EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 518 final COMMISSION STAFF WORKING DOCUMENT Country Report The Netherlands 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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(2020) 150 final}



Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Summary of the main findings from the MIP in-depth review 4.Reform priorities 4.1.Public finances and taxation 4.2.Financial sector 4.3.Labour market, education and social policies 4.4. Competitiveness, reforms and investment 4.5.Environmental sustainability Annex A: Overview table Annex B: Commission debt sustainability analysis and fiscal risks Annex C: Standard tables Annex D: Investment guidance on Just Transition Fund 2021-2027 for The Netherlands Annex E: Progress towards the Sustainable Development Goals (SDGs) References LIST OF Tables

Table 1.1:Key economic and financial indicators Table 2.1:Assessment of 2019 CSR implementation (*) Table 3.1:Outward spill-over heat map for Netherlands Table 3.2:MIP assessment matrix(*) Table 3.3a:Simulated domestic impact and spillovers of a public investment boost of 1% of GDP for 10 years Table 4.2.1:Financial soundness indicators Table C.1:Financial market indicators Table C.2:Headline social scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth Table E.1:Indicators measuring the Netherlands’s progress towards the SDGs LIST OF Graphs Graph 1.1: GDP growth and components Graph 1.2: Investment by sector, selected countries (2018) Graph 1.3: Construction investment (2000-2018) Graph 1.4: Labour market developments Graph 1.5: Actual and predicted wage growth based on fundamentals

Graph 1.6: Employment growth by type (y-o-y change) Graph 1.7: Net lending by institutional sector Graph 1.8: Regional GDP growth including and excluding natural gas extraction (2018) Graph 2.1: Overall multi-annual implementation of 2011-2019 CSRs to date Graph 4.1.1: General government expenditure, revenues and structural budget balance Graph 4.1.2: Personal income tax rates, 2015-2020 Graph 4.1.3: Environment taxes (2018) Graph 4.1.4: Tax mix in the Netherlands and the euro area (share in total tax revenues) Graph 4.2.1: Private debt developments versus euro area average Graph 4.2.2: Household debt versus GDP growth Graph 4.2.3: House price developments (2008 Q1 = 100) (1) Graph 4.2.4: House price valuation indicators Graph 4.2.5: New housing supply versus expected needs 36 Graph 4.2.6: Compulsory payment wedge on labour income (2018) Graph 4.2.7: Current account balance components Graph 4.2.8: Non-financial corporate savings surplus: breakdown by company size (1) Graph 4.3.1: Labour market indicators (1) Graph 4.3.2: Vacancy rate by sectors (%, Q2 2019) Graph 4.3.3: Unit labour cost decomposition Graph 4.3.4: Transition rate from temporary to permanent employee by educational level

Graph 4.3.5: Relative ‘Child Penalty’ Graph 4.3.6: Employment rates of the non-EU-born compared to natives (%) Graph 4.4.1: Evolution of GDP per hour worked (1), NL versus peer countries Graph 4.4.2: Quality score for transport infrastructure in the Netherlands Graph 4.5.1: Greenhouse gas emissions by sector Graph 4.5.2: Renewable energy usage by source LIST OF Boxes Box 1.1: Nitrogen Ruling Implications Box 2.2: EU funds and programmes to address structural challenges and to foster growth and competitiveness in the Netherlands Box 3.3: Public investment and potential spillovers Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 4.4.1: Investment challenges and reforms in the Netherlands Box 4.5.1: Climate policy: towards carbon neutrality Executive summary While the Dutch economy remains resilient overall, subdued medium-term growth prospects underscore the importance of sustaining the reform momentum ( ). There are long-term challenges in the housing market, labour market and pension system that still need to be addressed in full. While the government has taken policy measures to improve the housing supply and to reduce high household debt, significant incentives to incur debt remain. Expansionary fiscal policy and nominal (non-inflation adjusted) wage and employment growth support household disposable income growth and contribute to external rebalancing. Tackling labour market segmentation remains a challenge despite recent measures. The government and social partners have reached agreement on a major pension reform. In addition, further investments in R&D, human capital and climate and energy measures are needed to boost long-run productivity growth and address the transition to a low-carbon economy. Tackling these challenges would further support the resilience of the Dutch economy and reduce risks from imbalances. Domestic demand is the sole driver of a moderating economic expansion. In 2019, GDP increased by 1.7% amidst weaker external demand. In 2020 and 2021, growth is projected to moderate to 1.3% in both years. In conjunction with a lower tax burden on labour income and declining inflation, household disposable income is expected to see the largest improvement in years. By extension, private consumption should still support economic activity in 2020. Fiscal policy will also support growth, as tax relief for households and increasing public expenditure leading to a lower fiscal surplus of around 0.5% of GDP in 2020. Government debt has declined to below 50% of GDP in 2019 and will continue to decline in the coming years, indicating that public finances are in good shape. At the same time, the projected increase in public expenditure as a result of ageing points to medium risks for the long-term sustainability of public finances. Despite a tight and well-performing labour market in general, wage growth is still modest compared to fundamentals. The unemployment rate reached its lowest level since 2008 and labour force participation increased. Employment gains are expected to remain positive, but will be weaker in the coming years. Permanent contracts account for the bulk of recent employment gains, which seems to reflect current labour market tightness, rather than a reduction in labour market segmentation. The persistence of a high degree of segmentation could offer a partial explanation for somewhat lagging wage developments, and remains a source of vulnerability in the face of any adverse economic shocks.

Investment is set to slow amidst weaker business confidence and substantial policy uncertainty linked to a ruling by the Council of State on nitrogen emissions. Investment continued to support growth in 2019, with the investment rate broadly in line with the euro area average at 21% of GDP. The share of public investment is expected to increase to 3.5% of GDP, significantly below pre-crisis levels but well above the euro area average. Business investment is set to slow in conjunction with weaker business confidence, increased trade related uncertainty and weaker external demand. Risks to the investment outlook are relatively high given the uncertainty over construction and infrastructure investment as a result of the nitrogen ruling. The restrictions on issuing new permits around Natura 2000 protected areas implied by the ruling are likely to translate into weaker construction investment in 2020, despite ongoing housing shortages and measures to mitigate its adverse effects. The Netherlands has made some progress in addressing the 2019 country-specific recommendations. There has been some progress in the following areas: ·Taking measures to reduce the debt bias for households and distortions in the housing market, including by helping to develop the private rental sector. ·Implementing policies to increase household disposable income, including by strengthening the conditions that support wage growth. ·Addressing features of the tax system that may facilitate aggressive tax planning. ·Reforming the second pillar of the pension system. ·Strengthening life-long learning and upgrading skills. ·Supporting and upward trend in investment. ·Focusing investment-related economic policy on renewable energy, energy efficiency and greenhouse gas emissions reduction. ·Focusing investment-related economic policy on addressing transport bottlenecks. There has been limited progress in the following areas: ·Reducing the incentives for the self-employed without employees and promoting adequate social protection for the self-employed. ·Tackling bogus self-employment. ·Focusing investment-related economic policy on R&D in particular in the private sector. The Netherlands performs very well on most indicators of the Social Scoreboard supporting the European Pillar of Social Rights. It has a good record overall in terms of labour market performance and social situation. Per capita real gross disposable income of households continued to rise, with income inequality below the EU average. The Netherlands is among the top performers, with a low level of poverty. On progress towards its national targets under the Europe 2020 strategy, the Netherlands has achieved its targets on the employment rate, early school leaving and higher education. While the target for reducing national greenhouse gas emissions in the non-Emissions Trading System (ETS) sectors is expected to be met, this is unlikely for energy savings. The target of 14% for renewable energy consumption in 2020 is expected to be out of reach. Although the Netherlands is a frontrunner in decarbonising its transport sector, the use of renewable energy in transport is below the EU average. While the Netherlands has taken measures to increase R&D spending, a substantial further effort is needed to reach 2.5% of GDP. As a high-income country, the Netherlands ranks as one of the top performers among EU member states on several Sustainable Development Goals (SDGs), such as eliminating poverty (SDG 1) and reducing inequalities (SDG 10). The only area in which it scores lower than most – albeit with a positive trend – is climate action (SDG 13). ( ) The main findings of the in-depth review contained in this report and the related policy challenges are as follows: ·Mortgage interest deductibility continues to fuel household debt. Private debt is well above macroeconomic imbalance procedure thresholds. Corporate debt is largely linked to intra-group borrowing by multinationals and poses limited macroeconomic risks. High household debt makes households vulnerable to shocks with macroeconomic repercussions. Although the ratio of household debt to GDP has been falling, it is still twice the euro area average. Household debt largely consists of mortgage debt and is fuelled by generous tax relief on mortgage interest payments. Despite the reduction in mortgage interest deductibility, debt-financed home ownership remains heavily subsidised.

·Subsidies to owner-occupied housing and social housing lead to an underdeveloped private rental market. The (rent-controlled) social housing 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 enter the owner-occupancy market early, leading to high debt-to-income ratios and potential financial vulnerability issues. ·The second pillar pension system plays a key role in generating a high savings rate, especially in combination with high mortgage debt. While the pension system performs well on pension adequacy and fiscal sustainability, it has drawbacks in terms of intergenerational fairness, transparency and flexibility. Moreover, second pillar pension contributions are an important driver of compulsory savings for households, and can affect household consumption in a pro-cyclical way. 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 reinforces the pro-cyclical dynamics of household finances. Effective implementation of the planned pension reform could address key challenges in the second-pillar system. ·The current account continues to show a marked surplus. The Netherlands has had a current account surplus of over 7% of GDP on average over the past two decades. All institutional sectors remain in surplus, which led to the current account surplus rising to 11.2% of GDP in 2018. Non-financial corporations are the most important structural driver of the savings surplus. This is in part linked to the large presence of multinationals in the Netherlands, but small and medium-sized enterprises are also a significant contributor. The latter appears driven in part by tax incentives and other structural factors discouraging the distribution of retained earnings. The household sector’s savings surplus is largely the result of high compulsory savings, including via the pension system, combined with pressure to reduce mortgage debt. The government sector was running large deficits during the crisis and in its aftermath. Since 2017, it has turned net lender, although this is set to fade given the current expansionary fiscal stance. In the coming years, the current account surplus is expected to decline somewhat as import growth outpaces export growth, reflecting a weakening external environment combined with relatively robust domestic demand. ·Boosting domestic investment has small but positive international spillover effects. Simulations in this report show that a structural increase in public investment in the Netherlands would reduce the Dutch current account surplus and would also have a positive impact on economic growth in other euro area countries. Other key structural issues analysed in this report, which point to particular challenges facing the Dutch economy, are the following: ·The labour market performed well across the board, but challenges involving labour market segmentation as well as integration of people with a non-EU background remain, in particular women. Employment reached a record high and unemployment remains close to historic lows. An increasingly tight labour market has recently provided incentives for employers to offer more open-ended contracts. However, the share of flexible employment and the number of self-employed without employees remains high, and there are large differences in the working conditions and social protection under different employment contracts and work arrangements. In addition, there is still a large untapped labour pool linked to the high number of women in part-time employment and people with a non-EU-born migrant background. Furthermore, the employment situation of those at the margins of the labour market remains challenging. This is partly linked to the remaining large performance gap between non-immigrants and pupils born abroad and the fact that native-born pupils with a migrant background only partially catch up. ·Economic evidence suggests that the Netherlands’ tax rules are used for aggressive tax planning. Specifically, rules such as the absence of withholding taxes are cause for concern. In addition to the implementation of European and internationally agreed initiatives, the Netherlands has taken some unilateral measures, notably by putting into place a new withholding tax on interest and royalty payments to low-tax countries as of 2021, however its effectiveness remains to be seen. ·A more effective anti-money laundering framework is needed to combat the misuse of major financial institutions and legal structures for money laundering purposes. The misalignment between the low reporting of unusual transactions by trust and company service providers and tax advisors and their high risk exposure calls for stricter supervision. Given the extensive presence of complex legal structures, the rapid establishment and well-functioning of the beneficial ownership register will be key to avoid misuse of such entities. Recent big money laundering cases involving Dutch financial institutions also show the need to strengthen supervision and enforcement. ·Ambitious goals for tackling climate change challenges have been set. The budgetary and macroeconomic impact of policy plans under the climate agreement is expected to be limited. The transition towards renewable energy usage has been slower than expected so far. Substantial investment in climate-focused R&D and innovation, as well as renewable energy production and related infrastructure, are needed to support long-term sustainability goals. The Commission’s proposal for a Just Transition Mechanism under the next multi-annual financial framework for the period 2021-2027, includes a Just Transition Fund, a dedicated just transition scheme under InvestEU, and a new public sector loan facility with the EIB. It is designed to ensure that the transition towards EU climate neutrality is fair by helping the most affected regions in the Netherlands to address the social and economic consequences. Key priorities for support by the Just Transition Fund, set up as part of the Just Transition Mechanism, are identified in Annex D, building on the analysis of the transition challenges outlined in this report. ·Investments in R&D, human capital, climate and energy measures can help support productivity growth and address other key societal challenges. The Netherlands remains one of the most productive countries in the EU, but in common with most mature economies, it has experienced a notable slowdown in productivity growth. Targeted policy action, including investment in sectors with the strongest prospects to raise potential growth for the wider economy, can contribute to tackling the challenges presented by this global trend. In particular, investments in R&D as well as human capital – notably in training and upskilling and boosting digital skills – can help support long-run productivity growth and maintain a strong innovation capacity. Investment in initiatives to address climate change and promote the energy transition can make a key contribution to wider societal goals, including the need to ensure sustainable and resource-efficient economic growth. Furthermore, investment in new housing is needed to alleviate the current housing shortage. 1. Economic situation and outlook GDP growth In 2019, the economy entered its sixth consecutive year of expansion, but growth slowed as external demand weakened, which translated into subdued exports. At the same time, strong domestic demand helped sustain a healthy GDP growth rate of 1.7%. The largest growth contribution came from investment, which benefited from low capital cost, high profitability and overall supportive domestic demand, despite a more challenging environment (Graph 1.1). Private consumption was boosted by continued employment growth in a tight labour market. Graph 1.1:GDP growth and components Source: European Commission 2019 Autumn forecast Growth is expected to stabilise at a lower level in 2020 and 2021 as domestic demand remains the sole driver of a more modest expansion. Private and public consumption are expected to be the main growth drivers, with private consumption set to benefit from an expected improvement in real wages. Public consumption will also contribute to domestic demand as it should increase by about 2.6% in real terms in 2020 and 2.1% in 2021, following a more expansionary fiscal stance. Export growth will grow at a slower rate than historically, and import growth should continue to outpace export growth this year and next on the back of solid domestic demand. Business confidence has declined as a result of increased trade related uncertainty over the course of 2019, and business investment is expected to slow in 2020 in tandem with more modest growth. Although solid in 2019, construction and infrastructure investment has become affected by policy uncertainty because of the nitrogen ruling of the Council of State (see Box 1.1). If unaddressed, this would lead to weaker construction investment. The output gap, which has been positive since 2017, should remain positive but start closing over the coming years. Inflation Consumer price inflation is set to decline after experiencing a peak in 2019. As measured by the harmonized index of consumer prices ( ), inflation increased to 2.7% in 2019 due to higher indirect taxes (VAT and energy taxes). In 2020, inflation is expected to moderate to 1.4% as these indirect tax increases no longer impact inflation figures and weaker external demand in turn translates into an alleviation of inflationary pressures. At the same time, accelerating wage growth should exert upward pressure on prices, especially for services. A substantial lowering of energy related taxes for households will generate downward pressure on energy price inflation. Consumption Private consumption is set to remain buoyant in 2020 on the back of robust growth in disposable income. The labour market is expected to remain tight as employment gains remain positive despite the participation rate already being at a record high, translating into a further acceleration of nominal wage growth. In conjunction with a lower tax burden on labour income and dissipating inflation, household disposable income is expected to see a substantial improvement. By extension, private consumption should continue to support economic activity in 2020. Investment

Investment continued its upward trend in 2019 and is now broadly in line with the euro area average (Graph 1.2). In 2018, public investment as a share of GDP (3.3% of GDP) was substantially higher than the euro area average (2.7%) and peer countries. According to the European Commission’s 2019 Autumn Forecast, it is expected to increase to 3.5% in 2021. Household investment as a share of GDP is comparable to the euro area average. Business investment, which has historically been lower than the rest of the euro area, remains relatively low compared to the euro area average despite strong growth in recent years, in particular as a share of corporate savings (see Section 4.2.6). This could indicate scope for higher private investment, in particular in R&D (see Section 4.4.2). Further investment needs have been identified in R&D, upskilling- and reskilling of human capital and climate and energy to boost productivity growth and to maintain a strong innovation capacity (see Section 4.4.1). Graph 1.2:Investment by sector, selected countries (2018) Source: European Commission (Eurostat) For 2020, investment is set to slow amidst weaker business confidence and policy uncertainty linked to the nitrogen ruling. Trade related uncertainty as well as weaker external demand have led to lower business confidence and weaker investment dynamics since the second half of 2019. This in turn translates into a weaker for business investment growth in 2020 (CPB, 2019c). Household residential investment has seen on average double-digit increases in recent years (Graph 1.3), and construction investment remained supportive of growth in 2019 on the back of strong house price increases of around 6% in 2019 (see Section 4.2.4). However, over the course of the summer of 2019, the nitrogen ruling from the Council of State became a source of significant policy-induced uncertainty for construction and infrastructure, as it resulted in permits no longer being granted for such projects and led to de facto higher environmental standards for new constructions around Natura 2000 protected areas (Ministry of the Interior, 2019). The nitrogen ruling could translate into weaker construction investment in 2020 (see Box 1.1). Graph 1.3:Construction investment (2000-2018) Source: European Commission (Eurostat) Labour market The unemployment rate bottomed out at its lowest level since 2001 as the labour market remains tight. The unemployment rate, which stood at 3.8% in 2018, fell to 3.4% in 2019. (Graph 1.4). Employment increased by 1.7% in 2019 and is also expected to remain marginally positive this year. Labour force participation (age 15-75) now stands at a relatively high 71.4%. Youth and long-term unemployment rates have also fallen compared to last year. However, some untapped potential remains as regards (part-time) employment of women, older workers, people with a migrant background and (partly) people with disabilities (see Section 4.3.1). Box 1.1: Nitrogen Ruling Implications The Dutch Programmatic Approach to Nitrogen (‘Programmatische Aanpak Stikstof’, PAS) is a policy framework from 2015, which aimed to reduce the deposition of reactive compounds of nitrogen ( I ) in Natura 2000 protected areas to prevent soil acidification and loss of biodiversity. PAS was used as the basis for granting construction and infrastructure permits in case of such emissions in anticipation of future reductions of nitrogen depositions. However, the Council of State (‘Raad van State’) annulled PAS as the basis for granting such permits on 29/5/2019 because of its incompatibility with Art 6 of Habitats Directive 92/43/EEC, as it failed to secure such future reductions ex ante. This subsequently led to a stop of new permits for projects around these protected areas, causing significant policy uncertainty for housing and infrastructure investment over the course of 2019. In part as a result of the nitrogen ruling, the number of granted building permits has dropped substantially, and some infrastructure projects are expected to experience substantial delays (Ministry of Infrastructure and Water Management, 2019). If unaddressed, the ruling could lead to an estimated cumulative reduction of 36 000 dwellings being realized up to 2024. Annual housing production in 2024 could drop to 65 000, as compared to baseline predictions of around 75 000 new dwellings a year (Ministry of the Interior, 2019; Koops and Manshanden, 2019). The government has therefore announced short-term measures that reduce emissions with the objective of improving the quality of the nature and re-enabling permit grants and the continuation of infrastructure and housing projects, although uncertainties remain (Ministry of Agriculture, Nature and Food Quality, 2019). As of yet, these measures concern: (i) a reduction of the day-time maximum speed on highways to 100 km/h; (ii) a voluntary buyout scheme for pig farmers; and (iii) a different composition of cattle feed. The government is considering structural measures for both permit grants as well as nature preservation. Graph 1.4:Labour market developments Source: Statistics Netherlands Nominal wage growth accelerated further, but remains below what would be expected based on its relationship with fundamentals. With wage developments lagging the cycle, ongoing favourable labour market conditions are translating into an acceleration of nominal wage growth, as nominal compensation per head is expected to have increased by around 2.5% in 2019, compared to 1.7% in 2018. However, it remained roughly in line with the inflation rate, thus resulting in stagnating real compensation, and real wages therefore remained flat in 2019. For 2020 however, trade unions have also put forward substantial wage demands, and nominal wage growth per employee is expected to accelerate further to around 3%. A substantial increase in household disposable income is therefore expected for 2020 as nominal wage growth coincides with lower expected inflation and a reduction of the labour tax wedge (Ministry of Finance, 2019a) ( ), supporting private consumption (see Section 4.3). However, nominal wage growth still seems to lag behind expected growth based on its historical relationship with inflation, productivity and unemployment developments (Graph 1.5). The relatively large share of temporary employees and self-employed could offer a partial explanation for this phenomenon (European Commission, 2019a). Graph 1.5:Actual and predicted wage growth based on fundamentals Source: European Commission Permanent contracts account for the bulk of recent employment growth, but this seems to be a reflection of labour market tightness as labour market segmentation remains prevalent. Since 2018, job growth has increasingly consisted of permanent contracts (Graph 1.6). This has led to a modest decline in the combined incidence of self-employed and temporary employees in total employment from 39.0% in Q1 2018 to 37.9% in Q3 2019. Although some measures have recently been implemented to address labour market segmentation ( ), distinct institutional factors that underlie the high combined incidence of flexible arrangements and self-employed without employees largely remain in place (Council of State, 2018). The decline therefore seems a reflection of current labour market tightness as opposed to being policy-induced , and its share is expected to remain high, also compared to other EU countries (see Section 4.3.1). The persistence of such a degree of labour market segmentation remains a source of vulnerability, as it could amplify shocks for certain groups in case of adverse economic developments (CPB, 2019b). Graph 1.6:Employment growth by type (y-o-y change) Source: Statistics Netherlands Public finances After sizeable surpluses in 2018 and 2019, the 2020 fiscal stance is expansionary. In 2018, the general government headline surplus reached 1.5% of GDP following solid revenue growth, outpacing expenditure growth. In 2019, the surplus is expected to have remained around this level, with higher expenditure offset by revenue growth. In 2020 and 2021, the headline surplus is set to decline to around 0.5% as tax relief for households kicks-in. In structural terms, the surplus is projected to decline from 0.9% in 2018 to 0.2% in 2020 and 2021, pointing to an expansionary fiscal stance (see Section 4.1). The government also implemented budgetary measures aimed at reducing greenhouse gas emissions by 49% in 2030 compared to 1990 levels (see Section 4.5). External Position Having peaked at a record 11.2% of GDP in 2018, the current account surplus has started to decline but remains high. A persistent trade surplus in goods, averaging 9.9% of GDP over 2014-2018 of which around 3% pps. re-exports, has been the main driver of the current account surplus from a balance of payments perspective. In 2019, the current account surplus is expected to have declined somewhat as import growth outpaced export growth. For the coming years, the current account surplus is expected to remain high but decline further as robust domestic demand coincides with a weak external environment as well as declining natural gas extraction. Net primary income flows have had a limited impact on the current account on average over a multi-year period, but remain a source of short-term volatility. A large part of the savings surplus is attributable to the corporate sector, with net savings of 8.1% of GDP in 2018 (Graph 1.7). Both large companies and small and medium sized enterprises (SMEs) make a substantial contribution to the aggregate savings surplus. SMEs account for a relatively stable 2-3% of GDP per annum, whereas large companies including multinationals account for the rest of the savings surplus and are responsible for the volatility in the savings behaviour of non-financial corporates (DNB, 2019a). Tax policy could play a role in explaining part of these high corporate savings (European Commission, 2019a). At the same time, however, note retained earnings of multinationals that are domiciled in the Netherlands are statistically attributed to the Dutch current account surplus, even though they are largely owned by foreigners (IMF, 2019b). Conversely, Dutch pension funds are large portfolio investors in foreign companies which have considerable non-distributed earnings that are not included in Dutch national accounts, even though the ultimate beneficial owners are Dutch employees participating in the capital-covered second-pillar pension scheme. Correcting for these effects would shift the surplus from corporations to households by an estimated 2-4% of GDP (Rojas-Romagosa et al., 2014; Section 4.2.6). However, the overall current account surplus would not change much following such a correction. Graph 1.7:Net lending by institutional sector Source: European Commission (Eurostat)

Household savings remain in surplus as they continue to experience deleveraging pressures. While household (mortgage) debt has continued to increase in nominal terms in recent years, the increase was limited to around 1% per year on average in 2015-2018 despite strong house price increases. On the back of robust real GDP growth, this has resulted in passive deleveraging, with household debt declining from 111% of GDP in 2015 to a still substantial 102% of GDP in 2018. The high stock of household debt, which mainly consists of mortgage debt, is largely driven by policy distortions in the housing market as well as prevailing tax incentives. Although a series of incremental measures have been taken in recent years to rein in mortgage debt growth ( ), household (mortgage) debt is likely to remain elevated as substantial policy distortions remain in place (see Section 4.2.4). Social dimension Income inequality after taxes and transfers is relatively low and has remained stable over time. Moreover, the Social Scoreboard shows that the Netherlands has one of the lowest share of people at risk of poverty or social exclusion (see Section 4.3.1). As a result of the highly redistributive tax and benefit system, the disposable income of the top 20% after tax is only around 4 times that of the lowest 20% ( ), well below the euro area average of 5.1. In the framework of Sustainable Development Goal 10 (reduced inequalities), income inequality has remained stable in terms of disposable income, while income inequality in gross income, before taxes and benefits, has increased substantially over the last 20 years. This points to increasing redistribution, which is also reflected in the fact that around 75% of the gross income of the lowest income quintile consists of benefits and allowances (Ministry of Finance, 2019c). Significant income differences persist between people with and without a migrant background, with no signs of improvement since 2003 (see Section 4.3.1). Intergenerational differences and low liquid wealth at the lower end of the wealth distribution lead to high net wealth inequality. The top 10% of households own around 61% of total net wealth, while the bottom 20% of households have negative net wealth (Statistics Netherlands, 2018 data). High wealth inequality, , in combination with high household mortgage debt, may strengthen procyclicality in houshold spending with macro-economic implications, as witnessed during the financial crisis and following recession (Teulings and Zhang, 2019; European Commission, 2019a; see also Section 4.2.5). Regional dimension Regional differences in economic growth rates and household disposable income are limited. GDP per capita in purchasing power standards stood at 128% of the EU-average in 2018. In 2018, GDP growth varied from 3.4% on an annual basis in Flevoland, to -0.8% in Groningen. At first glance, this suggests substantial growth divergence between regions. This is largely attributable to the accelerated reduction of natural gas extraction in the area. With natural gas extraction in Groningen being phased-out, this observed divergence is likely to remain in the coming years. However, growth in Groningen excluding natural gas extraction was 2.7% in 2018, implying a much smaller difference in economic performance excluding gas extraction at the regional level compared to the rest of the economy (Graph 1.8). This smaller variation in regional growth rates is also reflected in relatively limited differences in regional household disposable income averages. These vary from 110% of the national average in Utrecht to 87% in Groningen. Regional differences do appear larger in other aspects such as access to finance, congestion, and shortages in specific labour market sections amongst others (see Sections 4.2.2-4.2.4). Graph 1.8:Regional GDP growth including and excluding natural gas extraction (2018) Source: Statistics Netherlands Performance on sustainable development goals Overall, the Netherlands performs well in achieving the Sustainable Development Goals. As a high-income country, it is one of the top performers among EU member states in several areas, including eliminating poverty (SDG 1), reduced inequalities (SDG 10), access to justice and trust in institutions (components within SDG 16) and global partnership and financial governance (SDG 17). The only area in which the Netherlands ranks comparatively poorly is climate action (SDG 13), linked to a low renewable energy share and high greenhouse gas intensity of energy consumption. However, most underlying indicators for this SDG have shown gradual progress over time. More generally, in terms of trends, the Netherlands has recorded stable or improving performance for most SDGs over the past 5 years. Progress has been particularly strong with regard to responsible consumption and production (SDG 12), clean water and sanitation (SDG 6), quality education (SDG 4) and affordable and clean energy (SDG 7). Performance has also risen further from an already high level (see above) on SDGs 9, 10 and 16. Table 1.1:Key economic and financial indicators Source: 2. Progress with country-specific recommendations Since the start of the European Semester in 2011, 89% of all country-specific recommendations addressed to the Netherlands have recorded at least ‘some progress’. 11% of these CSRs recorded ‘limited’ or ‘no progress’ (Graph 2.1). Substantial progress has been made in recent years on public finances, including reform of the long-term care system and protection of expenditure in growth-friendly areas. Substantial progress and full implementation have also been achieved in several areas related to the labour market and pensions, such as raising the statutory retirement age and getting older workers back into work. The Dutch authorities have implemented significant structural reforms to ensure the long-run sustainability of public finances since the first round of country-specific recommendations. In line with country-specific recommendations adopted in 2011 and 2012, the Netherlands had corrected its excessive deficit by 2013, while protecting public expenditures directly relevant for growth, such as spending on R&D, education and training. Following recommendations to improve the fiscal sustainability of public finances, the government implemented reforms in long-term care and pensions. In particular, it raised the statutory retirement age and linked it to life expectancy. The government has taken steps to address high household debt and distortions in the housing market, but challenges remain. Dutch households have high mortgage debt levels (see subsection 4.2.3), driven by tax incentives as well as housing market distortions (see subsection 4.2.4). Since 2012, recommendations have been issued on the need for reforms in this area, in particular to adjust the favourable tax treatment of home ownership, refocus social housing and provide a more market-oriented price mechanism in the rental market. The government has acted upon those recommendations, in particular by tightening mortgage interest deductibility rules (including a requirement to repay mortgages within 30 years to qualify for mortgage interest deductibility) and by gradually reducing the applicable rate for the deduction. Policy measures have also been taken to make rent setting more flexible and to support the private rental housing supply. However, tax incentives for (mortgage-financed) home ownership remain generous, and the private rental sector is still underdeveloped. Graph 2.1:Overall multi-annual implementation of 2011-2019 CSRs to date Source: European Commission The Netherlands has made some progress in addressing the 2019 country-specific recommendations (Table 2.1). Some progress has been made in addressing CSR 1, in particular on the housing market, pension reform, increasing household disposable income and addressing aggressive tax planning. However, challenges remain in each of these areas. Some progress has been made in addressing CSR 2, notably in strengthening life-long learning and upgrading skills. Moreover, some progress has also been made in addressing CSR 3 as the government is supporting overall investment as part of a broader fiscal expansion and has tackled various sector-specific investment needs, albeit to varying degrees. Some progress has been made in each of the policy areas covered by CSR 1. To address high household debt, the applicable rate for mortgage interest tax deductibility is being reduced by 3 percentage points per year from 2020, to 37% in 2023. While this helps to address the debt bias for households, a substantial subsidy on debt-financed home-ownership remains (see subsection 4.2.3). The Dutch authorities announced a package of housing market measures in September 2019, aimed primarily at boosting construction, including in the private rental sector; however, its impact remains uncertain (see subsection 4.2.4). On reforming the second pillar of the pension system, a framework agreement was reached between social partners and government, and its further finalisation is currently ongoing (see subsection 4.2.5). The government has introduced tax measures that support higher real disposable incomes of households (see subsection 4.1), and ongoing favourable labour market conditions are translating into an acceleration of nominal wage growth (see Section 1). On aggressive tax planning, the Netherlands introduced a conditional withholding tax on royalty and interest payments from 2021 (see subsection 4.1). However, its effectiveness in addressing aggressive tax planning remains to be seen. On CSR 2, which focuses on issues related to self-employment as well as life-long learning and up-skilling, limited progress has been made. Limited progress has been made on reducing the incentives for the self-employed without employees and promoting adequate social protection for the self-employed. While a number of proposals have been announced to tackle issues in these areas (see Table 2.1 for an overview and subsection 4.3.1 for further details), most have not been adopted yet. Limited progress has been made on tackling bogus self-employment: while suspension of the enforcement of measures adopted to tackle bogus self-employment has been further extended until 2021, the criterion ‘under the control and direction’ (‘gezagsverhouding’) has been clarified as of January 2019. A draft questionnaire has also been developed to implement a web module that will qualify the working relationship of self-employed workers. In addition, some progress has been made on life-long learning and upgrading skills thanks to a new strategy that aims to create a genuine learning culture and give individuals more ownership of their training, including via individual training budgets (see subsection 4.3.2). Some progress has been made on CSR 3, which calls for supporting investment with a particular focus on R&D, energy and climate, and transport infrastructure. In terms of supporting overall investment, the Dutch authorities are implementing a fiscal expansion (see subsection 4.1), including by boosting investment, and have passed legislation to launch Invest-NL, a national promotional institution with a mandate to support private-sector investment. However, there is still some scope to do more as the Netherlands has some remaining fiscal space. Limited progress has been made on R&D investment. Revised R&D figures show slow progress on private R&D intensity and a slight decline in public R&D intensity (see subsection 4.4.2). Total R&D intensity has stabilised at around 2.2%, but lags behind the national target of 2.5% for 2020 and the R&D intensity of co-leaders in innovation. Although new policy measures have been announced, their impact remains to be seen. Some progress has been made on energy and climate-related investment. The Netherlands has adopted a climate act setting greenhouse gas reduction targets for 2030 and 2050, as well as a climate agreement with a set of adopted and proposed policies for meeting the 2030 target, including an analysis of investment needs (see subsection 4.5). On investment to address transport bottlenecks, some progress has been made. The government agreement set out a clear path with measures to address the increasing traffic on the road, rail, water and in the air. However, room for further improvement remains.

Upon request from a Member State, the Commission can provide tailor-made expertise via the Structural Reform Support Programme to help design and implement growth-enhancing reforms. Since 2019, such support has been provided to the Netherlands in three policy areas: i) enhancement of policy evaluation systems; ii) improvement of SOLVIT service delivery to Dutch businesses; and iii) development of monitoring tools and quality assurance framework to strengthen the adult education system. Table 2.1:Assessment of 2019 CSR implementation (*) (Continued on the next page) Table (continued) (Continued on the next page) Table (continued) Source: European Commission Box 2.2: EU funds and programmes to address structural challenges and to foster growth and competitiveness in the Netherlands The Netherlands is benefiting from EU funds. The financial allocation from the EU Cohesion Policy funds( II ) for the Netherlands, including national co-financing, amounts to €2.4 billion in the current Multiannual Financial Framework, equivalent to around 0.05 % of the GDP annually. By the end of 2019, the total allocation planned was assigned to specific projects and €1.3 billion was reported as spent by the selected projects, showing a level of implementation well above the EU average( III ). EU Cohesion Policy funding supports transition challenges in the Netherlands by promoting growth and employment via investments in innovation, climate transition, employment and labour mobility. Investments driven by funding from the European Regional Development Fund (ERDF) have already supported over 5,000 enterprises of which over 2,000 enterprises to introduce new products to the market. Almost 600 enterprises received support to cooperate with research institutions. Private investment matching the support for R&D and innovation projects has exceeded €425 million. Also, ERDF funding contributes to the development of innovative low-carbon technologies. Under the social inclusion objective the European Social Fund supported over 548,000 persons on their way to the labour market depending on their individual needs and financed dedicated traineeships that enabled offering a job to 62,000 participants that otherwise would have had very little chances on the labour market. The EU also supports investment through the agricultural and fisheries funds, the Connecting Europe facility and Horizon 2020. Support from the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund amounts to €1.27 billion €and €128 million €respectively (including the national co-financing for both). The Connecting Europe Facility allocated €508 million to 77 transport projects with a total investment value of €1.6 billion. Horizon 2020 provided €3.6 billion to boost innovation and research in the Netherlands, of which €697 million to SMEs. EU funding contributes to mobilisation of private investment. By the end of 2018, European Structural and Investment Funds( IV ) supported programmes mobilised additional capital by committing about €158 million in the form of loans, guarantees and equity, which is 4.8% of all decided allocations of these funds. EU funds already invest on actions in line with the Sustainable Development Goals (SDGs). In the Netherlands, up to 98% of ESI Funds allocations are declared to support 9 out of the 17 SDGs. 3. Summary of the main findings from the MIP in-depth review The 2020 Alert Mechanism Report concluded that a new in-depth review should be undertaken for the Netherlands to assess the persistence or unwinding of the imbalances observed (European Commission, 2019f). In spring 2019, the Netherlands was identified as having macroeconomic imbalances (European Commission, 2019b). The imbalances identified related in particular to the high level of private debt as well as the large current account surplus. This chapter summarises the findings of the analyses in the context of the macro-economic imbalance procedure (MIP) in-depth review that is contained in various sections in this report ( ). 3.1. IMBALANCES AND THEIR GRAVITY The current account balance increased further in 2018 to a high of 11.2% of GDP. The surplus is the highest in the euro area as a share of GDP. A persistently high trade surplus in goods is the main driver from a trade perspective. In 2018 the Netherlands contributed 0.7 percentage points to the euro area current account surplus, the second largest contribution after Germany (2.1 percentage points). All domestic sectors are in surplus, with the corporate sector making the largest contribution to net lending. Both financial corporations and non-financial corporations are in surplus, with the latter being the main driver. Net lending by non-financial corporations amounted to 6.7% of GDP in 2018. Compared to the rest of the euro area, profitability and net property income are relatively high for Dutch firms, whereas domestic investments are lower. This is linked in part to the large presence of multinationals in the Netherlands, but small and medium-sized enterprises are also a significant contributor (see Section 4.2.6). Households have been recording surpluses since the crisis, amounting to 1.5% of GDP in 2018. The dip in the housing market following the crisis led to a decrease in residential investment, while at the same time boosting personal savings via deleveraging pressure linked to high household debt. Pension funds are also an important driver of household net lending due to relatively high second-pillar pension contributions (see subsection 4.2.5) which are largely invested abroad. The government sector recorded a headline surplus of 1.5% of GDP, driven by past consolidation measures and increasing tax revenues. Private debt continued to decline in 2018, but remains high. It reached 242% of GDP in 2018, down from 252% the year before. Non-financial corporate debt accounted for 140% of GDP. However, around 60% of this debt is owed by multinationals. As multinationals’ debt largely consists of intra-group debt, the macro-economic risks appear to be limited (see subsection 4.2.3). Household debt largely consists of mortgage debt. The tax deductibility of mortgage interest payments incentivises households to take on mortgage debt. The household debt ratio declined to 102% of GDP in 2018 on the back of GDP growth that outpaced household debt growth. Although household debt continues to increase in nominal terms, growth remains much slower than before the crisis, at around 1-1.5% annually in recent years. Growing mortgage debt can be linked to strong house price rises. House price growth accelerated in 2018 to around 7% in real terms, exceeding the macro-economic imbalance procedure threshold. Overall, house price developments suggest a lagged supply response rather than overvaluation at national level (see subsection 4.2.4). Potential spillovers to other EU countries are relatively moderate given the size of the Dutch economy. Table 3.1 shows that exports to the Netherlands constitute a relatively large share of GDP for Belgium (13%). From the Dutch perspective, Germany is the largest export destination, followed by the United Kingdom. On the financial side, Belgium, Cyprus, Ireland, Hungary, Luxembourg and Malta have a relatively high exposure to the Netherlands. Box 3.1 shows an analysis of the effects of a stylised public investment boost on GDP, indicating small but positive spillover effects on the rest of the euro area. Table 3.1:Outward spill-over heat map for Netherlands Source: IMF, OECD, TiVa, BIS and Commission services 3.2. EVOLUTION, PROSPECTS AND POLICY

RESPONSES The current account is set to fall gradually, but remains high. According to the European Commission’s Autumn Forecast, the surplus is set to gradually decline from 11.2% in 2018 to 8.6% in 2021 as import growth is projected to outpace export growth. This reflects a weakening external environment combined with comparatively robust domestic demand. The latter is in turn linked to a pick-up in wage growth and an expansionary fiscal stance (see Section 1 and subsection 4.1). Declining natural gas exports following the phase-out of gas production in Groningen are also expected to weigh on the current account surplus. Private debt is expected to remain high. Overall, still relatively robust nominal GDP growth combined with ongoing deleveraging pressures are projected to support the trend of passive deleveraging. However, in nominal terms household debt growth appears likely to pick up somewhat as a result of sharp house price rises in recent years (see subsection 4.2.3). The maximum applicable rate of mortgage interest deductibility is being reduced by 3 percentage points per year, from 49% in 2019 to 37% in 2023. While this lowers the debt bias for households, a substantial subsidy for mortgage borrowing remains. The government has also launched initiatives to boost new housing supply, including in the private rental sector, which would provide households with an alternative to taking on mortgage debt. However, with a share of 13% of the total housing stock in 2018 the private rental sector remains underdeveloped.

3.3. OVERALL ASSESSMENT The Netherlands has recorded persistently large current account surpluses. The net lending position is largely driven by non-financial corporations, with relatively high savings and low domestic investments. Both large corporations, including multinationals, and small and medium-sized enterprises have substantial surpluses. Households also make a positive contribution, among other things due to high mandatory pension contributions. Household debt as a share of GDP is around 50 percentage points higher than the euro area average and well above the relevant benchmarks (see subsection 4.2.3), as tax incentives encourage households to take on mortgage debt. While household debt is coupled with substantial housing and pension assets, these assets are often illiquid, leaving households vulnerable to shocks. The external surplus and the high private debt level are both expected to unwind only gradually. The current account balance is set to moderate slowly on the back of domestic demand and rising wages, also supported by the expansionary fiscal stance. However, the level is expected to remain well above the threshold. While household debt is decreasing as a share of GDP, it is growing in nominal terms, linked to sharp house price rises. Despite measures taken, strong incentives to take on mortgage debt remain, also against the background of an underdeveloped private rental market. Table 3.2:MIP assessment matrix(*) (Continued on the next page) Table (continued) Source: European Commission Box 3.3: Public investment and potential spillovers Following the 2019 country-specific recommendations on investment-related economic policy, the European Commission QUEST model is applied to simulate the domestic and cross-border impact of a public investment boost of 1% of GDP sustained for 10 years. The Netherlands maintains an expansionary fiscal stance, via both lower taxes on labour income and increased expenditure, including on investment (see subsection 4.1). 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. To illustrate the size of potential spillovers, this box describes the impact of a stylized debt-financed increase in productive public investment by 1% of GDP for the next 10 years. Such a public investment boost could be motivated by a favourable debt trajectory, low borrowing costs and monetary policy constrained by the effective lower bound on nominal interest rates. The QUEST simulations show a positive impact on Dutch real GDP of around 0.6% in the first year, increasing to 1.2 % after ten years (Table 1). ( V ) The current account surplus is reduced by around 0.1% of GDP. The spillover of the domestic investment impulse via the trade channel is positive, albeit small, with real GDP in the REA rising by 0.1% in the first few years and then gradually tapering off. These results describe the effects of a public investment boost in the Netherlands on an ‘all else equal’ basis; of course, a coordinated investment programme across several member states would have a much bigger domestic and cross-border impact. Table 3.3a:Simulated domestic impact and spillovers of a public investment boost of 1% of GDP for 10 years Source: European Commission 4. Reform priorities 4.1.Public finances and taxation 4.1.1.Expenditure and revenue developments* ( ) After a prolonged period of zero growth, nominal government expenditure is increasing again (Graph 4.1.1). Based on the 2018-2021 multi-annual government agreement, government expenditure is rising mainly in the field of defence, infrastructure and education. Recent additional fiscal measures, announced in the 2020 budget, involve further spending on climate measures, in particular an increase in the subsidy for sustainable energy use ( ), and higher spending on state pensions ( ). The government also announced additional budgetary measures to address nitrogen issues (see Sections 1 and 4.4) and to raise teacher’s salaries. Public investment is expected to have increased from 3.3% of GDP in 2018 to 3.5% of GDP in 2019, remaining well above the euro area average, but below its longterm average (3.8% of GDP). Revenue growth outpaced expenditure growth and has led to headline surpluses. The general government balance is forecast at 1.5% of GDP in 2019. Tax relief (mainly for households) and faster expenditure growth are expected to lead to a decline in the surplus, to 0.5% of GDP in 2020, based on the European Commission autumn forecast. In structural terms, taking the economic cycle and incidental measures into account, the government surplus is set to fall from 0.9% of GDP in 2018 to 0.2% of GDP in 2020, illustrating an expansionary fiscal stance (Graph 4.1.1). Graph 4.1.1:General government expenditure, revenues and structural budget balance Source: European Commission 2019 autumn forecast Revenue side measures lower the tax burden on labour by roughly 0.5% of GDP. In 2020, the number of personal income tax brackets is reduced to two, with a base rate of 37.35% for all annual incomes up to €68,507 and a marginal top personal income tax rate of 49.5% for all income above this threshold (Graph 4.1.2). This measure is only partly financed by an increase in indirect taxes and leads to an overall lowering of the tax burden. This is expected to increase the labour supply and employment. It reduces progressivity, but the impact on income redistribution is partly offset by an increase in the general income tax credit and the earned income tax credit. The government is also reducing corporate income taxes, but less than announced earlier. In 2020, the tax rate on profits up to €200,000 is reduced from 19% to 16.5%, while the rate on profits exceeding €200,000 remains at 25%; this goes against the tax rate of 22.55% that was proposed in the 2018-2021 government agreement. From 2021 onwards, the lower tax bracket will be reduced to 15% and the higher tax bracket to 21.7%. The lowering of the corporate income tax rates is partly financed by an increase in the tax base, amongst others following implementation of the Anti-Tax Avoidance Directive.

Graph 4.1.2:Personal income tax rates, 2015-2020 Source: European Commission The tax mix is relatively green. With 8.6% of total tax revenue coming from environmental taxes ( ) in 2018, the tax mix is relatively green by European standards (Graph 4.1.3). Moreover, the share of environmental taxes is set to increase. A carbon levy will be introduced for the non-emission trading industrial sector by 2021, while the energy taxes for households will also increase. Graph 4.1.3:Environment taxes (2018) Source: European Commission However, the tax mix is not particularly ‘growth-friendly’. With over 50% of total tax revenue coming from taxes on labour in 2018, the tax burden on labour is around the euro area average. Inactivity traps and unemployment traps remain relatively large for low-income earners, making it financially unattractive to accept a job at this income level ( ). Despite increasing in 2019, the share of consumption taxes in the total tax mix remains around the euro area average, while the share of recurrent property taxes is well below the euro area average. A comparison with other EU countries suggests that there is scope to improve the tax mix by shifting taxes on labour further to areas less detrimental to growth, such as consumption or property income ( ). Graph 4.1.4:Tax mix in the Netherlands and the euro area (share in total tax revenues) Source: European Commission 4.1.2.Aggressive tax planning Evidence ( ) suggests that the Netherland’s tax rules are used by companies that engage in aggressive tax planning. The international corporate tax system aims to tax the profits of multinationals where they arise. However, these firms have in some instances exploited mismatches and loopholes in the international tax framework to reduce their overall tax burden. This brings with it significant problems, such as revenue losses, unfair competitive advantages or lower tax morale. A study commissioned by the Dutch Ministry of Finance shows that the Netherlands was home to some 15,000 letterbox companies in 2017,, with a balance sheet size of nearly €4,500 billion – about six times the country’s GDP and 80% of the stock of foreign direct investments in the Netherlands (SEO, 2018). According to a recent IMF paper, the Netherlands is the second biggest recipient of foreign direct investments made through special purpose entities worldwide after Luxembourg, with the two countries hosting nearly half of the world’s letterbox companies (Damgaard et al, 2019). Several studies highlight that the Netherlands is used as a conduit country, i.e. certain multinationals use the country’s tax rules to route their profits to low or no tax jurisdictions (Garcia-Bernardo et al, 2017). A recent study by the CPB Bureau for Economic Policy Analysis (CPB 2019e) shows that, between 2014 and 2016, around 25% of dividend payments and 45% of interest payments from the Netherlands had low tax jurisdictions or tax havens as their destination. For royalty payments, this ratio reached 75% between 2008 and 2010 (most recent figures in the study). The government is implementing European and internationally agreed initiatives as well as unilateral measures. The bill on implementing the second Anti-Tax Avoidance Directive should neutralise certain hybrid mismatch arrangements that would otherwise result in double non-taxation (effective as of 1 January 2020). The government has also transposed the sixth amendment of the Directive on Administrative Cooperation into national law, which will enter into effect as of 1 July 2020. This will force intermediaries to disclose aggressive tax planning schemes to tax authorities. The Netherlands adopted most of the provisions of the OECD Multilateral Convention to Prevent Base Erosion and Profit Shifting, which has entered into force on 1 January 2020. However, the application of the provisions of this multilateral instrument will depend on the choices made by the relevant treaty partners. In 2019, the government also introduced a dynamic ‘black list’ of jurisdictions, comprising those on the EU list and countries with a statutory corporate tax rate lower than 9%. It uses this list for the recent controlled foreign company measure, the ruling rules and the future withholding tax on interests and royalties. The government has also amended the framework for granting advance tax rulings, ensuring a more transparent process. The government has announced the introduction of a conditional withholding tax on outbound payments, but its effectiveness remains to be seen. The current absence of withholding tax on royalty and interest payments may lead to cross border payments being taxed at a very low rate or escaping tax altogether if they are channelled to a low or no tax jurisdiction. This has been flagged as a key element that facilitates aggressive tax planning through the Netherlands. The government has announced the introduction of a conditional withholding tax on royalty and interest payments, which should enter into force on 1 January 2021. This should affect financial payments made to certain low and no tax jurisdictions. Nevertheless, the effectiveness of the withholding tax is uncertain - countries with a statutory corporate tax rate above the threshold but offering special regime effectively reducing the tax rate below this threshold would not be affected. Similarly, countries with a statutory corporate tax rate above the threshold but with a territorial tax regime that effectively exclude profits not repatriated on their territory would fall outside the scope of this measure. 4.1.3.FISCAL FRAMEWORK The Netherlands has a well-established fiscal framework. For more than 25 years, it has been conducting a trend-based fiscal policy with a strong multi-annual focus. The main characteristics of this fiscal framework include: (i) the use of independently derived macroeconomic assumptions; (ii) the use of inflation-adjusted expenditure ceilings for the government’s entire term; (iii) the use of automatic stabilisers on the revenue side; and (iv) a well-defined budgetary process for decision-making and clear distribution of responsibilities, including the tasks of independent fiscal institutions. The CPB Bureau for Economic Policy Analysis carries out independent macro-economic and fiscal forecasts while the Advisory Division of the Council of State, as fiscal council, monitors compliance with numerical fiscal rules and performs a normative assessment of government finances. The commitment to comply with EU fiscal rules is embedded in the legal framework, in particular via the law on sustainable public finances (Wet Houdbare Overheidsfinancien). In the 2020 budget, a relatively large number of ad hoc adjustments were made to the expenditure and revenue ceilings. The fiscal framework uses fixed ( ) multi-annual expenditure ceilings, with automatic stabilisation mostly taking place via the revenue side of the budget. In normal economic times, the framework provides for stability, by setting budgetary anchors well in advance. However, in the 2020 budget relatively large ad-hoc adjustments were made to the expenditure and revenue ceilings. This was done (i) to accommodate higher spending on climate and pensions following discretionary policy decisions; and (ii) to allow under-spending compared to the expenditure ceilings in 2018 and 2019 to be effectuated in later years after the current government’s period. 4.1.4.Debt sustainablity analysis and fiscal risks Short-term and medium-term fiscal risk indicators do not give cause for concern. The European Commission’s short-term indicator S0 ( ) does not flag significant fiscal risks. The medium-term S1 indicator, which measures the effort required to achieve a debt level of 60% of GDP by 2033 ( ), is also negative (-3.2% of GDP). This implies low fiscal sustainability risks, which is explained by a debt level below the reference value. The low short-term and medium-term risk is consistent with the ‘AAA’ rating given to Dutch government debt by the three major credit rating agencies, and with low spreads on sovereign yields and credit default swaps. The fiscal sustainability gap indicator (S2) points to medium risk in the long term ( ). This is mainly due to the projected increase in ageing costs. While the Netherlands scores well on the fiscal sustainability of its public pension system and other age-related public expenditures, spending on long-term care stands out. In the baseline reference scenario, public spending on long-term care is expected to grow from 3.5% of GDP in 2016 to 6% of GDP in 2070, with both at a much higher initial level and rising much faster than in peer countries. In this context, while the 2015 reform in the long-term care system aims to increase the efficiency of the system and contain public expenditures, more recent policy measures such as the additional investment to meet the requirements of the quality framework for nursing homes go in an opposite direction. The government also softened the increase in the first-pillar retirement age and its link to life expectancy. 4.2. Financial sector 4.2.1.Banking sector

Overall the banking sector appears resilient. Dutch banks remain well capitalised, with a common equity tier 1 ratio of around 17% (well above the euro area average of 14.8%). Profitability has improved over the last 5 years and the return-on-assets stood at 0.5% in Q2 2019 while the return-on-equity reached 8.7% (see Table 4.2.1). Table 4.2.1:Financial soundness indicators Source: ECB Despite banks’ overall financial soundness and a low level of non-performing loans, there are underlying risks linked to their mortgage exposure. The share of non-performing loans continued to decrease across all sectors, reaching 1.8% in mid-2019, a 10% decrease compared with the year before. However, with mortgage debt levels remaining high and continued house price rises (see subsections 4.2.3 and 4.2.4), combined with risk weights at low levels, risks are building up. In recent years, several measures have been taken to rein in mortgage debt growth. This includes taking macroprudential policy steps (European Commission, 2018a) as well as reducing tax incentives for taking on mortgage debt (see Section 4.2.3 below). In addition, to further improve financial sector resilience against vulnerabilities associated with the banking sector’s high mortgage debt exposure, the Dutch central bank intends to introduce a risk weight floor for banks’ mortgage holdings, with the level of the floor linked to the loan-to-value ratio of the underlying loans ( ). The floor is expected to come into force in autumn 2020. Although Dutch banks are well capitalised, they continue to rely heavily on market funding, and leverage remains high. The financial sector’s solvency position and capital ratios continue to exceed regulatory requirements. Both capital adequacy and the tier 1 ratios improved further, reaching 22.6% and 18.7% in Q2-2019. Given the gap between actual lending and its long-term trend, the countercyclical buffer has been kept at 0% by the Dutch central bank (DNB, 2019b). At the same time, the additional buffers imposed on the five systemic banks remain in force, and their gradual build-up should be completed this year. However, despite its relatively high capital ratios relative to risk-weighted assets, the banking sector continues to be highly leveraged. Its leverage ratio (capital and reserves as a share of total — i.e. non-risk-weighted — assets) has declined somewhat, to 5.8% in June 2019. This is one of the lowest levels in the euro area. The sector also continues to rely heavily on market financing, with deposits as a share of total liabilities declining further to 48.7% in September 2019. Consistent with this, the loan-to-deposit ratio started to pick up again, reaching 118.7% in Q2-2019 — one of the highest levels in the euro area. Dutch banks will also have to comply with the final Basel III framework from 2022, implying a significant boost to minimum capital requirements. According to analysis by the European Banking Authority (European Banking Authority, 2019), this reform could increase the tier 1 minimum required capital and will affect mainly the large and systemically important banks (Bank for International Settlements, 2017). Although Dutch banks should be able to fulfil the new requirements, the impact on their capital position could be significant( ). However, since the new framework provides for a 5-year implementation period, beginning in 2022, any additional capital needs will be phased in gradually. Dutch banks maintain healthy profitability, although margins are coming under pressure. The sector’s return on equity stayed almost flat (8.7% in Q2-2019, from 8.8% the year before). At 73.8%, the net interest margin in mid-2019 is on an upward trend and one of the highest in the EU. However, with low interest rates putting pressure on margins, banks are looking for ways to improve their returns. One strategy that banks are focusing on is increasing efficiency by introducing digital solutions and reducing the number of branches (European Central Bank, 2019b; DNB, 2019c). Another, potentially more worrying, emerging trend is that banks appear to be easing their lending conditions and acceptance criteria for mortgage loans and credit facilities for non-financial corporations (European Central Bank, 2019a). While the latter could have a positive impact by addressing genuine financing bottlenecks (e.g. in relation to small and medium-sized enterprises; see subsection 4.2.2), it also risks increasing the vulnerability of banks’ loan books to shocks. The Netherlands has deep financial markets that are attractive for international players. The Dutch market is attracting various new financial players, partly due to its technical and logistical infrastructure. Moreover, Cboe Global Markets Inc., one of the world’s largest exchange holding companies, has entered into an agreement to acquire European Central Counterparty NV (EuroCCP), a Dutch equity clearing firm, increasing the potential for developing derivatives clearing capabilities in the Netherlands. However, the growing prominence of electronic trading and the arrival of new trading platforms raise concerns over IT risks, the control of trading algorithms in volatile markets and supervision of market abuse in rapidly moving and globally dispersed markets. To support market operators, the Dutch central bank and the Dutch Authority for Financial Markets have already put forward several initiatives ( ) to inform on relevant risks and opportunities. Sustainable finance The financial sector plays a key role in mobilising finance to fulfil the environmental sustainability agenda. At international level, the Dutch central bank is one of the founding members of the Network of Central Banks and Supervisors for Greening the Financial System, which aims to strengthen the efforts of the financial sector in meeting the climate goals. At national level, the Dutch central bank set up the Sustainable Finance Platform, which aims to promote and increase awareness of sustainable funding in the financial sector. Due to the risks that the energy transition might have on financial institutions, the central bank is also including the data on sustainable assets owned by financial institutions in its stress test scenarios. Furthermore, Dutch banks have pledged to measure, monitor, manage and reduce the environmental footprint of their balance sheets. Anti-money laundering The Netherlands is among the countries with the largest flows of inward and outward foreign direct investment. In 2017, this involved a total amount of over €4.5 trillion. A substantial part of these flows (some 80%) is ultimately transferred to a foreign destination through special purpose entities, letterbox or shell companies with no real economic activity in the Netherlands (CBS, 2018b). Against this backdrop, it is key that entities involved in company and trust formation (trust and company service providers (TCSPs), tax advisors, public notaries, lawyers) are aware of the money laundering risks linked to those business structures. The 2017 national risk assessment considers the money laundering risks posed by TCSPs and by complex fiscally driven legal structures as high and medium-high, respectively.( ) The national risk assessment justifies the high risk rating for TCSPs with the fact that these services are often directed towards fiscally-driven structures of legal entities, which are vulnerable to misuse. Inadequate understanding of risk exposure to money laundering by professionals that service such entities, particularly when complex schemes are involved, hampers their role as gatekeepers. Trust and company service providers, including legal professionals and tax advisors, are the first line of defence against money laundering risk, as they are involved in company formation. However, statistics provided by the Dutch Financial Intelligence Unit on unusual transaction reports (UTRs) highlight concerns in this area. The number of UTRs filed by TCSPs has been low and declining in recent years ( ). The number of UTRs filed by tax advisors has been low as well ( ). The Dutch administration has proposed some measures to combat the misuse of company and legal structures for money laundering purposes. The prevention of letterbox companies is also one on the measures mentioned in the Dutch Anti-Money-Laundering (AML) Action Plan from mid‑2019 (Ministry of Finance, 2019d), with a specific focus on the trust sector. Also stricter rules to monitor TSCPs is an important part of the AML Action Plan, as well as the establishment of the ultimate beneficial owner registers on legal entities and on legal arrangements. However, the laws setting up the registers have not been adopted yet. Upon adoption and establishment of the registers, operators will have 18 months to register, well after the deadlines of 10 January and 10 March 2020 laid down in EU law. The criminal investigation into the AML compliance practices of Dutch bank ING led to an out-of-court settlement, including a record fine, in September 2018. The settlement found ING guilty of criminal offences in violating compliance rules on anti-money-laundering and combating terrorism financing.( ) Another investigation linked to ABN Amro Bank is ongoing. These cases illustrate how the services provided by the big financial institutions are exposed to money laundering risks, and also draw attention to systemic issues in relation to AML supervision and enforcement in this sector. 4.2.2.Access to finance Access to finance for smaller companies is hampered by some bottlenecks, in part linked to a high degree of market concentration in the banking sector. While sufficient financing seems to be available to fund larger, low-risk investments, smaller Dutch companies experience a relatively high rejection rate for credit applications. Firms taking out smaller loans are also charged wider mark-ups on average compared to peer countries (European Commission, 2019a). This may be due to the high market concentration in the Dutch banking sector (European Commission, 2019a) and the absence of a national credit register (Dubovik et al., 2019; van Solinge, 2019). However, in recent years some alternative (non-bank) providers of financing have emerged. These are challenging the dominant position of traditional banks as lenders to small and medium-sized enterprises, including by offering a wider range of financial instruments. Moreover, the Dutch authorities are considering creating new instruments and expanding existing instruments ( ) to improve access to finance for small and medium-sized companies (EZK, 2019a). 4.2.3.Private debt* Private debt continues to decline gradually, but remains high by international standards. At the end of 2018, it amounted to 242% of GDP. This represents a significant reduction from its peak of 267% of GDP in 2014, but remains well above the euro area average of about 135% of GDP (Graph 4.2.1). Both household debt, at 102% of GDP, and non-financial corporate debt, at 140% of GDP, far exceed the prudential and fundamental threshold( ) levels of 65% and 96% of GDP (prudential) and 75% and 104% of GDP (fundamental) respectively, according to Commission calculations. However, the high level of corporate indebtedness is mainly due to the debt of multinationals (about 60% of total non-financial corporate debt). As this consists largely of intra-group debt, it does not raise immediate financial stability concerns (European Commission, 2019a and 2018a). With regard to private debt, the main concern is therefore household debt. Graph 4.2.1:Private debt developments versus euro area average Source: Eurostat Household debt continues to decline as a share of GDP, although it is still increasing in nominal terms. Following the post-crisis housing market correction, nominal household debt declined over the course of 2013-2014 as households actively deleveraged. As house prices started to recover, debt growth started rising again. However, at a pace of around 1-1.5% year-on-year, it has remained subdued, both compared with pre-crisis household debt developments and relative to nominal annual GDP growth of 2% to 5% (Graph 4.2.2). This is in part attributable to policy measures to rein in mortgage debt growth, including restrictions on interest-only loans (see below) as well as tighter rules for loan-to-value and loan-to-income ratios. Voluntary mortgage repayments, which became financially attractive due to low interest rates on deposits, also played a significant role (DNB, 2018a). Going forward, household debt growth appears likely to pick up somewhat, as the sharp house price rises seen in recent years (see subsection 4.2.4) feed through into higher mortgage amounts for new borrowers.

Graph 4.2.2:Household debt versus GDP growth Source: Eurostat Mortgage interest tax deductibility is being reduced, but remains generous. High household indebtedness is largely due to mortgage debt, which is fuelled by the fact that mortgage interest on owner-occupied homes is treated as a fully deductible expense in income taxation. Dutch authorities have taken some steps to limit this, both by disqualifying new interest-only mortgages from tax deductibility (in force since 2013) and by reducing the maximum applicable rate at which mortgage interest is deductible. This reduction was very gradual at first (0.5 percentage points per year from 2014), but from 2020 it will proceed at an accelerated pace, with the maximum rate lowered in three steps from 49% at present to 37% in 2023. However, this reduction only affects households in the top tax bracket (some 10% of the labour force), and a rate of 37% still signifies a strong implicit subsidy on mortgage borrowing, currently amounting to around €10 billion (1.4% of GDP). It also contrasts with policies in other EU countries, where mortgage interest deductibility has mostly been phased out or capped at a relatively low nominal amount, or where the applicable rate is substantially lower. ( ) 4.2.4.Housing market* The housing market upswing continues, albeit at a slower pace and with significant regional differences. At national level, nominal house price growth slowed from 9% in 2018 to around 6% in 2019. In major cities, where the recovery in prices had been particularly steep, the market cooled more notably. This was especially the case in Amsterdam, where prices rose by about 3% over the course of 2019 – just slightly above inflation – following price rises of 10-15% per year since 2016. Nationwide, house prices are now around 12% above their pre-crisis peak although they remain somewhat lower in real terms, whereas in the largest cities prices are substantially above previous highs (Graph 4.2.3). Graph 4.2.3:House price developments (2008 Q1 = 100) (1) Source: Statistics Netherlands (nominal house prices); Eurostat (deflated house price index) While valuation indicators do not show clear signs of overheating at present, the risk that house prices exceed fundamentals appears to be rising. At national level, the price-to-income ratio (a valuation indicator linked to housing affordability) rose to about 9% above its long-term average in Q3 2019 (Graph 4.2.4). A model-based estimate still points to undervaluation based on 2018 data (although this is partly a reflection of relatively weak residential investment in the post-crisis period combined with low interest rates). Overall, with continued above-income price rises, it appears increasingly likely that the housing market will re-enter overvalued territory. This is particularly the case for regions where price growth has outstripped the national average and key indicators, notably the price-to-income ratio, appear more stretched. For Amsterdam, for example, econometric models do indeed suggest that price developments have already decoupled from fundamentals for several years (Houben et al., 2017). Risks related to the Dutch housing market are also highlighted in the European Systemic Risk Board recommendation to the Netherlands issued in June 2019 (ESRB, 2019). Graph 4.2.4:House price valuation indicators Source: European Commission On the demand-side, house prices are supported by the favourable tax treatment of owner-occupied housing. Under the Dutch tax system, most investment assets are subject to income taxation based on a deemed rate of return under the ‘box 3’ approach, implying annual tax payments of about 0.9-1.6% of their net financial value under current rules( ). Owner-occupied housing is exempted from this approach, and is instead subject to a (generally lower) recurrent property tax( ). Moreover, when financed with a mortgage, it benefits from a substantial additional tax advantage linked to mortgage interest tax deductibility (see subsection 4.2.3). Overall, these tax benefits represent a significant subsidy that favours owner-occupied housing over other investment opportunities as well as over rental housing. Möhlmann et al. (2019) estimate that their impact on house prices (relative to a fully neutral taxation scenario( )) amounts to around 10%, and on the share of rental homes in the overall housing market to around 5 percentage points. Demand for owner-occupied housing is also driven by the lack of a viable alternative on the rental market. The Dutch housing market is characterised by large owner-occupied and social housing sectors, each of which are subsidised through different channels( ). The private rental market is the only sector not receiving any subsidy, and with a share of about 13% of the overall number of homes it remains relatively underdeveloped. This leads to poor availability of rental housing and high rent levels. As a result, middle-income households – whose earnings are above the social-housing ceiling yet often insufficient to comfortably afford private-sector rents – can be pushed into (largely mortgage-financed) home ownership. This particularly concerns younger families, leading to a relatively young average first-time buyer age accompanied by high debt-to-income and loan-to-value ratios. This, in turn, creates potential financial vulnerability issues for this age group (DNB, 2019b; European Commission, 2017b). The housing supply continues to fall short of estimated needs, particularly in major cities. Following the financial crisis, the Netherlands experienced a prolonged period of weak residential construction (European Commission, 2019a). This resulted in a significant housing shortage, estimated by the Dutch authorities to be around 294 000 homes in 2019, equivalent to 3.8% of the overall housing stock (BZK, 2019a). Shortages in large metropolitan areas are especially severe, amounting to 5-7% of the local housing stock (ABF Research, 2019). To address the existing shortage as well as expected demographic developments, the government set a target for net new housing of 75 000 homes per year until 2025 (BZK, 2018a). Thanks to a gradual recovery in construction output, this target was just about met in 2018 and 2019, but a sharp fall in building permits in 2019 (partly linked to the ‘nitrogen problems’ (‘stikstofproblematiek’), see below) suggests this is unlikely to be the case in the coming years (Graph 4.2.5). Moreover, the 75 000 target possibly understates actual building needs going forward ( ), so even if it is achieved shortages may well persist. Graph 4.2.5:New housing supply versus expected needs Source: Statistics Netherlands (historical data); BZK (2018a) (2018 target) Cyclical and structural bottlenecks are constraining housing supply and raising construction costs. As a result of a sharp fall in building activity after the financial crisis, both the construction sector and municipal planning departments declined in size. Following the subsequent recovery, developers now face increasingly tight capacity constraints. From a more structural perspective, a key impediment for more construction is a lack of buildable land: the amount of land allocated to housing has risen at a far slower pace than new residential construction, and remains scarce both by international comparison and relative to land designated for other purposes, such as industrial use. This is in part linked to the role of local governments: decisions on zoning plans are generally made by municipalities and are thus not necessarily conducive to addressing overall housing needs (Michielsen et al., 2019). This can translate into cumbersome and unpredictable requirements being imposed on projects, raising costs and reducing scope for exploiting economies of scale. Another, partly related, issue are long throughput times in the planning and development process, particularly for inner-city construction, which creates further uncertainty for developers. As a result, the responsiveness of housing supply to house price rises in the Netherlands is one of the lowest among OECD countries (Caldera et al., 2013). The ‘nitrogen problems’ (‘stikstofproblematiek’) create additional near-term downside risks to new housing construction. As a result of a judgment of the Council of State in June 2019, construction projects leading to the incremental deposition of a number of harmful nitrogen compounds near to 118 Natura 2000 nature protection areas across the Netherlands are generally no longer permitted without compensatory measures (see Box 1.1 in Section 1). Estimates indicate this would reduce housing completions by about 36 000 dwellings cumulatively over 2020-2024 in a scenario with no mitigating policy steps (Manshanden et al., 2019). Although the government has announced a package of measures to alleviate the judgment's impact on new construction (LNV, 2019), it remains a significant source of uncertainty. Policy developments The Netherlands has taken some steps to improve rental market functioning in recent years, albeit with a limited impact so far (European Commission, 2019a and 2018a). These include measures to allow higher rent increases for ‘scheefhuurders’ (middle and high income earners in social housing), a regulatory change facilitating more short-term rental contracts since 2016, and the possibility for municipalities to designate a portion of dwellings as intended for the private rental sector in their zoning plans since 2017. While positive steps, so far these measures have not translated into a meaningful expansion of the private rental sector relative to the overall housing market. In September 2019, a package of further housing market measures was announced, aimed primarily at boosting construction. Investment subsidies of up to €1 billion, distributed over a period of 4 years, will be made available to municipalities where shortages are most acute. A further €1 billion, spread evenly over 10 years, will be allocated to targeted tax reductions for social housing corporations building new homes. These measures could, over time, contribute to raising new housing construction, but significant implementation uncertainty remains. In particular, it may be challenging to determine that new homes built under the schemes genuinely represent a net addition to the housing stock, rather than projects that would have happened anyway or that simply shift resources away from other potential developments. Other recent policy steps risk having a limited or even negative impact on the supply of private rental housing. In May 2019, legislation was adopted to simplify the market criterion (‘markttoets’) for social housing corporations. This should allow them to engage in construction of mid-priced (non-regulated) rental housing more easily. However, against the current backdrop of strong private-sector development activity and capacity constraints in the construction sector, this appears unlikely to create significant incremental rental housing supply in the near-term, while – if successful in the longer run – it risks crowding out the role of the private sector in the non-regulated rental market. In addition, adjustments to the rent-setting system for social housing( ), announced as part of the September 2019 housing market package mentioned above, imply that more homes remain in the regulated sector rather than transitioning to the private rental market. Moreover, measures to discourage ‘buy-to-let’ purchases (also proposed as part of the same package) may favour expansion of the owner-occupier market at the expense of rental housing availability. 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 state pension, which is non-means-tested and independent of employment history( ). It is funded by a specific contribution and general income taxes, with a current cost of about 5% of GDP. To limit its fiscal impact, the statutory retirement age has been linked to life expectancy since 2012.() The second pillar is typically organised at industry or company level and is capital-funded, with compulsory participation. Although there has been a gradual shift towards defined contributions in recent years, about 90% of all participants still fall under (quasi‑)defined-benefit( ) pension schemes. The third pillar is formed by individual pension plans, supported by a targeted tax relief on premiums paid on such products. The first and second pillar aim to provide a retirement income that replaces around 75% of the average lifetime gross salary. Given that retirees are exempted from paying the specific first pillar pension contribution, net replacement rates are often around 100% (OECD, 2017a).

Second-pillar pension contributions are a key driver of relatively high compulsory savings, having a significant impact on the savings/investment balance. With a typical contribution rate of around 20% of gross earnings, second-pillar premiums are responsible for the bulk of the comparatively large non-tax compulsory payment wedge in the Netherlands (Graph 4.2.6). As such, they can lead to suboptimal consumption smoothing across different lifetime phases, particularly as younger households typically also experience significant forced savings via principal repayments on relatively large mortgages (see subsection 4.2.2). In contrast, older age cohorts on average enjoy high pension income, with limited housing expenses and lower overall living costs. At macroeconomic level, compulsory savings via pension funds are a significant driver of the household sector's savings/investments imbalance (European Commission, 2019a) and therefore of the overall current account surplus (see subsection 4.2.6). Graph 4.2.6:Compulsory payment wedge on labour income (2018) Source: OECD (2019a) The funding ratio of pension funds is negatively affected by falling interest rates, triggering adjustments that dampen the impact of monetary policy transmission. The defined-benefit nature of most second-pillar funds implies that the present value of their liabilities – i.e., future pension pay-outs – increases as interest rates decline. The resulting asset/liability mismatch can make it necessary to forgo anticipated benefit increases, raise premiums, or cut benefits outright (Lever et al., 2018). This has a negative impact on disposable household income and can encourage precautionary savings behaviour, weighing on household consumption when monetary policy aims to stimulate domestic demand. The second pillar in its current form also has structural drawbacks in terms of coverage, transparency and intergenerational fairness. The Dutch pension system emerged in the mid-twentieth century, and was mainly geared towards workers remaining employed within the same company or sector throughout their working lives. As it now stands, it is not well equipped to deal with current structural labour market trends, including flexible career paths with increasing job mobility between sectors and a growing share of self-employed workers (who are not normally covered within the system). In addition, the system involves systematic redistribution from younger to older workers, via the ‘average contribution, average accrual’ (‘doorsneesystematiek’) approach ( ) (CPB, 2018). As this makes the link between contributions and pension savings less clear, it also reduces transparency. The social partners and government reached a framework agreement on pension reform in June 2019. Overall, the agreement aims to address vulnerabilities in the pension system while maintaining its strengths: compulsory participation, collective implementation, collective risk sharing and supportive tax rules. The agreement and its subsequent implementation steps imply a number of key changes, including (SZW, 2019a, 2019b and 2019c): ·Transitioning from the current doorsneesystematiek to an actuarially fair system. This will be based on a fixed contribution percentage combined with an accrual rate that declines with age, reflecting the shorter investment horizon for premiums from older workers. ·A tighter linkage between changes in pension funds' financial position and pay-outs, implying a lower threshold for both benefit increases and cuts (albeit smoothed over a period of up to 10 years in most cases). This also implies that benefit adjustments, rather than premium changes, will become the primary mechanism to absorb asset/liability imbalances. ·More individual flexibility in using accumulated pension assets, in particular the option to redeem part of it as a lump-sum payment at the pensionable age under certain conditions. ·A slower increase in the first-pillar retirement age (see subsection 4.1), and more scope for workers in occupations deemed particularly arduous to retire earlier. ·The introduction of mandatory disability insurance for the self-employed (see subsection 4.3.1). Overall, effective implementation of the planned reform could address key challenges in the second-pillar system. In particular, it removes the structural intergenerational transfers present under the doorsneesystematiek approach( ), reduces the procyclical impact of the system (as market