EUROPEAN COMMISSION Brussels,7.3.2018 SWD(2018) 217 final COMMISSION STAFF WORKING DOCUMENT Country Report The Netherlands 2018

Including an In-Depth Review on the prevention and correction of macroeconomic imbalances

Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2018) 120 final}





Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Summary of the main findings from the Macroeconomic Imbalance Procedure in-depth review 3.1.Imbalances and their gravity 3.2.Evolution, prospects and policy responses 3.3.Overall assessment 4.Reform priorities 4.1.Public finances and taxation 4.2.Financial sector 4.3.Labour market, education and social policies 4.4.Investment* 4.5. Sectoral policies Annex A: Overview table Annex B: Macroeconomic Imbalance Procedure Scoreboard Annex C: Standard tables References

LIST OF Tables Table 1.1:Key economic and financial indicators Table 2.1:CSR progress Table 3.1:MIP assessment matrix (*) – the Netherlands Table 4.1.1:Total public funding for R&D and innovation, 2015-201722 Table 4.2.1:Financial soundness indicators Table 4.4.1:Investment by sector NL and euro area (% of GDP) Table 4.4.2:Non-financial corporate sector income sheet Table 4.5.1:Total productivity growth, 1995-2015 (%) Table B.1:The MIP scoreboard for the Netherlands (AMR 2018) Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard indicators58 Table C.3:Labour market and education indicators59 Table C.4:Social inclusion and health indicators60 Table C.5:Product market performance and policy indicators61 Table C.6:Green growth62 LIST OF Graphs Graph 1.1: GDP per capita (volume, index 2010=100) Graph 1.2: GDP volume and pre-crisis trend

Graph 1.3: GDP Growth and contributions Graph 1.4: Labour market developments Graph 1.5: Wage growth: actual and predicted based on economic fundamentals 6 Source: European Commission (see Kiss and Arpaia, 2011) 6 Graph 1.6: Trends in labour costs and its components 7 Graph 1.7: Average annual real income gain/loss compared to previous generation* 7 Graph 1.8: Net wealth by age 8 Graph 2.1: Overall multiannual implementation of 2011-2017 CSRs to date 10 Graph 4.1.1: Average headline budget balance in different states of the economy 21 Graph 4.2.1: Size of the financial intermediaries and of the debt securities market 23 Graph 4.2.2: House price developments 24 Graph 4.2.3: House price valuation 25 Graph 4.2.4: Private debt 27 Graph 4.2.5: Debt of large non-financial corporations 27 Graph 4.2.6: Intra-group-to-total debt 28 Graph 4.2.7: Interest paid and received by multinationals 28 Graph 4.2.8: Compulsory payment wedge (2016) 29 Graph 4.3.1: Main labour market developments 31 Graph 4.3.2: Relationship between unemployment and nominal wage growth (2001-2016) 31 Graph 4.3.3: Share of part-time work with and without children (2016) 33

Graph 4.3.4: Female labour market participation (with child) 33 Graph 4.3.5: Employment (20-64 year) by type (y-o-y changes) 35 Graph 4.3.6: Self-employed by sector ( % of total employment in the sector) 35 Graph 4.3.7: Transition rate from temporary to permanent employment by quarter 36 Graph 4.4.1: Investment by asset 40 Graph 4.4.2: Domestic and foreign investment 40 Graph 4.4.3: Net lending/borrowing by sector 41 Graph 4.4.4: Non-financial corporate sector saving and investment 41 Graph 4.4.5: Gross savings by non-financial corporations 41 Graph 4.4.6: Gross operating surplus and components 42 Graph 4.4.7: Net operating surplus by sector 42 Graph 4.4.8: Net distributed income ratios 43 Graph 4.4.9: Corporate savings by firm size 43 Graph 4.4.10: Current account 44 Graph 4.4.11: Trade balance goods by product group (2016) 44 Graph 4.4.12: Trade balance services by product group (2016) 44 Graph 4.4.13: NIIP and cumulative current account surplus 45 Graph 4.4.14: Euro area output and aggregate demand 45 Graph 4.5.1: Contributions to changes in growth of real value added 47 Graph 4.5.2: Productivity development by sector 47

Graph 4.5.3: Productivity growth by firm productivity level (leaders/laggards) 48 Graph 4.5.4: R&D intensity in manufacturing 49 LIST OF Boxes Box 2.1: Tangible results delivered through EU support to structural change in the Netherlands Box 3.1: Euro area spillovers Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 4.3.1: Implications of temporary employment on income Box 4.4.1: Investment challenges and reforms in the Netherlands Box 4.5.1: Policy highlight: Public procurement expertise centre in the Netherlands Executive summary The Netherlands’ economic expansion remains strong and offers a window of opportunity to boost the reform momentum. In its coalition agreement 2018-2021, the new government announced a number of measures in the field of fiscal policy, housing market, labour market and pensions. Ensuring that these measures are swiftly implemented would improve domestic demand and support potential growth. While measures have been announced to reduce the debt bias for households, incentives to incur debt remain. The labour market continued its recovery in 2017 and performed well across the board, although the challenges in the field of pensions and labour market segmentation remain.( ) Economic growth accelerated to 3.1 % in 2017, the fastest in a decade. The solid economic performance in 2017 was broad based, with both domestic demand and net exports making a positive contribution to growth. The European Commission’s Interim Winter 2018 forecast projects economic growth of 2.9 % for 2018 and 2.5 % for 2019, with the domestic economy’s strong performance expected to continue. The growth contribution from net exports is expected to be fairly limited given strong domestic demand, which drives up imports. The investment rate has returned to its long-term average. Residential investment volumes in particular have been highly cyclical, dropping sharply after the crisis and experiencing double-digit growth in recent years. Corporate investment in equipment grew in line with GDP and is expected to accelerate on the back of rising capacity utilisation rates. Public and private investment in R&D increased to 2.0 % in 2016, falling short of the Europe 2020 target of 2.5 % of GDP. While barriers to private investment appear to be minor, procedures for obtaining building permits are lengthy compared to other Member States. A buoyant housing market boosts household assets, but may also lead to further imbalances. Driven by low interest rates, house prices and transaction volumes have increased sharply in recent years. Rising house prices have positive wealth effects and gradually lift affected households out of negative housing equity. At national level, house price valuation indicators do not point to overvaluation. However, there are signs that house price increases in some regions cannot be explained by fundamental factors alone. Nominal debt levels have started to rise again, albeit much slower than house price growth, which limits financial vulnerabilities. Wage growth remained moderate despite a tightening labour market. In 2016, wage growth outpaced productivity gains, resulting in a small increase in the nominal unit labour cost. However, taken over a longer period wage growth has been below the level that could be expected based on fundamental drivers such as unemployment, productivity and inflation. In the next years, wage growth is expected to increase in line with further labour market tightening. The new government announced a large discretionary fiscal stimulus package for 2018-2021. The budget surplus is expected to have increased to 0.7 % in 2017, while the general government debt-to-GDP ratio fell below the 60 % threshold. The government announced increased spending on social affairs (in particular child-related benefits), defence, education and innovation. The budgetary framework has been amended to exclude a number of cyclical expenditures from its fixed budgetary ceilings. This improves its stabilisation function on the expenditure side, while increasing the cyclicality of the budget. Fiscal sustainability has improved thanks to headline budget surpluses, higher GDP growth and a favourable public debt trajectory. This has led to the Netherlands being designated as ‘low risk’ based on the Commission’s baseline medium-term projections. Some indicators suggest that the Netherlands' tax rules are used by multinationals engaged in aggressive tax planning structures. The Netherlands has taken steps to amend certain aspects of its tax system that may facilitate aggressive tax planning, and the government has announced a reform agenda to further amend certain aspects of the tax system. For the time being, the absence of withholding taxes on dividend payments by co-operatives, the possibility for hybrid mismatches using the limited partnership (CV) and the absence of withholding taxes on royalties and interest payments, combined with the lack of some anti-abuse rules, may facilitate aggressive tax planning.

The Netherlands has made some progress in addressing the 2017 country-specific recommendations (CSRs). Substantial progress has been made in supporting potential growth and domestic demand; some progress has been made in R&D investment. The government announced that it will speed up the cut in tax relief on mortgage interest payments, and included it in the coalition agreement. However, only some steps were taken to reduce remaining distortions in the housing market, leading to some progress overall on CSR 1. The Netherlands has made limited progress in tackling remaining barriers to hiring staff on permanent contracts. No concrete measures have been taken yet to reduce distortive tax incentives that favour self-employment or to increase the social protection coverage for the self-employed. The government reaffirmed its intention to reform the second pension pillar, although no new measures have been taken since the CSRs were adopted.. Limited progress has been made in creating conditions to promote higher real wage growth while respecting the role of social partners, leading to limited progress overall on CSR 2. On progress in reaching the national targets under the Europe 2020 Strategy (see also Annex A), the Netherlands is doing well on employment, greenhouse gas emissions, energy efficiency, early school leaving and tertiary education attainment. However, more effort is needed on R&D investment, renewable energy and poverty reduction. The Netherlands performs relatively well on the indicators of the Social Scoreboard supporting the European Pillar of Social Rights. The labour market performance and social outcomes are good and inequality is low. Few young people are not in employment, education or training. The share of people at risk of poverty or social exclusion is low. However, certain issues merit attention such as low but slightly increasing income inequality and good but weakening impact of social transfers in reducing poverty. The main findings of the in-depth review contained in this report, and the related policy challenges, are as follows: ·Housing market institutions have contributed to high household debt levels, and inefficiencies remain. Owner-occupancy rates are high and have been strengthened by the generous tax relief on mortgage interest payments. Before the crisis, interest-only mortgages and very high loan-to-value ratios drove up household indebtedness to around 120 % of GDP in 2009. Although it is falling gradually, the household debt-to-GDP ratio is still twice the euro area average. While mortgage tax relief is being cut gradually, the effective subsidy to debt-financed homeownership remains substantial. ·The financial attractiveness of owner-occupancy and social housing partly accounts for the underdeveloped private rental market. The social housing and rent-controlled sector is large compared to other Member States. The private rental market is the only non-subsidised housing sector and remains underdeveloped. The lack of a well-functioning middle segment on the rental market encourages households to buy rather than rent, leading to high debt-to-income ratios and financial vulnerability at a young age. ·The current account continues to show a marked surplus. The Netherlands has had a current account surplus of 6 % of GDP on average for the last 30 years. This high level is mostly accounted for by the non-financial corporate (NFC) sector. A comparatively large corporate savings surplus is rooted in a relatively high operating surplus, together with high foreign investment income and low levels of profit distribution by multinationals. After the crisis, household debt reduction together with fiscal consolidation saw the current account surplus peak at 10.3 % of GDP in 2012, after which it declined to 9 % in 2016. The European Commission’s Autumn 2017 forecast projects a gradual decline in the current account balance following buoyant domestic demand. Simulations in this report show that an increase in public investment would reduce the trade surplus and would also be passed on to the euro area through potential spillover effects, leading to higher economic growth of the other euro area countries. ·The second pillar pension system plays a key role in shaping household finances, especially in combination with high mortgage debt. While the pension system performs well on pension adequacy and fiscal sustainability, it holds drawbacks in terms of intergenerational fairness, transparency and flexibility. Moreover, second pillar pension contributions are high and fluctuate depending on the financial performance of pension funds. As such, it may affect household spending in a pro-cyclical way, with risks seemingly to weigh on young age groups as lower indexation and higher pension contributions have been the primary means of adjustment. Importantly, households combine substantial housing and pension wealth with high mortgage debt. However, the former are highly illiquid and unevenly distributed across generations. This makes households vulnerable to economic shocks and accentuates the pro-cyclical dynamics of household finances. Other key structural issues analysed in this report which point to particular challenges facing the Dutch economy, are as follows: ·Despite a reduction in the tax burden, non-tax compulsory payments are expected to remain high. The Dutch government announced a tax reform for 2019 that will reduce the number of tax brackets from four to two and lower the top tax rate from 52 % to 49 %. The overall income tax burden is expected to decline. However, non-tax compulsory payments such as pension contributions and healthcare premiums drive up the total compulsory payment wedge on labour. While this may be equitable, it could also give rise to other inefficiencies, especially in terms of the above-mentioned link between compulsory pension contributions and household finances. ·The labour market continued its recovery in 2017 and performed well in terms of job creation, although the challenges of labour market segmentation and integration of people with a migrant background remain. Total employment rose steadily, while the unemployment rate continued to fall in 2017. Flexible employment constitutes a relatively large and increasing share of the labour market. The self-employed are not obliged to be insured against labour-related risks such as accidents at work, unemployment and old age (second pillar); which could affect the sustainability of the social security system in the long run. The new government announced several measures potentially addressing segmentation, but the specifics, timeframe and possible impact remain unclear. Finally, there is still untapped labour potential in the high number of women working part-time and also people born outside the EU given that their employment rate lags behind that of those born in the Netherlands. ·School education outcomes are above the EU average, but have worsened since 2012. In the 2015 Programme for International Student Assessment (PISA), the proportion of low achievers increased in all three core fields. Differences between schools have one of the biggest impact on pupils’ performance, and are strongly linked to the different educational tracks they offer. ·According to worldwide rankings, the Netherlands has an efficient and productive R&D sector, but growth-friendly public expenditure is lower than that of top performers. The country’s high-performing education system and scientific base provide a sound basis for boosting innovation and growth capacity through education and R&D activities. Although substantial additional investment has been announced, public R&D intensity is set to decline. ·The reduction of CO2 emissions is on track, but the share of renewable energy production is low. The Netherlands is expected to miss its national target of 14 % renewable energy production by 2020, with the National Energy Outlook 2017 estimating a renewable energy share of 12.5 % by 2020. 1. Economic situation and outlook GDP growth Economic growth has accelerated to 3.1 % in 2017, the highest rate in 10 years. This expansion follows on the back of a relatively strong recovery in recent years, but it should be seen in the context of a prolonged double dip in 2012-2013. While the acceleration of economic growth in 2016 was mostly driven by labour utilisation (the number of hours worked), both labour utilisation and productivity growth contributed to GDP per capita growth in 2017 (by 2 percentage points and 1 percentage point respectively). In per capita terms, GDP is 3 % above pre-crisis peaks and is growing rapidly (see Graph 1.1). That said, under the assumption that economic growth returns to potential growth rates after 2019, the permanent impact of the crisis is estimated at roughly 4 % of GDP (see Graph 1.2) ( ). Graph 1.1:GDP per capita (volume, index 2010=100) Source: European Commission (Eurostat) As the business cycle matures, private consumption is expected to be the main growth driver. According to the European Commission’s Winter 2018 Interim Economic Forecast, real GDP is projected to increase by 2.9 % in 2018 and 2.5 % in 2019. Private consumption is set to pick up as wage and employment growth improve household disposable income, while rising house prices lead to positive wealth effects. As a result of the new government’s fiscal plans, public consumption is set to increase by almost 3 % in real terms in 2018 and 2019. Corporate investment in equipment is expected to grow as capacity utilisation rates have reached pre-crisis levels. However, this is partly offset by a slowdown in residential investment, which has recorded double-digit growth in recent years. The growth contribution from net exports is expected to be fairly limited given strong domestic demand, which drives up imports (see Graph 1.3). Graph 1.2:GDP volume and pre-crisis trend Source: European Commission. The pre-crisis trend is approximated by a linear estimate on Q1-2001 to Q4-2007.

Inflation Inflation is picking up. Driven mainly by energy prices, consumer price inflation is expected to reach 1.3 % in 2017 after remaining muted in 2015 and 2016. Looking ahead, inflation is expected to pick up further based on higher wage growth, which drives up prices in particular in the service sector. In 2019, inflation is expected to increase to 2.3 % as the planned increases in indirect taxes (VAT and energy taxes) kick in. Graph 1.3:GDP Growth and contributions Source: European Commission (Winter 2018 Interi,m Economic forecast) Labour market Employment growth accelerated further in 2017. Employment growth increased from 1 % year-on-year in 2015 and early 2016, to 2.1 % in 2017. The increase in the number of employed persons is mainly due to an increase in temporary and self-employment, although the number of permanent contracts has also increased in the final quarters of 2017 after a period of negative growth. The unemployment rate fell to 4.9 % of the labour force in 2017, down from 6.0 % in 2016 and well below the EU average. Long-term unemployment, which increased substantially since 2009, declined for all age groups. In Q3-2017 it reached 1.9 % of the labour force, down from 2.4 % in Q3-2016 (see Section 4.3). While overall labour market participation remains high, an untapped potential remains, especially related to part-time employment of women and for people with a migrant background. Wage growth has been moderate in the recent years, but is expected to pick up as a result of a tightening labour market. In 2017, nominal compensation per employee is expected to have increased moderately by 1.7 %. This is below the level that could be expected based on the level of the economic fundamentals. For 2018, trade unions have formulated substantially higher wage demands compared to previous years. In combination with a tightening of the labour market, this is expected to result in an acceleration of nominal wage growth over the coming years. Nevertheless, wage growth remains low in comparison with fundamental drivers (see Graph 1.5). Graph 1.4:Labour market developments Source: European Commission (Statistics Netherlands; seasonally adjusted data) Graph 1.5:Wage growth: actual and predicted based on economic fundamentals Source: European Commission (see Kiss and Arpaia, 2011) Unit labour costs are expected to increase in the coming years. In 2016, real compensation per employee increased by 0.6 %, which resulted in a slight increase in unit labour costs (0.3 %). However, in 2017 and 2018, a tightening of the labour market is expected to push up real wage growth. In combination with low productivity growth, this is expected to result in a stronger increase in unit labour costs (1.8 % in 2018). This level is above the average in the euro area, indicating the risk of a slight loss in competitiveness. However, from a long run perspective cost competiveness in the Netherlands evolved broadly in line with the euro area as the accumulated increase in unit labour cost in the period 2002-2016 was very similar in the Netherlands (24.5 %) as compared to the euro area (25.4 %) (see Graph 1.6). Graph 1.6:Trends in labour costs and its components Source: European Commission (Eurostat) Social developments Income inequality is relatively low compared to the EU average. The Netherlands displays comparatively good outcomes with respect to social protection and inclusion. By international standards poverty is low, and taxes and transfers are effective in reducing income inequality and poverty. However, the capacity of the social system to reduce poverty shows signs of weakening (see Section 4.3). There are signs that intergenerational income inequality is increasing. In theory, young cohorts typically earn more than older generations at the same age as economic growth translates into real income gains over time. This is also largely supported by income data for Dutch households: for any given age, younger birth cohorts earn more than previous birth cohorts (see Graph 1.7 which shows the average income difference with the previous birth cohort). For most birth cohorts, this income gain is roughly EUR 3 000 per year. Although there are increasingly few data points, it is striking that very young income earners on average earn less than previous generations. This could be a consequence of the economic downturn during the years after 2008. Graph 1.7:Average annual real income gain/loss compared to previous generation* Source: European Commission (Statistics Netherlands, household income data). *) 5 year birth cohort. Inequality in net wealth is partly explained by household debt and life cycle patterns. The relatively high inequality in net wealth is to a large extent driven by high mortgage debt and negative net housing equity ('underwater mortgages', see Section 4.2.4). Excluding households with negative wealth, inequality in net wealth is much lower and more in line with other EU countries. Life cycle patterns are also important. As wealth represents cumulated savings over the years, a large proportion of total net wealth is concentrated among relatively old households. Median net wealth grows until the age of 65 where it peaks around EUR 100 000, after which it starts to decline (see Graph 1.8). Net wealth inequality tends to be smaller within age groups than between, which implies that the distribution is less skewed from a life cycle perspective. Graph 1.8:Net wealth by age Source: European Commission (based on Statistics Netherlands wealth data for 2014) External position The large current account surplus is expected to have increased in 2017, and to decline only slowly in the next years. Following muted domestic demand (see European Commission 2017b, Section 1.2) and a sharp recovery in international trade after the crisis, the current account surplus peaked at more than 10 % of GDP in 2012. Largely as a result of declining net primary incomes, in particular lower income from foreign direct investment, the current account surplus fell to 9 % of GDP in 2016. However, increased profitability of the foreign activities of Dutch multinationals led to an increase in the balance of primary incomes in early 2017, which improved the overall current account balance. Looking ahead, the trade surplus is projected to continue to decline, albeit slowly as buoyant domestic demand coincides with growth in world trade, which is set to continue to fuel Dutch export growth.

Public finances Despite the new government announcing a substantial fiscal stimulus package, the budget is expected to remain in surplus over the coming years. The headline government surplus is set to fall from 0.7 % of GDP in 2017 to 0.5 % in 2018, and to rebound to 0.9 % in 2019 based on robust revenue growth and government expenditure growth below the level of nominal GDP growth. The structural budget balance, which is the nominal budget balance corrected for the impact of the economic cycle and one-off measures, is expected to have reached 0.3 % of GDP in 2017, and set to decline to -0.2 % in 2018 and -0.1 % in 2019. The debt-to-GDP ratio fell below 60 % during the course of 2017. This was mainly due to sizable stock-flow adjustments resulting from the reprivatisation of financial institutions, and strong nominal GDP growth. Debt is expected to continue to decline to 51.5 % of GDP in 2019. Table 1.1:Key economic and financial indicators Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter 2018 Interim forecast for real GDP and HICP, Autumn forecast 2017 otherwise) 2. Progress with country-specific recommendations Progress with the implementation of the recommendations addressed to the Netherlands in 2017( ) has to be seen in a longer-term perspective since the introduction of the European Semester in 2011. Looking at the multi-annual assessment of the implementation of the CSRs since these were first adopted, 78 % of all the CSRs addressed to Netherlands have recorded at least 'some progress'. 22 % of these CSRs recorded 'limited' or 'no progress' (see Graph 2.1). Substantial progress and full implementation have been achieved in several areas of the labour market, for instance increasing the statutory retirement age and enhancing the participation of older workers, people with disabilities and migrants. Other areas with substantial progress have been the reform of the long-term care as well as the protection of expenditure directly relevant for growth such as education, innovation and research. Graph 2.1:Overall multiannual implementation of 2011-2017 CSRs to date Source: European Commission The Netherlands has secured a timely and durable correction of its excessive deficit. Following the house price correction and the financial crisis, the Netherlands went through a period marked by an increasing debt-to-GDP ratio and a worsening budget balance, leading to an excessive deficit. From 2009-2013, a significant consolidation effort led to the abrogation of the excessive deficit procedure in 2013 and has ensured continuous improvement in the budgetary situation ever since. In 2017, the Netherlands are expected to have reached a government budget surplus of 0.7 % of GDP and a debt-to-GDP ratio below the 60 % threshold for the first time since 2011. During the fiscal consolidation period, public funding to research and innovation has stabilised at around 0.9 % of GDP. This fully meets the recommendation to protect such investments. Nevertheless, at 2.0 % of GDP, the total R&D intensity has stagnated below the target of 2.5 %. This underachievement is mostly the result of low private R&D spending (1.2 % of GDP in 2016). While the figure is only slightly below the euro area average (1.4 % of GDP) it is considerably lower than in other Member States with similar levels of educational attainment and economic development (e.g. Sweden 2.3 % of GDP, and Germany 2 % of GDP). In recent years, the Netherlands has taken substantial measures reforming the long-term care and retirement age, and announced plans to reform the second pillar of the pension system. A major reform has been implemented to decentralise long-term care, aimed at achieving efficiency gains and providing tailor-made support. Nevertheless, expenditure in this sector is still projected to increase relatively fast compared to the EU average, among others due to the implementation of a framework to improve the quality of long-term care (‘Kwaliteitskader Verpleeghuiszorg’). The statutory retirement age in the first pillar is being increased in steps to 67 by 2021 and is linked to life expectancy thereafter. The government announced that it plans to reform the second pillar of the pension system based on the previously started dialogue with social partners. Specific measures and the exact timeline have not yet been specified. Important reforms in the housing market have been taken, but distortions remain. In line with 2017 CSR 1, the government has decided to accelerate the reduction of the generous mortgage interest tax deductibility (MID) from currently 0.5 pp to 3 pps per year from 2020 onwards until the MID reaches 37 % in 2023. A requirement to repay the mortgage principal in order to qualify for tax relief had previously been introduced as well. On the rental sector, some progress has been made by implementing a point system that allows for more market-oriented rents and higher rent increases in the regulated sector for tenants with an income above a certain threshold. By introducing short-term rental contracts, the government provides scope for a more flexible rental market, but it is too early to assess the impact of these reforms. Despite the reforms, distortions remain in the housing market, creating a debt bias and influencing the decision to buy or rent. Substantial progress has been made on improving participation in the labour market, although important challenges remain on labour market segmentation. In recent years, the Dutch government has taken several measures such as the Participation Act (‘Participatiewet’) or the Action Plan 50+ (‘Actieplan 50+’) to improve the employability of people at the margin of the labour market, including disabled and older workers. Reforms were also carried out on employment protection and unemployment benefits to increase labour force mobility. Nevertheless, labour market segmentation remains a concern, as reflected by the absolute and relative increase in flexible employment contracts. The Netherlands has made some progress ( ) in addressing the 2017 country-specific recommendations. Substantial progress has been made on the fiscal-structural part of CSR 1, with the government set to implement additional fiscal measures in 2018 that support domestic demand, in particular increasing expenditure on security and on teachers’ salaries. From 2018 onwards, R&D investment will be increased. On the housing market, some progress has been made. The government has taken some measures to support the development of the middle segment rental market. For the owner-occupied market, the government announced that it will speed up the MID reduction from 2020 onwards until it reaches 37 % in 2023, which is still relatively high. For CSR 2, limited progress has been made as the government has only announced its intention to address the problem of labour market segmentation. Concrete measures have not yet been revealed. Wage growth is slowly increasing, with limited progress made on promoting higher real wage growth. No progress has been made on reforming the second pillar of the pension system; while the government announced its intention, no details have been communicated. ESI Funds address key challenges to inclusive growth and convergence. In the Netherlands, this is done notably by stimulating investments in R&D in the private sector for experimental development of new products, the set-up of living labs and the stimulation of cooperation between SMEs and research institutions. ESI Funds also invest in coaching people who are at a distance from the labour market and in measures that help improve the job prospects of older workers. Table 2.1:CSR progress Source: European Commission

Box 2.1: Tangible results delivered through EU support to structural change in the Netherlands The Netherlands is a beneficiary of European Structural and Investment Funds (ESI Funds) support and can receive up to EUR 1.9 billion until 2020. This represents around 1 % of public investment( I ) annually over the period 2014-2018. By 31 December 2017, an estimated EUR 1.2 billion (62 % of the total) was allocated to projects on the ground. These investments helped 309 enterprises to cooperate with research institutions and 1 100 SMEs to introduce new products to the market. Furthermore, 212 000 people had benefited from actions fostering social inclusion and 5 200 enterprises received support to adapt the working environment to prolonged working lives. Out of the EU financing, EUR 97 million will be invested through financial instruments. ESI Funds help address structural policy challenges and implement country-specific recommendations. Investments in research and development in the private sector are stimulated, among others, by providing loans, grants or guarantees for experimental development of new products, by setting-up living labs or by facilitating and stimulating cooperation between SMEs and research institutions. The Funds also invest in coaching for people with a distance to the labour market which in turn helps enhance the overall labour market participation. Furthermore, specific measures are supported which improve the job prospects of older workers. In addition, as a precondition for ESI Funds support( II ), the Dutch regions developed Smart Specialisation Strategies for research and innovation which help focus the resources and efforts on product specialisation with a strong market potential. The Netherlands is also advancing the take up of the European Fund for Strategic Investments (EFSI). As of December 2017, overall financing volume of operations approved under the EFSI amounted to EUR 2.2 billion, which is expected to trigger total private and public investment of EUR 8 billion. More specifically, 17 projects involving the Netherlands have been approved so far under the Infrastructure and Innovation Window (including 4 multi-country projects), amounting to EUR 2.1 billion in EIB financing under the EFSI. This is expected to trigger about EUR 7.5 billion in investments. Under the SME Window, 7 agreements with financial intermediaries have been approved so far. European Investment Fund financing enabled by the EFSI amounts to EUR 135 million, which is expected to mobilise approximatively EUR 515 million in total investment. Over 1 100 smaller companies or start-ups will benefit from this support. Transport ranks first in terms of operations and volume approved, followed by energy and SMEs. Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By the end of 2017, the Netherlands has signed agreements for EUR 357 million for projects under the Connecting Europe Facility. For more information, see https://cohesiondata.ec.europa.eu/countries/NL 3. Summary of the main findings from the Macroeconomic Imbalance Procedure in-depth review The in-depth review for the Dutch economy is presented in this report. In spring 2017, the Netherlands were identified as having macroeconomic imbalances, in particular relating to a high current account surplus (reflecting a saving and investment balance) and a high private debt level, in particular household mortgages and non-financial corporation (NFC) debt. The Commission's 2018 Alert Mechanism Report concluded that a new in-depth review should be undertaken for the Netherlands to assess developments relating to identified imbalances. Analyses relevant for the in-depth review can be found in the following sections: the tax and regulatory framework in Section 4.1; private indebtedness in Section 4.2; wage developments in 4.3; and saving and investment imbalances in Section 4.4. Potential effects of a public investment shock on the trade balance are discussed in Box 3.1. 3.1. Imbalances and their gravity The Netherlands has recorded persistent current account surpluses for more than three decades. In 2016, the three-year average for the current account surplus was 8.8 % of GDP, higher than any other EU country (see Section 4.4). As such, the Dutch surplus contributed 0.6 pp to the euro area surplus in 2016 (by comparison, the German contribution was 2.4 pps). From a real trade perspective, the main driver of the current account remains the strong trade surplus in goods. A savings-investment approach points to the non-financial corporate (NFC) sector as main driver of the surplus. The net lending is mostly explained by the strong net lending position of NFCs, which have increased their excess savings since 2 000. The high savings are also due to a sharp increase in savings by multinationals, which distribute only a low share of their profits, thereby generating a statistical upward effect on the external net lending position. In recent years, the household sector reduced its saving surplus, while the government recorded a small surplus in 2016 for the first time in eight years (see Section 4.4). Pension funds hold the largest share of household savings and invest mainly in securities and mostly abroad, which further increases the surplus. Total assets held by pension funds have reached almost 200 % of GDP in 2016, of which 17 % is invested in the Netherlands (see Section 4.2.5). The saving-investment imbalance peaked in 2012, at the midst of the prolonged second dip in the Dutch economy, partly driven by pro-cyclical pension institutions. This may point to a suboptimal allocation of resources, leaving room for increased growth and welfare. Private sector debt remains high. In 2016, it stood at 222 % of GDP, with NFCs contributing slightly more (114 % of GDP) than households (108 % of GDP). While NFC debt has roughly remained constant in terms of GDP, household debt has increased considerably over the past 20 years. The build-up of household debt was driven by the regulatory framework, tax incentives and large increases in both house prices and associated mortgage lending. While household liabilities are high, in particular mortgage debt, they coexist with large illiquid assets in the form of housing wealth and pension wealth. NFC debt can largely be linked to multinationals, which hold more than two thirds of total NFC debt. Foreign large NFCs hold mostly intra-group debt, on which interest is being charged by one group company to another. This suggests that debt is being used for tax reasons, as MNEs can use debt shifting to lower their tax burden via increased interest payments to other group companies. The medium-to-large size of the Dutch economy allows for moderate outward spillovers for other Member States via the trade channel, with the exception of Belgium, where they can be relatively large. As a result of close financial interlinkages with neighbouring countries, outward financial spillovers are potentially more relevant for a wider set of countries, including France and the UK. Conversely, the high degree of economic and financial openness of the Dutch economy expose it to potentially significant inward spillovers, in particular from neighbouring Member States and from the US, along trade, financial and banking channels. Box 3.1 illustrates how a boost to government investment in the Netherlands can produce both positive domestic and cross-border effects. The simulation presented therein follows the spirit of the euro area recommendation 1( ), in particular as regards improving growth potential and fostering investment in Member States with large external surpluses. 3.2. Evolution, prospects and policy responses The surplus position is projected to continue. It is expected to reach 9 % in 2017, before slowing to 8.7 % in 2018 and 8.4 % in 2019, according to the European Commission Autumn 2017 forecast. The expected decline is mostly due to buoyant domestic demand (see Section 1). In the coming years, wage growth is expected to increase on the back of significantly higher wage demands by trade unions and a further tightening of the labour market. In addition, the government has announced a fiscal stimulus package, which is expected to have a dampening effect on the current account balance. Key measures include an increase in defence and security spending (EUR 1.3 billion), social transfers (EUR 0.6 billion) and salaries of primary school teachers (EUR 0.3 billion). Private sector debt is expected to remain high. Household debt (mainly mortgages) has increased again, which can partly be attributed to rising house prices, even though credit growth remains well below house price increases. At the same time, rising house prices have positive wealth effects and will gradually lift affected households out of negative housing equity. In relative terms, the private debt-to-GDP ratio is expected to decrease, due to positive GDP growth (passive deleveraging).

The tax system currently treats mortgage and NFC debt favourably. Though the government has announced to accelerate the reduction in mortgage interest deductibility, large tax incentives to buy houses remain. The underdeveloped private rental market does not offer sufficient alternatives to buying. NFC debt is expected to remain high. In 2019, the government will implement the EU Anti-Tax Avoidance Directive (ATAD), which aims among others to discourage companies from creating artificial debt arrangements designed to minimise taxes. 3.3. Overall assessment The Netherlands is experiencing imbalances due to its large current account surplus and the high private debt level. The current account surplus is driven by comparatively low household disposable income( ), large foreign investments by domestic pension funds and capital flows of multinationals. The high level of private debt mainly consists of household mortgage debt and (intra-group) NFC debt; both are influenced by tax incentives. While high mortgage debt makes households vulnerable to financial shocks, this risk is limited in the case of intra-group debt of NFC debt, as this is most likely being used for tax optimisation purposes. Both the private debt and the external surplus are expected to remain at very high levels, with a small reduction in the current account surplus in the coming years. The positive economic outlook, the government’s fiscal stimulus package and expected higher wage growth are likely to boost domestic demand and have a dampening effect on the current account balance. The budgetary stance will be less restrictive in 2018 and therefore less of a drag on domestic demand than in the immediate aftermath of the crisis, with positive effects on domestic demand and thus on the rebalancing of the current account. Private debt levels are expected to remain high as nominal debt is increasing again. The observed deleveraging has been passive, due to buoyant nominal GDP growth. Table 3.1:MIP assessment matrix (*) – the Netherlands (Continued on the next page) Table (continued) Source: European Commission Box 3.1: Euro area spillovers The new government's fiscal plans include a discretionary public spending impulse of almost 1 % of GDP in 2019 compared to a zero policy baseline. These measures are likely to yield a positive impact on economic growth in the Netherlands. High trade openness of the Dutch economy suggests potentially important spillovers to the rest of the euro area (REA), which is balanced, however, by the limited economic size of the Netherlands compared to the EA aggregate (see also European Commission, 2016a). To illustrate the size of potential GDP spillovers, this box describes the impact of a permanent debt-financed increase in productive public investment by 1 % of GDP on the Dutch GDP level, the REA GDP level and the Dutch trade balance. A public investment impulse could be motivated by a favourable debt trajectory, low borrowing costs and monetary policy constrained by a zero lower bound for interest rates. In essence, such a scenario would undo the fall in public investment since 2009. Simulations with the European Commission's QUEST model( III ) show a positive impact on the level of Dutch real GDP of around 0.5 % in the first year, increasing to 0.9 % after five years. The trade surplus is reduced by around 0.1 % of GDP from the first year onwards. The spillover of the domestic investment impulse via the trade channel is positive. In particular, a 1 % of GDP fiscal expansion via public investment in the Netherlands raises real GDP in the REA by circa 0.1 %. 4. Reform priorities 4.1. Public finances and taxation 4.1.1. TAXATION* ( ) New fiscal measures will reduce the tax burden on labour. The new government has announced a package to reduce income taxes by EUR 0.5 billion (0.1 % of GDP) in 2018, which will increase gradually to EUR 6.2 billion (0.9 % of GDP) in 2021. The measures are targeted at all income groups. The tax burden on labour will be reduced by lowering the income tax, which is primarily achieved by reducing the number of tax brackets from four to two, with a base rate of 36.95 % in the lower bracket and a top rate of 49.5 % (for income above EUR 68 600). Another important measure is the increase in the general tax credit and labour tax credit, which will be increased in total by EUR 1.5 billion (0.2 % of GDP) in 2019, EUR 3.3 billion (0.5 % of GDP) in 2020 and permanently to EUR 4.7 billion (0.7 % of GDP) from 2021 onwards. Child benefits and childcare allowances will be increased by EUR 0.5 billion (0.1 % of GDP) in 2019 and by around EUR 1 billion from 2020 onwards. At the same time, some tax measures will be introduced to mitigate the drop in tax revenue. The energy tax for households will be increased, generating EUR 0.5 billion in 2018 and an extra EUR 1 billion from 2021 onwards. The reduced VAT rate will rise from 6 % to 9 %, which is expected to generate an extra EUR 2.6 billion per year from 2019 onwards. In general, the income tax package implies a tax shift away from labour to sources of revenue less detrimental to growth. To strengthen the fiscal investment climate for companies, the corporate tax rate will be gradually reduced from 25 % to ultimately 21 % (24 % in 2019, 22.5 % in 2020 and 21 % in 2021). The low rate (in 2017 for taxable profit up to EUR 200 000) will be reduced in the same way from 20 % to 16 %. Some indicators continue to suggest that the country’s corporate tax rules are used by companies engaged in aggressive tax planning (ATP). As shown in a study (IHS, 2018), the Netherlands' high inward and outward foreign direct investment (FDI) stocks( ) can only be explained in part by real economic activities taking place in the Netherlands. The high level of dividend, royalty and interest payments made via the Netherlands( ) (see Section 4.4) continue to suggest that the country’s tax rules are used by companies that engage in ATP. A large share of these FDI stocks is held by so-called ‘special purpose entities’ (SPE)( ). The absence of broad withholding taxes on dividend payments by co-operatives, the possibility for hybrid mismatches by using the limited partnership (CV) and the absence of withholding taxes on royalties and interest payments (which may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction),, combined with the lack of some anti-abuse rules, may facilitate ATP. The possibility for hybrid mismatches, using the CV will cease to exist with the implementation of the EU directive on hybrid mismatches, on the first of January 2020 at the latest. A reform agenda has been announced to tackle certain aspects of the Dutch tax system that may facilitate ATP. Withholding taxes on interest and royalty payments will be introduced for payments to low tax jurisdictions and in cases of abuse. While the withholding tax on dividends, which is currently 15 %, will be abolished in principle, it will remain in abuse situations and for payments to low tax jurisdictions. The timeframe for these reforms as well as for introducing withholding taxes on royalties and interests is not yet clear. These plans will not affect the proposed introduction of a dividend withholding tax on payments by cooperatives that largely operate as holding/financing companies, which will enter into force on 1 January 2018. The definitions of "abuse" and "low-tax jurisdiction" in the context of the partial abolition of dividend withholding taxes and the introduction of withholding taxes on interest and royalties will be important. The interest deduction restriction of the Anti-Tax Avoidance Directive (ATAD) will be introduced in the shape of an earnings stripping measure. At the same time several existing interest deduction restrictions will be abolished, but it is not yet clear which. Section 10a of the Corporation Tax Act, which provides for a base erosion rule, will be retained. A generic minimum capital requirement will be introduced (thin cap rule) that limits interest deduction on loan capital in excess of 92 % of the commercial balance sheet total. (Foreign) investors investing via fiscal investment institutions (‘fiscale beleggingsinstellingen’) exempt from corporate tax were taxed on their property by means of the dividend withholding tax. Now that the dividend withholding tax is set to be abolished in principle, fiscal investment institutions will no longer be able to invest directly in property. This is intended to prevent such investments from avoiding both corporate tax and dividend withholding tax. The Netherlands has taken measures to amend aspects of its tax system that facilitate ATP. The Code of Conduct Group (Business Taxation)( ) has approved the amended Dutch patent box. The old system is subject to a grandfathering clause that runs until June 2021. Under the new system( ) there will be a stronger link between the intellectual property (IP) that can benefit from the system and the R&D that created this IP. The effective tax rate of the patent box has been increased from 5 % to 7 % in 2018. While economic evidence on the effectiveness of patent boxes as a means to encourage R&D remains limited, they may be used as tax competition tools. The rules for the trust sector will be tightened. The powers of the supervisory authority for the trust sector (De Nederlandsche Bank) will be extended. In response to the Panama Papers the information position and the abuse detection capability of the tax authorities will be strengthened. In addition, the provisions of the Anti-Tax Avoidance Directives must be transposed into national law by the end of 2018 and 2019. It will be important to assess to what extent new measures, whether announced or legislated, in conjunction with the effect of the transposition of the directive, limit the scope for ATP in the Netherlands. The tax rate on income from substantial shareholdings will increase. It will gradually rise from 25 % to 28.5 % by 2021 to maintain the balance between self-employed persons subject to income tax and self-employed persons who operate via a company subject to corporate tax. The exemption per person from the investment yield tax will increase from EUR 25 000 to EUR 30 000. The expected yield will follow real interest rates on savings more closely. 4.1.2 LONG-TERM SUSTAINABILITY OF PUBLIC FINANCE

The government debt-to-GDP ratio is declining faster than expected. In 2017, the debt ratio is expected to have reached 57.7 % of GDP, having fallen below the 60 % threshold for the first time since 2011. The debt trajectory is more favourable than expected due to higher GDP growth as well as stock-flow adjustments, which include the sale of shares of state-owned financial institutions. The Commission’s debt sustainability analysis( ) projects a further decrease to 38.6 % of GDP in 2028 (final projection year) assuming no policy change, driven mainly by primary surpluses, but also nominal GDP growth and low interest rate expenditure. With its favourable government debt trend the Netherlands remains 'low risk', based on the Commission's baseline medium-term projections. The retirement age is linked to life expectancy in 2022. Following reforms in 2012, the retirement age will gradually rise to 67 years in 2021. From 2022 onwards, the retirement age is linked to life expectancy and is currently set at 67 years and 3 months. Due to stagnating life expectancies in the latest projections, the retirement age will not increase in 2023, which will be the first time since 2013. 4.1.3 FISCAL FRAMEWORK The Netherlands has a well-established fiscal framework, which has been in place since 1994. The main principles are embodied in a specific law and the new government has reiterated the main principles of the framework. The main characteristics of this multi-annual trend-based fiscal framework include: (i) the use of independently derived macroeconomic assumptions; (ii) the use of inflation-adjusted( ) expenditure ceilings, which are predetermined and cover the government’s entire term of office; (iii) the use of automatic stabilisers on the revenue side, and (iv) a well-defined budgetary process for decision-making and the clear distribution of responsibilities, including the tasks of the Bureau for Economic Policy Analysis (CPB) and the Council of State (Advisory Division). The CPB carries out the independent fiscal forecast while the Council of State is tasked with monitoring compliance with numerical fiscal rules. Moreover, the commitment to comply with EU fiscal rules is embedded in the legal framework of the Netherlands. The government aims at increasing the stabilising effect of its budget. Dutch public finances have a suboptimal track record in terms of their stabilisation function. During booms, very small budget surpluses are generated in general, which often leads to pro-cyclical measures in subsequent recessions. Although this applies to more euro area countries, it contrasts with the experience of other countries, such as Sweden and Denmark (see Graph 4.1.1) (Afman and Deroose, 2016). Last year’s report by the advisory group on budgetary issues( ), which gives general advice on the budgetary guidelines before a new government term, recommended increasing the stabilising effect of the budget. In the report, the group recommended excluding cyclical expenditure items such as unemployment benefit expenditure from the ceilings, but including interest expenditure and natural gas production. The government has followed this advice and removed some cyclical components from the expenditure ceiling, namely the non-discretionary, cyclical changes in expenditure on unemployment and social assistance. At the same time, interest expenditure and the impact of discretionary decisions on natural gas production are included. While this would further improve the macroeconomic stabilisation function of the budgetary framework, this would also make the budget more sensitive to the economic cycle, further stressing the need for fiscal prudence in economic good times. Graph 4.1.1:Average headline budget balance in different states of the economy Source: Afman and Deroose (2016); 1996-2015 average. While the Dutch fiscal framework recognises the EU fiscal rules as the anchor to fiscal policy, further efficiency gains could be made. This could be achieved through further alignment, for instance when assessing fiscal sustainability or operationalising the medium-term budgetary objective within the national context (Vierke and Masselink, 2017). There are also some options available to improve flexibility in the framework while being careful not to hinder responsible budgeting; for example, the application of ‘rolling mechanisms’ with multi-annual expenditure ceilings updated on an annual basis according to predefined drivers (e.g. an update of macro conditions). 4.1.4 QUALITY OF PUBLIC FINANCE Growth-friendly public expenditure increased slightly in 2015-2016, but remains lower than that of other ‘innovation leaders’( ). Public spending in growth-enhancing areas is of particular importance to unlock investment in knowledge-based capital and sustain long-term growth and employment. Public R&D intensity in the Netherlands gradually increased to 0.9 % of GDP in 2013, close to the average of the most advanced EU peers (1 %). Total budget appropriations for R&D amounted to 0.72 % of GDP in 2015, below those of the most advanced EU peers. Direct public funding for R&D is projected to decline until 2020 (see Section 4.5.1). Table 4.1.1:Total public funding for R&D and innovation, 2015-2017 Source: Vennekens and Van Steen, 2017 Public investment remains strong, but spending on education is increasing rather slowly. Public gross fixed capital formation accounted for 3.5 % of GDP in 2016, above the EU average of 2.9 % (EA 2.7 %), but below that of other ‘innovation leaders’, notably Sweden (4.4 %), Finland (4 %) and Denmark (3.7 %). While the Dutch education system provides a sound basis for upgrading human capital, innovation and growth, spending on education is still below that of top performers such as the Nordic countries. In 2015, the Netherlands spent 5.4 % of GDP on education, above the EU and euro area averages but less than the top-performing peer countries such as Denmark (7.0 %), Sweden (6.5 %), Belgium (6.4 %), Finland (6.2 %) and the Baltic countries. The efficiency of public spending on education in the Netherlands is relatively high, which is also illustrated by the comparatively good educational attainment (EC, 2017f). According to the coalition agreement, the government plans to increase its expenditure on growth-enhancing areas such as R&D by EUR 600 million in 2018-2019. 4.2. Financial sector 4.2.1. BANKING SECTOR The Dutch banking sector remains one of the largest in the EU in terms of GDP and is highly concentrated. Its assets accounted for around 370 % of the country’s GDP in 2017 (compared to 530 % in 2007) (DNB, 2017b). Assets in the total financial system are close to eight times the GDP at the end of 2016. As for the assets of the insurance and pension sectors, they amount to 70 % and 184 % of GDP respectively whereas investment funds hold assets equivalent to 113 % of GDP (Graph 4.2.1). The Dutch banking market has one of the highest concentration levels in the EU, with the five largest banks holding 85 % of assets in 2017, compared to a euro area average of 48 % (ECB, 2017). Given the systemic relevance of those five banks, the Dutch Central Bank has ordered them to gradually build up extra capital buffers in 2016-2019. The government plans to continue the reprivatisation of ABN AMRO. Graph 4.2.1:Size of the financial intermediaries and of the debt securities market Source: ECB, European Commission Financial soundness indicators of Dutch credit institutions do not give rise to stability concerns. The banks did not suffer major losses on their loan portfolios during the crisis, and the ratio of non-performing loans did not exceed 3 % in the last few years amounting to just 2.2 % in 2016. The banks maintain adequate financial resilience and sound solvency positions with capital standards well above the regulatory requirements. At sector level, the capital adequacy ratio stood at a solid 23.1 % and the Tier 1 capital ratio at 18.3 % compared to the euro area average of 17.6 % and 15 % respectively in Q2-2017 (see Table 4.2.1). The leverage of Dutch lenders – although lower than during the crisis – stands at a modest 4.7 % at sector level (DNB, 2017b), compared to the euro area average of 5.1 % (ECB). Table 4.2.1:Financial soundness indicators Source: ECB, CBD The share of wholesale funding in the banking sector remains high. Deposits account for only 47 % of total funding which is well below the euro area average of 56 % (August 2017). In a stress scenario, funding costs could rise sharply impacting profitability and the net interest income of Dutch banks. On a positive note, since the crisis the maturity of market funding has been lengthened to prevent imminent liquidity risk. The deposit share has also been growing over time, which has a positive effect on the loan-to-deposit ratio which further decreased to 110.6 % in September 2016. This ratio and the banks' reliance on wholesale funding are likely to be further reduced following the increasing role of pension funds and insurance companies in the mortgage credit market. Their market share in mortgages increased from 8 % (2010) to 11 % (2016) (DNB, 2016). The profitability of the banking sector – while remaining solid – might still be affected by prolonged low interest rates, non-bank competitors and upcoming regulatory changes. Past loans priced at high fixed interest rates – mostly mortgages – will gradually mature over the next two decades, and new loans are likely to be repriced at less profitable rates. Banks' margins and credit volumes on the mortgage credit market are coming under pressure due to increasing competition from pension funds and insurance companies – these were responsible for 20 % of new mortgages in 2016 (DNB, 2016). In other traditional banking domains – for instance payments – banks face growing competition from fintech companies following further opening of the market as a result of the adoption of the Payment Services Directive 2. The package on prudential rules recently endorsed by the Basel Committee on Banking Supervision – applicable over the next few years – will also have implications for the Dutch banks’ profitability. Given their considerable exposure to mortgages, the new rules mean that they would have to set aside additional capital, which is likely to reduce the sector's return on equity. Dutch banks are making additional efforts to improve their efficiency by further switching from branch offices to digital services. Since 2007, they have already reduced the number of offices across the country by more than 50 % to 1 764 offices in 2015. 4.2.2. ACCESS TO FINANCE *

The perception of bank loan availability has further improved, and a majority of policy measures have been implemented under the Additional SME Finance Action Plan (Aanvullend Actieplan Mkb-financiering). Equity funding and business angel funding for new and growing firms is satisfactory (EC, 2017j). Companies valued access to finance more positively while increasingly using channels other than traditional bank lending. These improvements reflect in part the decrease in loan requests by SMEs and the net decline of 13 % in bank lending rates. Among the main reasons for this decline are: increased financial buffers of SMEs due to a return to sustained profits; increased solvency ratios and liquidity and an increase in leasing as a financial instrument (DNB, 2016). The Netherlands Investment Agency (NIA) and the Netherlands Investment Institution (NLII) contribute to the improved access to finance( ). New forms of finance have emerged, backed by new regulations and alternative providers for SME finance. The scheme ‘New providers of SME-finance’ (Nieuwe aanbieders van MKB-financiering) marked the start of several funds which offer alternative SME finance (e.g. FundIQ and DBS2 Factoring) backed by a guarantee from the Ministry of Economic Affairs. A new scheme ‘Co-Investment Facility for Business Angels’ (Co-Investeringsfaciliteit voor Business Angels) was launched in 2017 under the existing SEED capital scheme. 4.2.3. HOUSING MARKET * ( ) The housing market continues to recover with increasing regional differences. At the national level, house prices are gradually moving towards the pre-crisis peak in 2008 (see Graph 4.2.2). At the end of 2017, the national house price index is expected to have reached 94 % of the 2008 level. While annual house price growth nationally was around 6 % in 2017, it was much higher in the four largest cities: Amsterdam recorded house price growth of 13 % in 2017, Rotterdam and Utrecht 11 % and The Hague 9 %. The rise in house prices in the four largest cities is not accompanied by increasing credit to households. Since 2016, credit growth in these cities has been decoupled from house price growth, falling to roughly 0 % year-on-year by the end of 2016, suggesting that house purchases are financed by savings rather than credit (DNB, 2017a). House price valuation indicators nationally do not point to overvaluation. Long-term values of price-to-income and price-to-rent ratios are below their long-term averages (see Graph 4.2.3). Estimates suggest that house prices are broadly in line with fundamental values. Yet, for Amsterdam, recent research reveals that the upsurge in house prices cannot be explained by fundamental factors such as the (improved) quality of dwellings, the interest rate, income growth or rental prices (Houben, Dröes and Lamoen, 2017). Graph 4.2.2:House price developments Source: Statistics Netherlands The housing market recovery is also reflected in increasing transaction volumes. In Q3-2017, the number of transactions involving existing dwellings increased to the highest level recorded since 1995. In the same quarter, the total value of transactions involving existing dwellings reached a record high of EUR 16 billion, which is almost EUR 3 billion above the previous peak in Q4-2007. The housing market recovery is likely to continue in the near future. The value of building permits issued for new dwellings increased from EUR 3.4 billion in 2013 (26 000 dwellings) to EUR 6.5 billion in 2016 (51 000 dwellings), which is still some way below the EUR 12 bn recorded in 2007 (for 88 000 dwellings). As in the past, the majority of dwellings (around 60 %) are being built by construction companies and investors. However, the absolute number of permits issued fell from 7 000 to 4 000. Housing corporations and the state greatly reduced their share in new permits, from 23 % in 2007 (3 000 permits) to 8 % in 2016 (500 permits). Individuals have considerably increased their share over time from around 19 % in 2007 to 31 % in 2016. This is mostly due to the decreasing number of permits of other builders, as their total share was around 2 000 permits in both years. Graph 4.2.3:House price valuation Source: European Commission The strong presence of the social housing sector may increase the pressure on house prices. The social housing sector is one of the largest in the EU with a 29 % share of total dwellings nationally in 2017. This share has decreased by only 0.8 % over the past 5 years and is expected to slowly decrease given that fewer construction permits have been issued for the social housing sector than for the private rental and owner-occupied sectors. In Amsterdam and Rotterdam, social housing corporations dominate the housing market with shares of 42 % and 44 % respectively. An important share of the social dwellings in the Netherlands is occupied by 'scheefhuurders'( ). Over the past years, the share of scheefhuurders (18 % of total social housing tenants) has slightly decreased but is still above 400 000 nationally (WoON 2015). Because the social housing sector is so large, its inefficiencies prevent a more efficient functioning of the whole housing market putting price pressure on the remaining market segments. The private rental market is the only non-subsidised housing sector and remains underdeveloped. Its share in total dwellings is advancing very slowly: only 13 % of housing units were rented out privately in 2016. Looking at the number of construction permits issued, this situation is unlikely to change, as most permits are not issued for rental dwellings. The government has not announced new measures to support the provision of rental dwellings. In 2016, only 16 000 permits were issued to build rental dwellings, compared to 35 000 permits issued to future homeowners. Part of the problem is that municipalities can receive a higher price for land used for building owner-occupied dwellings instead of rental flats, which is due to the subsidies in the owner-occupied market (DNB, 2017a). To increase land availability for the private rental market, the Law on Spatial Planning( ) was amended in 2017, allowing municipalities to set aside zones specifically for building middle segment rental dwellings. While the government announced its intention to support the supply of affordable housing on the private rental market, more details on such support have not been communicated yet. Social housing corporations increase rents hesitantly. While rents in the private rental sector increased by 2.3 %, rents in the social sector increased by only 1.1 % in 2017. This is less than what corporations are legally allowed to increase rents by. According to the 'rental price method'( ), housing corporations could have increased rents by 1.3 % in total in 2017, with maximum increases of 2.8 % for lower-income tenants (with a yearly income of up to EUR 40 349) and 4.3 % for higher-income tenants. Data from 2016 shows that only 24 % of high-income households received the maximum rent increase. Excluding rent increases due to new rental agreements, existing rents in the social housing sector actually increased by only 0.6 % in total in 2017 (CBS, 2016). This implies that half of the rent increase was borne by new tenants, which are typically low-income households because housing corporations have to allocate at least 80 % of dwellings to this target group. High-income households stay in social housing. Recent survey data shows that high-income households have little financial incentives to move out of their social housing: 84 % of tenants with an income above EUR 40 349 state that rent increases did not influence their decision to move out of social housing (ING, 2017). Most scheefhuurders are more than 65 years old (ING, 2017) and their potential rent increase is limited by law (BZK, 2017). Social housing corporations face a trade-off when increasing rents. On the one hand, it is profitable for them to increase rents and with it their revenue. On the other hand, if they increase rents too much, they run the risk of seeing their most profitable tenants (those with high incomes) leave. Once those dwellings are vacant, the majority of those must be allocated to low-income households again. Swapping a high-income tenant for a low-income one implies that the corporation will get less revenue for the same dwelling. A recent survey showed that one third of corporations do not plan on carrying out income-dependent rent increases (RIGO, 2016). 4.2.4. PRIVATE DEBT * Private debt continues to remain high in the Netherlands. It stood at 221.5 % of GPD in 2016, evenly split between households (mainly mortgages) and non-financial corporations (NFC). Over the past 20 years, the NFC debt-to-GDP has roughly stayed stable, whereas household debt has increased considerably from 63 % of GDP in 1995 to 118 % of GDP in 2009 during the house price peak, before falling to 108 % of GDP again (see Graph 4.2.4). Both household and NFC debt considerably exceed the level suggested by prudential considerations, as suggested by Commission calculations( ). Note, however, that corporate debt is mostly driven by multinational operations and the prevalence of cross-border intra-company loans, whereas the indebtedness of the remaining resident NFCs is in line with prudential levels. Household debt consists mainly of mortgage loans and has been identified as an important vulnerability by the European Systemic Risk Board (ESRB, 2016). The high level of mortgage debt is driven by strong distortions in the housing market: the generous tax treatment of owner-occupied housing, the legacy of regulation favouring high LTV ratios and interest-only loans, the inefficient and subsidised social housing sector and underdeveloped private rental market. While tax relief on mortgage interest payments is gradually being reduced (see discussion below), it will still be the highest in the EU. Nominal household debt is rising. Following the burst of the housing bubble, nominal household debt peaked at EUR 758 billion in 2012. After a small dip in the following two years, nominal debt stood at the previous peak level again in 2016. However, the household debt-to-GDP ratio has been decreasing since the 2012 peak, due to rising nominal GDP. While the government has implemented measures in the past – in particular the MID reduction, compulsory repayment in order to be eligible for the MID and loan-to-value and loan-to-income limits – these do not tackle the high level of debt directly and may only impact the debt level in the long run. Graph 4.2.4:Private debt Source: Statistics Netherlands The number of underwater mortgages has decreased( ). The most recent loan level data from the Dutch central bank shows that the number of underwater mortgages has decreased from 36 % of total loans in Q1-2013 to 14 % in the Q2-2017. Much of this is due to the recovering housing market. Those most affected are aged 30 to 40. This group consists mainly of first-time buyers who bought their homes in the years immediately before the housing market crisis. It is also the group most exposed to changes in market prices given the high loan-to-value ratio.

The loan-to-value (LTV) and loan-to-income (LTI) ratios remain high. The maximum LTV ratio for new mortgages has gradually been lowered to reach 100 % by 2018. While the total LTV ratio for outstanding debt was at 78 % in 2015, the 30- to 40-year-old homeowners most affected by underwater mortgages had an average LTV ratio of 110 % in 2015. The LTI ratio( ) of that group was at 5.3, whereas the total LTI ratio stood at 4.2 in 2015. The government announced a faster reduction of mortgage interest tax deductibility. Instead of reducing the MID by 0.5 pp per year until it reaches 38 % in 2041, it will be reduced by 3 pps from 2020 onwards, reaching 37 % in 2023. While this is a considerable increase in MID reduction, a rate of 37 % would still be the highest in the EU. In addition, this reduction will only affect taxpayers in the top tax bracket; the measure will not affect those in the lowest tax brackets( ). A strong subsidy on debt creation therefore remains. Recent quasi-experimental research has questioned the justification of mortgage interest deduction and has shown that MID induces households to become more indebted with higher MID regimes (Gruber, Jensen and Kleven, 2017). The government has also decided to phase out – over a period of 30 years starting in 2019 – the so-called Hillen Act and gradually lower the imputed rent by 0.15 pp per year from the current 0.75 % to 0.6 % from 2020 onwards. Based on new rules, the tax on the notional rental value will have to be paid on the owner-occupied property for which the mortgage has been almost or fully repaid. So far, the Hillen Act allowed in such cases that the tax liability of the notional rental value be reduced to zero. Graph 4.2.5:Debt of large non-financial corporations Source: Statistics Netherlands The debt of non-financial corporations can largely be attributed to multinational enterprises (MNEs). The MNE share of total NFC debt increased considerably over the years from 52 % of GDP in 2007 to 90 % in 2015, which equals 69 % of the total NFC debt stock( ). Part of the reason for this high MNE debt is the taxation and regulatory framework, which provides incentives for large companies to settle in the Netherlands and exploit regulatory differences across borders. Several regulatory features attract MNEs to the Netherlands (e.g. the patent box regime, the absence of withholding taxes on royalties and interest or the common practice of granting advance tax rulings), although not all of them are directly linked to debt. Graph 4.2.6:Intra-group-to-total debt Source: Statistics Netherlands Foreign NFCs account for at least 43 % of total NFC debt, which is mostly intra-group. The large share of foreign NFC debt could imply the use of debt for fiscal reasons. This seems to be even more plausible given that 60 % of foreign large NFC debt was intra-group, so loans are provided across the group, mostly with interest charged (see Graph 4.2.6). The intra-group debt of domestic NFCs without international subsidiaries is indeed much lower (below 5 % in 2015). Intra-group debt shifting is typically used by MNEs to lower their tax burden via increased interest payments to other group companies outside the Netherlands. The data on interest paid by MNEs confirm this finding, as the gap between the interest paid and received by MNEs has widened substantially with the large increase in MNE debt (see Graph 4.2.7). This can also be linked to a Court of Justice of the European Union (CJEU) ruling from 2003 on the deductibility of interest on loans for foreign participations (Jansen and Ligthart, 2014). The CJEU( ) decided that, similar to domestic participations, interest on loans for the acquisition of foreign participations should also be tax deductible in the Netherlands. As NFC intra-group debt is most likely used for tax optimisation purposes, it does not point to an immediate macroeconomic risk. Graph 4.2.7:Interest paid and received by multinationals Source: Statistics Netherlands 4.2.5. PENSIONS * The three-pillar pension system scores well on pension adequacy and fiscal sustainability. The first pillar is the pay-as-you-go public pension, funded by a specific premium and general income taxes. To ensure its fiscal sustainability, the statutory retirement age has been linked to life expectancy (see Section 4.1)( ). The second pillar is organised at the industry level and capital funded. At the request of the representative social partners in the industry participation can be made compulsory, and pension contributions and revenues depend on work experience. Although there is a shift towards defined contribution schemes( ), some 90 % of workers still fall under a defined benefit schemes. The third pillar is formed by individual pension products, and basically only consists of a tax exemption for premiums paid on such products. The first and second pillar aim to provide a replacement rate at 75 % of the average salary at the age of retirement. The second pillar has drawbacks in terms of coverage, transparency and flexibility over the life cycle. It was developed in the mid-twentieth century and is not well equipped to deal with the current structural labour market trends (individualisation, flexibility, job mobility between sectors, ageing). The government aims to modernise the pension system following the contours outlined by the Social and Economic Council (SER). The government wishes to move, together with the social partners, towards a system that addresses the vulnerabilities while maintaining its strengths: compulsory participation, collective implementation, risk sharing and supportive tax rules( ). The second pension pillar is pro-cyclical and expensive when interest rates are low. The past few years have exposed the vulnerabilities of the second pension pillar. Low interest rates but also population ageing and the sharp increase in life expectancy have created a situation of ‘under-coverage’ in many pension funds. To keep the system sustainable, indexation has been foregone in recent years, and pension contributions have been increased to around EUR 30 billion, almost 5 % of GDP. Nowadays, salaried employees work roughly one day a week for their pension. This is an important contributor to the compulsory payment wedge, which is comparatively high in the Netherlands (see Graph 4.2.8; pension contributions explain roughly 70 % of the non-tax compulsory payment wedge). Total pension fund assets increased from EUR 778.5 billion in 2009 (127 % of GDP) to EUR 1 378 billion in 2016 (almost 200 % of GDP). However, overall this is still insufficient to cover the increase in liabilities. The increase in pension savings has weakened private consumption growth and increased the domestic savings surplus. As lower pension payouts are a last resort, the balance of risks is geared towards the active and young generations. In other words, ad hoc adjustments to indexation and pension contributions have led to pro-cyclical macroeconomic shocks and could give rise to intergenerational transfers at the expense of current younger generations, i.e. they pay higher premiums for a relatively lower guaranteed pension. Graph 4.2.8:Compulsory payment wedge (2016) Source: OECD (2017). Non-tax compulsory payments (NTCPs) as an additional burden on labour income in 2016. http://www.oecd.org/tax/tax-policy/Non-tax-compuslory-payments.pdf. The chart gives the average compulsory payment wedge and average tax wedge for single taxpayers without children at average earnings, 2016. Pension funds shape the country’s financial architecture. Pension funds draw on domestic household savings and invest them largely overseas to benefit from global diversification and respect the fiduciary objective of its participants( ). While this is beneficial for portfolio efficiency, questions could be asked about the impact on the domestic finance base as it may influence the relatively low deposit-to-total-funding ratio of banks (see Section 4.2.1). With a high compulsory payment wedge, households have difficulties putting money aside to buy a house, and by consequence, need to take up mortgage debt. Banks on the other hand are financing mortgages on a large scale with money lent on international capital markets. This creates a dependence on wholesale finance and increases the vulnerability to financial turmoil. Pension funds have only recently started to invest more in the long side of the Dutch mortgage market. While there is general consensus on the need to reform the pension system, concrete steps are yet to be taken. In recent years, a number of incremental policy measures were taken such as an increase in the retirement age, a change in the tax system accompanying this increase and measures in the field of financial supervision, allowing for a longer recovery period for pension funds with under-coverage. There are also initiatives to increase pension fund financing in the domestic economy, which would benefit economic growth in the Netherlands. However, few concrete steps have been taken to address the pro-cyclicality of the pension system. The strict promise in particular to deliver a predefined nominal benefit level carries a high cost; this is ultimately paid by the pension fund participants themselves and increases the amplitude of the economic cycle. The reform directions currently being discussed by the social partners have promising potential: they could lead to lower and more stable pension contributions, while respecting pension adequacy. 4.3. Labour market, education and social policies 4.3.1.Labour Market* Labour market recovery gained further momentum in 2017. In the first half of the year, more than 9 million people were employed in the Netherlands, which is above the pre-crisis level. With 77.9 % in 2017 the Netherlands has one of the highest employment rates in Europe. However, the employment rate was still slightly below the pre-crisis level due to an increase in the working age population. The positive labour market developments also include a sustained decline in the unemployment rate, which fell to 4.9 % in 2017. This decline was also reflected in the youth and long-term unemployment rates. Graph 4.3.1:Main labour market developments Source: European Commission (Eurostat) Despite low unemployment and high job vacancy rates, wage growth remains relatively moderate. Growth of nominal compensation per employee remained subdued at 1.2 % in 2016. While accelerating to 1.7 % in 2017, it remains below the level which could be expected based on the low level of unemployment (See Graph 4.3.2) and based on other fundamental drivers such as inflation and productivity (see Graph 1.5 in Section 1). Low wage growth may be further explained by the remaining labour market slack, i.e. a measure of underutilisation of labour resources( ), estimated at 8.6% in Q3-2017. Graph 4.3.2:Relationship between unemployment and nominal wage growth (2001-2016) Source: European Commission (Eurostat)

In addition to macro-economic developments and labour market slack, increased labour market segmentation may also partly explain the low wage growth. The proportion of temporary employees rose between 2006 and 2014 from 16 % to 17.3 %. The estimated aggregate wage growth was 11 % lower due to this increase in temporary employment, since temporary employees in general receive a lower wage than permanent employees, ( ). Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights, proclaimed on 17 November 2017 by the European Parliament, the Council and the European Commission, sets out 20 key principles and rights to benefit citizens in the EU. In light of the legacy of the crisis and changes in our societies driven by population ageing, technological change and new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better working and living conditions. The Netherlands performs relatively well on the indicators of the Social Scoreboard ( ) supporting the European Pillar of Social Rights. The country displays an overall good labour market and social situation. Per capita real gross disposable income of households increased in 2016 and is almost at pre-crisis levels. Income inequality is relatively low, although it increased slightly in 2016. Regarding equal opportunities in the labour market and fair working conditions, the issue of labour market segmentation deserves continuing attention. The gender imbalance in labour market participation has been very slow to adjust under the current incentives of the work-life balance policies. The gender gap in employment leads to an important gender gap in old-age pensions that raises a point of concern with respect to equal opportunities in the labour market. The high part-time employment rate of women is a result of a combination of factors. One of them is the system of family-related leaves (paternity and parental leave), which does not support a gender balanced take-up of leaves, leading to an unequal sharing of caring responsibilities between mothers and fathers and discourages first earners, often men, from using them. The rate of youth not in employment, education or training is comparatively low. In 2016 the Netherlands continued policy initiatives to address youth unemployment. The government implements the so called 'City Deal Aanpak Jeugdwerkloosheid', a policy programme and partnership between 7 cities and schools (secondary and tertiary), researchers, employers and intermediaries. The focus is to identify solutions for (migrant) youth in disadvantaged neighbourhoods to improve their preparation for a better transition to work by focusing on career guidance at their school. Within the programme 'Matchen op Werk' the Dutch government invests together with municipalities, Public Employment Services (UWV) and their partners in sustainable work opportunities for youth. Together they aim at improving services for employers - the key partners in tackling youth unemployment - and improving access to job openings. While in the past years trade unions have foregone wage demands in exchange for employment protection, wage demands are far higher for 2018. The Netherlands Trade Union Confederation (FNV), the Dutch largest trade union, has called for a minimum wage increase of 3.5 % in nominal terms in 2018, with up to 5 % for low earners. This contrasts with the wage demands in the past years which were more moderate and when the main objective was to preserve employment and reduce the share of temporary employment. The actual outcome remains to be seen. Female labour market participation Despite the labour market performing well, there is still untapped labour potential. While the employment rate of women is high (71.6 % in 2016), almost three out of four women (74.8 %) work in part-time. As a result, the full-time equivalent employment rate of women is much lower (48.9 %) and the gender gap in full-time equivalents is one of the highest in the EU (27.2 pps). The share of part-time employment rate is particularly high among women with caring responsibilities (see Graph 4.3.3): in 2016, 86 % of the women with at least one child under 14 years worked part-time, while 51 % of women without children did. However, in recent years the part-time employment rate for women with children has fallen and the hours worked part-time have increased, while there is no similar trend visible for women without children (see Graph 4.3.4). Having children did not have a major effect on the proportion of men working on a part-time basis. However, it is worth noting that the part-time employment rate for men is well above the EU average and that of neighbouring countries. Differences in work intensity result in a large earnings gap (47.5 % in 2014) and later in life in a large gender pension gap later in life (42.5 % in 2016) Historically speaking, part-time employment of women has always been high in the Netherlands and may therefore be slow to adjust. The high share of part-time employment rate is a result of a combination of multiple factors and institutional drivers, such as the design of family-related leaves, as well as intermediate cost and availability of full-time childcare and after school care (Portegijs et al., 2008; Task Force Part-time Plus, 2010). Graph 4.3.3:Share of part-time work with and without children (2016) Source: European Commission (Eurostat, Labour Force Survey) Graph 4.3.4:Female labour market participation (with child) Source: European Commission (Eurostat) These may affect the (unequal) sharing of caring responsibilities between men and women. At the same time, research suggests that the way in which work-life balance policies are designed and the incentives that they induce could have an impact on the choices made and therefore on the employment outcomes of women (OECD, 2017d; Eurofound, 2017b). In particular, the fact that parental leave is often unpaid discourages main earners (often men) from using it; it therefore strengthens the role of women as primary carers for their children. The fact that only 2 days of paid paternity leave are offered to men may also be acting as a brake on the equal sharing of childcare responsibilities. In this respect, the new government agreement proposes increasing paternity leave from 2 to 5 days in 2019. This is to be extended as of 1 July 2020 by 5 weeks of additional leave, to be taken within the first 6 months of the birth. Labour market integration of migrants While the overall participation rate is very high, people with a migrant background are lagging behind in employment. The situation of those born outside the EU remains a key issue in particular. The employment rate of non-EU-born migrants stood at 58.9 % in 2016 and is 20.6 percentage points (pps) lower than for natives, a slight increase compared to 2015 (20.2 pps). The gap is larger for non-EU-born women (23.4 pps lower than native-born women) due to very high inactivity rates among them. Non-EU-born migrants also face a higher unemployment rate (12.1 %) than those born in the Netherlands (5.4 %), in particular those aged 15-24. Differences in labour market outcomes for non-EU-born migrants can be explained only partially by differences in age and educational achievement. This suggests that other factors such as lack of recognition of qualifications, language skills, limited professional networks or discrimination may play a role (EC, 2017b). The labour market outcomes of the ‘second-generation’ (i.e. native-born residents with a migrant background) are also unfavourable, even though they were born and educated in the Netherlands. Looking at data recently published by Statistics Netherlands( ), the employment rate of native-born residents with a migrant background from ‘non-Western’ countries( ) aged 15-74 was around 60.1 % in 2016, well below the average for those without a migrant background (67.4 %) (CBS, 2017a, Table Arbeidsparticipatie). However, it was higher than for first-generation immigrants from ‘non-Western countries’ (54.2 %) largely because of much higher unemployment. Moreover, even after adjusting for skills (literacy score), age, gender and education level (OECD, 2014, Table A.7), native-born children of two immigrant parents had a lower probability of being employed (19.4 pps) in 2012 than native-born children of two native-born parents. There is scope to strengthen integration programmes. The efficiency of the (2012-2014) reform of the integration policy for immigrants can be questioned. It obliges them to learn Dutch and take a civic integration test, while putting most of the responsibilities of integration — in particular language learning (including the financial burden) — on immigrants (see Algemene Rekenkamer, 2017). The low success rate in language tests and the quality of integration courses are also issues of concern. The new coalition plans to increase public funding on language courses (‘from day 1’) while increasing the level of language proficiency required. While the current re-evaluation of the integration policy seems necessary, it is unclear whether it will sufficiently address the integration needs of newcomers on the labour market. Segmentation* Flexible employment constitutes a relatively large and growing share of the labour market. Both temporary employment as well as self-employment without employees increased considerably in the last 10 years in the Netherlands (see Graph 4.3.5). Changes in industrial production — with employment shifting towards sectors that are more prone to self-employment or temporary employment — only partly explain the recent shift towards more flexible employment. This situation is also affected by distinct institutional factors, including favourable tax treatment (for the self-employed without employees) and differences in social security legislation as well as large differences in applicable labour regulations and labour protection rules for permanent and temporary contracts (EC, 2017b, p. 30; EC, 2016a, pp. 46-49). The recent upsurge in job creation is mainly down to temporary employment and self-employment. This trend suggests a further increase in the flexibility of the Dutch labour market. Despite the 2015 reforms (see below), the proportion of temporary employees (aged 20-64) continued to increase, reaching 18.4 % in Q3-2017 (EU average: 13.7 %). The proportion of self-employed without employees in total employment was 12.1 % in Q3-2017 (EU average: 9.9 %). The group of self-employed without employees is highly diverse, and self-employment without employees has increased across all sectors (see Graph 4.3.6) and age groups. Graph 4.3.5:Employment (20-64 year) by type (y-o-y changes) Source: European Commission (Eurostat, non-seasonally adjusted data) The self-employed are not obliged to be insured against labour-related risks such as accidents at work, unemployment and old age (second pillar). They are only entitled to healthcare, long-term care, family benefits, a state pension (first pillar) and survivors’ benefits. There are no sickness benefits (sick pay) for them during the first 2 years of long-term sickness. Everyone in the Netherlands, including the self-employed, has compulsory basic private health insurance. However, the majority of the self-employed (57 %) indicate that they would feel financially insecure if they were faced with a serious long-term illness (EU average: 48 %) (Eurofound, 2017a)( ). Around one in five employees in the Netherlands was employed on a temporary contract in 2016. New entrants in particular are exposed to temporary contracts: 44.1 % of employees under 30 are on temporary contracts (EU average: 32.2 %). This is a significant increase compared to 2005, when only 33.0 % of employees under 30 worked on temporary contracts. The high prevalence of temporary employment negatively affects the job duration and career prospects of young people. The average job tenure of workers under 30 decreased from 27 months in 2005 to 21 months in 2015. Estimates show that around half of this decline can be attributed to the increase in temporary contracts for young workers (EC, 2017f). There are also negative implications for their incomes given the significant wage gap between temporary and permanent workers (see Box 4.3.2).

Graph 4.3.6:Self-employed by sector ( % of total employment in the sector) Source: European Commission (Eurostat) In 2015, the government implemented a major reform to reduce the differences between temporary and permanent contracts. This reform was discussed in detail in European Commission 2016a and European Commission 2017a. Given that the measures are being introduced gradually, a formal evaluation of the reform is only expected in 2020. Preliminary evidence on the impact of the changes introduced under the Dutch dismissal and unemployment law (Wet werk and zekerheid) indicates that the changes, including the decline in severance pay, did not influence the decision of employers to dismiss or recruit permanent employees (Heyma et al., 2017). The transition rates from temporary to permanent contracts have remained fairly constant in the last 3 years, ranging from 11 % to 12 % per quarter (see Graph 4.3.7). The enforcement of a mechanism adopted to reduce incentives for employers to replace employees with bogus self-employment has been suspended until at least the beginning of 2018. In order to modernise the labour market and address segmentation, the new government announced several additional measures, but specifics and time frame for adoption remains unclear. The most important are (1) shortening of employer-paid sick leave from 2 years to 1 year for small enterprises (under 25 employees); (2) the introduction of an additional ground for dismissal in case of an open-ended contract; (3) the introduction of a minimum hourly rate for self-employed without employees to reduce bogus self-employment