COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for THE NETHERLANDS Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on The Netherlands’s 2014 national reform programme and delivering a Council opinion on The Netherlands’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Netherlands, budget deficit, economic convergence, economic growth, economic reform, economic stabilisation, financial control, job creation, multilateral surveillance, social situation, stability programme, structural adjustment













EUR-Lex - 52014SC0420 - EN











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52014SC0420

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for   THE NETHERLANDS Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on The Netherlands’s 2014 national reform programme and delivering a Council opinion on The Netherlands’s 2014 stability programme /* SWD/2014/0420 final */









Contents
Executive summary. 3
1............ Introduction. 5
2............ Economic situation and outlook. 5
3............ Challenges and assessment of policy
agenda. 7
3.1......... Fiscal policy and taxation. 7
3.2......... Financial sector 18
3.3......... Labour market, education and social
policies. 20
3.4......... Structural measures promoting sustainable
growth and competitiveness. 25
3.5......... Modernisation of public administration. 31
4............ Conclusions. 32
Annex... 39

Executive summary 

The
Dutch economy is emerging from recession. In the
immediate aftermath of the crisis, the economy was weighed down by weak domestic
demand stemming from adverse trends in employment and disposable income. The
persistent nature of the current economic weakness is mainly due to rigidities
and distortive incentives built up over decades which shaped housing finance
and sectoral saving patterns. Unwinding these imbalances is expected to involve
the joint tackling of economic and financial flows and balance sheet positions.
According to the Commission 2014 spring forecast, the outlook for 2014 and 2015
shows an economy emerging from a prolonged economic slump with more supportive
trends in disposable income and, albeit with a lag, employment. On the back of
the improved economic outlook and several consolidation packages, the headline budget
balance is set to improve substantially over the forecast period. 
The Netherlands made some progress in implementing the 2013 country-specific recommendations. With
regard to public finances substantial progress has been made. Some progress has
been made in response to the recommendations concerning the sustainability of
public finances in the long term and the labour market. By contrast, only
limited progress has been made in response to the recommendation on the housing
market. Further measures remain necessary in all areas where the
recommendations have not yet been fully addressed. The policy plans submitted
by the Netherlands address most of the challenges identified in last year’s
Staff Working Document, and broad coherence between the two programmes has been
ensured. The national reform programme confirms the commitment to address
shortcomings in the areas identified in last year’s Staff Working Document.
The immediate
policy challenge for the Netherlands is to restore confidence and foster growth
while stabilising public finances and supporting continued balance-sheet
adjustment at a measured pace. Within the fiscal constraints,
measures to promote innovation and safeguard growth-enhancing expenditure are
crucial for a balanced adjustment. Managing the transition in the housing
market gradually and sustainably also represents an essential aspect of such a
strategy. There
remain considerable challenges when it comes to fiscal policy and the labour
market.
·        
Public
finances: Thanks
to a significant and sustained fiscal effort, the Netherlands reduced its
budget deficit to 2.5% in 2013. With the adoption of additional, wide-ranging
consolidation measures, the general government deficit is expected to remain
below 3 % of GDP in 2014 and a significant improvement is expected in 2015. The
stability programme aims at approaching the medium-term objective in 2015 but
there is a risk of a significant deviation from the adjustment path. Additional
measures may be needed to reach the medium-term objective and to adhere to it
throughout the period covered by the stability programme, also to ensure
meeting the debt benchmark and improving the long-term sustainability of public
finances. Expenditure that is directly relevant for growth and domestic demand,
such as education, innovation and (fundamental) research, needs to be
protected.
·        
Housing
market:
Further progress with reforms in the housing market is needed. Although some
measures have been introduced, the reform momentum has slowed in the
past year. Mortgage interest deductibility has been only gradually and partially
reduced, leaving sizeable scope for households to mortgage-finance the purchase
of owner-occupied housing. The private rental market is still not functioning
fully, partly due to fiscal distortions and a social housing sector that,
despite its large scale, still has long waiting lists and provides housing for
tenants with incomes above the social housing threshold.
·        
Labour
market/education: The Dutch labour market is still performing
relatively well compared to that of other Member States. However, unemployment
is on the rise and to decline only slowly with the expected recovery while the
ageing of the population is projected to put further pressure on the long-term
supply of labour. There is still a large pool of untapped labour. Employment
rates of people with migrant backgrounds have been falling since 2008. The
employment rate of people with disabilities is comparatively low and their
employment gap has been increasing since 2008. Youth unemployment rose to 11 %
in 2013. Additional measures to reduce tax and other disincentives on labour
would make work more attractive. Although the Dutch school system performs well
overall, quality, specific needs and excellence across various educational
levels need to be addressed.

1.        
Introduction 

In
May 2013, the Commission proposed a set of country-specific recommendations
(CSRs) for economic and structural reform policies for the Netherlands. On the basis of these recommendations, the Council of the European Union
adopted four CSRs in the form of a Council Recommendation in July 2013. These
CSRs concerned public finances, the housing market, the labour market and the
education system. This staff working document (SWD) assesses the state of
implementation of these recommendations in the Netherlands.
The SWD assesses policy measures in
light of the findings of the Commission’s 2014 Annual Growth Survey (AGS)[1] and
the third annual Alert Mechanism Report (AMR),[2]
which were published in November 2013. The AGS sets out the Commission’s
proposals for building the necessary common understanding about the priorities
for action at national and EU level in 2014. It identifies five priorities to
guide Member States to renewed growth: pursuing differentiated, growth-friendly
fiscal consolidation; restoring normal lending to the economy; promoting growth
and competitiveness for today and tomorrow; tackling unemployment and the
social consequences of the crisis; and modernising public administration. The
AMR serves as an initial screening device to determine whether macroeconomic
imbalances exist or risk emerging in Member States. It found positive signs
that macroeconomic imbalances in Europe are being corrected. To ensure that a
complete and durable rebalancing is achieved, the Netherlands and
15 other Member States were selected for a review of developments in the
accumulation and unwinding of imbalances. These in-depth reviews were published
on 5 March 2014 along with a Commission Communication.[3]
Against the
background of the 2013 Council Recommendation, the AGS, the AMR and the
in-depth review, the Netherlands presented a national reform programme (NRP) and
a stability programme (SP) on 29 April 2014. These programmes provide detailed
information on progress made since July 2013 and on the government’s plans. The
information contained in these programmes provides the basis for the assessment
made in this staff working document.
The
programmes underwent an inclusive consultation process involving the national
parliament. The NRP was also discussed with stakeholders, the social partners
and subnational governments. Before submitting both programmes, they were
debated in Parliament.

2.        
Economic situation
and outlook 

Economic
situation
According to the
Commission 2014 spring forecast, real GDP contracted by 0.8% in 2013. This
outcome reflects weak economic activity at the start of the year, while growth
turned positive in the second quarter and strengthened significantly towards
the end of the year, helped also by transitory factors (in particular a hike in
investments in vehicles reflecting the expiry of a fiscal facility). Whilst
weak domestic demand continued to be a drag, corporate investment rebounded strongly
towards year-end, in line with the improved business outlook. Private
consumption also returned to positive territory. In combination with the
general improvement in soft indicators since the second half of 2013, this
points to a more broad based recovery. 
Unemployment
rose sharply during the first half of 2013 as a result of declining employment
coupled with an increase in labour supply (the ‘added worker effect’). Since
mid-2013, the unemployment rate has been relatively stable. This is mainly due to
a supply effect, as many of the unemployed withdrew from the labour market in
response to negative prospects for an economic recovery (the ‘discouraged
worker effect’). The unemployment rate reached 6.7 % in 2013. In 2012 and for
most of 2013, Harmonised Index of Consumer Prices (HICP) inflation was almost
3 %, due to higher energy prices and the increased VAT rate from October 2012.
In October 2013, inflation fell markedly to 1.3 % as the previous energy and
tax increases dropped out of the figures.
Economic
Outlook
According
to the Commission 2014 spring forecast, the Dutch economy is slowly picking up.
Building on the positive developments in the second half of 2013, growth of
domestic demand is expected to turn positive in 2014 and even to overtake net
exports as the main driver of growth. On the back of low real wage growth and
ongoing deleveraging of households, private consumption is still under pressure
but expected to strengthen in the course of 2014. Domestic investments are to
be boosted by the improved economic outlook. 
With
positive contributions to economic growth expected to spread to all main
segments of the economy in 2015, the upturn is expected to be broad-based. However,
the employment outlook is set to remain weak in the short term, as labour
markets tend generally to respond slowly to changes in the business cycle.
Together with negative employment developments in the public sector and health
care, this accounts for the projected further rise in the unemployment rate to
7.4% in 2014. Employment should start increasing again in 2015 leading to a
slight fall in unemployment to 7.3%. In line with trends in import prices,
moderate wage gains and the only gradual pickup in domestic demand over the
forecast horizon, inflation is expected to ease to 0.7% in 2014 and to only
modestly increase to 0.9% in 2015. Over the forecast horizon, the rebound in
domestic demand is unlikely to raise inflationary pressures, given sizeable
slack. 
The
macroeconomic outlook presented in the NRP and the stability programme is
broadly realistic. The stability programme and the NRP share the same
macroeconomic outlook, which is fairly close to the Commission 2014 spring
forecast and even slightly more pessimistic on the prospects for economic
growth. The NRP includes an estimate of the macroeconomic impact of policy
measures in the short, medium and long term. It presents estimates of the
annual total effect of adopted measures stemming from the coalition agreement
and the additional consolidation package presented in September last year on a
number of key economic variables (in particular economic growth, private
consumption, net exports, the consumer price index and employment (albeit not
adjusted for the substantial later amendments). It uses the Netherlands Bureau
for Economic Policy Analysis' (CPB) Saffier II model to this end. 

3.        
Challenges and assessment of policy agenda 
3.1.                
Fiscal policy and taxation 

Budgetary developments and debt
dynamics 
The
objective of the budgetary strategy outlined in the 2014 stability programme is
to ensure a lasting correction of the excessive deficit as of 2013 and to reach
a budgetary position close to the medium term objective (MTO). The stability programme confirms an MTO of a structural deficit of
0.5% of GDP by 2015. 
In 2013, the general government
deficit reached 2.5% of GDP. The headline deficit
was significantly influenced by the sale of mobile telephony licenses (around
0.6% of GDP). The nationalisation of SNS Reaal is assumed to have had no impact
on the deficit outturn, yet a final decision on the classification by Eurostat
is still pending. Based on currently available information, the impact may be
an increase in the deficit of no more than 0.3% of GDP. 
The differences between the budget
adopted for 2014 and the Draft Budgetary Plan, which was found to be compliant
with the requirements of the Stability and Growth Pact (SGP), are marginal and
do not affect the overall budgetary stance.
Compared to 2013, the budget for 2014 implemented fiscal measure of around 2%
of GDP, half of which was the result of an additional consolidation package
requested by revised Council Recommendation under the EDP of June 2013. 
According to the stability programme,
the government plans a general government budget deficit of 2.9% of GDP in 2014, which is 0.1 pp below the value foreseen in the previous 2013 stability
programme. On the one hand economic growth turned out to be lower than
expected, on the other hand, the additional consolidation package foreseen in
the 2013 stability programme was smaller than the package eventually adopted.
Based on the current developments in public finances, the Commission 2014
spring forecast expects a general government budget deficit of 2.8% of GDP.
Risks to the budgetary targets appear to be large on the upside and the
downside but overall broadly balanced. Particular risks stem from the expected
revenue of some of the new measures, especially concerning the fiscal treatment
of companies made for the sole purpose of (temporarily) avoiding taxes on
severance payments. Even though the government has calculated the additional
revenue from this measure in a conservative way, the exact amount to be
received is subject to a large degree of uncertainty. 
Even though additional sizeable
fiscal measures were implemented, the (recalculated) structural balance in 2014
is planned to remain constant compared to 2013. According
to the SP, government revenues in percentage of GDP are expected to increase
from 47.3% of GDP in 2013 to 47.7% of GDP in 2014. The expenditure ratio is
also expected to increase, from 49.9% of GDP in 2013 to 50.3% of GDP in 2014.
Although overall expenditure is set to increase, expenditure on
growth-enhancing items shows some worrisome trends, which could have negative
repercussions for economic growth. Public expenditure on education is planned
to fall over the programme period (see Box 1). According to the NRP, public
spending on R&D and innovation (direct and indirect), was EUR 6.4 billion
in 2012 is expected to reach € 6.6 billion in 2013, after which it is set to
decline to EUR 5.9 billion in 2017. Using the GDP projections underlying the
NRP, this represents a decline of public spending on R&D and innovation
from 1.07% of GDP in           2012 to 0.92% of GDP in 2017. Although the
increasing relative importance of indirect government funding should
improve the efficiency of this spending, the fact that total public spending
for research, development and innovation is set to decline could hamper
economic growth prospects, and domestic demand, of the Dutch economy. 
For 2015 the government plans a
general government budget deficit of 2.1% of GDP, which is higher than the
deficit of 1.8% of GDP foreseen in the previous stability programme. This is mainly the result of economic growth revised downwards
compared to the previous forecast. The Commission 2014 spring forecast expects
a general government budget deficit of 1.8% of GDP, mainly due to a more
favourable macroeconomic outlook. There appear to be some risks to the
budgetary forecast, especially from the planned decentralisation of some areas
of social security and long-term care to municipalities. The (recalculated)
structural balance is expected to improve by 0.3 pp of GDP. Expenditure is
expected to decrease to 50% of GDP, whereas government revenues are expected to
increase further to 47.7% of GDP. For the years beyond 2015, the general
government deficit is expected to improve to 1.9% of GDP in 2016 and 1.4% of
GDP in 2017, which is slightly lower than foreseen in the previous stability
programme. 
Under the assumption that the EDP is
abrogated, the Netherlands will be subject to the preventive arm of the SGP and
should ensure sufficient progress towards its MTO starting from 2014. With a debt ratio above 60% and, according to the Commission spring
forecast, an estimated output gap in 2014 and 2015 in the range between -4% and
-1.5% of GDP, the Netherlands is required to pursue an annual structural
adjustment toward the MTO of at least 0.5% in 2014.
In 2014, the Stability Programme (as
recalculated by the Commission using the commonly agreed methodology) envisages
virtually no improvement in the structural balance,
with the structural deficit remaining at 1.3% of GDP, in line with the
Commission's forecast. According to the information provided in the Programme,
the growth rate of government expenditure, net of discretionary revenue
measures, is consistent with the expenditure benchmark both in 2014 and 2015.
However, according to the Commission 2014 spring forecast, the Netherlands would comply with the expenditure benchmark in 2014 but not in 2015. The above
analysis of budgetary developments in the Netherlands, with the structural
balance as a reference, including the analysis of expenditure, net of
discretionary revenue measures, points then to the existence of a risk of
significant deviation based on both Programme’s plans and the Commission's
forecast in 2014.
In 2015 the Commission’s forecast
projects a larger improvement in the (recalculated) structural balance than the
Programme (0.5% and 0.3% of GDP respectively).
Nevertheless, the risk of significant deviation persists also in 2015 based on
both pillars on a two-year horizon since both the two year change in the
structural balance and in the growth rate of expenditure are projected to
deviate by respectively 0.3% and 0.4% of GDP from the required adjustment.
According to the stability programme the Netherlands will not meet the MTO by
2015. 
The above analysis of the budgetary
developments in the Netherlands, with the structural balance as a reference,
including the analysis of expenditure, net of discretionary revenue measures,
points to the existence of a risk of significant deviation from the
requirements of the preventive arm as from 2014 based on both Programme’s plans
and the Commission's forecast. 
After
having been on a downward trend for a some years, general government gross debt
came out at 45.3% of GDP in 2007. Mainly due to
persistently high budget deficits and weak nominal growth, gross debt increased
to 73.5% of GDP in 2013. According to the Stability Programme, general
government gross debt is increasing further 74.6% of GDP in 2014, roughly
stabilising in 2015 and decreasing thereafter. In addition to the implemented
treasury banking for local government authorities, improving primary balances
and reprivatizing recently acquired financial institutions could help improve
the gross debt level. This would also improve the long-term sustainability of
public finances. 
Already
before the crisis, the government has accumulated a significant amount of
implicit liabilities and guarantees, which has been increasing in the recent
years. Although it is unlikely that these
liabilities will be drawn upon, the effect on the budgetary position and the
stock of debt would be sizeable in case of very adverse shocks. 
Box 1:
Public expenditure on education
Last year’s public finance CSR recommended the Netherlands achieve the structural adjustment specified in the Council Recommendation under
the EDP and that it protect expenditure in areas directly relevant for growth
such as education, innovation and research.
In recent years, public
expenditure on education (COFOG[4]
9) stabilised at around 5 % of GDP while it shrank as a percentage of total
government expenditure, from a peak in 2005 (over 19 %) to just above 17 % in
2012 (Figure 1). The relative decline in expenditure on education as a
proportion of total expenditure is not crisis-related as this trend began in
2006 but was accentuated in recent years. Expenditure on education as a
percentage of GDP is expected to decrease in the coming years (forecast data
are marked with an asterisk). More striking is the shift of government
expenditure from education to other purposes. The proportion of government
expenditure allocated to education is expected to decline from its peak in 2005
(19.1%) to 16.6% in 2017. 
Figure 1:
Public expenditure on                  Figure 2: Investments
of educational
education                                                        institutions
(secondary & tertiary education) 
   
Source:
Statistics Netherlands (CBS),                        Source:
Statistics Netherlands (CBS)             
Stability
Programme, data provided by the 
Ministry
of Finance
Of course, total expenditure on education does not
fully correlate with the quality of spending. For this, it is necessary
to look more closely at expenditure decisions at school level. Since the 1990s,
primary and secondary schools have no longer had their costs reimbursed. They
receive instead an ex-ante lump sum payment and have also been given more
freedom on how to allocate this money. While teachers’ salaries are agreed
centrally, other forms of expenditure and investments can be prioritised at
school level (including the number of teachers on the payroll). Since the new
system was put in place, educational institutions have invested an increasing
proportion of their non-wage-related expenditure in buildings (Figure 2),
peaking in 2008. This can be inter alia
explained by the rising real estate prices which peaked in the same
year. Many schools have decided to prioritise investing (i.e. the proportion of
expenditure not used for wages, which makes up almost ¾ of the total
expenditure of schools) in new buildings rather than buying new supplies and
equipment. Some schools, especially a number of regional education centres (ROCs),
abandoned existing and functioning buildings and invested in new buildings so
much that they now face financial problems and have to cut expenditure, which directly
affects the quality of education.[5]
   || Box 2: Main measures ||   
   || Revenue || Expenditure ||   
   || 2012 ||   
   || ·      Limit on tax credit for single parents (0.1% of GDP) ·      Reversal of increase in health care own contribution (0.1% of GDP) || ·      Health care benefits (-0.1% of GDP) ·      Child care benefits (-0.1% of GDP) ||   
   || 2013 ||   
   || ·      Adjustment of pension deductability. (From 2013 onwards, fewer pension entitlements qualifying for tax relief can be accrued; 0.1 % of GDP) ·      VAT increase by 2 percentage points as of October 2012 (0.7 % of GDP) ·      Environmental friendly taxation and increase in excise duty on alcohol, tobacco and soft drinks (0.25 % of GDP) ·      Limiting mortgage interest deductibility for new mortgage loans (0 % of GDP; structural gains far beyond the programme horizon) ·      Increase insurance tax (0.2% of GDP) || ·      Health care benefits (-0.1 % of GDP) ·      Primary education (-0.1 % of GDP) ·      Increase of own contribution for specialised health care in combination with other measures (0.3 % of GDP) ·      Increase retirement age (0 % of GDP, but sizeable structural gains beyond the programme horizon) ·      Wage freeze (for civil servants and nonindexation of income tax brackets) (0.5 % of GDP) ||   
   || 2014 ||   
   || ·      Stimulating movement in the rental housing (0.2% of GDP) ·      Taxation of annuities and box 2 (0.5% of GDP, long-term effect negative) ·      Freeze of tax brackets and credits (0.15% of GDP) ·      Retention of business-related revenue envelopes (0.1% of GDP) || ·      General government (wage freeze, price adjustment, etc.) (-0.3 % of GDP) ·      Health care (-0.2 % of GDP) ||   
   || 2015 ||   
   || ·      Reduction of natural gas production     (-0.1% of GDP) || ·      General government expenditure (-0.3 % of GDP) ·      Various health care measures ||   
   || 2016 ||   
   || ·      Reduction of natural gas production     (-0.2% of GDP)   || ·      General government expenditure          (-0.1% of GDP) ·      Various health care measures ||   
   || Note: The budgetary impact in the table is the impact reported in the programme or in other documents provided by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. ||   
Fiscal framework
The Netherlands has a well-developed fiscal framework. Leaving aside
its precise compliance with EU rules put in place in recent years, the well-established
Dutch medium-term budgetary framework has long been considered a best practice
within the EU. The main characteristics of the multi-annual trend-based fiscal
framework currently in place are: (i) the use of real expenditure ceilings,
which are pre-determined and apply to the government’s entire term of office;
(ii) the automatic stabilisation of revenues and (iii) the use of independently
derived macroeconomic assumptions. When a new government is formed, medium-term
yearly budgetary targets are set for its term of office, for general government
expenditure and the tax burden. The Dutch authorities are fully committed to
fulfilling their obligations under the Stability and Growth Pact (see Box 3). To reinforce their commitment, they have also ratified the Treaty on Stability,
Coordination and Governance in the Economic and Monetary Union.[6] In December
2013, the Senate approved legislation that aims to transpose provisions of the
EU directive on budgetary frameworks and the Fiscal Compact into national
legislation from 1 January 2014 (in particular by setting up the Council of
State as the independent fiscal institution in charge of fiscal rule
monitoring). It also covers provisions and coordination mechanisms for local
government finances (Wet Houdbare Overheidsfinanciën). Although in
practice the correction mechanisms to ensure healthy public finances at local
level are rather weak, this is a welcome development overall as is likely to
lead to better monitoring of public finances. The planned decentralisation of a
large number of tasks from the central to local governments from January 2015,
which will include substantial expenditure cuts (see Section 3.5), will be a
test case to see how the new provisions on monitoring public finances across
layers of government work. Decentralisation also brings with it risks with
regard to the quality and equality of access to public services provided
locally (see Section 3.5).
Box
3: The Netherlands`s status vis-à-vis the Stability and Growth Pact
The Netherlands currently subject
to the corrective arm of the Stability and Growth Pact. The Council opened the
Excessive Deficit Procedure for the Netherlands in 2009 and recommended to
correct the excessive deficit by 2013 at the latest, a deadline which was
extended to 2014 in the revised Council recommendation of June 2013. In that
revised recommendation the Council recommended that "(2) The
Netherlands should reach a headline deficit target of 3.6 % in 2013 and 2.8 %
of GDP in 2014, which is consistent with an improvement of the structural
balance of around 0.6 % and 0.7 % of GDP in 2013 and 2014 respectively, based
on the Commission services updated 2013 spring forecast. (3) The Netherlands should implement the multiannual measures already adopted with the 2013 budget,
while standing ready to compensate them if their yield would prove less than
currently foreseen, and implement additional measures sufficient to achieve a
correction of the excessive deficit in 2014. The Council establishes the
deadline of 1 October for the Netherlands to take effective action and, in
accordance with Article 3(4a) of Regulation (EC) No 1467/97, to report in
detail the consolidation strategy that is envisaged to achieve the targets. In
addition, to ensure the success of the fiscal consolidation strategy, it will
be important to back the fiscal consolidation by comprehensive structural reforms,
in line with the Council recommendations addressed to the Netherlands in the context of the European Semester and in particular those related to the
preventive arm of the Macroeconomic Imbalances Procedure." 
The year
following the correction of the excessive deficit, the Netherlands will be subject to the preventive arm of the Pact and should ensure sufficient
progress towards its MTO. As the debt ratio in 2013 was 73.5% of GDP, exceeding
the 60% of GDP reference value, during the three years following the correction
of the excessive deficit the Netherlands would also be subject to the
transitional arrangements as regards compliance with the debt criterion, during
which it would have to ensure sufficient progress towards compliance.
An overview of the
current state of excessive deficit procedures is available on: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm.
The economic
crisis has exposed weaknesses in the fiscal framework, as a result of which
successive governments have adjusted the budget compared to original targets
set out in the framework. Since the onset of the crisis successive
governments have amended their medium-term budgetary plans with wide-ranging additional
consolidation measures, partly because initial expenditure ceilings were based
on growth paths which turned out to be overly optimistic. Under the current
government’s coalition agreement, automatic stabilisers are free to operate
within each of the separate expenditure sub-ceilings for ‘core’ central
government, social security, the health care, as long as the country’s overall
fiscal position stays in line with European fiscal rules. As regards national
budgetary rules, interest expenditure is kept outside the overall expenditure
ceiling, whereas expenditure items sensitive to the cycle (unemployment and
social welfare benefits for example) are kept within the overall expenditure
ceiling.[7]
This could prevent automatic stabilisers from working properly in an economic
downturn. Possible actions to put into practice the general commitment to abide
by European provisions are not specified in detail.
Long-term sustainability
The Netherlands has to address its long-term fiscal sustainability risk. Government
debt (73.5% of GDP in 2013 and expected to remain broadly unchanged until 2015)
is currently above the 60% of GDP Treaty threshold, and projected to rise
further by 2030. According to the 2012 Ageing Report, the Netherlands appears to face medium fiscal sustainability risks in the medium-term. The
medium-term sustainability gap[8],
showing the adjustment effort up to 2020 required to bring debt ratios to
60 % of GDP in 2030, is at 1.2 % of GDP, primarily related to the
projected ageing costs contributing with 1 pp. of GDP until 2030 and the high
level of government debt (73.4% of GDP in 2015). In the long-term, the Netherlands appears to face medium fiscal sustainability risks, primarily related to the
projected ageing costs contributing with 4 pp. of GDP over the very long run,
in particular in the field of long-term care. The long-term sustainability gap[9]
shows the adjustment effort needed to ensure that the debt-to-GDP ratio is not
on an ever-increasing path, is at 5.3 % of GDP. Risks would be higher in
the event of the structural primary balance reverting to lower values observed
in the past, such as the average for the period 2004-2013. It is therefore
appropriate for the Netherlands to reduce government debt and to further
contain age-related expenditure[10]
growth to contribute to the sustainability of public finances in the long term.
 
A comparatively large
part of Dutch GDP is spent on providing pensions and long-term care. Given
the ageing of the population, the current healthcare system and long-term care
need to be reformed to ensure an appropriate intra- and inter-generational
distribution of costs and risks and to maintain a certain level of quality and
accessibility. In this regard, the Netherlands has initiated
comprehensive reforms in the publicly (pay-as-you-go) and privately funded
pillars of the pension system and in the long-term care system. In addition to
reforms with respect to second-pillar pensions, measures to encourage older
workers to work longer and increase their labour market mobility are being put
in place. Long-term care reforms involve shifting responsibilities to
municipalities, reducing overall expenditure and making efficiency gains to
curb cost increases. Some of these reforms still have to be specified
in detail and still need to be adopted,[11]
although the central government, local governments and social partners have
agreed on most of them. Implementation risks of this decentralisation relate
both to the achievement of overall savings and to the implications for access
to and quality of care (also in terms of regional dispersion). All in all, the Netherlands made some progress on dealing with this issue.
The
  Netherlands has made some progress on implementing the part of the recommendation
regarding the adjustment of second-pillar pensions in consultation with social
partners, to ensure an appropriate intra- and inter-generational distribution
of costs and risks. It has strengthened the long-term
sustainability of the pension system by gradually increasing the statutory
retirement age from 65 in 2012 to 67 in 2023,[12] but
there has been an ongoing discussion about the technical parameters for the second-pillar
pension reform. From 2.15 % in 2014,[13] the
annual accrual rate exempted from taxes will be lowered to 1.875 % from January
2015. This should lead to a decrease in the height of the pension premia
(provided that pension funds translate the impact of the lower accrual rate
into lower ones), but also to lower pension payments in the future. At present,
Dutch pensions are relatively generous from an EU perspective and lower payouts
need not result in a shortfall in terms of pension sufficiency. However, it could
increase differentiation in pension income across future pensioners, especially
in view of less stable labour relationships compared to the past. This may
merit reconsidering the existing system for taxation on pensions and wealth. Under
the planned reforms, the financial supervision of the pension
funds will be improved and made more rigorous. Better use will also be made of
financial buffers in order to better cope with financial shocks. This should
reduce the system’s pro-cyclicality. If pensions need to be adjusted following
financial shocks, the Central Bank will assess the way in which the pension
funds have taken inter-generational effects into account to ensure inter- and
intra-generational fairness in pension contracts. Currently, the parliament is
considering the proposed legislation. The overall reform of the second-pillar
pension system broadly go in the right direction, while a more fundamental
review of the system and its governance may still be called for. The announced broad
societal debate about the future of pensions, pointing to a more fundamental
reassessment of their role, is therefore also a welcome development.
From 2015, the Netherlands has planned a substantial reform of long-term care to make it more
cost-effective and sustainable. It aims to upgrade the role of
local governments and increase the use of informal care. The
central government will remain responsible for institutional care, while
municipalities will be responsible for most home care. It is important that the
reform be implemented in such a way that it ensures accessible, cost-effective
and sustainable provision of high-quality long-term care, notwithstanding the
significant structural savings envisaged. It is too early to say whether these
savings will be made in practice. Nonetheless, since the reform only deals with
a part of public expenditure on long-term care, additional measures would be
necessary to ensure that that the system as a whole is financially sustainable.
Putting greater emphasis on rehabilitation and independent living would help
reduce the need for institutional care and ensure savings can be made without
compromising accessibility.
Tax system 
In 2013 the Netherlands received a country specific recommendation concerning the reduction of tax
disincentives to labour. The analysis in this staff working document leads to
the conclusion that the Netherlands has made some progress to address this
recommendation. In 2014, an increase of the labour tax credit by EUR
950 over a period of four years has been legislated, intended to reduce the
unemployment trap and the inactivity trap. Also, the general tax credit will be
increased by EUR 260 over these years. However, these increases only hold for
lower incomes. Both credits will be gradually reduced and finally abolished for
higher incomes. This increases the progressivity of the income tax system by
increasing the marginal burden for middle incomes. 
Part of the
revenues of the reform of the tax treatment of owner-occupied housing will be
used from 2014 to reduce labour taxes. It is intended
to finance the extension of the threshold value of the highest tax bracket and
from 2018 a reduction in the rates of the second and third (lowest) brackets.
In practice, this implies that especially lower and middle incomes should
benefit from lower taxes on labour. A faster decline in the mortgage interest
deductibility would reduce the differences in the taxation between
owner-occupied and rental housing and thus support the emergence of a
functioning rental market. Any net tax receipts resulting might be used to
generically decrease the tax burden, for instance on labour, with potential
beneficial effects on both employment and disposable household income. For
progress with respect to accelerating the planned reduction in mortgage
interest deduction see section 3.4. 
At
3.9 % of GDP, the Netherlands has the second highest level of environmental
taxes as a percentage of GDP in the EU. It raises
significant revenues from transport taxes, especially the vehicle registration
tax. It is one of the few countries in the EU with a significant proportion of
pollution taxes, beginning with a tax on the pollution of surface waters and
sewerage charges (0.72 % of GDP, EU-27 0.1 % of GDP).[14] Even
though it has one of the highest levels of environmental taxes in the EU,
subsidies through lower energy taxes for energy-intensive industry and
horticulture remain.[15]
Although they have been reduced, the government still grants environmentally
harmful subsidies for old cars.
The
excise duties on diesel and liquefied petroleum gas (LPG) were increased as of
1 January 2014 and the vehicle circulation tax has been reformed. After
these increases, diesel is taxed close to the average EU level, but petrol
taxes are high by EU standards, leading to the second biggest petrol-diesel tax
difference in the EU.[16] Over
the last few years, environmental factors have been added to the taxable income
from company cars, the vehicle circulation tax and the vehicle registration
tax. This has led to a large increase in the sales of energy-efficient cars and
a substantial drop in revenues from the vehicle registration tax. Emission
limits for lower tax rates were tightened in 2014 and will further be tightened
in 2015.[17]
Taxes on company cars remain low.[18] 
The 2014
taxation plan[19]
contains some measures towards a growth-friendly tax shift, such as increasing
charges on tap water and re-introducing the waste tax.
However, taxation could be shifted further away from labour towards
environmental and other taxes less detrimental to growth[20] (e.g.
by reducing the preferential tax treatment of diesel compared to petrol;
reducing environmentally harmful subsidies; reducing the scope of the reduced
VAT rate, abolishing the deduction for small mortgage debt and reducing mortgage
interest more quickly and ambitiously, while considering increasing recurrent
property taxation, which are still relatively low).
Multinational
companies frequently channel tax-driven financial flows to other jurisdictions
through the Netherlands.
An
OECD study[21]
suggests that some international corporations may shift profits to low-tax
jurisdictions through the Netherlands. The absence of withholding tax on
outbound royalties and interest payments, and the fact that the Dutch tax
authorities gives advance clearance (tax rulings) on the tax consequences for
such activities, is a reason large numbers of special-purpose vehicles are
registered in the Netherlands without having a substantial physical presence
there. This generates considerable gross financial flows from special-purpose
entities through the Netherlands, amounting to more than three times its GDP.[22] The
government recently introduced new substance requirements for holding
companies. These requirements are meant to identify a real presence in
the Netherlands, for example by requiring that at least half of the members of
the board reside or are actually established in the Netherlands and that the
bookkeeping of the company takes place in the Netherlands. The aim is
to prevent corporate taxpayers with no real presence in the Netherlands from benefitting from the Dutch tax treaty network.

3.2.                
Financial sector 

The
  Netherlands has one of the largest banking sectors in the EU in terms of its
balance sheet relative to GDP. In 2013, the banking sector’s
total assets were almost four times GDP. The Dutch banking sector is highly
concentrated. Since the onset of the crisis, the Dutch banking sector has
shrunk and has improved its capitalisation. The three largest banks manage over
80 % of all the sector’s assets. Together with a smaller bank, one of the three
largest banks is currently state-owned. The government has communicated the
intention to re-privatise both banks.
Obligatory
savings through pension funds leave little room for households to save outside
the pension system. At the same time, they used to have strong,
mainly fiscal, incentives to take out interest-only mortgages combined with
high loan-to-value ratios to leverage against housing wealth. This has resulted
in a banking sector that has a comparatively large share of domestic mortgage
loans on its balance sheets and relies heavily on wholesale funding to finance
them. This has led to a funding gap of around 75 % of GDP and a loan-to-deposit
ratio of over 200 %. More restrictive lending policies and precautionary
savings by households have decreased the funding gap but their dependence on
market funding leaves Dutch banks vulnerable to developments in financial
markets, especially as regards maturity mismatches. Given the low number of
non-performing loans, arrears and forced sales, short-term risks are, however, unlikely
to emerge from the large mortgage portfolio. Moreover, since the housing market
has stabilised, risks to house prices from large negative shocks are subsiding.
In
the coming years, changes to the fiscal treatment of mortgages and new
regulations will help strengthen and deleverage the banking sector. Since
the beginning of 2013, only mortgages that are repaid in a linear or annuity
mode over 30 years are eligible for mortgage interest deductibility. As a
result, interest-only mortgages, previously very popular, are virtually no
longer taken up. Over time, repaying the principal in the course of the
mortgage contract will reduce the size of the outstanding mortgages on bank
balance sheets, supporting capital ratios. However, given grandfathering
clauses and the large stock of various forms of interest-only mortgages, this
will be a gradual and back-loaded process. Larger capital ratios will help
absorb possible future losses, improve confidence and secure market access.
Access to finance remains a challenge, in
particular for SMEs, but overall its negative impact seems limited. According to the most recent ECB survey,[23] 20 %
of SMEs, one of the highest percentages in the EU, name access to finance as
their biggest problem. For the moment the negative impact of this appears to be
limited. According to the survey, the demand from SMEs for credit is low
compared to other Member States and concentrated at companies in adverse
financial shape. Overall, around 5% of all SMEs are confronted with a rejection
of a loan application, a higher percentage than in Germany (3%), but comparable
to Belgium (4%) and France (5%).[24]
That the rejection rate is somewhat higher than in Germany is probably related
to the credit cycle in relation to state of the domestic economy, which has experienced
a sharp fall in domestic demand, especially private consumption. This in turn
affected investment opportunities and thus loan demand, in particular for firms
oriented towards the domestic market – often SMEs. These trends resulted in a doubling
of arrears of SME loans between the second quarter of 2009 and the second
quarter of 2013[25].
Additionally, decreasing house prices have decreased the value of (potential)
collateral. As Dutch banks are well on track on meeting their new capital
ratios even under adverse scenarios[26],
there does not seem to be a problem related to the supply of credit as far as
the loan-generating capacity of banks is concerned. The overall supply of
credit does not seem to be a major impediment to a recovery.
As described in the NRP, the Dutch
authorities have taken a number of measures to help SMEs access finance. For example, the government is continuing to implement existing
guarantee schemes and re-enforcing available budgets. It has also increased the
maximum ceiling for micro-credits and is looking at alternative ways of
financing. These instruments appear to be underused however. This either means
that they are not effective or it is a further indication that SMEs’ access to
finance is not a major problem. In any case, it could be worthwhile to assess
the instruments’ efficiency. In the medium term, the virtual disappearance of interest-only
mortgages from the mortgage market and the resulting shrinkage of the mortgage
portfolio of banks should free up assets and capital to provide credit for more
productive sectors of the economy. However, the overhang from existing
financing structures will take some considerable time to adjust.

3.3.                
Labour market[27], education and social policies 

Given
the ageing population, ensuring that there is a sufficient supply of labour in
the
long term remains a key issue for the Dutch economy. It is
crucial to use the large pool of untapped labour. This includes women, people
with a migrant background, people with disabilities, young people and older
workers. The government developed an ambitious reform agenda to increase labour
participation and mobility (see Box 4 below). The planned reforms are
comprehensive and substantial, but a difficult negotiation process with social
partners has slowed down their implementation.
In
2013 the Dutch labour market fared relatively well compared to that of other EU
countries, although unemployment continued to increase. It
is expected to continue doing so in 2014, albeit at a much slower pace and to
start decreasing in the course of the year. Unemployment growth and a
continuing increase in labour supply in the short term (see Section 2) may lead
to a decline in the participation rate for 2013 and 2014, making it more
difficult to reach the target of 80 % participation by 2020. The 2012
percentage of people not in education, employment or training (NEET) is around
4%, the lowest in the EU. Early school leaving rates in the Netherlands have significantly dropped to 9.2% in 2012. Youth unemployment is still
substantially lower than in most other European countries but is on the rise
(11.5% in 2013).
In
2013 the Netherlands received a country specific recommendation on making
better use of the untapped supply of labour to increase labour market
participation in order to cope with future labour supply shortages. The
analysis in this staff working document leads to the conclusion that the Netherlands has made some progress on measures taken to address this recommendation. 
 Box 4: State of play of reforms following from the Social Agreement[28] 
 Labour market reform || Name of proposed act (acts it will be replacing) || State of play adoption process in Parliament || Expected implementation date 
 Reform of unemployment benefits and employment protection legislation || "Wet Werk en Zekerheid" Replaces: "Werkloosheidswet" (WW) and changes several acts concerning employment protection legislation (EPL). || Proposed act has been adopted by the lower chamber and has been sent to the upper chamber to be adopted before the 2014 summer recess (10.07.14). || Gradual implementation from July 2015. 
 Reform of labour disability schemes and social assistance act ("Participatiewet") || "Participatiewet" Replaces the "Wet Werk en Bijstand" (WWB), "Wet Sociale Werkvoorziening" (WSW) and parts of the "Wet werk en arbeidsondersteuning jonggehandicapten" (WAJONG) || Proposed act has been adopted by the lower chamber and has been sent to the upper chamber to be adopted before the 2014 summer recess (10.07.14). || 1 January 2015 
 Agreement to provide 125,000 jobs for people with a (labour) disability by 2026. || "Quotumwet" Complements the "Participatiewet" || Internet consultation of the proposed act has been closed. The act still has to be presented to the lower chamber of Parliament. The act foresees the obligation to hire a certain percentage of people with a labour disability only when targets agreed on with social partners are not reached. || Act will only enter into force when targeted results have not been reached. This will for the first time be evaluated in 2016. 
 Second pillar pension reform Lowering of accrual rates || "Wet verlaging maximumopbouw- en premiepercentages pensioen en maximering pensioengevend inkomen" Changes the rules for fiscally exempted pension accrual and changes the "Belastingplan 2014" || Proposed act has been adopted by the lower chamber and has been sent to the upper chamber of Parliament to be adopted before the 2014 summer recess. || 1 January 2015         
Labour
market and social policies
Female
labour market participation in the Netherlands is high compared to the EU
average.[29]
Nevertheless, a high percentage of women, often second-income earners, work
part-time. It is important to ensure that fiscal and other disincentives do not
discourage taking up work for a second-income earner. In the Netherlands, the average amount of hours women work remains well below the EU average. The
high part-time rate has a negative impact on the financial independence of
women and partly accounts for a high gender pay gap (16.9%)[30] and
gender pension gap (40%) which is also affected by cohort effects[31]. However,
this did not lead to a substantial increase in the risk of poverty for women,
which remains relatively low. Since only 4.2% of part-time workers want to work
more (whereas in all other Member States this share is between 10 and 60%)[32], it
seems that the incidence of part-time work is to a large degree based on
personal preferences. In order to help reduce disincentives for second-income
earners, the Netherlands implemented measures to make it financially more
attractive to work more hours, for example by phasing out transferable tax
credits for second-income earners, as recommended in the 2013 country specific
recommendation, and by increasing the labour tax credit for lower incomes. The
government is also working on reforming several child arrangements with the aim
of diminishing the inactivity trap, especially for single parents.[33]
The
employment gap for non-EU nationals increased from 20.5 % in 2008 to 24.2 % in
2012.
Furthermore, a recently published report[34]
points out that non-EU nationals in the Netherlands are affected
disproportionally by the economic crisis when it comes to labour market
performance and social inclusion (i.e. poverty). In the NRP no national
targeted policies specifically aimed at increasing the employment rate of
people with a migrant background are mentioned.
The
employment gap for persons with disabilities increased from 25.6 percentage
points in 2009 to 29.2 percentage points in 2011. [35] In order to
increase the labour participation of people with disabilities a new
Participation Act will be implemented from January 2015. It aims to improve the
labour market participation of people with disabilities by merging and
reforming several benefit schemes, while shifting responsibility for their
execution to municipalities and reducing overall funding. The government and
the social partners have also agreed to hire 125 000
people with disabilities in the next 12 years, although it is not specified
where these jobs should be coming from. Not everyone who loses their disability
benefits will be offered a job however.[36] In
relation to the Participation Act, the Social Assistance Act will be amended to
focus more on labour market activation. These changes are planned to enter into
force from January 2015 as the Social Assistance Act will be incorporated in the
Participation Act.
Several measures have been taken to
encourage older workers to work longer and increase their labour mobility. As a
result, the effective retirement age has been increasing substantially,[37]
narrowing the gap between the statutory and the effective retirement age. Under
current arrangements, older workers can still combine relatively high severance
pay with generous unemployment benefits to retire early. Relatively strict
employment protection legislation for workers with permanent contracts and high
(seniority-linked) severance pay give older workers few incentives to change
jobs. As a result, the labour market is inflexible and labour mobility
relatively low. This increases the risk of long-term unemployment for people
who lose their jobs, especially people over 55. Fighting youth unemployment and
helping older workers remain employable are amongst the priorities, but it is
questionable whether the "sector plans" will actually create any new
jobs. Overall, these reforms, in line with the 2013 country specific
recommendations, are expected to have a positive impact on labour
market participation and mobility. However, possible negative effects in times
of rising unemployment must be taken into account. The impact of the reforms
therefore needs to be closely monitored.
The
government is currently working on a comprehensive reform of the unemployment
benefits scheme (WW) and employment protection legislation (Ontslagrecht).
When they enter into force, from July 2015, the reforms will make dismissal
procedures less complicated and expensive by setting out a clear dismissal
route and linking the amount of severance pay or ‘transition payment’ to
seniority rather than age. The maximum severance pay will be reduced to EUR
75 000 or an annual salary, whichever is higher. The aim of these measures is
to make the system fairer and simpler. Rules on temporary employment are also
being tightened for employers. The Netherlands will gradually reduce the
maximum length of time statutory unemployment benefits are paid from 38 months
in January 2016 to 24 months in 2019.[38] The
pace of accrual of unemployment benefits rights will also be decreased and the
length of time after which a benefits recipient must accept all job offers will
be decreased from twelve to six months. The government also provided EUR 600
million for 2014 and 2015 to fund the implementation of plans in order to
reduce unemployment in the short term. The social partners are responsible for
implementing these plans and provide 50% of the funding. As stated in last
year's staff working document, the Netherlands stands to benefit from tackling
these labour market rigidities. The
same would hold for other arrangements with potentially large effects on the
labour market, in particular the regulation stipulating that, under certain
conditions, employers are obliged to pay at least 70% of the salary to
employees whom fall chronically ill for a period of two years.
Making
use of the existing room in the institutional framework to allow for more
differential wage increases could help support household income. Both
price and cost competitiveness indicators and the proportion of labour income
show that overall wage developments have been broadly in line with
productivity. However, the proportion of household disposable income in GDP has
decreased substantially in the last twenty years. This is partly because an
increasing part of the income earned in the country accrues to households in a
different way (especially through individual government consumption), and
partly also reflects changes in taxation and pension premia. In spite of the
varying profitability of the different sectors of the economy, wage increases
do not vary much across subsectors. To an extent this reflects the binding
nature of collective agreements within sectors. However, as social partners
have a lot of freedom in negotiating collective agreements under the existing
institutional framework, they do not seem to fully use this freedom to
negotiate wage increases that differentiate more according to productivity and
profitability differentials across subsectors.[39]
Taking advantage of the scope in the existing framework for more differentiated
wage increases could help support household income and internal demand without
jeopardising the profitability or competitiveness of firms.[40]
Greater differentiation of wage increases across firms and industries, aligning
them more closely with productivity increases, might also provide a stronger
incentive for reallocating production factors, thus making production more
efficient overall. Such an approach would have to be decentralised and take
account of companies’ productivity, profitability and prevailing buffers in
order not to weaken their viability or competitiveness.
The
planned reforms in long-term care consist of a transfer of part of the
responsibilities in the current long-term care system to municipalities and
health insurance companies from January 2015. This transfer
of responsibilities (this also includes the new tasks for the Participation
Act) is accompanied by budget cuts under the assumption that efficiency gains
are possible under the new implementation structure. The reforms have been
broadly agreed with the Dutch municipalities in December 2014, but have not yet
been adopted by the parliament. Responsibilities for less intensive care tasks,
extra-mural care for disabled people, district nursing and care for children
will be transferred to the health insurance and the municipalities. The new
schemes also call for a larger reliance on informal care. The planned
structural savings amount at EUR 3 billion and are due to a reduction of the
planned expenditure increase from 3% to 1.5% per year. The timeframe for the
implementation of the reform is very ambitious. It is important to closely
monitor the effects of the reforms to ensure that increased efficiency goes hand
in hand with ensuring accessibility and the quality of long term care. Another
risk to be monitored concerns regional or local dispersion in terms of access
and quality, in function of the age and risk profile of the population.
Education

The
Dutch education system works well and has almost reached its Europe 2020
targets.
Early school leaving fell from 10.9 % in 2009 to 9.2 % in 2013. The tertiary
education attainment rate, for which the target is at least 40 %, reached 43 %
in 2013. On average, the quality of the education system is high. This is
reflected in good scores under the OECD’s Programme for International Student
Assessment and Programme for the International Assessment of Adult
Competencies,[41] and
in good international university rankings. However, competence in mathematics
has decreased and the number of top performers in tertiary education is small.[42]
Public
expenditure on education is set to decrease over the programme period.
Overall public expenditure on education has been stable in recent years but is
expected to slightly decrease over the coming years (see Box 3). While there is
no direct link to the quality of education, the implications need to be
monitored. Up to 7 % of funding is closely linked to performance in higher
education and vocational training. Additional funding will be made available by
changing to a new study financing system, but it has been postponed to
September 2015. It is important to monitor very carefully the policy’s impact
on low-income groups and adapt it if necessary. A new subsidy scheme recently
introduced should facilitate companies to offer learning on the job positions. A
National Education Agreement ("Onderwijsakkoord")[43] was
reached in September 2013 on the level of funding for employing more teachers,
improving labour conditions, assessing the quality of teachers and education
while decreasing the administrative burden on teachers. It remains to be seen
whether the agreement will achieve the results it is expected to.
Although
the Netherlands’ education system works well, there are risks.[44] In
addition to basic skills, more attention needs to be given to cross-curricular
‘advanced skills’ (such as problem-solving, collaboration, entrepreneurship and
information and communications technology skills). The variety and revision of
the range of education available and of teaching methods also need to be
tackled. There are also risks in relation to low-achieving pupils and (early)
tracking[45] in
secondary education which may accentuate differences between young people from
different social (and migrant) backgrounds. The 2014 national reform programme acknowledges
these problems and points to a number of measures that have been taken aimed at
improving the quality of education across a number of educational levels. As of
August 2014, schools must provide adapted education for pupils who need extra
support, while the aim is to reduce enrolment in separate schools for pupils
with special educational needs. This implies a risk as regards the impact on
pupils in need of specific pedagogical support as well as potential spillovers
to other pupils resulting from their integration. These need to be monitored with
a view to taking corrective action if needed. On the differentiation of the
educational offer and excellence, the government adopted a new law on higher
education, offering more differentiation between courses. In primary and
secondary education, as of 2013, school boards have received extra budget to
provide adequate support to the most talented students. As most of the measures
have only recently been introduced or still have to be implemented, it is still
unclear whether they will be sufficient to remedy the shortcomings of the
education system, but they are clearly steps in the right direction.

3.4.                
Structural measures promoting sustainable growth
and competitiveness 

Housing
The
housing market seems to stabilise, especially in larger cities. House
prices fell markedly and the number of transactions in the purchase segmented
plummeted since the onset of the crisis. Recently, the housing market seems to
bottom out, as prices have started to increase again in some larger cities and
the overall number of transactions is also increasing again.
In
2013 the Netherlands received a country specific recommendation concerning the
implementation of housing market reform by accelerating the planned reduction
in mortgage interest tax deductibility Since April
2012, a set of measures have been implemented which go some towards
implementing the related CSR, especially with regard to adjusting the fiscal
treatment of housing finance by gradually reducing mortgage interest deductibility
while not fully removing it (the reduction of mortgage interest deductibility
rates is planned to take 28 years). Other measures include income-dependent
rent increases over and above the rate of inflation, a housing tax for housing
associations, stricter mortgage rules, especially on redemption, and a
temporary VAT decrease (6 %) for parts of the construction sector. The
loan-to-value ratio is being lowered to 100 % by 2018. In 2014, additional
measures for the rental market have been announced but not yet presented in full
detail. These include measures to refocus social housing corporations on their
core task, a change in the way rent ceilings are calculated in the social
housing sector, and measures to promote the free rental market. Overall, the reduction
of mortgage interest deductibility rates is very gradual and only partial,
leaving a considerable subsidy for households to mortgage-finance the purchase
of owner-occupied housing. The ability to retain the tax treatment for existing
mortgages until amortisation adds to the effective backloading of the impact. The
functioning of the rental market is still impaired by fiscal distortions and a
social housing sector that, despite its large scale, still has long waiting
lists and provides housing for tenants with incomes above the social housing
threshold. As a result, the Netherlands has made limited progress in
implementing the 2013 CSR on the housing market.
The loan-to-value ratio of 100 % planned
for 2018 is still very high from an international perspective and
does address the issue of people faced with negative housing equity. Gradually
reducing the maximum loan-to-value ratio further would reduce this risk, but it
needs to be adapted to the capacity of households to serve housing loans
outside the pension system. Indeed, the 2014 national reform programme mentions
the intention further to reduce the loan to value ratio once the housing market
recovers. For existing cases, over the next 20 years, the reduction in mortgage
interest deductibility rate will only affect people in the highest tax bracket.
Speeding up the reduction would spread the burden of the reforms more evenly
across households and free up fiscal space for a growth-friendly tax shift.
Even when the planned limitation of the mortgage interest deductibility rate
has been completed, the current tax system will still treat owner-occupied
housing differently from other assets. Not only are recurrent taxes on
owner-occupied housing low, but the ability to deduct mortgage interest
payments from taxable labour income also makes owner-occupied housing more
attractive than renting. This creates an incentive to invest to favour
investments in owner-occupied housing over more productive assets, potentially
implying a misallocation of savings. It also makes it less attractive for
investors to offer houses for rent as they do not receive fiscal subsidies. Channelling
budgetary savings from a reduction in mortgage interest deductibility rate back
to households through lower taxes on labour would make the tax
system more growth-friendly. The 2014 in-depth review on the Netherlands[46]
contains a detailed analysis of housing market and related policies in light of
potential imbalances (see Box 5 below).
The government is trying to encourage
higher-income households to move by higher rent differentiation by income in
order to increase the availability of social housing for households that need
it.
The system of income-related rent increases aims at addressing the problem of
long waiting lists. It will take time to let higher-income households move out
of social housing, especially since the yearly rent increases for people with
higher incomes are relatively modest. The system of income-related rent
increases has also proven to carry a significant administrative burden and has
created problems regarding the privacy of sensitive information about tenants
(especially information about household income). In response to this the 2014
national reform programme announces plans to simplify and reform the
calculation of the maximum rent for social housing. Under the new system the
value of the dwelling will influence the maximum rent. This allows rents to
better reflect the value and quality of dwellings and aims at improving the
availability of social housing for poorer households. Any undue income effects
can in principle be addressed by targeted measures. Such an approach can help
develop a rental market more responsive to price incentives in particular by
heightening the incentives for tenants who can afford to do so to move to more
expensive dwellings. This in turn may help increase the size and improve the
functioning of the currently undersized commercial rental market. 
What is still missing is an affordable
middle segment of dwellings for rent, home-ownership or cooperative housing. Such
a well-developed middle segment is needed given the changes made to the
owner-occupied part of the market. The government
has eased the conditions under which a social housing corporation can sell
houses that do not fall under the rent ceiling (and are therefore not social
housing by definition). While this should give social housing corporations an
incentive to refocus on their core task, it could have a negative impact on the
functioning of the housing market if the discounts social housing corporations
usually give when selling houses are too large. Moreover, the overall rent
ceiling for social housing will be kept stable for 3 years (as of 2015) at the
current level. This means that the ceiling according to which a new rental
contract is regulated or liberalised, will be kept constant in the coming three
years. This measure can be expected to strongly improve the incentives to offer
rental housing in the middle segment of the free rental market and to improve
the affordability of the social rental sector.
The government has introduced a property
tax levy aimed at taxing social housing corporations. It is
intended to increase the proportion of recurrent taxes from housing and reduces
the amount of ‘dead capital’ in the hands of social housing corporations. A
stricter separation of the activities of social housing corporations for social
housing and their activities in the liberalised rental market is expected to limit
cross-subsidisation and to limit the financial risks. Such a strict separation
of (implicitly) subsidised and non-subsidised activities was initially proposed
but the weaker form of a mere administrative split makes it more difficult to
prevent cross-subsidisation. 
The governance of the social housing
sector needs to be strengthened to reduce operational risks and inefficiencies. Strengthening
the financial supervision of social housing corporations should help limit
risks to public finances stemming from the extent of implicit government
guarantees. With respect to inefficiencies, there are strong indications that the
operational costs of many social housing corporations could be lower.[47] 
On the whole measures taken in recent
years have gone in the right direction but as significant distortions still
persist in the housing market, they need to be followed up by additional
measures.
The 2013 country specific recommendation on the housing market made
implementing the measures more quickly contingent on the economic environment.
As the housing market is bottoming out and the economy is expected to continue
recovering, stepping up the pace of reform may be considered.
Box 5: Conclusions
from the March 2014 in-depth review on the Netherlands
The second in-depth review (IDR) on the Netherlands under the Macroeconomic Imbalance Procedure was published on 5 March 2014.[48] On
the basis of this review, the Commission concluded that the Netherlands continues to experience macroeconomic imbalances which require monitoring and
policy action. The review shows that macroeconomic developments regarding
private sector debt and ongoing deleveraging, coupled with remaining
inefficiencies in the housing market, deserve attention. The large external balance
surplus does not pose risks similar to large deficits and is partly linked to
the need for deleveraging.
Rigidities and distorted incentives have built up
over decades to shape housing finance and sectoral saving patterns. Financial
institutions’ balance sheets have become heavily geared towards housing
finance, as households leveraged up against housing wealth. At the same time,
since the mid-1990s, non-financial corporates have acquired a structural
savings surplus. This has resulted in a substantial, persistent external
balance surplus going hand-in-hand with a high level of gross household debt
and household net assets. In recent years, subdued domestic demand in the wake
of the global financial crisis has further pushed up the external balance surplus.
Over the past few years there have been improvements in this regard, with
policies implemented to curb mortgage-financing. Deleveraging will continue to
weigh on economic activity but a stabilising housing market and households’
significantly positive net asset position limit the risks.
Regarding ways of tackling these imbalances through
policy, a balanced adjustment of saving, expenditure and investment patterns
across the Dutch economy would have a beneficial effect on the domestic
investment climate and growth potential, thus improving economic prospects.
Taking advantage of the scope in the existing institutional framework for more
differentiated wage increases could help support household income. Such an
approach would have to take account of companies’ productivity, profitability
and prevailing buffers. Policy and supervisory measures to reduce the number of
incentives for households to incur housing debt and lower loan-to-value ratios
should ultimately lead to lower housing-related debt and leverage ratios.
However, it may take a long time for existing debt overhangs to lessen. The
private rental market is still not functioning fully and there are still
inefficiencies in the allocation of social housing to people who really need
it. It is important to maintain and speed up the pace of reforms in the housing
market by improving the sector’s functioning and reducing inefficiencies and
dead-weight losses arising out of the operations of social housing
corporations.
Research,
innovation and enterprise policy
A key challenge
for the Netherlands is exploiting their world-class science base to make the
economy more innovation-intensive. This requires preserving the
strong base in fundamental research and higher education, further enhancing
science-business cooperation, improving the transfer of knowledge and creating
a business environment that lends itself to the creation and development of
knowledge-intensive innovative companies. More skilled human resources
are needed for this to happen.
The National
2020 Technology Pact is a non-binding, joint initiative between the central
government, business communities, trade unions and other stakeholders. Concluded
in May 2013, it aims to increase the number of school pupils and technical
students to study, learn and work in technology. Together with the human
capital agendas, it is intended to address the shortage of skilled workers, though
care should be taken to promote skill enhancement broadly, without singling out
certain sectors. 
Fostering the
Dutch economy’s capacity for innovation still remains a challenge. The
government is continuing to implement its enterprise policy ‘To the Top’[49]. The
policy was introduced in 2012 with its ‘top sectors’ approach, complemented by
greater use of indirect support for research and innovation activities through
tax incentives and an innovation fund for entrepreneurship for example.[50] The
main objective of this policy is to foster public-private cooperation between
entrepreneurs and knowledge institutions, strengthen competitiveness, and
reinforce the knowledge base. While it is too early to fully assess the impact
of the various aspects of the enterprise policy, their implementation points to
progress in addressing the Netherlands’ innovation challenge. 
According to the
Innovation Union Scoreboard 2014, the Netherlands is one of the top ‘innovation
followers’.[51] Private
research and development investments increased slightly to 1.22 % of GDP in
2012, but they remain below the euro-area average (1.35 % in 2012). This is
partly because the Dutch economy has a large service sector and a relatively
small manufacturing industry geared towards medium-tech sectors. A lot of
private research and development expenditure is concentrated in a limited
number of large multinational companies. A strong publicly funded base in
education and fundamental research must be preserved in order to support
private sector innovation. To this effect, it is important that expenditure on
publicly funded fundamental research is shielded and not channelled into
earmarked uses. The absence of a significant structural orientation towards
research-intensive sectors and skill shortages, especially in engineering and
technology-related professions, may be detrimental the future competitiveness
of the Dutch economy.
Energy 
The Netherlands is the largest natural gas producer in
the EU. According to Eurostat,
the country accounted for 43.2% of EU-27 gas production in 2012, up from 40.6%
in 2010. In 2012 the country’s annual production was 57.4 million tonnes of oil
equivalent (Mtoe), down from 57.7.4 Mtoe in 2011. Dutch gas production is
forecast to decline significantly by 2020. The government is preparing itself
for when more imports will be necessary by pursuing a strategy to become Europe’s ‘gas roundabout’, thereby ensuring the security of supply by diversifying sources.
Even though the market is fully liberalised in the Netherlands, market
concentration at retail level remained high (the three largest companies cover
81 % of the retail market).
Sustainable
growth 
Under
the Effort Sharing Decision (ESD), by 2020 the Netherlands needs to decrease
its emissions not covered by the Emissions Trading Scheme by 16 % compared to
2005 levels. Its latest projections, taking into account
existing measures, suggest it will miss the target by one percentage point.[52] This
means that the situation needs to be further monitored. If measures in the
planning stage are taken into account, the Netherlands is currently on track
for reaching the target set out in the Effort Sharing Decision.[53] 
The
  Netherlands has reached a renewable energy share of only 4.47 % in 2012, far
off its EU target of 14 % by 2020. This might be due to a rapidly
changing[54]
policy environment before 2012. On 6 September 2013, more than 40
organisations, signed a legally non-binding Energy Agreement for Sustainable
Growth.[55] It
commits the parties to implementing measures to reach EU and national targets
on energy efficiency and using renewable energy. The crux of the
agreement is a set of broadly supported provisions on energy saving, clean
technology and climate policy. Their aim is to achieve four quantitative
objectives including an average annual saving of 1.5 % in final energy
consumption.
If
planned policies and policies that are being developed are not implemented as
soon as possible, the Netherlands risks falling short of its 2020 renewable
energy target.
The
broad involvement of society in helping to speed up the implementation of
policies is a welcome development, although it entails risks in terms of ownership
and accountability. Given the non-binding nature of many aspects of the Energy
Agreement, combined with limited supportive additional public expenditure, it
also remains to be seen whether its implementation will result in the expected
energy savings by 2020. The overcapacity in electricity
production poses a further challenge for the future energy policy in view of
the transition to a low carbon economy. It is therefore
important to closely monitor progress and take corrective action if necessary.
Cooperation mechanisms[56]
could be developed with other Member States to help the country reach its 2020
target.
Compared
to EU average peak hour congestion constitutes a problem in the Netherlands,
both inside the agglomeration as on essential interurban links.[57] Even
if the downturn of the economy and recent infrastructure developments have
improved the traffic flows[58], the
  Netherlands is still confronted with significant congestion. A system of road
pricing and/or congestion charges could have both economic and environmental
benefits[59], but
advanced preparations for introducing such a system were abandoned in 2010. 
The
  Netherlands would benefit from prioritising investments in resource
efficiency. It is promising that the Dutch government
recently published an ambitious, comprehensive programme supporting the
transition to a circular economy. In particular, there is scope to improve the
business environment by setting up programmes for giving SMEs hands-on support
to use fewer resources in order to save costs and create or safeguard jobs.[60]
Box
 6: Potential impact of structural reforms
on growth – a benchmarking exercise
Structural
reforms are crucial for boosting growth. It is therefore important to know the
potential benefits of these reforms. Benefits of structural reforms can be
assessed with the help of economic models. The Commission uses its QUEST model
to determine how structural reforms in a given Member State would affect growth
if the Member State narrowed its gap vis-à-vis the average of the three best EU
performers on key indicators such as the degree of competition or labour market
participation. Improvements on these indicators could raise GDP by about 4.5%
in a 10-year period. Some reforms could have an effect even within a relatively
short time horizon. The model simulations corroborate the analysis of Section
3.3, according to which large
potential gains could be achieved by further increasing participation rates.
Whilst to a considerable extent the low amount of hours worked by second-income
earners appear to reflect current preferences, it is also related to barriers
such as tax disincentives or expensive childcare provisions discouraging an
increase in hours worked. The simulation indicates that addressing these
barriers could have positive effects even within a relatively short time
horizon.
Table:
Structural indicators, targets, and potential GDP effects[61]
Source:
Commission services. Note: Simulations assume that all Member States undertake
reforms which close their structural gaps by half. The table shows the
contribution of each reform to total GDP after five and ten years. If the
country is above the benchmark for a given indicator, we do not simulate the
impact of reform measures in that area; however, the Member State in question can still benefit from measures taken by other Member States.[62]
* EU average is set as the benchmark. ** The long-run effect of
increasing the share of high-skilled labour in the population could be 1.7% of
GDP and of decreasing the share of low-skilled labour could be 3.9%.

3.5.                
Modernisation of public administration 

The
  Netherlands has a tradition of a reliable public administration and a
business-friendly legal environment. According to the
World Bank’s Doing Business Report,[63] it
generally has a business-friendly legal and regulatory environment that
encourages business competitiveness, but certain areas of regulation could be
improved or simplified even more. The Netherlands has one of the lowest EU
publication rates of public procurement contracts advertised at EU level
compared to country's GDP. Increasing this rate might bring economic benefits.[64] Planning
rules and licensing/derogation schemes at provincial and municipal level limit
market access for large retail shops. The planned amendment of the national
regulation aiming to reduce those barriers has not been adopted yet.
In
April 2013 a new programme was launched which aims to further reduce the
regulatory burden on businesses, professionals and citizens by EUR 2.5 billion
by 2017. The
introduction of new regulations is being linked to the revision or scrapping of
existing ones. By 2017 all business will be able to communicate with the
authorities online. While the main e-government infrastructure seems to be in
place, not all procedures can be completed electronically yet. While at
national level and in larger cities a considerable effort is being made in this
regard, a number of regional and local authorities may still need to make a
greater effort. In January 2014, the Chamber of Commerce and the innovation
agency Syntens were merged into one centralised organisation with a radically
simplified governance structure. The number of local offices was reduced
considerably, but services provided through a new digital one-stop shop for
entrepreneurs are being significantly
reinforced. It is still too early to assess the impact of this reorganisation,
but the approach seems promising.
Much
of the total fiscal consolidation effort is achieved through savings by
reducing the size of the public sector and decentralising competences. As
part of an effort to save on net expenditure, the government is decentralising
many competences to municipalities, from youth services to long-term
healthcare. This could improve the provision of public services by making
it possible to provide more individually tailored services in these areas. To
this end, local governments should maintain a large degree of autonomy
regarding their supporting policy solutions, as this might give rise to best
practices that could then be rolled out on a wider scale. However, at the same
time, this could lead to significant differences in the quality of and access
to associated public services, which could be perceived as unfair. It is
therefore important to ensure that the large degree of local autonomy is in
line with some centrally established criteria ensuring a minimum degree of
quality control and accessibility. Furthermore, it is important to maintain the
quality of public services across all levels of government; sustained freezes
in public sector remuneration are not conducive in this respect. Developments
need to be closely monitored and supportive policies should be implemented if
necessary. Another
risk is that the timeframes envisaged, whilst achievable in principle, are very
ambitious. This could lead to practical problems with implementation,
especially in municipalities with low organisational capacities and high demand
pressures.
The Netherlands recently introduced a comprehensive impact
assessment system to analyse the economic, social and environmental costs and
benefits and the administrative burden of new policies and legislation. Such a system is welcome because a thorough ex-ante assessment is
expected to save costs (e.g. the costs of not taking action, lock-in effects,
indirect and long-term effects). A next step could be to apply the new system
to all strategic policy decisions and make it transparent by publishing the
impact assessment reports.

4.        
Conclusions

The Dutch
economy had been in a prolonged slump with negative repercussions for the
budgetary balance and employment, but is finally emerging from recession.
Ongoing deleveraging of households, financial institutions and the government
caused weak internal demand and pushed up the external balance in 2013. In
particular households have been (voluntarily) repaying the principal of their
mortgages due to high loan-to-value ratios and decreasing house prices.
Weaknesses in the pension system and the labour market that came to the fore
during the crisis have been mitigated by measures implemented and are also
expected to be addressed to some extent by planned measures. The housing market
recently took a turn for the better, one of the factors enabling the economy to
start recovering. Since pension and labour market reforms are still being
adopted and implemented, their positive effects on the economy have yet to be gauged.
The
analysis in this staff working document leads to the conclusion that the Netherlands has made some progress in implementing the 2013 country-specific
recommendations. Far-reaching reforms implemented in recent years
have improved the Dutch economy’s long-term growth prospects. Nonetheless, more
still needs to be done to improve the economy’s structure, especially since the
reform momentum appears to have somewhat waned since the submission of the 2013
national reform programme and stability programme. 
Thanks
to a significant and sustained fiscal effort, the Netherlands is expected to
substantially reduce its budget deficit. With the
adoption of additional, wide-ranging consolidation measures, the general
government deficit is expected to reach 2.8 % of GDP in 2014 and 1.8% of GDP in
2015. The stability programme aims at approaching the MTO in 2015. Additional
measures may be needed to reach the MTO and to adhere to it throughout the
period covered by the stability programme, also to ensure meeting the debt
benchmark and improving the long-term sustainability of public finances. In
order to enhance the growth potential of the economy and support domestic
demand, safeguarding growth-enhancing expenditure, such as innovation and
research, including fundamental research, education and training will be
needed.
There
are still significant structural distortions in the housing market.
Measures taken in recent years have gone in the right direction but they do not
fully address the country specific recommendation. Mortgage interest
deductibility has been only gradually and partially reduced, leaving sizeable
scope for households to mortgage-finance the purchase of owner-occupied
housing. The private rental market is still not functioning fully, partly due to
fiscal distortions and a social housing sector that, despite its large scale,
still has long waiting lists and provides housing for tenants with incomes
above the social housing threshold. Since the economy is heading for a moderate
expansion and the housing market shows signs of bottoming out in terms of
prices and an increase in transactions, renewed or additional efforts and/or
speeding up the pace of housing market reforms could be considered. 
The
reform of the second pension pillar is ongoing but crucial details still need
to be fleshed out. The reform of the second-pillar pension
system follows from the increase in the statutory retirement age under the
first pillar as of 2013. This has already been enshrined in law but it remains
to be seen to what extent the reform ensures inter- and intra-generational
fairness. With regard to long-term care, the government is planning to
decentralise its supply to municipalities and expects to make considerable
efficiency gains as a result. There are however significant risks associated
with reaching these budgetary targets. This is because the planned
decentralisation is subject to a very ambitious timeframe. It may be difficult
to monitor and check the implementation of the planned measures, as a result of
which the expected savings may not be made. Moreover, preserving quality and
access to care needs to be monitored closely. Additional measures also seem to
be necessary to ensure the long-term sustainability of public finances.
Labour
market reforms are in the process of adoption and aim to improve labour market
participation and labour mobility. Labour market reforms include
changes to tax credits, a number of allowances, unemployment benefits and
employment protection legislation. Schemes for people with a labour disability
are also being reformed. Overall, these measures can be expected
to have a positive impact on labour market participation and mobility. This can
only be fully evaluated at a later stage however, as most of the planned
measures still have to be put in place. Their effects
must be closely monitored.
The
policy plans submitted by the Netherlands address most of the challenges
identified in last year's Staff Working Document, and broad
coherence between the two documents has been ensured. The national reform
programme confirms the Dutch commitment to address shortcomings in the areas of
the housing and the labour market. The stability programme demonstrates the
Dutch commitment to comply with the recommendations of the Excessive Deficit
Procedure, improve the budgetary position towards the medium-term objective and
ensure the long-run sustainability of public finances in line with the
Stability and Growth Pact. However, planned measures do not address the
challenges in a comprehensive way and there is a risk of a significant
deviation from the adjustment path towards the MTO.
Overview table (CSRs, 2020 Targets)[65] 
 2013 Commitments || Summary assessment 
 2013 Country specific recommendations (CSRs) 
 CSR 1: Reinforce and implement the budgetary strategy, supported by sufficiently specified measures, for the year 2014 and beyond to ensure a timely correction of the excessive deficit by 2014 in a sustainable manner and achieve the structural adjustment effort specified in the Council recommendations under the EDP. Protect expenditure in areas directly relevant for growth such as education, innovation and research. After the correction of the excessive deficit, pursue the structural adjustment effort that will enable the Netherlands reaching the medium-term objective by 2015. || The Netherlands made substantial progress in implementing CSR 1: ·         Fully addressed: Additional measures have been implemented that are expected to correct the excessive deficit in a sustainable manner. ·         Some progress: Expenditure in areas directly relevant for growth is under pressure. ·         Limited progress: The budgetary adjustment path does not appear to ensure reaching the MTO by 2015. 
 CSR 2: Step up efforts to gradually reform the housing market by accelerating the planned reduction in mortgage interest tax deductibility, while taking into account the impact in the current economic environment, and by providing for a more market-oriented pricing mechanism in the rental market, and by further relating rents to household income in the social housing sector. Refocus social housing corporations to support households most in need. || The Netherlands made limited progress in implementing CSR 2: ·         Limited progress: since last year’s NRP, the enthusiasm for further reforms has waned significantly. The implementation of reforms has not been stepped up as recommended, even though the economic outlook has improved and the housing market has stabilised. ·         Limited progress: the rental market is still underdeveloped. Rents in the social housing sector are linked to household income but the system introduced has proven costly. The government recently announced that rents will also be more closely linked to the value of the dwelling. This should support turnover in the market. ·         Limited progress: despite long waiting lists for social housing, social housing corporations are still engaging in activities outside their core task. The strict separation of (implicitly) subsidised and non-subsidised activities was initially proposed but now the weaker form of a mere administrative split seems to be considered. It will be more difficult to prevent cross-subsidisation under this arrangement. 
 CSR 3: Adjust the second pension pillar, in consultation with social partners, to ensure an appropriate intra- and inter-generational division of costs and risks. Underpin the gradual increase of the statutory retirement age with measures to increase the employability of older workers. Implement the planned reform of the long-term care system to ensure its cost-effectiveness and complement it with further measures to contain the increase in costs, with a view to ensure sustainability. || The Netherlands made some progress in implementing CSR 3: ·         Some progress: the Netherlands has partially implemented the part of the recommendation regarding the adjustment of the second pension pillar in consultation with social partners, to ensure an appropriate intra- and inter-generational distribution of costs and risks. The long-term sustainability of the pension system has been strengthened by gradually increasing the first-pillar statutory retirement age from 65 in 2012 to 67 in 2023, but there has been an ongoing discussion about the technical parameters for the second-pillar pension reform. An agreement reached in December 2013 is to be transposed in legislation in the course of 2014. From 2.15 % in 2014, the annual accrual rate exempted from taxes will be lowered to 1.875 % from January 2015. In principle, this should lead to a decrease in the height of the pension premiums. The Dutch Central Bank will monitor the situation. Under the planned reforms, the financial supervision of the pension funds will be improved and made more rigorous. Better use will also be made of financial buffers in order to better cope with financial shocks. This should reduce the system’s pro-cyclicality. If pensions need to be adjusted following financial shocks, the Central Bank will assess the way in which the pension funds have taken inter-generational effects into account to ensure inter- and intra-generational fairness in pension contracts. The proposed legislation is awaiting parliamentary approval.   ·         Substantial progress: several measures have been taken to encourage older workers to work longer and increase their labour mobility. As a result, the effective retirement age has been increasing significantly, narrowing the gap between the statutory and the effective retirement age.   ·         Some progress: it is also planned to reform the long-term care system from 2015. The reform will shift responsibilities from the state partly to municipalities and partly to health insurers, with a view to getting people to make greater use of informal care. The parliament is negotiating the proposed legislation. Whilst this reform is a step in the right direction, more will need to be done to ensure the long-term sustainability of public finances. 
 CSR 4: Take further measures to enhance participation in the labour market, particularly of people at the margin of the labour market. Continue to reduce tax disincentives on labour, including by phasing-out of transferable tax credits for second income earners. Foster labour market transitions and address labour market rigidities, including by reforming employment protection legislation and the unemployment benefit system.     || The Netherlands made some progress in implementing CSR 4: ·         Some progress: to increase the number of hours worked some tax measures (e.g. phasing out the transferable tax credit and increasing the labour tax credit for lower incomes) have been implemented, but the situation remains largely unchanged. Full-time female participation remains low. The high percentage of women working part-time contributes to a high gender pay gap (17.9 %) and pension gap (40 %). To make women more financially independent and alleviate future labour supply shortages, they need to work more hours. ·         Some progress: a Participation Act has been drafted to increase the labour market participation of people who live far from work. The parliament is discussing it and it is planned to implement it from January 2015. It aims to improve the labour market participation of people with disabilities by merging and reforming several benefit schemes, while shifting responsibility for their execution to municipalities and reducing overall funding. This increased responsibility, combined with substantial budget cuts for the municipalities, might create implementation problems. It is therefore crucial to monitor the reform’s impact on the quality of service provision. ·         Substantial progress: in addition to the reform of unemployment benefits and employment protection legislation, which are supposed to have a positive effect on labour mobility, a decrease in labour segmentation is scheduled to be implemented from July of this year (parts of employment protection legislation) until January 2016 (decrease of the maximum duration of unemployment benefits). 
 Europe 2020 (national targets and progress) 
 Employment rate target set out in the 2013 NRP: 80 %. || The employment rate was 76.8 % in 2010 77.0 % in 2011 77.2 % in 2012 and 76.5 % in 2013. In view of past performance, the Europe 2020 employment rate target of 80 % is ambitious but feasible. Current developments in the Dutch labour market might hamper the Netherlands’ ability to reach the target by 2020. 
 R&D target set out in the 2013 NRP: 2.5 % of GDP. || The R&D intensity has reached 2.16% in 2012. While a break in the statistical series in 2011 impedes any appropriate trends analysis, 2012 saw a clear increase in relation to 2011, both for public (0.94% vs. 0.89%) and private R&D intensity (1.22% vs. 1.14%). Public spending on R&D and innovation (EUR 6.4 billion in 2012) is expected to reach € 6.6 billion in 2013, after which it is set to decline to EUR 5.9 billion in 2017. This represents a decline of public spending on R&D and innovation from 1.07% of GDP in 2012 to 0.92% of GDP in 2017. The probability of achieving the overall R&D intensity target will depend on future developments of public R&D and innovation spending and the leverage effect on private R&D investments of both the top sector policy and the R&D tax incentives. 
 The Netherlands has an Effort Sharing Decision target to reduce non-ETS emissions by 16 % relative to 2005 levels by 2020. || Change in non-ETS greenhouse gas emissions between 2005 and 2012: -9 %. The Netherlands’ latest projections, taking into account existing measures, suggest that it will miss the target (-15 % in 2020 relative to 2005, a shortfall of 1 %). 
 2020 renewable energy target: 14 %. Proportion of renewable energy in all modes of transport: 10 %. || According to provisional Eurostat data, the proportion of renewable energy in gross final energy consumption reached 4.5 % in 2012. The average proportion of renewable energy sources for 2011/2012 (4.4 %) is therefore below the benchmark of 4.7 % set by the indicative trajectory in the Renewable Energy Directive for 2011/2012. 
 Energy efficiency target: 20 %. The Netherlands has set itself an indicative national energy efficiency target of a reduction of 1.5 % a year. This means it must reach a 2020 level of 60.7 Mtoe in primary energy consumption and 52.2 Mtoe in final energy consumption. || The Netherlands informed the Commission of the policy measures it plans to adopt to implement Article 7 of the Energy Efficiency Directive (on energy efficiency obligation schemes). It is estimated that the impact of Article 7 shall ensure about half of the required savings expected from the Directive. 
 Early school leaving target: <8.0 %. || The early school leaving rate was 10.9 % in 2009 10.0 % in 2010 9.1 % in 2011 8.8 % in 2012 and 9.2 % in 2013. A fast decline in the early school leaving rate, even in crisis years, shows that it is possible to reach the target of 8 % by 2020. 
 Tertiary education attainment target: >40% %. || The tertiary education attainment rate was 41.4 % in 2010 41.1 % in 2011 42.2 % in 2012 and 43.1% in 2013. The target has already been achieved. 
 Target for reducing the number of people living in households with very low work intensity in number of people: -100.000 (aged 0-64). || The number (in 1 000 people) of people living in households with very low work intensity was 1 068 in 2010 1 128 in 2011 and 1 133 in 2012 In the year the target was set, 1 053 000 people aged 0 to 59 lived in households with very low work intensity. This number increased to 1 133 000 in 2012 as a result of the economic crisis (an increase of 80 000). This makes it difficult for the Netherlands to reach the target of a decrease of 100 000 by 2020.[66] 

Annex

Standard
tables
Table
 I. Macroeconomic indicators
Table
II. Comparison of macroeconomic developments and forecasts
Table III. Composition of
budgetary adjustment
Table
IV. Debt dynamics
Table
V. Sustainability indicators
 
Table
VI. Taxation indicators
Table
VII. Financial markets indicators
Table
VIII. Labour market and social indicators
Table
IX. Product market performance and policy indicators
Table
X. Green growth
List of indicators used in Box 6 on the potential impact on growth of structural reforms. 
Final goods sector mark-ups: Price-cost
margin, i.e. the difference between the selling price of a good or service and
its cost. Final goods mark-ups are proxied by the mark-ups in selected services
sectors (transport and storage, post and telecommunications, electricity, gas
and water supply, hotels and restaurants and financial intermediation but
excluding real estate and renting of machinery and equipment and other business
activities[67]).

Source: Commission services estimation
using the methodology of Roeger, W. (1995). "Can imperfect
Competition explain the Difference between primal and dual Productivity?" Journal
of Political Economy Vol. 103(2) pp. 316-30, based on
EUKLEMS 1996-2007 data. 
Entry costs: Cost of
starting a business in the intermediate sector as a share of income per capita.
The intermediate sector is proxied by the manufacturing sector in the model. 
Source: World Bank, Doing Business
Database. www.doingbusiness.org.
2012 data.
Implicit consumption tax rate: Defined
as total taxes on consumption over the value of private consumption. In the
simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes. The implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced so that
the combined impact is ex-ante budgetary neutral.
Source: European Commission, Taxation
trends in the European Union, 2013 edition, Luxembourg, 2013. 2011 data.
Shares of high-skilled and low-skilled: The
share of high skilled workers is increased, the share of low-skilled workers is
reduced (halving the gap vis-à-vis the best performers). Low-skilled correspond
to ISCED 0-2 categories; high-skilled correspond to scientists (in mathematics
and computing, engineering, manufacturing and construction). The remainder is
medium-skilled. 
Source: EUROSTAT. 2012 data or latest
available. 
Female non-participation rate: Share
of women of working age not in paid work and not looking for paid work in total
female working-age population
Source: EUROSTAT. 2012 data or latest
available.
Low-skilled male non-participation
rates: Share
of low-skilled men of working age not in paid work and not looking for paid
work in total male working-age population
Source: EUROSTAT. 2012 data or latest
available.
Elderly non-participation rates (55‑64
years): Share
of the population aged 55‑64 years not in paid work and not looking for paid
work in total population aged 55‑64 years.
Source: EUROSTAT. 2012 data or latest
available.
ALMP: Active Labour
Market Policy expenditures as a share of GDP over the share of unemployed in
the population. 
Source: EUROSTAT. 2011 data or latest
available.
Benefit replacement rate: Share
of a worker's pre-unemployment income that is paid out by the unemployment
insurance scheme. Average of net replacement rates over 60 months of
unemployment. 
Source:
OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
2012 data.
[1] COM(2013) 800 final.
[2] COM(2013) 790 final.
[3] Apart from the 16 Member States identified
in the AMR, Ireland was also covered by an in-depth review, following the
conclusion by the Council that it should be fully integrated into the normal
surveillance framework after the successful completion of its financial
assistance programme.
[4] Classification of the functions of government (COFOG) is a
classification of government expenditure defined by the United Nations
Statistics Division and used by EUROSTAT.
[5] See
also OCW (2012), Onderzoek
naar de financiële positie van schoolbesturen in po en vo on
the financial situation of schools in primary and secondary education.
[6] The Netherlands ratified the treaty in October 2013. Title III,
known as the Fiscal Compact, includes a set of reinforced fiscal rules and
arrangements.
[7] http://statengeneraaldigitaal.nl/document?id=sgd:19801981:0001348

[8] See
Table V. The medium-term sustainability gap (S1) indicator shows the upfront
adjustment effort required, in terms of a steady improvement in the structural
primary balance to be introduced until 2020, and then sustained for a decade,
to bring debt ratios back to 60% of GDP in 2030, including financing for any
additional expenditure until the target date, arising from an ageing
population. The following thresholds were used to assess the scale of the
sustainability challenge: (i) if the S1 value is less than zero, the country is
assigned low risk; (ii) if a structural adjustment in the primary balance of up
to 0.5 p.p. of GDP per year until 2020 after the last year covered by the
autumn 2013 forecast (year 2015) is required(indicating an cumulated adjustment
of 2.5 pp.), it is assigned medium risk; and, (iii) if it is greater than 2.5
(meaning a structural adjustment of more than 0.5 p.p. of GDP per year is
necessary), it is assigned high risk.
[9] See Table V.
The long-term sustainability gap (S2) indicator shows the immediate and
permanent adjustment required to satisfy an inter-temporal budgetary
constraint, including the costs of ageing. The S2 indicator has two components:
i) the initial budgetary position (IBP) which gives the gap to the debt
stabilising primary balance; and ii) the additional adjustment required due to
the costs of ageing. The main assumption used in the derivation of S2 is that
in an infinite horizon, the growth in the debt ratio is bounded by the interest
rate differential (i.e. the difference between the nominal interest and the
real growth rates); thereby not necessarily implying that the debt ratio will
fall below the EU Treaty 60% debt threshold. The following thresholds for the
S2 indicator were used: (i) if the value of S2 is lower than 2, the country is
assigned low risk; (ii) if it is between 2 and 6, it is assigned medium risk;
and, (iii) if it is greater than 6, it is assigned high risk.
[10] Ageing
costs comprise long-term projections of public age-related expenditure on
pension, health care, long-term care, education and unemployment benefits. See
the 2012 Ageing Report for details.
[11] For an overview see http://www.rijksoverheid.nl/onderwerpen/zorgverzekering/documenten-en-publicaties/kamerstukken/2014/03/24/kamerbrief-over-tijdpad-hervorming-langdurige-zorg.html.
[12] The statutory retirement age will gradually increase to reach 67 in
2023. From 2024, the statutory retirement age will be linked to life
expectancy. A proposal to expedite this process, linking the statutory
retirement age to life expectancy from 2021, is being negotiated.
[13] This tax-exempted annual accrual rate was already lowered from
2.25 % to 2.15 % in 2014.
[14] Taxation
trends in the European Union (Eurostat, 2013).
[15] Taxing Energy
Use: A Graphical Analysis (OECD, 2013).
[16] Tax
reforms in EU Member States 2013 (European Commission, 2013).
[17] Taxation
trends in the European Union (Eurostat, 2013).
[18] In 2010 the low tax base for company cars
was estimated to result in a fiscal loss of EUR 1.5 billion per year, around 0.2 %
of GDP (see Commission Taxation Papers 22/2010).
[19] Wijzigingen in de belastingheffing met ingang van 1 januari 2014 (Ministry of Finance, 2013).
[20] Tax
reforms in EU Member States 2013 (European Commission, 2013), p. 47.
[21] Addressing Base
Erosion and Profit Shifting (OECD, 2013).
[22] See also In-depth
review (IDR) Macroeconomic Imbalances — Netherlands 2014.
[23]
Source: www.ecb.int/stats/money/surveys/sme/html/index.en.html.
[24]
Source: http://www.dnb.nl/binaries/DNBos3_tcm46-306789.pdf

[25]
Source: http://www.dnb.nl/binaries/DNBos3_tcm46-306789.pdf 
[26] Source: http://www.dnb.nl/binaries/DNBos3_tcm46-306789.pdf, see also Kreditverlening
aan het MKB 
[27] For further details, see the 2014 Joint
Employment Report, COM(2013)801, which includes a scoreboard of key employment
and social indicators.
[28] The "Social Agreement" was struck between the government
and social partners on 11 April 2013. 
[29] In 2012, 71.9 % compared to an EU average of 62.3 %. Source: NL Country Fiche on Gender Equality and Policy Developments (ENEGE,
4th Quarter 2013), p.15. 
[30] Data for 2012; source: NL Country Fiche on Gender Equality and
Policy Developments (ENEGE, 1st Quarter 2014)
[31] Data for 2010; source: ENEGE Report: "The
Gender Gap in Pensions in the EU" (2013), p. 48
[32] Source: EUROSTAT Labour Force Survey 2014 of 10 April 2014:
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-10042014-BP/EN/3-10042014-BP-EN.PDF
[33] The "Wet Hervorming Kindregelingen" was adopted by the
lower house of parliament on 11 March 2014, has been presented to the upper
house of parliament and is foreseen to be implemented in 2015.
[34] Jaarrapport integratie 2013, Sociaal Cultureel Planbureau, February
2014.
[35] Source: Eurostat (EU SILC)
[36] Raad van State, Advies W12.13.0314/III. 1 November 2013. Kamerstukken II 2013/2014, 33 161, nr. 108: http://www.raadvanstate.nl/adviezen/advies.html?id=11049.
[37] The effective retirement age went up from
60.9 in 2001 to 63.5 in 2009 (Eurostat). It increased to 63.9 in 2012.
[38] Social partners will be allowed to agree on
complementary unemployment insurance arrangements after the maximum of 24
months.
[39] IDR Macroeconomic Imbalances — Netherlands 2014.
[40] See also Overwegingen
bij de loonontwikkeling (Dutch Central
Bank, 2014).
[41] http://www.oecd.org/pisa/aboutpisa/netherlands-pisa.htm, Programme for the International
Assessment of Adult Competencies http://www.oecd.org/site/piaac/.
[42] See also Commissie Toekomstbestendig Hoger Onderwijs Stelsel (2010).
[43] http://www.rijksoverheid.nl/documenten-en-publicaties/convenanten/2013/09/19/nationaal-onderwijsakkoord-de-route-naar-geweldig-onderwijs.html.
[44] See also Een
smalle kijk op onderwijs-kwaliteit: report of the ‘Education Advisory Council’
2013.
[45] School tracking systems, which allot
students to certain school types according to their ability, seek to improve
efficiency in education by tailoring curricula to students’ needs. Yet, early
tracking bears the risk of misallocating students, as information about their
full academic potential may be incomplete at the time of tracking. This risk of
misallocation is likely to be higher the younger the age at which children are
tracked. 
(source:
http://newsroom.iza.org/en/2014/01/31/no-long-term-effects-of-early-track-choice-on-labor-market-outcomes/),
see also: Efficiency
and equity in european education and training systems COM(2006) 481 final
[46] IDR
Macroeconomic Imbalances — Netherlands 2014.
[47] See e.g. Regiecorporatie – naar een doelmatige maatschappelijke verhuurder. 
[48] IDR Macroeconomic Imbalances — Netherlands 2014.
[49] ‘To the top: towards a new enterprise policy‘ http://www.rijksoverheid.nl/documenten-en-publicaties/rapporten/2011/09/13/naar-de-top-het-bedrijvenbeleid-in-actie-s.html.
[50] Innovation Fund SME+.
[51] http://ec.europa.eu/enterprise/policies/innovation/policy/innovation-scoreboard/index_en.htm

[52] EEA,
Member States’ greenhouse gas projections submissions under Article 3(2) of the
EU MMD (19.3.2013), Referentieraming
Energie en Emissies Actualisatie 2012 (PBL 2012b).
[53] EEA,
Member States’ greenhouse gas projections submissions under Article 3(2) of the
EU MMD (19.3.2013), Referentieraming
Energie en Emissies Actualisatie 2012 (Planbureau
voor de Leefomgeving (PBL) 2012b).
[54] For example, incentives for renewable energies which were revised,
implemented or abolished in the period 2003-2012 include the exemption from the
regulatory energy tax, the three different renewable electricity subsidy
schemes MEP, SDE and SDE+, the energy investment allowance, the energy premium,
the accelerated depreciation of environmental investments. 
[55] Energy Agreement for
Sustainable Growth (Socio-Economic Council 2013).
[56] The Renewable Energies Directive (2009/28/EU) introduces optional
cooperation mechanisms between Member States which allow them to agree on the
extent to which one Member State supports the energy production in another and
on the extent to which the energy production from renewable sources should
count towards the national overall target of one or the other. 
[57] http://scorecard.inrix.com/scorecard/

[58] http://www.anwb.nl/verkeer/nederland/verkeersinformatie/filezwaarte

[59] Kosten en Baten varianten Anders Betalen voor Mobiliteit (Ecorys 2007), Economische analyses van Anders Betalen voor Mobiliteit (CPB 2008)
[60] Based on the results of best practices in other Member States, the
cost-benefit ratio between investments and SME cost savings can be up to 1:20
(Risk and Policy Analysts, Study on Economic and Social Benefits of
Environmental Protection and Resource Efficiency Related to the European
Semester (2014)).
[61] Final goods sector markups is the
difference between the selling price of a good/service and its cost. Entry cost
refers to the cost of starting a business in the intermediate sector. The
implicit consumption tax rate is a proxy for shifting taxation away from labour
to indirect taxes. The benefit replacement rate is the % of a worker's pre-unemployment income that is paid out by
the unemployment scheme. For a detailed explanation of indicators see Annex.
[62] For a detailed explanation of the
transmission mechanisms of the reform scenarios see: European Commission
(2013), "The growth impact of structural reforms", Chapter 2 in QREA No.
4. December 2013. Brussels; http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[63] http://www.doingbusiness.org/reports.
[64] The value of works, goods and services that Dutch authorities and
entities publish EU-wide stood at 2.1% of GDP and 6.8% of total public expenditure
on works, goods and services in 2012, which is below the respective EU averages
of 3.4% and 17.7%.
[65] The following categories are used to assess progress in
implementing the 2013 country specific recommendations: No progress: The
Member State has neither announced nor adopted any measures to address the CSR.
This category also applies if a Member State has commissioned a study group to
evaluate possible measures. Limited progress: The Member State has announced some measures to address the CSR, but these measures appear insufficient
and/or their adoption/implementation is at risk. Some progress: The Member State has announced or adopted measures to address the CSR. These measures are
promising, but not all of them have been implemented yet and implementation is
not certain in all cases. Substantial progress: The Member State has adopted measures, most of which have been implemented. These measures go a
long way in addressing the CSR. Fully addressed: The Member State has adopted and implemented measures that address the CSR appropriately.
[66] The Dutch target is related to the 0-64 age group instead of the
0-59 age group (Eurostat does not provide figures for latter and Statistics
Netherlands provides annual figures for the 0-64 age group to the Ministry of
Social Affairs and Employment). According to these figures, the number of
people in households with very low work intensity increased by 22 000 people
between 2008 and 2012.
[67] The real estate sector is excluded because of statistical difficulties
of estimating a mark-up in this sector. The sector renting of machinery and equipment
and other business activities is conceptually part of intermediate goods
sector.