EUROPEAN COMMISSION Brussels, 27.2.2019 SWD(2019) 1018 final COMMISSION STAFF WORKING DOCUMENT Country Report The Netherlands 2019









Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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(2019) 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 3.1.Imbalances and their gravity 3.2.Evolution, prospects and policy responses 3.3.Overall assessment 4.Reform priorities 4.1.Public finances and taxation 4.2.Financial sector 4.3.Labour market, education and social policies 4.4. Competitiveness reforms and investment Annex A: Overview table Annex B: Commission Debt Sustainability Analysis and fiscal risks Annex C: Standard Tables Annex D: Investment guidance on cohesion policy funding 2021-2027 for the Netherlands References

LIST OF Tables Table 1.1:Key economic and financial indicators -the Netherlands Table 2.1:Assessment of 2018 CSR implementation Table 3.1:Outward spill-over heatmap for the Netherlands Table 3.2:MIP assessment matrix Table 4.2.1:Financial soundness indicators, all banks in the Netherlands 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 LIST OF Graphs Graph 1.1: GDP growth Graph 1.2: Investment by sector, 2017 Graph 1.3: Labour market trends Graph 1.4: Actual and predicted wage growth based on fundamentals Graph 1.5: Change in employment by contract type (thousands) Graph 1.6: Temporary employment and self-employment without employees, % of total employment

Graph 1.7: Trends in unit labour costs and components Graph 1.8: General government budget balance Graph 1.9: Net lending by sector (% of GDP) Graph 2.1: Overall multi-annual implementation of 2011-2018 CSRs to date Graph 4.1.1: Change in the structural balance vs. output gap, 2019, euro area Member States Graph 4.1.2: Long term care expenditure Graph 4.1.3: Fiscal policy stance, 1997-2020 Graph 4.1.4: Government expenditure by function (% of total government expenditure) Graph 4.2.1: Credit growth Graph 4.2.2: Private debt Graph 4.2.3: Disaggregation of NFC debt Graph 4.2.4: Household debt (2017, % of GDP) Graph 4.2.5: House price valuation indicators Graph 4.2.6: House prices and development of new dwellings Graph 4.2.7: Pension contributions and payments Graph 4.2.8: Pension contribution (current and actuarially fair) Graph 4.2.9: Current account balance Graph 4.2.10: Net lending by sector Graph 4.2.11: Net lending by non-financial corporations Graph 4.2.12: Household balance sheets (% of GDP)

Graph 4.3.1: Labour market indicators Graph 4.3.2: Beveridge curve Graph 4.3.3: Vacancy rate by sector (%, 2018Q3) Graph 4.3.4: Flattening of the Philips curve Graph 4.3.5: Shortfall in wage growth (pps) and combined share of temporary employees and self-employed without employees (% of the workforce) Graph 4.3.6: Transition rate from temporary to permanent employee by educational level Graph 4.3.7: Hours worked and share of part-time work for women in 2007 and 2017 Graph 4.3.8: Employment rate of native born with migrant background (two foreign born parents) compared to native-born with native background (two native born parents) in the Netherlands and other EU MS (15-34), 2016-17 Graph 4.3.9: Impact of social transfers on reducing the at-risk of poverty rate (%) and the at-risk of poverty rate (%) (2005-2017) Graph 4.4.1: Investment share by sectors (2017) Graph 4.4.2: Productivity level compared to EU average Graph 4.4.3: Productivity by sector (2015) Graph 4.4.4: Business expenditure on R&D, 2015 LIST OF Boxes Box 2.1: EU funds help overcome structural challenges and foster development in the Netherlands Box 3.1: Spill-overs of structural reforms – the Netherlands Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 4.4.1: Circular economy Box 4.4.2: Investment challenges and reforms

Executive summary While growth is moderating, the still favourable economic environment provides a window of opportunity to sustain the reform momentum. This includes tackling long-term challenges in the housing market, labour market and pensions( ). Recent structural reforms have borne fruit in terms of a job-rich recovery. Although measures to reduce the debt bias for households have been adopted, incentives to incur debt remain. While the labour market continues to recover, challenges with respect to labour market segmentation and the pension system remain. Domestic demand continues to drive economic growth. In 2018, GDP increased by 2.5%. In 2019 and 2020, growth is projected to moderate to 1.7% for both years. Next to household consumption, government expenditure is providing a temporary boost to short-term GDP growth. Measures to reduce the wedge on labour — the difference between workers’ take-home pay and what it costs to employ them — and R&D investment support potential growth. With headline surpluses and government debt declining to below 50% of GDP in 2019, government finances are in good shape. However, the projected increase in public expenditure on long term care points to medium risks in long-term sustainability. Relatively strong investment growth is expected to soften. Reaching 21% of GDP in 2018, the investment rate is broadly in line with the euro area average. The share of public investment is stabilising at around 3.5% of GDP, significantly below pre-crisis levels but well above the euro area average. Household and business investment is set to continue growing, albeit less than in recent years. Risks to the investment outlook are relatively high given the uncertain international economic environment. Job creation continued in the second half of 2018, driving down the unemployment rate to pre-crisis lows. While the labour market has recovered from the crisis in terms of employment, jobs and the level of unemployment, the composition of the labour force has changed over the past decade. The share of permanent contracts has declined, with a marked increase in flexible contracts and self-employment. While flexible work arrangements allow for an efficient matching between labour supply and demand, an overly flexible labour market with high self-employment contains social-economic risks, such as underinvestment in human capital (human knowledge and/or skills) and underinsurance for old-age, disability and sickness. Wage growth remains moderate. Over a longer period, it has been below the level that could be expected based on fundamental drivers such as unemployment, productivity and inflation. This may partly be due to growth in flexible employment as temporary employees earn less in general. A further tightening of the labour market is expected to lead to an acceleration of wage growth in 2019 and 2020. Investments in Research and Development, human capital, climate and energy are needed to support productivity growth and maintain a strong innovation capacity. While the research and development investment intensity rose to over 2%, it is still well below the 2.5% national target and the level of top performers. In terms of labour productivity, the Netherlands is one of the best performing countries in many sectors. This implies that productivity growth should come from new innovations. A further increase in research and development investment, especially in the private sector, is needed for this to happen. Technical skills and qualified professionals are crucial for the Dutch economy’s innovation capacity and productivity growth. This points to the need to invest more in training, to promote flexible upskilling and reskilling opportunities for all. Improving society’s innovation capacity also requires investments to support education in the field of science, technology, engineering and mathematics. Moreover, increased investment in skills, education and training is crucial to improving access to the labour market and the employability of those operating at the margins of the labour market, while fostering equal opportunities and active inclusion. The energy transition and the reduction of greenhouse gas emissions requires substantial investments to ensure more sustainable and resource-efficient economic growth. Annex D identifies key priorities for support by the European Regional Development Fund and the European Social Fund Plus over 2021-2027, building on the analysis of investment needs and challenges outlined in this report. Overall, the Netherlands has made some progress in addressing the 2018 country-specific recommendations. There has been substantial progress in the following area: ·Raising public and private investment in research, development and innovation, while respecting the medium-term objective. The government is implementing fiscal stimulus measures, including higher investment in R&D. There has been some progress in the following areas: ·Taking measures to reduce the debt bias for households and the remaining distortions in the housing market, in particular by supporting the development of the private rental sector. The government accelerated the reduction in mortgage interest deductibility and submitted a law to Parliament to increase the supply of housing in the middle segment of the rental market. ·Creating conditions to promote higher wage growth, while respecting the role of the social partners. Wages in collective agreements increased on average by 2.1% in 2018. Public sector wages increased at a faster rate (by 3% in the second half of 2018), with wage agreements leading to a nominal increase of 7% in two years for all civil servants in central government. Additional funding has been provided to increase the salaries of primary school teachers. The government has taken tax measures that support higher disposable real incomes of households. There has been limited progress in the following areas: ·Reducing the incentives to use temporary contracts and self-employed without employees, while promoting adequate social protection for the self-employed. The government sent a draft bill (Wet Arbeidsmarkt in Balans to Parliament in November 2018. This draft bill contains a package of proposed measures to make the hiring of employees on a permanent basis easier and make flexible contracts less flexible. However no other concrete measures have been adopted so far. ·Ensuring that the occupational pension system is more transparent, inter-generationally fairer and more resilient to shocks. There has been no progress in the following areas: ·Tackling bogus self-employment. The government is expected to inform Parliament on the previously announced measures addressing bogus self-employment in spring 2019.

Regarding progress towards its national targets under the Europe 2020 strategy, the Netherlands has achieved its targets on energy efficiency, early school leaving and higher education. The targets on the employment rate and reduction of national greenhouse gas emissions are also expected to be met. The target of 14% for renewable energy consumption in 2020 is expected to be out of reach. While the Netherlands has taken measures to increase R&D spending, a substantial further effort is needed to reach 2.5% of GDP. The Netherlands performs very well on most indicators of the Social Scoreboard supporting the European Pillar of Social Rights. It has an overall good standing in labour market performance and the social situation. Per capita real gross disposable income of households continued to rise, with income inequality below the EU average. In the area of social protection and inclusion, the weakening of the situation with regard to the risk of poverty or social exclusion is a point of attention. However, the Netherlands is still among the top performers, with a low level of poverty. 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 in the hands of multinationals and poses limited macroeconomic risks. High household debt makes households vulnerable to financial 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. While mortgage interest deductibility is effectively being lowered, debt-financed home ownership remains heavily subsidised. ·Subsidies to owner occupied housing and social housing lead to an underdeveloped private rental market. The social housing and rent-controlled sector is large compared to other Member States. The private rental market is the only non-subsidised housing sector and remains underdeveloped. The lack of a well-functioning middle segment on the rental market encourages households to buy rather than rent, leading to high debt-to-income ratios and financial vulnerability. ·High illiquid housing and pension assets combined with high mortgage debt make households vulnerable to shocks. While the pension system performs well on pension adequacy and fiscal sustainability, it has drawbacks in terms of intergenerational fairness, transparency on pension rights and flexibility. Moreover, occupational pension contributions are high and fluctuate depending on how pension funds perform. As such, it may affect household spending in a pro-cyclical way, with the balance of risks geared towards young age groups as lower indexation and higher pension contributions have been the primary means of adjustment. Households combine substantial housing and pension wealth with high mortgage debt. However, the former are highly illiquid and unevenly distributed across generations. Long household balance sheets make households vulnerable to economic shocks and accentuate the pro-cyclical dynamics of household finances. ·The current account continues to show a marked surplus. The Netherlands has had a current account surplus of 7% of GDP on average over 1999-2017. All institutional sectors are currently in surplus, which led to the current account surplus rising to 10.5% of GDP in 2017. This high level is mostly accounted for by the non-financial corporation sector, and may be linked to the presence of multinationals’ headquarters. A comparatively large non-financial corporation savings surplus is rooted in a relatively high operating surplus, together with high net property income and relatively low levels of domestic corporate investment. Resuming income growth combined with high compulsory savings, pressure on households to reduce their debt level and low residential investment has led to positive net lending for households. The government sector recorded stable headline surpluses following substantial fiscal consolidation in recent years. While corporations make the largest contribution to the surplus over time, the government and household sector are largely responsible for the post-crisis increase in the current account surplus. Housing market and pensions institutions affect consumption and the surplus in a pro-cyclical way. ·Structural reforms have small but positive international spillovers. Simulations in this report show that structural reforms aimed at closing half of the gap with top performance in a selected range of pro-growth policy areas have a considerable effect on domestic GDP and small yet positive international spillovers. 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, while challenges of segmentation and integration of non-EU-born migrants remain. Employment reached a record high and unemployment continued to decline. An increasingly tight labour market has recently provided incentives for employers to offer more open-ended contracts. However, the share of flexible employment remains high, and there are large differences in the working conditions and social protection of the employment contracts and work arrangements. In addition, there is still large untapped labour potential in the high number of women in part-time employment and people with a non-EU-born migrant background. Furthermore, the employment situation of those operating at the margins of the labour market remains challenging. ·The Netherlands’ tax rules appear to be used by multinationals engaged in aggressive tax planning structures, but some important steps are being taken to limit such practices. Some elements that may facilitate tax planning include the absence of withholding taxes on royalties and interest payments. However, to curb aggressive tax planning the Netherlands is making important changes to its tax system in line with European and internationally agreed initiatives, but also through the announced introduction of withholding taxes on interest and royalty payments to low-tax countries or in case of abuse, which will need to be monitored closely. 1. Economic situation and outlook GDP growth GDP growth in 2018 remained robust at 2.5%, but moderated compared to 2017. In 2019 and 2020, growth is expected to decline further to 1.7% for both years. Unemployment has fallen well below 4% and the manufacturing capacity utilisation rate has been on an upward trend since 2013, exceeding its pre-crisis level. The output gap, which was negative for a prolonged period during the crisis, turned positive again in 2017 and is expected to remain so over the coming years (Graph 1.1). The economic expansion is job-rich, with labour productivity growth contributing less than 1% per year on average since the crisis. Graph 1.1:GDP growth Source: European Commission (Winter 2018 Interim Economic Forecast) As the economic cycle matures, domestic demand is the main contributor to growth. Private consumption is expected to increase on the back of higher disposable income as employment and wages increase. The government's expansionary fiscal package is also expected to boost growth, although it is subject to implementation risks. The contribution of net exports is projected to be close to zero, reflecting the weaker external environment and solid domestic demand. Investment Investment has been on an upward trend, reaching 20.5% of GDP in 2017. The investment rate is broadly in line with the euro area average (20.8%, Graph 1.2). The share of public investment has been decreasing since 2009, but is expected to stabilise at around 3.5% of GDP in 2018-2020, compared to a euro area average of 2.6%. Household investment is to a large extent driven by residential investment, which increased by 18% per year on average in 2015-2017 (in real terms). However, it is expected to experience more moderate growth in the coming years. Corporate investment has historically been lower than the rest of the euro area as a share of GDP, although it has been increasing rapidly in recent years. Looking ahead, corporate investment is expected to grow more moderately given that the economy is expanding at a slower pace and economic sentiment has decreased over the course of 2018. In terms of investment needs, higher investments in R&D, human capital and climate and energy are necessary to support productivity growth and to maintain a strong innovation capacity (see Section 4.4.1). Graph 1.2:Investment by sector, 2017 Source: Eurostat

Regional dimension Regional differences in terms of economic activity and income are limited. In 2016, GDP per head in purchasing power standard terms relative to the EU average varied from 90 in Friesland and Drenthe to 166 in Noord-Holland. While this seems a substantial difference, disparities in GDP per head at the provincial level are among the smallest in the EU and vary little over time. In most regions, except Groningen( ), GDP per head growth in 2010-2016 was similar to the national average of 1.1%. Variations in productivity per worker and in household income are much smaller. Household income varied between 83% (Groningen) and 115% (Utrecht) of the national average in 2015. Inflation A Value Added Tax (VAT) increase is expected to drive inflation up to 2.4% in 2019. An increase in the reduced VAT rate from 6% to 9% took effect at the start of 2019, as part of a comprehensive tax package. Higher energy prices pushed up inflation in recent months, but their influence is expected to dissipate in line with lower oil prices compared to the second half of 2018. In 2020, inflation is expected to fall to 1.7%. Underlying, core inflation is expected to pick up, in line with tightening supply constraints and related wage increases. Labour market Employment continued to increase strongly in 2018 while the unemployment rate is reaching historically low levels (Graph 1.3). Employment increased by 2.3% in 2018, following a 2.1% increase in 2017( ). The unemployment rate reached 3.8% in 2018, only slightly above the pre-crisis level of 3.7% in 2008. The employment rate (20-64 years) has exceeded its historical peak. Over the course of 2018, labour force growth started to accelerate, leading to a temporary stabilisation in the unemployment rate for several months before a further decline. Graph 1.3:Labour market trends Source: Eurostat (Labour Force Survey) Wage growth is increasing, but has remained moderate so far. According to the Commission’s Autumn 2018 Economic Forecast, nominal compensation per employee is expected to have increased by 2.4% in 2018, compared to 1.1% in 2017. As in previous years, wage growth remained below what would be expected based on its historical relationship with inflation, productivity and unemployment developments (Graph 1.4). Increased labour market segmentation could explain part of the low wage growth in recent years (see Section 4.3 and European Commission 2018e). Trade unions have again formulated substantially higher wage demands compared to before. In combination with a further tightening of the labour market, this is expected to result in an acceleration of nominal wage growth to 3.1% in 2019 and 3.5% in 2020. However, as inflation is also picking up the increase in real wages remains moderate. Graph 1.4:Actual and predicted wage growth based on fundamentals Source: European Commission (based on Autumn 2018 Economic Forecast) Graph 1.5:Change in employment by contract type (thousands) Source: European Commission The share of non-standard employment remains high in the Netherlands. Job creation for permanent employees has exceeded job creation for temporary employees since Q4-2017 (Graph 1.5). For the first time in years, the share of temporary employees in total employment decreased slightly to 14.8% in Q3-2018, down from 15.2% one year earlier. However, this is still well above the EU average (11.4%) and the pre-crisis level (Graph 1.6). In addition, the share of self-employed without employees in total employment remains high (12.2% compared to 9.9% for the EU average). Part-time employment also remains widespread, in particularly among women. Graph 1.6:Temporary employment and self-employment without employees, % of total employment Source: European Commission Unit labour costs are set to increase somewhat faster than the euro area average. According to the Commission’s Autumn 2018 Economic Forecast, growth of unit labour costs is expected to accelerate from 1.7% in 2018 to 2.2% in 2019 and 2.5% in 2020 (Graph 1.7). For 2019 and 2020, this is roughly 1 pp. above the euro area average. Over a longer period of time unit labour cost trends in the Netherlands are closely aligned with the euro area as a whole. Social developments The Netherlands has a low level of income inequality. As a result of the highly redistributive tax and benefit system, the ratio of disposable household incomes between the richest and the poorest quintile of the Dutch population is 4.0, which is well below the EU average of 5.2. Wealth inequality is higher, although this is mainly driven by households with negative net housing equity following the decline in house prices during the crisis.

Graph 1.7:Trends in unit labour costs and components Source: European Commission Public finances The budget balance is expected to remain in surplus over the coming years (Graph 1.8). The budget surplus is forecast to have reached 1.1% in 2018. This is higher than previously expected as several planned expenditure increases have been subject to implementation lags, including in infrastructure and defence. For 2019 and 2020 a surplus around 1% is foreseen, as further expansionary measures will be broadly compensated by strong growth in tax revenues. The structural balance is set to deteriorate from a surplus of 0.7% in 2017 to a deficit of 0.3% in 2019, before rebounding somewhat to -0.1% in 2020. The debt-to-GDP ratio is declining rapidly and is expected to fall below 50% in 2019, down from 57% in 2017. Graph 1.8:General government budget balance Source: European Commission Autumn 2018 Economic forecast External position Graph 1.9:Net lending by sector (% of GDP) Source: Statistics Netherlands After peaking at 10.5% in 2017, the current account surplus is expected to decline only gradually. From a net lending perspective, the corporate sector accounts for the largest part of the domestic surplus, while the household and government sector are also in surplus (Graph 1.9, see also Section 4.2.6). A sustained trade surplus in goods, averaging 9.5% over the period 2013-2017, is the main driver of the high level from a trade perspective. Primary income flows have had a limited impact on the current account on average over a multi-year period, but are a source of short-term volatility and largely explain the peak in 2017. On the back of solid domestic demand growth, the current account balance is expected to decline only gradually. Despite the persistently high current account surpluses, the net international investment position fell back somewhat from 63% in 2016 to 60% in 2017. Negative valuation effects and high nominal GDP growth outweighed domestic net lending. Table 1.1:Key economic and financial indicators -the Netherlands Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Interim Winter forecast 2019 for real GDP and HICP, Autumn forecast 2018 otherwise)

2. Progress with country-specific recommendations Since the start of the European Semester in 2011, 76 % of all country-specific recommendations addressed to the Netherlands have recorded at least ‘some progress”. 24% of these CSRs recorded "limited" or "no progress" (Graph 2.1). Substantial progress has been made over the past years in the area of public finances, this includes a reform of the long-term care system, and the protection of expenditure in growth-friendly areas; such as education, innovation and research. Substantial progress and full implementation have also been achieved several areas of the labour market and pensions, such as an increase in the statutory retirement age and getting older workers back into work. Graph 2.1:Overall multi-annual implementation of 2011-2018 CSRs to date Source: European Commission Since the first round of country specific recommendations in 2011, the government has implemented significant structural reforms. In line with country specific recommendations adopted in 2011 and 2012, the Netherlands 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 the field of long-term care and pensions. The statutory retirement age was raised and linked it to life expectancy. Housing market measures have helped to reduce the high household debt level, but challenges remain. At 105% of GDP and 211% of household disposable income in 2017, compared to 57% and 93% respectively for the euro area, household debt is high in the Netherlands. A high debt level makes households vulnerable to economic shocks. Household debt largely consists of mortgage debt, which is subsidised by mortgage interest deductibility in personal income taxes. Since 2012, recommendations have been issued on the need to reform the housing market, in particular to modify the favourable tax treatment of homeownership, refocus social housing and provide a more market-oriented price mechanism in the rental market. The Dutch government has acted upon those recommendations, in particular with a reduction of mortgage interest deductibility (including a requirement to repay mortgages within 30 years to qualify for mortgage interest deductibility). Policy measures have also been taken on the rental market, such as the the Housing Act (Woningwet) in 2015, but challenges in the housing market remain. 2018 assessment On the recommendation to use fiscal and structural policies to raise public and private investment in research, development and innovation, while respecting the medium-term objective, the Netherlands has made substantial progress. The government is implementing a fiscal stimulus, which includes public investment, while respecting the medium-term objective. According to the Commission Autumn 2018 Economic Forecast, the structural budget balance is expected to decline from 0.7% of GDP in 2017 to -0.3% of GDP, pointing to a fiscal expansion of 1% of GDP in 2019 (see Section 1 and Section 4.1). The announced increase in R&D expenditure in 2019 has been incorporated into the budget law. The main fiscal tool to foster R&D is set to increase by 2020. However, a gap remains compared to the national R&D target of 2.5% of GDP, implying that more effort is needed. Some progress has been made on reducing remaining housing market distortions. The accelerated reduction in mortgage interest deductibility has been adopted and will be implemented between 2020 and 2023. However, as this fiscal subsidy will not be phased out completely and remains an important policy distortion, sustaining a debt bias for households and affecting the decision to buy or rent. The government also acknowledges the need to develop the private rental market, making it a genuine alternative for the owner occupied market. It has submitted a draft law to Parliament to increase supply in the mid-priced rental market (Wet maatregelen middenhuur) by easing requirements for housing corporations to build for this segment.

On CSR 2, limited progress has been made to address the problem of labour market segmentation. As a first step in a broader process of labour market regulation measures and ongoing reflections on how to best tackle distinct institutional drivers properly, a draft bill (Wet Arbeidsmarkt in Balans) was sent to Parliament in November 2018. It contains a package of measures to make it easier to hire permanent employees and to make flexible contracts less flexible. In addition, a Committee of independent experts was established to advise the government on the regulation of labour in the future bearing in mind the changing economy and society. However, on possible social security coverage for sickness and disability of the self-employed, no concrete measures have been adopted yet, but a plan of action to increase and strengthen well informed choices by self-employed is expected to be presented in the beginning of 2019. In addition, government plans to tackle bogus self-employment have been delayed. Further details on possible measures are only expected to be provided by spring 2019 in view of them becoming law by January 2021. On wage growth, which is gradually increasing, some progress has been made. Wages in collective agreements have increased on average by 2.1% in 2018, with public wages increasing at a faster rate (by 3% in the second half of 2018). In 2018 wage agreements were reached in various government sectors (e.g. a nominal increase of 7% in two years for all civil servants in central government), after zero-wage growth in the public sector during the fiscal consolidation era. Additional funding has been provided to increase the salaries of primary school teachers. In the 2019 budget, the government has taken measures that support higher disposable real incomes of households, by a reduction of personal income taxes, which is only partly financed by higher indirect taxes. Despite a shared understanding among stakeholders of the need to reform, negotiations to reform the occupational pension fund system stalled at the end of 2018. Early February the government informed Parliament with a letter setting out the government initiatives to continue reforming the occupational pension system, leading to limited progress. Overall, the Netherlands has made some progress in addressing the 2018 country-specific recommendations. Substantial progress has been made in general in addressing CSR 1, in particular, by implementing fiscal stimulus measures, including public investment and increasing R&D expenditure, while respecting the medium term objective. On CSR 2, limited progress has been made, leading to some progress overall. Table 2.1:Assessment of 2018 CSR implementation Source: European Commission Box 2.1: EU funds help overcome structural challenges and foster development in the Netherlands The Netherlands continues to benefit from EU funds to support structural change. The financial allocation from European structural and investment funds, whose aim is to help the Netherlands face development challenges, amounts to up to EUR 1.9 billion in the current multiannual financial framework. This is equivalent to around 0.04% of GDP annually in 2014-2020. As of the end of 2018, EUR 1.47 billion had been allocated to specific projects. In addition, numerous Dutch research institutions, innovative firms and individual researchers have benefited from other EU funding instruments, in particular Horizon 2020 which has provided EUR 2.6 billion to boost innovation and research in the Netherlands. Furthermore, the Connecting Europe Facility has allocated EUR 439 million to specific projects on strategic transport networks. EU funding has helped to address policy challenges, including those identified in the 2018 country specific recommendations. EU funds support investment in R&D in the Netherlands. The European structural and investment funds stimulate investments in innovation in the private sector, among others, by providing loans or grants to develop experimental new products and services, set-up living labs and encourage cooperation between small and medium-sized enterprises (SMEs) and research institutions. Over 400 enterprises have received support to cooperate with research institutions and over 1 500 SMEs to introduce new products to the market. Private investment that matches R&D support has exceeded EUR 300 million. The “Uniiq – Proof of Concept Fund for South-Holland” uses EU Funds to invest EUR 22 million in supporting SMEs to convert an idea into a concrete, marketable product or service. EU funds also contribute to a EUR 4 million investment to develop the “High tech X-Gen wind turbine”, which is compact, maintenance-friendly, silent, affordable and suitable for the built environment. Horizon 2020 has supported over 3 300 research projects covering a broad range of areas from health to energy transition. The European social fund also invests in coaching people at the margin of the labour market, which in turn helps improve overall labour market participation. Furthermore, it supports specific measures that improve the job prospects of older workers. 212 000 people have benefited from measures that foster social inclusion and 5 200 enterprises have received support to adapt the working environment to prolonged working lives. EU funding helps to mobilise private investment. The European structural and investment funds mobilise additional private capital in the Netherlands, whereby private enterprises provide a high proportion of national co-financing. Around EUR 31.3 million of support from the European structural and investment funds has been allocated to financial instruments including loans, guarantees and equity, which is expected to leverage substantial private investment. In addition, financing allocated to projects under the European fund for strategic investments amounts to EUR 2.2 billion in the Netherlands and is set to trigger EUR 10 billion in investments (EIB, 2018). For infrastructure and innovation, 27 projects financed by the European Investment Bank and backed by the European fund for strategic investments have been approved to the tune of EUR 2 billion. For SMEs, 12 agreements with intermediary banks or funds have been approved for EUR 199 million in total financing, leading to improved access to finance for 7 364 SMEs and mid-caps. 3. Summary of the main findings from the MIP in-depth review The 2019 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 (European Commission, 2018b). In spring 2018, the Netherlands was identified as having macroeconomic imbalances (European Commission, 2018a). The imbalances identified related in particular to the high level of private debt and the large current account surplus. This chapter summarises the findings of the analyses in the context of the macro-economic imbalance procedure 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 2017 to a peak of 10.5% of GDP. The surplus is among the highest in the euro area. A persistently high trade surplus in goods is the main driver from a trade perspective. However, the recent increase was mainly driven by higher net primary income flows, reflecting higher net property income in the corporate sector. In 2017 the Netherlands contributed 0.7 pps to the euro area current account surplus, which is the second largest contribution after Germany (2.3 pps). With the corporate sector making the largest contribution to net lending, all domestic sectors are in surplus. 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 5.3% of GDP in 2017. Compared to the rest of the euro area, profitability and net property income are relatively high for Dutch firms, whereas investments are lower. The presence of multinational enterprises is likely to influence aggregate corporate sector net lending, although available macro-economic data do not allow for a straightforward identification of their statistical impact (see Section 4.2.6). Households have been recording surpluses since the crisis, amounting to 2.3% in 2017. The dip in the housing market during the crisis led to a decrease in residential investment, while at the same time private consumption stagnated. Pension funds are also an important driver of household net lending. Pension contributions and investment income are much higher than payouts, with pension funds mainly investing in assets abroad (European Commission, 2018e). The government sector recorded a headline surplus of 1.2%, driven by past consolidation measures and increasing tax revenues. Private debt continued to decline in 2017, but remains elevated. Private debt reached 252% of GDP in 2017, down from 262% the year before. Non-financial corporate debt accounted for 148% of GDP. However, 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. 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 105% of GDP in 2017 on the back of strong GDP growth, although nominal household debt is increasing again. However, growth is much slower than before the crisis, at around 1% annually in recent years. Growing mortgage debt can be linked to the strong recovery of the housing market. House prices accelerated in 2017, increasing by 6% in real terms therefore reaching the macro-economic imbalance procedure threshold. Overall, house price developments suggest a lagged supply response rather than overvaluation at national level (see Section 4.2). Potential spill-overs 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 (11%). From the Dutch perspective Germany is the most important export destination, followed by the United Kingdom. On the financial side, Belgium, Cyprus, Ireland, Luxembourg and Malta have a relatively high exposure to the Netherlands. Box 3.1 presents an analysis of the effects of a stylised set of structural reforms on GDP, indicating small but positive spill-over effects to the rest of the euro area. The simulations presented therein follow the spirit of the 2019 Council Recommendations for the euro area. 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 10.5% in 2017 to 9.1% in 2020. Growth during this phase of the cycle is mainly driven by domestic demand, leading to higher imports and a gradual expected decline in the trade balance. Wage growth in recent years has been relatively subdued, but is expected to increase in line with the tightening labour market and increased wage demand by trade unions. Domestic demand is further supported by implementation of the fiscal stimulus package ensuing from the coalition agreement.

Table 3.1:Outward spill-over heatmap for the Netherlands Source: UN, OECD, WIOD, BIS and Commission services Private debt is expected to remain elevated. Solid nominal GDP growth is projected to support the trend of passive deleveraging. The acceleration of the maximum applicable rate of mortgage interest deductibility from 49% in 2019 to 37% in 2023 has been adopted by Parliament. While this decreases the debt bias for households, a substantial subsidy remains. The government has also launched initiatives to support the private rental segment, which would provide households with an alternative to taking on mortgage debt. However, with a share of 13% of the total housing stock in 2017 the private rental sector remains underdeveloped. For firms, a limitation on the deductibility of interest payments has been introduced in 2019, which may reduce the incentive to take on debt for tax optimisation purposes. 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 both relatively high savings and low investments. Corporate net lending is also likely influenced by the presence of large multinationals. 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 pps higher than the euro area average as tax incentives encourage households to take on mortgage debt. While household debt is coupled with substantial housing and pensions 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 fiscal stimulus package. However, the level is expected to remain well above the threshold. While household debt is decreasing as a share of GDP, it is increasing in nominal terms as the housing market has recovered. 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 3.1: Spill-overs of structural reforms – the Netherlands There is some debate about the size and direction of the cross-border spill-overs of structural reforms. While the demand effect leads to higher export demand for foreign products, reforms usually improve a country’s competitiveness too, which has the opposite effect. Whether the net effect is positive or negative depends on the relative strength of these two opposing channels and is likely to be reform-specific. In a simulation exercise using the European Commission’s the QUEST model( I ), the impact of a comprehensive set of reforms is quantified for all EU Member States in a harmonised way (Varga and in ’t Veld, 2014). For a large set of structural indicators the benchmark is defined as the average of the three top performing countries. In the simulation these gaps are then closed by half for all indicators together, and for each country separately. An update of this exercise for the Netherlands, based on recent indicators (but does not capture the latest reform measures), is shown in the table below. As the magnitude of the reform ‘shocks’ simulated here are based on a harmonized benchmarking exercise, they do not exactly correspond to past European Semester country specific recommendations. However, they do illustrate the potential impact structural reforms can have. An ambitious reform package would boost Dutch GDP, with small but positive spillovers to the rest of the euro area. The simulated reforms cover all areas: product market regulation and entry, labour market participation, taxation structure and R&D subsidies. For the Netherlands the largest ‘reform gaps’ identified are in the tax wedge (as captured by the relative share of labour tax revenues compared to consumption tax revenues) and the benefit replacement rate, with smaller gaps identified in the field of labour force participation, in particular of low-skilled workers. Based on the simulation, this ambitious reform package would boost GDP by 5% after 10 years, and 7.75% after 20 years. The reforms raise competitiveness, leading to a real depreciation and boosting exports. The terms of trade fall by around 5% after 10 years, and there is a marginally positive effect on the trade balance as a share of GDP. The net spill-over to the rest of the euro area (EA) is small but positive. 4. Reform priorities 4.1.Public finances and taxation 4.1.1.EXPENDITURE DEVELOPMENTS* ( ) Following a period of fiscal consolidation, the government is implementing a sizeable fiscal stimulus package. The expansionary fiscal policy stance is illustrated by a 1 percentage point of GDP decline in the structural budget balance in two years, from a surplus of 0.7% of GDP in 2017 to a deficit of 0.3% in 2019 (Graph 1.8) ( ). In its 2019 Budgetary Plan, the government highlights increased spending on education, research and innovation (EUR 1.9 billion, 0.25% of GDP), defence and security (EUR 1.7 billion, 0.2% of GDP) and infrastructure (EUR 1 billion, 0.1% of GDP, amongst others via an increase in the infrastructure fund). Public investment, which fell from a peak of 4.3% of GDP in 2009 to 3.4% of GDP in 2017, is expected to stabilise at slightly above 3.5% of GDP in 2018 and 2019. Graph 4.1.1:Change in the structural balance vs. output gap, 2019, euro area Member States Source: European Commission Autumn 2018 Economic Forecast While the fiscal stance is pro-cyclical, the expansionary budget is partly used to ease supply-side constraints. A pro-cyclical fiscal stance (Graph 4.1.1) risks fuelling prices while only having a limited impact on real economic growth due to supply-side constraints. However, price and wage developments have been relatively muted until now. Moreover, focusing on supply-side investment, such as education, R&D and innovation is expected to have beneficial effects on potential growth in the medium run. 4.1.2.TAXATION*

The 2019 income tax package contains a shift away from labour and income taxes to other sources of revenue less detrimental to growth. The Netherlands has one of the highest tax and non-tax compulsory payment wedges on labour in the EU (European Commission, 2018e). The government is reducing the tax burden on labour by lowering personal income tax by 0.7% of GDP, while increasing indirect taxation (on consumption) by 0.4% of GDP, largely via an increase in the reduced Value Added Tax rate from 6% to 9% as of 2019. A lower tax wedge and a shift from direct to indirect taxes is generally seen as beneficial for economic growth as the tax burden is shifted from the active to the inactive population. The number of tax brackets has been reduced from four to two, with a base rate of 38% in the lower bracket and a top rate of 51.75% (for incomes above EUR 68 507) as from 2019. Both rates will be reduced to 37% and 49.5% from 2021 onwards. Tax deductible expenses will gradually only be deductible against the lower rate, leading to lower tax expenditures. In addition, the labour tax credit (arbeidskorting) will be increased to incentivese people to work. To strengthen the fiscal investment climate for companies, the corporate tax rate will be gradually reduced from 25% to 20.5%. For taxable profit up to EUR 200 000, the rate will be reduced from 20% to 15%. The high level of dividend, royalty and interest payments made via the Netherlands (European Commission, 2018e) may be an indication that the country’s tax rules are used by companies that engage in aggressive tax planning. The current absence of withholding taxes on royalties and interest payments (which may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction) may have facilitated aggressive tax planning. A study commissioned by the Dutch Ministry of Finance on tax avoidance through Dutch letterbox companies( ) concludes that the annual income flows (dividends, interest, royalties) flowing through these companies amounts to EUR 199 billion (27% of GDP), of which EUR 177 billion (24% of GDP) mainly flows to other Member States and the USA. The remainder, EUR 22 billion (3% of GDP), flows to low tax jurisdictions. This part should be affected by the announced introduction of withholding tax on interest and royalties( ), which should be monitored closely. For the income flows to other Member States and the USA, the Dutch government generally assumes that normal taxation will apply in these countries and that any tax avoidance could be addressed by exchanging information and anti-abuse measures. The Netherlands is acting to address aggressive tax planning by implementing European and internationally agreed initiatives. The interest deduction restriction of the Anti-Tax Avoidance Directive has been introduced in the shape of an earnings stripping measure, implying that net interest expenses are only deductible up to 30% of the gross operating profit( ). The Netherlands introduced black list with 21 countries that the Netherlands considers low-tax jurisdictions, which is used for the new controlled foreign company measure, the ruling rules and the future withholding taxes on royalties and interests. At the same time, two existing targeted interest deduction restrictions have been abolished. The government has also announced that as of 1 July 2019 certainty in advance (rulings) will only be granted to multinationals that have a sufficient economic nexus in the Netherlands. A ruling will not be granted if it involves a transaction with an entity residing in a low-tax jurisdiction or if the purpose of the transactions is solely to reduce or avoid paying Dutch or foreign taxes. This may limit the attractiveness for letterbox companies. In 2018, the government introduced a withholding tax on profit distributions by cooperatives in abusive situations, its effects remain to be assessed. The government has also proposed to adopt almost all provisions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, including a principal purpose test to counter treaty shopping. These should become effective as of 2020 and should among others prevent multinationals from benefiting from the Netherlands’ tax treaty network without having substantial presence in the Netherlands. However, application of the provisions of the multilateral instrument will depend on the choices made by the relevant treaty partners. The effectiveness of all these measures in addressing aggressive tax planning will need to be monitored( ). 4.1.3.DEBT Sustainability analysis and fiscal risks According to the 2018 Fiscal Sustainability Report, the Netherlands faces medium sustainability risks in the long run. The report analyses risks in the short-, medium- and long term ( ). The early detection indicator of fiscal stress, the S0 indicator, signals low risks in the short term ( ). The medium-term S1 indicator, which measures the effort required to achieve a debt level of 60% of GDP by 2033 ( ), is negative (at -1.7% of GDP). This implies low fiscal sustainability risks, which is mainly explained by a debt level below the reference value. The debt sustainability analysis also points to low sustainability risks. However, the analysis of 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 in terms of fiscal sustainability of the public pension system and other expenditures related to ageing, public spending in the field of health-care and in particular long-term care stand 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 having a much higher initial level and greater increase than on average in the euro area (Graph 4.1.2). In a risk scenario, which assumes higher age-related spending due to non-demographic costs, such as long-term care costs in excess of costs expected from purely demographic factors due to technological changes (e.g. development of new drugs) the increases are even greater. This represents a substantial liability for today’s government finances. The 2015 long-term care reform may lead to a more cost-effective system, but its effect on fiscal sustainability is partly off-set by additional spending to improve the quality of nursing homes. In 2015, the government moved the long-term care system to the municipal domain to improve its efficiency and support fiscal sustainability. This was accompanied by a budget cut and a tightening of the eligibility criteria. In parallel, the authorities promote independent living, where older people are encouraged to live at home for as long as possible before turning to more expensive nursing homes. This reform is expected to reduce the growth in long-term care expenditure by 0.2% per year in the period 2018-2021 (Mot et al., 2016). However, fiscal sustainability concerns remain given that additional annual expenditure of EUR 2.1 billion (0.3% of GDP) is needed to meet the requirements of the quality framework for nursing homes as of 2021. Graph 4.1.2:Long term care expenditure Source: Ageing Report 2018, Ageing Working Group scenario's 4.1.4.FISCAL FRAMEWORK and quality of public finances The Netherlands has a well-established fiscal framework. Since the mid-nineties, the Netherlands has been conducting a trend-based fiscal policy with a strong multi-annual focus. The main characteristics of this multi-annual trend-based fiscal framework include: (i) the use of independently derived macroeconomic assumptions; (ii) the use of inflation-adjusted expenditure ceilings 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 Bureau for Economic Policy Analysis and the Advisory Division of the Council of State. The 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, is tasked with monitoring compliance with numerical fiscal rules and a normative assessment of government finances. The commitment to comply with EU fiscal rules is embedded in the legal framework of the Netherlands, in particular via the law on sustainable public finances (Wet Houdbare Overheidsfinancien). Automatic fiscal stabilisation has been strengthened. The fiscal framework uses strict expenditure ceilings, with automatic stabilisation mostly taking place via the revenue side of the budget. Changing macro-economic conditions are therefore absorbed by the headline budget balance via revenues. However, this framework does not prevent pro-cyclical decision-making when multi-annual fiscal plans are set at the start of a new government term, or when fiscal thresholds are breached during a government term. In fact, fiscal consolidation (operationalised by a positive change in the cyclically-adjusted primary budget balance) took place mostly in years with a negative output gap, and fiscal expansions in economic good times, with a positive output gap (Graph 4.1.3). In 2018, the government slightly improved the automatic stabilisation function of the budget by removing the non-discretionary, cyclical changes in expenditure on unemployment and social assistance from the expenditure ceiling. This allows for stronger automatic stabilisation via the expenditure side of the budget. As short-term expenditure multipliers tend to be larger than tax multipliers (thanks to smaller savings leakages, see also Coenen et al, 2012), the fiscal stabilisation function of the budget is expected to improve. Graph 4.1.3:Fiscal policy stance, 1997-2020 Source: European Commission 2018 The government expenditure mix is relatively growth-friendly. Government expenditure as the ratio to GDP has fallen, due to the acceleration of nominal GDP growth in recent years. Graph 4.1.4 assesses the government’s expenditure mix by function compared to the euro area average, with expenditure categories expressed as a share of total government expenditure. This shows relatively high government spending on growth friendly areas such as education and public investment( ) and comparatively low share of expenditure on social protection and general public services, compared to other euro area countries. Graph 4.1.4:Government expenditure by function

(% of total government expenditure) Source: Eurostat, Classification of the Functions of Government (2016) 4.2. Financial sector 4.2.1.Banking sector While there appear to be no imminent risks to financial stability, vulnerabilities in the banking sector remain. Dutch financial institutions meet regulatory requirements and their profitability improved last year supported by economic growth. Their asset quality is sound and the level of non-performing loans is one of the lowest in the EU. However, banks still largely rely on market funding — albeit with long maturity periods in most cases — and their leverage ratio stands below the EU average. Concentration in the banking sector may give rise to competition issues. With total assets of 312% of GDP at in September 2018, the banking sector remains very large compared with the EU average of 274%. The market is characterised by a high concentration. This may affect competition in certain markets, such as credit to non-financial corporations, where banks are hardly challenged by other lenders. For instance in the small and medium-sized enterprises’ loans market, the three largest Dutch banks provide circa 85% of total bank financing. On the other hand, the mortgage credit market has become more competitive in the last few years thanks to the emergence of new players such as insurance companies and pension funds. They currently account for around 30% of new mortgage production. Dutch banks maintain sound financial resilience, but their reliance on market funding and leverage remain high. Their financial stability indicators, namely the solvency position and capital ratios, largely exceed the regulatory requirements. At sector level, the capital adequacy ratio stood at 22.1% and the Tier 1 ratio, which compares a bank’s equity capital with its total risk-weighted assets, at 18.4% in Q2-2018 (see Table 4.2.1). Given the strong capital base and modest lending growth, the counter-cyclical buffer has been kept at 0% by the Dutch central bank (De Nederlandsche Bank, 2018a). At the same time, it maintained the 1% to 3% additional buffers imposed on the five systemic banks, which are gradually being increased between 2016-2019. Regardless of the sound capital levels, the banking sector continues to be highly leveraged with a fully phased-in leverage ratio (capital/total assets) of 4.4% in September 2018, which is one of the lowest in the euro area. Furthermore, with deposits ( ) accounting for a modest 49% of total funding (against 58% for the euro area average), the sector continues to rely heavily on market financing. Even though its maturity has been largely extended, thereby limiting liquidity risk, the cost of market funding could grow sharply in a stress situation. Table 4.2.1:Financial soundness indicators, all banks in the Netherlands Source: ECB Central Bank Data

The profitability of Dutch banks has been rising, mirroring economic growth. The sector’s return on equity reached almost 9% in 2017 compared to the EU average of 6%. However, given the continued squeeze on interest margins, the banks’ profits increasingly rely on non-interest income sources and further cost-cutting measures. However, there is room for cost-to-income and efficiency improvement in the sector, among others by modernising IT systems and introducing digital solutions by smaller institutions, which would allow them to compete better against new fintech players. Bank credit growth turned negative in 2018 in both household and corporate segments. In Q3-2018, the stock of household credit in the banking sector fell by around 2% year-on-year. It consisted of a 2% decrease in mortgage loans and a 5% decrease in consumer loans (Graph 4.2.1). The reduction was not only due to subdued new lending by banks, but also as a result of the large volume of redemptions and repayments made by consumers. In addition, the role of non-banks such as pension funds and insurers in the production of mortgages has been growing, as reflected in their expanding market share. It also appears that a high number of new residential investments have been financed from investors’ equity or households’ savings. Non-financial corporate credit growth also remained negative, at around 2% year-on-year in Q3-2018, partly due to a high volume of repayments. Furthermore, large corporates have been increasingly using corporate bonds as a source of finance to replace or complement bank credit. The issuance of corporate bonds by Dutch companies has grown by roughly 50% since 2014. Graph 4.2.1:Credit growth Source: European Central Bank The funds of the Deposit Guarantee Fund, an independent legal entity, have been moved from a segregated account in the Dutch central bank to an account with the Treasury. The Dutch Deposit Guarantee Fund is being built up gradually and has so far accumulated around EUR 1 billion, with an additional EUR 4 billion to be paid by banks by 2024. Until 2018, these funds were kept in a ring-fenced account of the Dutch central bank with the intention to be invested in a diversified portfolio of low-risk assets in line with the Deposit Guarantee Scheme Directive. As of November 2018, the resources of the fund have been transferred to be kept in an account with the Dutch Treasury, instead of the central bank. The Treasury will now be able to use the funds for the financing of government expenditures. Once the fund needs to make payouts to depositors or finance interventions in accordance with its legal mandate, the Treasury will have to make the funds available. The transfer of the account of the fund to the Treasury reduces the gross debt level, but has no effect on the public deficit as its contributions were already classified under the government sector based on the EUROSTAT decision from 2016. Nevertheless, if in case of a crisis the Dutch Treasury suddenly needs to raise market financing in order for the fund to make payouts,, gross debt will increase, which may have an impact on financial stability. The recovery and resolution framework for insurance companies (the Insurers Recovery and Resolution Act) was adopted, which should contribute to financial stability. Following the lessons learned during the crisis and given the vulnerabilities of the insurance sector — brought out by low interest rates and shrinking life insurance industry — the government proposed a legal framework for the recovery and orderly resolution of insurers. The legislation draws on the Bank Recovery and Resolution Directive. It mandates medium-sized and large insurance companies to set up crisis plans that outline measures to be taken when they are at risk of failing. Smaller players whose default would not have a major impact on society, financial markets or the economy would not be obliged to draw up crisis plans. In addition, the Dutch central bank as resolution authority would have to draw up resolution plans for the systemic insurance firms and would have the power to intervene in critical situations. Thanks to the new legislation, policy holders should be better protected and insurance companies more resilient, resulting in greater financial stability. The legislation was adopted on 27 November 2018 and is in force from 1 January 2019. 4.2.2.Access to finance Overall, the Netherlands maintains a score in line with the EU average on access to finance, but the mark-up on smaller loans remains high. Demand for credit is rising, with the success rate slightly improving. The situation worsened somewhat at the end of 2017 compared to other euro area countries (ECB, 2018 and European Commission, 2018c). Small and medium-sized enterprises, which take out smaller loans on average, pay a relatively large mark-up: the cost of borrowing for small loans relative to large loans is the third highest in the EU, despite falling marginally since 2016 (European Commission, 2018c). While remaining small, equity funding and business angel funding are relatively important and fast growing (OECDa, 2018). Various initiatives have been launched to support small and medium-sized enterprises financing. These include venture capital, increasing small and medium-sized enterprises credit supply or the emission of bonds via the stock exchange and the set-up of a dedicated investment institution (see Box 4.4.2). 4.2.3.Private debt* The private debt level in the Netherlands continues to decline, but remains very high. The private debt ratio reached 252% of GDP in 2017, down from 262% in 2016, with both households and non-financial corporations contributing to the decline. Household debt accounted for 105% of GDP versus 148% for non-financial corporations. This is well above Commission calculations of prudential thresholds, which stood at 65% and 93% for households and non-financial corporations respectively in 2017( ). Graph 4.2.2:Private debt Source: Statistics Netherlands High corporate debt is mainly driven by intra-group debt of multinationals. Until the crisis, non-financial corporate debt was relatively stable at around 120% of GDP, but increased substantially during the crisis to over 150%, followed by a gradual decline. The high level of corporate debt and the recent increase are driven by multinational enterprises. Debt of other (non-multinational) firms has been broadly stable in recent years and does not exceed the prudential corporate debt threshold. As multinationals’ debt largely consists of intra-group debt, it does not pose an immediate macro-economic risk (European Commission, 2018e). In 2019, a limitation on the deductibility of interest payments (‘earnings stripping’) was introduced as part of the implementation of the Anti-Tax Avoidance Directive. This reduces the incentive to take on debt for tax optimisation purposes and could help reduce corporate debt. Graph 4.2.3:Disaggregation of NFC debt Source: Statistics Netherlands. Household debt declined to 105% of GDP in 2017 as nominal debt developments were outpaced by GDP growth. However, it remained well above prudential thresholds. After declining temporarily in 2013 and 2014, nominal household debt is increasing again. However, at 1% per year on average over 2015-2017 it is increasing at a much slower pace than before the crisis, when it grew by more than 8% per year over 2000-2008. Mortgage debt is the main driver of household debt, accounting for 86% of total household debt in 2017. Part of the relatively subdued growth is explained by voluntary mortgage repayments, which are financially attractive given the low interest rates on deposits. According to the Dutch central bank, these have amounted to EUR 75 billion since 2013 (De Nederlandsche Bank, 2018c). Solid real GDP growth and higher inflation are expected to support further passive deleveraging (also see Section 1). However, household debt over GDP was still about 50 percentage points higher than the euro area average in 2017. As a share of household income, the difference is even greater as household income constitutes a relatively low share of GDP in the Netherlands (Graph 4.2.4). Graph 4.2.4:Household debt (2017, % of GDP) Source: European Commission The share of underwater mortgages has decreased substantially. According to loan level data by the Dutch central bank, 6% of mortgages exceeded the value of the underlying property (“underwater mortgages”) in Q2-2018. This is a substantial decrease from 27% 3 years earlier, supported by a strong increase in house prices (see Section 4.2.4). The average loan-to-value ratio for new mortgages of those under 35, who are often first-time buyers, decreased from 96% to 90% over the same period. This can be related to stricter loan-to value- and loan-to-income ratio’s for mortgages. These developments reduce the risk of remaining indebtedness when people sell their homes. 4.2.4.Housing market* The housing market moved from recovery into a phase of buoyancy. Nominal house prices increased by 9% in 2018, up from annual growth of 7.6% in 2017. Nationwide, house prices exceeded their 2008 nominal pre-crisis level in mid-2018, although they are still well below the pre-crisis level in real terms. Real house prices increased by 6% in 2017, thereby reaching the MIP scoreboard threshold, and accelerated further in 2018. Price-to-income and price-to-rent ratios were broadly in line with historical averages in 2017. A model-based assessment also does not suggest that house prices exceeded their fundamental value (Graph 4.2.5). These indicators suggest that house prices were overvalued before the crisis, followed by a strong correction during the crisis, and recovery in recent years. Overall, current housing market developments point to a lagging supply response rather than overvaluation. However, a continuation of price increases at this rapid rate could lead to a risk of overvaluation in the future. The ratio of average prices to income has already returned to a level that is higher than in most euro area economies. Graph 4.2.5:House price valuation indicators Source: European Commission Behind national trends, substantial regional differences exist. The housing market recovery was led by the larger cities, where house prices have increased at a faster pace than the rest of the country. In the four largest cities, house prices increased by 11% to 13% per year on average in 2016-2018. In most provinces outside the Randstad region, house prices increased at a more modest rate of around 5-7% in the same period. This difference may be explained by the attractiveness of urban areas (PBL, 2015) and more restrictive supply constraints in those areas. A recent study by the Dutch central bank suggests that house prices react stronger to income increases in municipalities where a larger share of available land has already been developed (Öztürk et al., 2018).

While demographic trends and economic developments increase demand for housing, available housing supply has decreased substantially. While population growth was just below 0.5% per year over the last 10 years, the number of households increased at a substantially faster rate due to the increasing share of one-person households. Nominal disposable income per household, after stagnating during the crisis, has been increasing again and was almost 8% higher in 2017 than in 2008. Financing costs have started to pick-up recently, but are still below pre-2008 levels due to low mortgage interest rates (De Nederlandsche Bank, 2018d). However, on the supply side of the market, the number of existing dwellings for sale has decreased by more than 70% between 2012 and 2018( ). The number of transactions peaked at a historic high of 242 000 in 2017, but decreased by almost 10% in 2018. The slowdown is most pronounced in the larger cities, where supply shortages are largest, but is occurring in all provinces. Building more homes could help ease current housing market pressures. Housing supply in the Netherlands has historically been relatively inelastic, although it has increased since the crisis according to a recent Centraal Plan Bureau--study (Michielsen et al., 2018). The development of new dwellings has declined drastically since 2009 and started to recover in 2015 (Graph 4.2.6). The government has stated an annual construction target of 75 000 dwellings until 2025 to address housing shortages and meet demographic trends (Ministry of the Interior, 2018a). In 2018 66 000 new dwellings were built and the number of new building permits, which reached 70 000 in 2017, remained roughly stable at that level. Graph 4.2.6:House prices and development of new dwellings Source: Statistics Netherlands 4.2.5.Pensions* The three-pillar pension system scores well on pension adequacy and fiscal sustainability. The first pillar is the pay-as-you-go state pension, funded by a specific contribution and general income taxes. To ensure its fiscal sustainability, the statutory retirement age has been linked to life expectancy by a fixed formula embedded in law. The second pillar is typically organised at industry or company level and is capital-funded. Participation is compulsory, and pension contributions and revenues depend on employment history. While some large industries have moved to defined contribution pension schemes, 90% of all participants still fall under defined benefit pension schemes. The third pillar is formed by individual pension products and only consists of tax relief on contributions paid on such products. The first and second pillar aim to provide a replacement rate of 75% of the average lifetime gross salary when people retire. Pension funds are important economic agents in the economy that affect household saving and investment behaviour. Annual actual contributions by employers and employees came to more than EUR 33 billion in 2017, fluctuating at around 5% of GDP. Pension pay-outs were just below EUR 30 billion in 2017, amounting to around circa 4% of GDP on average over the last 10 years (Graph 4.2.7). Compulsory savings via pension funds contribute to the domestic savings surplus and the current account balance. If the change in net equity of pension funds ( ) is taken as an approximation, this partial effect could be as high as 3% of GDP. Graph 4.2.7:Pension contributions and payments Source: European Commission (based on National Accounts) The development of pension contributions and benefits amplifies the economic cycle. Expansionary monetary policy affects funding ratios as lower interest rates increase liabilities. This leads to lower indexation of pensions, higher contributions and, as a last resort, lower benefits. This dampens private consumption growth due to the impact on disposable household income and precautionary savings behaviour. This was particularly the case right after the turn of the century, during the 2002-2003 recession, but also after the 2009 recession (Graph 4.2.7) pensions contributions increased( ). Increased longevity, a changing labour market environment and lower interest rates pose challenges to the current system. The occupational pension system is well developed, holds a large capital buffer (around 200% of GDP in Q3-2018) and ranks high in international comparisons of pension systems( ). However, a specific combination of challenges points to vulnerabilities, leading to a broad consensus among social partners and the government on the need to reform. These challenges include ageing, the increase in non-standard forms of work not covered by the system and, in particular and the sensitivity of the system to low interest rates. Although the financial supervision framework was relaxed slightly in 2015, pension funds had to take measures to improve the funding ratio: indexation was scrapped, contributions were increased and nominal pension payments were cut in some cases. Taken together, these developments have negatively affected the trust in the system. A generational divide, influenced by systemic redistribution from young to old workers via the average pay/average accrual system, lies beneath these challenges. Both older and younger generations claim to carry a disproportional part of the adjustment burden. For pensioners, the real value of their pensions has declined due to the lack of indexation and/or cuts in nominal pensions. Young generations have seen pension contributions go up and expect to receive lower pensions in the future. In addition, the current ‘average pay, average accrual’ system ('doorsneesystematiek') is considered in need of reform. In the current set-up, pension contributions paid in at any point of one’s career entitles the beneficiary to the same amount of pension benefits, irrespective of their age and the investment horizon. While this system facilitates collective risk sharing, it is not actuarially fair (Graph 4.2.8). It leads to systemic redistribution from young workers (who pay too much compared to an actuarially fair contribution) to older workers (who pay too little compared to an actuarially fair contribution). While the shifts in value may be limited when measured over the full life-cycle, this system may lead to arbitrary outcomes depending on career paths. As it makes the link between contributions and pension savings less clear, it also reduces transparency. In addition, as lower pension pay-outs are a last resort, the balance of risks is geared towards the active and young generations. In other words, ad hoc adjustments to indexation and pension contributions have led to pro-cyclical macroeconomic shocks and could give rise to intergenerational transfers at the expense of current younger generations, i.e. they pay higher contributions for a relatively lower guaranteed pension. Graph 4.2.8:Pension contribution (current and actuarially fair) Source: Lever, M.H.C. and S. Muns (2016) Pensioenresultaat bij degressieve opbouw en progressieve premie, CPB Notitie. Despite a shared understanding among stakeholders, negotiations on a comprehensive pension reform have stalled. The government and social partners have been working on a substantial overhaul of the occupational pension system, based on four themes: (i) coverage: an adequate pension for all workers including the self-employed; (ii) actuarial fairness: a shift to a more actuarially fair system of accruing pension rights; (iii) transparency: moving towards a more transparent and simple pension contract, which would be aligned with more flexible work patterns; and (iv) flexibility: more room for customised solutions and options, including a greater focus on aligning compulsory pension savings with individual needs. Despite extensive negotiations over several months, no overall agreement could be reached and the negotiations on a comprehensive pension reform subsequently stalled. Early February 2019, the government informed Parliament with a letter setting out the government initiatives to continue reforming the occupational pension system. 4.2.6.Savings and investment imbalance* The Dutch economy has been running a current account surplus for the last three decades. In 2017 the surplus increased to a historic high of 10.5% of GDP, up from 8.1% in 2016 (Graph 4.2.9). Based on the latest four quarters for which data is available (Q4-2017 to Q3-2018), the current account has remained broadly stable since. From a balance of payments perspective, a persistent surplus trade surplus in goods is the main driver. In terms of product groups, the trade in chemicals and related products, together with food and live animals make a significant contribution. Just over half of goods exports in 2017 consisted of re-exports, illustrating the Netherlands’ role as a trade hub. Statistics Netherlands has previously estimated the value added of one euro of re-exports at 11 cents, with a total GDP contribution of 3.8% in 2015 (CBS, 2016). The trade balance increased slightly in 2017 on the back of buoyant global trade developments. However, the balance on primary incomes increased by almost 2 pps. in 2017 and was therefore the main cause of the increase in 2017. According to Commission current account ‘norm’ estimations( ), fundamental drivers explain almost 4 pps of the surplus in 2017. For the Netherlands these fundamental drivers include the relatively high income per person, expected ageing relative to the rest of the world and the Netherlands’ status as a financial centre. Graph 4.2.9:Current account balance Source: Statistics Netherlands All institutional sectors are in surplus. A breakdown by institutional sector points to the corporate sector (both the non-financial and financial sector) as the largest contributor (Graph 4.2.10). Developments in the household and public sector are also important. Before the crisis, households were net borrowers. However, since 2009 they have been net lenders adding to the surplus. Although the government sector was running large deficits during the crisis and in its aftermath, fiscal consolidation and buoyant revenue developments led to a strong net lending position. Graph 4.2.10:Net lending by sector Source: Statistics Netherlands The relatively high corporate surplus is driven by non-financial corporations. Non-financial corporations record relatively high profits and net foreign income, as well as comparatively low investments. A comparison with the euro area over 2008-2017 shows that both the gross operating surplus and net property income were 2.1 pps. higher in the Netherlands. Investments were 1.4 pps. lower (Graph 4.2.11). High profitability therefore does not seem to translate into higher distributed earnings or higher domestic investments. In total, this led to a difference of 5.2 pps in net lending. The contribution of financial corporations to the surplus is smaller than the contribution of non-financial corporations, but is also persistently positive. Within this subsector, there is no clear driver( ). Graph 4.2.11:Net lending by non-financial corporations Source: European Commission Corporate sector net lending is likely to be positively influenced by the presence of multinational enterprises. In 2008-2017, gross value added of non-financial firms as a share of GDP exceeded the euro area average by 5.4 pps. This relatively large share in corporate sector value added is likely to be related to the presence of a relatively high number of multinational enterprises, which play an important part in corporate savings (see Eggelte et al., 2014, European Commission, 2017d; and European Commission, 2018e). High corporate savings may be caused by relatively strong profitability as well as by profit shifting and aggressive tax planning. While earlier studies have pointed to the importance of multinationals for international trade (see for example CBS, 2018), available macro-economic data do not allow for a clear-cut estimation of their overall contribution to the current account surplus. The OECD and the IMF are currently working on an international methodology to develop disaggregations of the current account, and a separate identification of macro-economic transactions related to multinationals( ).

Household saving is to a large extent driven by institutional features of the housing market and the pension system. Following a housing market boom, the crisis led to a considerable dip in new construction. Residential investment as a share of GDP, declined from over 6% in 2008 to 3% in 2013, leading to an increase in household net lending. The decrease in house prices also resulted in a negative net housing equity position for many households. This wealth shock could have contributed to the strong fall in private consumption during the crisis( ), further boosting household saving. Policy factors like the introduction of mandatory mortgage repayment within 30 years to qualify for mortgage interest deductibility in 2013 also require homeowners to increase their savings. On the pension side, high pension contributions and investment income that exceed pension benefits also fuel the household surplus (see Section 4.2.5). Higher wage growth could have a small but positive effect on external rebalancing. While the total compensation of employees as a share of GDP is close to the euro area average, wage growth in recent years has been below what would be expected based on fundamental drivers such as productivity, inflation and unemployment (see Section 1 and Section 4.3). Higher wages would boost imports through their positive effect on disposable household income. Insofar as wages translate into higher prices, the export volume would also decrease as a result of competitiveness effects. Taken together, these effects lead to a decline in the trade balance. This decline is partly counterbalanced by the fact that higher export prices have a positive impact on the nominal export value. An analysis based on the Commission’s QUEST-model suggests that an autonomous wage increase of 1% would lead to a reduction in the trade balance of 0.1% compared to a baseline scenario. 4.2.7.POLICY PERSPECTIVE ON HOUSEHOLD BALANCE SHEETS* Long household balance sheets make households vulnerable to financial shocks, with pro-cyclical effects. Pension entitlements as a share of GDP have been on an upward trend between 2007 and 2017 reaching almost 200% of GDP (Graph 4.2.12 and Section 4.2.5). Housing wealth decreased during the crisis, but has been increasing over a longer time horizon. However, both housing and pension wealth are typically illiquid. At the same time, almost half of all households own less than EUR 10 000 in liquid financial assets (Smid and Luginbuhl, 2018). High debt and low liquid savings make households vulnerable to financial shocks, and limit consumption smoothing over time. Low liquid assets are also associated with a higher volatility of consumption at the macro-level (Lukkezen and Elbourne, 2015). Graph 4.2.12:Household balance sheets (% of GDP) Source: Statistics Netherlands Pension savings come with a large compulsory payment wedge on labour and low liquid savings. While high mandatory pension contributions lead to good pension adequacy, they make up a large part of the relatively large tax and non-tax compulsory payment wedge in the Netherlands (European Commission, 2018e). At EUR 33 billion in 2017, contributions amounted to almost 10% of total employee compensation just for the second pillar. The high pension assets that households build up over their lifetime are among the largest in the euro area, but are generally not accessible until retirement. Mortgage interest deductibility is an important driver of household debt. This fiscal subsidy encourages households to enter the owner-occupied market and take on mortgage debt. Given housing supply-constraints, it also leads to higher house prices. The announced acceleration of the reduction in mortgage interest deductibility between 2020 and 2023, reducing the maximum applicable rate from 49% to 37%, has been turned into legislation (Belastingplan 2019). Nevertheless, the fiscal subsidy on home-ownership remains substantial. Further developing the private rental market can contribute to reducing household debt. Implicit and explicit subsidies lead to a relatively large and highly regulated social housing sector (a share of 29% of the total housing market). The private rental market, as the only non-subsidised segment, remains underdeveloped with a share of 13% in total dwellings. It is often not affordable for middle-income households, while at the same time they are not eligible for social housing (Middelkoop and Schilder, 2017). In 2018, the government presented draft legislation to ease the requirements for housing corporations to build for the middle income rental segment (Wet maatregelen middenhuur). Municipalities also play an important role in increasing private rental supply, but may not be fully incentivised to do so. Since 2017, they can include minimum shares for the affordable private rental segment in their zoning plans. However, they can generate higher revenues by developing and selling land for new construction in the owner occupied segment market as mortgage interest deductability pushes up prices in this segment (De Nederlandsche Bank, 2017). At the same time, according to a recent survey the percentage of municipalities that had some form of policy aimed at increasing supply in this segment rose from 40% in 2016 to 53% in 2018 (Stec groep, 2018). Supply-side measures in the rental segment can provide an alternative for middle incomes to taking on mortgage debt, but the debt bias for households continues to exist as long as homeownership is fiscally subsidised. Taken together, current pension and housing institutions may lead to a sub-optimal pattern of saving and consumption over the lifetime. Households are encouraged to take on high mortgage debt. The introduction of mandatory mortgage repayment to qualify for interest deductibility in 2013 improves the incentive for households to repay their mortgage. However, higher monthly mortgage payment and high pension contributions both require substantial savings, which puts consumption under pressure. At the same time, replacement rates at retirement exceed 100% for many households, particularly in the case of homeowners (Studiegroep Duurzame Groei, 2016). This suggests potential welfare losses due to a lack of consumption smoothing over the lifecycle. 4.3. Labour market, education and social policies 4.3.1.Labour market The labour market is performing well, with headline labour market indicators converging towards pre-crisis levels. Labour force participation continues to increase and now exceeds the pre-crisis level. Moreover, it is one of the highest in the EU at 82.2% in Q3-2018. In the last quarter of 2018, the unemployment rate reached the pre-crisis low level of unemployment of 3.6% (Graph 4.3.1) on the back of robust GDP growth. In addition, the long-term unemployment rate stood at 1.4% in the third quarter of 2008 (well below the EU average of 2.9%) and is declining for all age groups. Graph 4.3.1:Labour market indicators Source: European Commission Labour shortages are starting to emerge. In line with the expansionary phase of the business cycle the movement along the Beveridge curve continued in the second quarter of 2018 (Graph 4.3.2). As labour shortages emerge, the slope becomes steeper, with the number of vacancies increasing more than the decline in unemployment. Moreover, the Beveridge curve shifted outwards, indicating that the matching efficiency worsened. The vacancy rate (i.e. number of vacant positions as a percentage of the sum of the number of vacant and occupied positions) reached 3.1% in the third quarter of 2018, and is particularly high in the Information and Communications Technologies, health and construction sector (Graph 4.3.3). In addition, the share of companies reporting difficulties in filling vacancies increased. Shortages are increasing in certain professions, such as secondary school teachers and nurses, and in certain regions more than others( ). Graph 4.3.2:Beveridge curve Source: European Commission. Labour shortages are the percentage of managers reporting labour as a limiting factor for their business in the industrial sector. Data are obtained from the Business and Consumer survey. Graph 4.3.3:Vacancy rate by sector (%, 2018Q3) Source: European Commission Wage developments* Despite increasing labour shortages, wage growth remained moderate. Nominal wage growth (measured as total compensation per employee in full time equivalents) remained subdued at 1.1% in 2017. Wage growth was also relatively muted in the sectors with fast growing vacancy rates. In combination with increasing inflation, this resulted in nearly zero real wage growth in 2017. While trade unions may have foregone wage demands in recent years in exchange for employment protection, the largest trade union has set far higher wage demands for 2019, with 5% compared to 3.5% in 2018. The government has also repeatedly acknowledged the need for higher real wage growth. With the further tightening of the labour market, nominal wage growth is expected to accelerate to 2.7% and 3.3%, in 2018 and 2019, according to the Commission’s Autumn 2018 Economic Forecast. Wage growth is lower than it was before the crisis with similar levels of unemployment. The Philips curve, which measures the extent to which wages react to changes in unemployment, has flattened since the start of the economic recovery (Graph 4.3.4). This implies that wage growth has become less responsive to changes in unemployment. Wage growth remains subdued even when controlling for unemployment, inflation and productivity (see Section 1).

Graph 4.3.4:Flattening of the Philips curve Source: European Commission In addition to labour market slack, increased labour market segmentation may have been an important driver of low wage growth in the last decade( ). In 2000-2017, the increase in the share of non-standard employment correlates negatively with the shortfall in wage growth ( ). The downward pressure on wages can be partly explained by the fact that overall wages for temporary employees are substantially lower than wages for permanent employees (European Commission, 2018e, Box 4.3.1). As a result, the increase in the share of temporary employees negatively affected wage growth across the wage distribution with the largest impact at the bottom (European Commission, 2018h). Lower tax and social contributions for the self-employed may also lead to downward pressure on wages. Self-employed without employees pay lower tax and social security contributions compared to employees. This may result in unfair competition and downward pressure on wages and unfair competition, in particular for those at the bottom of the earnings distribution. Graph 4.3.5:Shortfall in wage growth (pps) and combined share of temporary employees and self-employed without employees (% of the workforce) Source: European Commission Labour market segmentation Flexible employment represents a growing share of the labour market. Both temporary employment and self-employment without employees increased considerably in the last ten years. Important drivers of the trend towards flexible employment relationships are distinct institutional factors, including favourable tax treatment (for the self-employed without employees) and differences in social security legislation as well as large differences in applicable labour regulations and labour protection rules for permanent and temporary contracts( ). Self-employed are not obliged to be insured against labour-related risks such as accidents at work, unemployment and old age (second pillar). These factors and differences may create financial (dis)incentives with particularly distortive effects at the margin of the labour market impeding on fair working conditions, hampering smooth labour market transitions and inclusive growth. In addition, labour market segmentation may have a negative impact on wage developments and not provide adequate social protection coverage for all. While job creation in recent years has mainly been due to temporary employment and self-employment, job growth for employees with permanent contracts has recently outpaced that for temporary employment. Since the second half of 2017 there has been an increase for the first time in the transition rate from temporary to permanent contracts. This increase applies to all education levels, but is particularly strong for high-skilled workers (almost 4 pps). As a result, for the first time in years the share of temporary employees (as a percentage of total employment) decreased slightly in the third quarter of 2018 (14.8%) compared to one year before (15.2%). An increasingly tight labour market may have provided incentives for employers to offer more open-ended contracts. Graph 4.3.6:Transition rate from temporary to permanent employee by educational level Source: Statistics Netherlands Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence towards better working and living conditions in the European Union( II ). It sets out twenty essential principles and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and social protection and inclusion. The Netherlands performs very well on most indicators of the Social Scoreboard supporting the European Pillar of Social Rights. It has an overall good standing 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. In the area of social protection and inclusion the weakening of the situation with the risk of poverty or social inclusion is a point of attention. However the Netherlands is still among the top performers, with a low level of poverty. The issue of labour market segmentation deserves further attention with regard to equal opportunities in the labour market and fair working conditions. Flexible employment still represents a relatively large share of the labour force. In the last 10 years both temporary employment as well as self-employment without employees increased considerably. The vocational education and training sector performed well overall. It has a participation rate higher than EU average and provides recent graduates with better