and second-round wage effects occur, de-anchoring expectations.
- Euro area monetary policy tightening could heighten real-financial feedback loop risks.
- Sharp downturn in house prices could induce consumption cuts to service debts.
- Upside: use of large pandemic savings could cushion private demand.
Fiscal Policy: Managing the Impact of Higher Energy Prices and Aggregate Demand
- 2023 budget measures:
- Added fiscal measures amounting 2.4 percent of GDP, net of offsetting revenue measures.
- Support package mostly targeted: social transfers to households and subsidies to SMEs.
- Gas and electricity price cap for small consumers in 2023 is not targeted.
- IMF welcomes:
- Reestablishment of the standard VAT rate at 21 percent from January 1, 2023.
- Planned reversal of the energy tax reduction.
- Increase of particular allowances to make support more targeted.
- Policy recommendations:
- At least the fiscal cost of the price cap and other energy measures must be covered in the budget.
- Better target the price cap (e.g., focus on most vulnerable households or reduce subsidized consumption amounts).
- Protect public investment on medium-term challenges (climate change, housing, education) amid any sizeable fiscal adjustment in 2023.
- Consider contemplated changes to wealth tax and/or a one-time solidarity tax increases on high-incomes and businesses to support deficit reduction.
- Removal of non-targeted tax measures lowering energy prices and the temporary solidarity contribution from the fossil fuel sector could raise revenue.
- Preferably avoid one-off windfall taxes imposed ex-post; consider a permanent, well-designed excess profit tax regime as part of regular corporate taxation.
- Fiscal stance guidance:
- A non-expansionary or modestly contractionary fiscal stance in 2023 is warranted given high inflation and tight labor market.
- Fiscal policy should remain flexible and evolve if risks materialize (automatic stabilizers, larger adjustments for negative supply shocks, limited adjustment for negative demand shocks, discretionary support if severe housing correction threatens stability).
Energy Security
- No physical gas shortage expected this winter, but future supply uncertainty remains high.
- Supply-side measures and developments:
- New floating LNG terminal at Eemshaven doubled gas import capacity.
- Two new nuclear plants planned; government intends to extend KCB’s operating life beyond 2033.
- 40 percent tax reduction on investments in gas in the North Sea to stimulate exploration and production.
- Netherlands and Germany to jointly drill for a new gas field in the North Sea with gas production expected by end-2024.
- Slowed decline of gas production from small fields.
- Scheme to hedge gas prices implemented, supporting gas storage.
- Demand-side measures:
- Tightened energy savings targets for businesses.
- Lifting output restrictions to coal-fired power stations.
- Extension of the National Isolation Program to promote energy efficiency.
- Energy security strategy:
- Crisis has increased desirability of Netherlands gas production, accelerated energy mix diversification, and incentivized energy saving.
- Boosting investment in clean energy, part of the NRRP, will enhance energy security and support the green transition.
Housing and Financial Stability
- Housing market:
- Market richly valued; recent cooling merits continued vigilant monitoring.
- Housing sector vulnerabilities: high household indebtedness, illiquid assets concentrated in pension and insurance claims, a quarter of mortgages facing interest rate reset in the coming five years, prevalence of interest-only mortgages, overextended balance sheets of recent home buyers.
- Mitigating factors: large share of fixed-rate mortgages and long maturities.
- Authorities’ requirement of stricter conditions to risky mortgage loans from January 2022 is appropriate.
- Efforts to increase awareness about interest-only lending risks are welcome.
- Structural imbalance in housing market requires determined policy intervention.
- Government program addresses housing shortages and affordability, but the large role attributed to rent control could be re-evaluated.
- Financial sector vulnerabilities and recommendations:
- Elevated non-financial corporate debt could weigh on financial intermediaries as credit and interest rate risks rise.
- Rapid, disorderly adjustment of yields with high market volatility or downturn may negate benefits of interest rate normalization and pressure non-bank financial institutions.
- Continued close monitoring, tailored stress tests, closing data gaps, and advancing supervisory frameworks are warranted.
- Authorities should be ready to deploy existing policy levers and actively contribute to international efforts developing macroprudential frameworks for non-bank vulnerabilities.
- Ongoing occupational pension reform should be completed within the timeframe foreseen.
- Macroprudential policy:
- Raising the counter-cyclical capital buffer (CCyB) from 0 to 1 percent in May 2022 was appropriate; DNB considers 2 percent neutral.
- Going forward, pausing further tightening of capital-based macroprudential measures could be considered given fluid macro-financial environment.
- In the medium term, explore avenues opened by EU macroprudential framework evolution, such as sectoral systemic risk buffers.
Medium-term Challenges: Enhance Economic and Social Resilience
- Fiscal space and priorities:
- Authorities command substantial fiscal space given still low debt to GDP to devote to medium-term challenges.
- IMF welcomes use of fiscal space to advance green and digital transitions and tackle structural challenges in housing, labor markets, and education.
- Support for: Climate and Transition Fund deployment; new spending over two years for the National Education Plan; launch of the National Growth Fund targeting R&D and knowledge development.
- NRRP: structural investment and reform plans to address housing and labor shortages, reinforce education, and advance digitalization are welcome.
Climate Change
- Dutch Climate Policy Program priorities:
- Guarantee standards and pricing, stimulate renewable generation from wind and sun, phase out coal, and reinforce grid capacity.
- NRRP earmarks 48 percent of its total allocation for the green transition.
- IMF recommendations:
- Reinforce carbon pricing with harmonized feebates for industry and power.
- Continue shifting taxes away from electricity onto residential natural gas.
- Transition from fuel to driving-related taxes.
- Adaptation:
- Netherlands is a good practice for climate adaptation, particularly to sea-level rise, with strong institutional capacity, financial resources, and knowledge support.
- Recommendations: integrate adaptation holistically into long-term planning, focus government action on adaptation with large positive externalities, remove barriers to private adaptation, address equity issues, and highlight cost of market distortions for adaptation in the National Adaptation Plan.
Labor Market, Digitalization, and Taxation
- Labor market duality and participation:
- Steps taken to reduce differences between employment forms, e.g., accelerated phasing out of the self-employed person’s tax deduction.
- Increased childcare subsidies over the medium term and minimum wage increase in 2023 should help offset rising costs and keep women in the labor force.
- Ongoing reforms of parental leave and expanded child-care allowance expected to facilitate full-time female labor force participation.
- IMF encourages continued realignment of tax and other incentives across employment types to reduce labor market duality.
- Digitalization:
- High degree of digitalization served well during COVID-19; shortages of IT professionals existed pre-pandemic and SMEs need faster adoption.
- NRRP allocates 26 percent of financing to accelerate digital transition through quantum technology, digital upskilling, and improving rail connectivity.
- Capital taxation and housing tax incentives:
- IMF welcomes reforms of capital taxation to reduce disparities between effective taxes on different income types and firms.
- Regarding housing, reform options include raising the value of imputed rents to market levels; combined with planned taxation of actual returns, this would achieve more equitable taxation across different assets.
- Tax incentives to buyers could be reformed to help reduce demand for owner-occupied housing.
Conclusion
- IMF mission thanks the authorities and counterparts for constructive policy dialogue and productive collaboration.
Source: IMF Staff Concluding Statement of the 2022 Article IV Mission to the Kingdom of the Netherlands–The Netherlands (December 9, 2022).