Amsterdam: An IMF team led by Mr. Fabian Bornhorst visited the Netherlands during May 4–13 to conduct the 2026 Article IV consultation. The following statement was issued at the end of the visit:
Entering 2026 from a position of relative strength, the Dutch economy faces a renewed test from spillovers from the war in the Middle East, which are expected to weaken growth and increase inflation. The government’s restrained and well‑targeted policy response to higher energy prices—with readiness to scale up if more severe risks materialize—is appropriate. At the same time, it is critical not to lose sight of ongoing, pressing policy challenges: weak investment and binding capacity constraints—including in energy, nitrogen, labor, and housing—continue to weigh on the outlook. Recognizing this, the coalition agreement proposes reforms to ease these constraints and support innovation‑led growth, alongside measures to address rising medium-term spending pressures and steps to strengthen defense readiness. On housing, notwithstanding useful supply-side measures in the coalition agreement, tighter borrower-based macroprudential measures would help cool the residential real estate market and reduce financial stability risks. Ensuring that innovation is a strong driver of productivity gains, growth, and rebalancing will require sharper identification of gaps and targeted action to crowd in private investment. Challenges faced by innovative firms—particularly related to scale, market access, capital‑market depth, energy and security, and resilience in an increasingly fragmented world—go beyond what national policies can resolve and require the Netherlands to actively advance EU‑level solutions.
Lower Growth and Higher Inflation from the Energy Price Shock
- Near-term growth prospects are unusually uncertain. The economy demonstrated resilience in 2025, supported by strong growth momentum and ample macroeconomic buffers. However, the war in the Middle East has pushed up energy prices and uncertainty. Higher energy prices will squeeze household budgets and raise firm costs, while weaker confidence is weighing on private consumption and investment and external demand is weakening. In staff’s baseline scenario, where the conflict is limited in duration, growth is projected to moderate to 1.0 percent this year and 1.3 percent next year. The balance of risks is tilted to the downside. A more prolonged conflict would worsen the outlook through reinforcing channels, including tighter financial conditions and possibly supply chain disruptions. In a severe scenario, with oil and gas prices rising by a further 40 and 100 percent, on average over 2026–27, growth in 2026–27 could be roughly halved, relative to the baseline.
- In the baseline, higher energy prices will push inflation back up and delay its return to the 2 percent target. Headline inflation is projected to rise to 2.9 percent this year, driven by higher energy prices and pass‑through to other goods and services. As conditions differ from those during the larger 2022 energy shock, second‑round effects are expected to be more muted this time. Still, headline inflation is projected to remain elevated at 2½ percent in 2027 and 2028 before converging to target. A larger and more persistent energy price shock would likely amplify second‑round effects, with higher inflation possibly feeding into wage agreements and firms passing rising labor costs onto prices. In the severe scenario, therefore, headline inflation could exceed the baseline by 0.8 and 2.3 percentage points in 2026 and 2027, respectively.
Responding to the Evolving Energy Price Shock
- The government’s planned energy support measures are well-targeted, fiscally restrained, and preserve price signals. The package appropriately focuses on vulnerable households, energy‑intensive SMEs, and housing‑related energy investment. Broader and untargeted measures—such as price caps or VAT or fuel‑tax reductions—would not only be fiscally costly; they would also undermine price signals needed to encourage energy conservation and transition. They are also difficult to unwind: one legacy measure—the fuel‑excise reduction introduced in response to the 2022 energy crisis—remains largely in place. The government’s contingency framework for energy shocks involves preparedness to confront an evolving shock with possible scaling of support to the severity of the shock.
Fiscal Policy Outlook
- Fiscal plans are well calibrated to slowing growth, provided energy‑related risks are managed prudently. The broadly neutral stance—with cyclically adjusted deficits kept at around 2¼ percent of GDP over 2026–31—is appropriate. Automatic stabilizers should provide the main macroeconomic buffer, including in a severe scenario, in which use of fiscal space could be directed toward energy security and the energy transition. Elevated energy prices should not derail plans; rather, they underscore the need to strengthen resilience and accelerate the energy transition. The budget‑neutral design of energy support—with offsetting revenue measures and expenditure reallocations in 2026 and tax adjustments from 2027—will help contain fiscal and demand pressures in the context of a tight labor market and residual excess demand.
- The coalition agreement rightfully prioritizes investment and structural reforms but hinges on building parliamentary support and implementation capacity. The gradual increase in defense spending to 3.5 percent of GDP by 2035, support for innovation‑led growth, and measures to ease key structural bottlenecks are incorporated in the fiscal framework and supported by identified adjustment and revenue measures. Uncertain parliamentary majorities raise the risk of delays and incomplete implementation. This could inject uncertainty over policy direction and prolong bottlenecks, and fiscal deficits could drift toward 3 percent of GDP. Compromises should protect growth‑enhancing investment—particularly in infrastructure and education. Uncertainty surrounding the approval of proposed measures calls for conservative assumptions on reform yields. In addition, implementation capacity risks highlight the need for careful sequencing and prioritization of expenditure.
- As medium‑ and long-term spending pressures intensify, fiscal sustainability will depend on progress with health and tax-funded pension reforms. Public debt remains low, and sustainability risks are contained with deficits and debt projected to stay below 3 and 60 percent of GDP through 2031. Over time, however, spending pressures will intensify. Defense spending is projected to rise by about 1½ percent of GDP by 2035, while ageing‑related health and public pension costs, together with climate‑related spending, could add another 4 percent of GDP by 2050. Planned healthcare reforms generate savings of 1 percent of GDP, and reforms to tax-funded pension would save another ½ percent of GDP, annually, from the early 2030s onwards. Realizing savings will require strong implementation and prioritization. Even then, additional measures may be needed to preserve sustainability.
Tax Policy and Revenue Reform
- Rebalancing the planned tax revenue package away from labor taxation would reduce economic distortions. Coalition plans rely primarily on measures that increase the tax burden on labor, notably through limited indexation of personal income tax brackets and higher social insurance contributions (“freedom contribution”). These measures raise taxes on work, lowering labor participation and hours worked in an economy that is already under pressure from aging. They also increase wage costs. By comparison, planned measures such as broadening the VAT base by reversing reduced rates and introducing corrective taxes (e.g., on sugar) are less distortionary. Phasing out costly and ineffective tax expenditures would do both: raise efficiency and revenues. Looking ahead, a comprehensive review of tax benefits—frequently discussed but deferred—would provide an opportunity to rationalize, simplify, and improve policy consistency.
- Capital income tax reform is important to enhance investor certainty, reduce distortions in saving and investment decisions, and secure more stable and predictable revenues. The current transitional regime remains legally vulnerable and administratively demanding. Its temporary nature and design choices limit predictability for taxpayers and investors and complicate fiscal planning. Proposed improvements aim to move toward taxation of actual returns and a more predictable framework. Addressing design challenges—including liquidity risks from taxing unrealized gains, asymmetric gain‑loss treatment, and impacts on innovative firms and smaller investors—is critical for success. Anchoring reforms in administrative feasibility, careful sequencing, and legal robustness would support durable implementation and improve stability and predictability of capital income tax revenues.
Structural Policies for Productivity, Investment, and Rebalancing
- Structural bottlenecks and rising geoeconomic fragmentation are weighing on productivity, investment, and medium‑term growth and sustaining elevated external imbalances. Tight labor markets, binding capacity constraints, and heightened uncertainty have kept private investment subdued despite high corporate savings. This has limited supply expansion and slowed rebalancing. Constraints are becoming increasingly binding as ageing weighs on potential output growth, estimated at 1.2 percent in the medium term, while the large external current account surplus is projected to narrow only gradually. The high‑tech sector offers scope to lift productivity growth well beyond its current footprint although rising geopolitical fragmentation heightens vulnerabilities, particularly through trade and supply‑chain channels. Policy priorities are therefore twofold: (i) easing domestic constraints that hold back investment and (ii) strengthening resilience through diversification and EU‑level coordination.
Domestic Bottlenecks to Investment, Scaling, and Diffusion
- Insufficient electricity grid capacity remains a binding constraint on electrification, deployment of renewables, and industrial competitiveness. Grid congestion, long connection queues, and uncertainty over future access are delaying investments and the deployment of renewables. Even as substantial investments in grid infrastructure are underway, capacity expansion remains too slow, prolonging reliance on gas and keeping electricity prices high, relative to peers. Plans to relieve bottlenecks rightly focus on accelerating permitting, and incentivizing flexible demand and energy savings. High energy costs, rising network charges, and higher ETS prices could pose risks to the competitiveness of some high‑tech energy‑intensive manufacturing sectors. Delaying the phase-out of indirect cost compensation provides relief, but should remain temporary and targeted, and preserve incentives for adjustment and decarbonization. Completing the EU energy market would improve connectivity and energy security, while lowering prices and overall investment needs.
- Unresolved nitrogen‑related constraints remain a key impediment to investment by sustaining permitting uncertainty across industry, infrastructure, and housing. The coalition agreement’s move toward legally binding sector‑specific reduction targets for 2030 and 2035, supported by a €20 billion (1.7 percent of GDP) multi‑year package, is an important step. Timely execution will be key. Reliance on administrative and subsidy‑based measures risks slow and uneven abatement. Embedding explicit pricing instruments—such as nitrogen emission feebates—would strengthen incentives for reductions and enhance cost effectiveness.
- Closing skills gaps and facilitating labor reallocation are key to supporting productivity growth and adjustment as structural changes, including from AI and digitalization, reshape labor demand. Policy priorities include:
- Strengthening the skills pipeline and reducing mismatches by expanding vocational education and lifelong learning, raising STEM enrolment—still low relative to peers—and attracting international talent, including through streamlined recognition of foreign qualifications. Training must adapt to rising demand for advanced and task‑specific technical skills as AI and digitalization progress. Looking ahead, while the planned reversal to education spending cuts is welcome, safeguarding education quality will be essential to secure future skills supply.
- Lowering barriers to regular hiring and supporting mobility across sectors and occupations, particularly for small firms, while preserving worker security and work incentives. Steps to curb false self-employment and extend disability insurance to the self-employed move in this direction. With around one third of tasks potentially affected by AI, greater labor mobility will be needed. Shortening employers’ sick pay obligations for small firms—for example by reducing the duration of employer responsibility and pooling residual risks through collective insurance—could lower the cost of open-ended contracts. Reducing the use of non‑compete clauses could further enhance labor mobility. While the proposed reduction in unemployment insurance duration could support faster re-employment its effects should be carefully monitored. These measures should be complemented by well-calibrated active labor market policies to support transitions.
- Closing gaps in access to finance for growth‑stage firms is key to sustaining innovation‑led growth and scaling firms. While early‑stage funding is strong, later‑stage risk capital remains uneven: it is less abundant for high-capital-intensity sectors in which regulatory hurdles, need for specialized facilities and large-scale testing equipment, and supply chain complexity make the transition from lab proof-of-concept to commercial deployment especially lengthy. The proposed National Investment Institution (NII), possibly building on the ongoing integration of Invest NL and Invest International, could help standardize funding processes, improve coordination, provide “bridge” patient equity capital and help better leverage EIB co‑financing and EU instruments. To deliver, it needs clear mandates, arms‑length governance, and a strong crowd‑in model for private finance.
Domestic and EU Policies for Scale and Integration
- Industrial policy is becoming a more explicit tool to steer investment; initiatives in this area need to be managed effectively. The government is targeting economy‑wide R&D spending of 3 percent of GDP and deeper EU‑level integration and coordination in security and other strategic areas. Policies identify markets and technologies with high economic and scale potential, with the approach flanked by proposals for a National Agenda for Disruptive Innovation (NADI) and the NII. Whether this approach delivers value for money and higher overall productivity will depend on effective implementation and the ability to crowd-in private investment. Identifying gaps is critical as economic transitions in the areas of climate, energy, and mobility already benefit from dedicated public funds.
- EU policies are a critical complement to innovation‑led growth as they help address scale, deployment, and market‑access constraints that cannot be resolved at the national level. Further deepening the Single Market will reduce regulatory fragmentation, enabling innovative firms to operate at scale and strengthening incentives for cross‑border investment. EU digital policy frameworks and common data initiatives facilitate cross‑border deployment of AI and digital solutions, and the Net‑Zero Industry Act accelerates diffusion of clean technologies through faster permitting and procurement. Progress on horizontal reforms—particularly the European Innovation Act and proposed 28th Corporate Regime—would further lower compliance costs, improve legal certainty for scaleups, and support deeper product‑ and capital‑market integration. Together, these measures would amplify the impact of domestic R&D policies and strengthen resilience in an increasingly fragmented global environment. The Netherlands should play a lead role in driving EU-level reforms.
Resilience Under Geoeconomic Fragmentation
- Strengthening high-tech resilience requires diversification, strategic interdependence, and deeper EU‑level coordination. Heavy reliance on foreign inputs (30 percent of high‑tech exports) and external demand (60 percent of domestic value added)—mainly from Germany, the U.S., and China—heightens vulnerability to trade tensions and supply chain disruptions. Priorities are to broaden suppliers, identify critical dependencies through transparent, rules‑based screening, leverage strategic interdependencies, and manage critical exposures. At the EU level, deploying sector‑specific initiatives—such as the Chips Act, including for back‑end capacity—advancing the savings and investment union, and deepening capital market integration are critical to achieving scale and supporting ecosystem development. Still, exposure to geoeconomic and technological shocks will remain, requiring sustained resilience efforts.
Financial Sector Policies
- Financial stability risks remain significant: some structural and cyclical vulnerabilities have abated but others may be emerging. Corporate bank credit risk has declined as corporate debt significantly dropped. A modest fall in household debt, together with a declining household debt-to-income ratio and lower mortgage-provider exposure to interest-only loans signal reduced structural risks, amid rising house prices and valuations. Commercial real estate developments in 2025 also signal lower risks: investment transactions and volumes were up in 25H2, and vacancy rates down or stable across segments. Bank exposure to domestic and U.S. sovereign risk has declined. In insurance, pressures on health and non-life insurers eased. Claims inflation—driven by higher building costs, wages and medical costs—had strained profitability but was declining before the Middle East conflict. However, occupational pension funds (PFs) remain vulnerable to margin calls on interest rate derivatives, with liquidity contingent on access to repo markets. Meanwhile, complex linkages between banks and non-banks in private credit markets may be strengthening, raising the risk of contagion from shocks to the investment fund subsector to banks, PFs, and insurers.
- Macroprudential buffers are appropriate given the combination and level of risk. The banking sector is profitable, liquid, and well capitalized, and non-performing loans are low. Insurance sector and occupational PF fundamentals are strong. The countercyclical capital buffer has remained at the 2 percent positive neutral rate since May 2024 reflecting broadly stable cyclical systemic risks and declining but still-significant structural risks. Buffers for systemically-important banks remain in a 0.25–2 percent CET1-to-risk-weighted-assets ratio range.
- Tighter borrower-based macroprudential policy is needed to improve affordability and reduce financial stability risk from housing. Housing valuations remain among the highest in Europe. Housing market risks are partly mitigated by rising real disposable incomes, a large share of fixed-rate mortgages, and full legal recourse in case of default. The risk-weight floor will not be extended beyond end-2026. Declining but still-high household debt warrants additional macroprudential borrower-based measures tightening. Given binding supply constraints, the current borrower-based settings put undue upward pressure on house prices, eroding rather than supporting affordability. In line with recommendations of the 2024 IMF Financial Stability Assessment Program (FSAP), maximum loan-to-value limits should be lowered further to 90 percent, mortgage-interest deductibility gradually phased out, and borrowers further incentivized to reduce reliance on interest-only mortgages.
- Addressing the housing shortage will require ambitious supply‑side reforms. The coalition agreement includes several measures that could materially boost supply. These include limiting construction objections, reducing fragmentation in local construction regulations, and simplifying and easing land-use policies. These measures, together with greater harmonization of EU directives and regulations affecting the housing sector, are useful, but delivering transformational impact will remain challenging. An overhaul of rental market regulation and stronger financial incentives (and higher profitability) for mid-segment private developers and investors are also needed to effectively and durably tackle the housing crunch.
- The second pillar occupational pension system transition is advancing; continued monitoring and proactive management of risks remains warranted. The reform is expected to reduce structural demand for long-dated bonds and interest rate swaps and could increase demand for equity at the margin. Regulatory flexibility to avoid forced asset sales under adverse market conditions, together with staggered implementation, has helped mitigate market and liquidity risks. Close monitoring and supervision and proactive risk management by the Dutch National Bank and the Authority for Financial Markets have helped keep the transition orderly and should continue.
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The IMF team thanks the authorities and other counterparts for the constructive policy dialogue and productive collaboration.
