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# 52013SC0369

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for the NETHERLANDS Accompanying the document Recommendation for a Council Recommendation on the Netherlands' 2013 national reform programme and delivering a Council Opinion on the Netherlands' 2013 stability programme for 2012-2017 /\* SWD/2013/0369 final \*/**

  

Table of Contents

Executive summary. 3

1........... Introduction. 5

2........... Economic developments
and challenges. 6

2.1........ Recent economic
developments and outlook. 6

2.2........ Challenges. 7

3........... Assessment of policy
agenda. 9

3.1........ Fiscal policy and
taxation. 9

3.2........ Financial sector 14

3.3........ Labour market, education
and social policies. 15

3.4........ Structural measures
promoting growth and competitiveness. 20

3.5........ Modernisation of public
administration. 26

4........... Overview table. 28

5........... Annex. 32

Executive
summary

Economic
Outlook

The
Dutch economy is in recession, weighed down by weak domestic demand stemming
from adverse trends in employment and disposable income. The persistent nature
of the current economic weakness owes much to rigidities and distortive
incentives built up over decades which shaped house financing and sectoral
savings patterns.  Gross domestic product shrank
by 0.9% in 2012 and economic growth is expected to remain negative in 2013 at
-0.8%, turning positive at 0.9% in 2014, according to the Commission's spring
2013 forecast. Unemployment averaged 5.3% in 2012, but is forecast rise to 6.9%
in 2013 and 7.2% in 2014. After reaching 2.8% in 2012, inflation is expected to
fall to 1.5% in 2014.

The
headline general government deficit was 4.1% of GDP in 2012 and is expected to
fall to 3.6% of GDP in 2013. The efforts made to reduce the
deficits in 2011-2013 have been sizeable and the adjusted fiscal effort amounts
to an average of 1.1% of GDP a year, above the required ¾% of GDP. The
structural balance (net of one-off and temporary measures) amounted to 2.6% of
GDP in 2012, and, according to the Commission services' Spring 2013 forecast,
will improve to 2.0% of GDP in 2013 before deteriorating to 2.3% in 2014, if
policies remain unchanged.  Sufficient progress towards the medium term
objective is not ensured on the basis of the stability programme. The debt
ratio is expected to increase steadily to 71.2% of GDP in 2012, 74.6% of GDP in
2013 and 75.8% of GDP in 2014.

Key Issues

The Netherlands has been identified by the Commission as experiencing macroeconomic imbalances,
particularly with regard to private sector debt. A
strong negative feedback loop from the housing market to the real economy,
notably through its effect on wealth and confidence, is weighing on economic
activity.

The Netherlands has made some progress on meeting the 2012 CSRs, particularly on fiscal
consolidation and the long-term sustainability of public finances. Some
progress has also been made in response to the recommendations concerning the
labour market and the housing market. Good progress has been made in
response to the recommendation on innovation and science/business links.
However, further measures remain necessary in all areas where the
recommendations have not yet been fully achieved.

The policy response needs
to strike a balance between the need to make adjustments and pursue reforms and
the desirability of supporting near-term activity.
Within the fiscal constraints, efforts to promote innovation and safeguard
growth-enhancing expenditure will be key to achieving a balanced adjustment.
Managing the transition in the housing market gradually and at a sustainable
pace, yet with a sufficient level of ambition, will be a defining element of
such a strategy.

The
immediate policy challenge for the Netherlands will be to contain balance sheet
adjustments, to restore confidence and harness growth while simultaneously
stabilising public finances. There are considerable
challenges when it comes to fiscal policy, the labour market, the housing
market, investments in research and development (R&D) and education.

·
Public finances: The
Netherlands reduced its budget deficit to 4.1 % in 2012, thanks to a strong
and sustained fiscal effort. With the adoption of additional sizeable
consolidation measures in 2013 the deficit is expected to decline further to
3.6 % of GDP. However, the fiscal consolidation measures listed in the
stability programme would not suffice to achieve the correction of the
excessive deficit by 2014. The social partners agreed on elements of a pension
reform including bringing the statutory retirement age in the second (funded)
pillar in line with the first pillar. Ongoing consolidation is required to
ensure a sustainable correction of the excessive deficit and to achieve the
medium-term objective (MTO), while safeguarding growth-enhancing expenditure
areas directly relevant for growth such as education, innovation and research.

·
Labour market/education:
The Dutch labour market is still performing relatively well compared to other
EU Member States. However, unemployment is on the rise and population ageing is
putting further pressure on the labour supply. A large pool of untapped labour
is still available: the average number of hours worked in the Netherlands is much lower than the EU average, especially for women (77% of whom worked
part-time in 2012); employment rates of people with migrant backgrounds have
been falling since 2008; and youth unemployment rose to 9.5% in 2012.
Additional efforts to reduce tax disincentives on labour would make work more
attractive. Although the Dutch school system performs well overall, it fails to
deliver excellence, and high achievers score much lower than their
international peers.

·
Housing market: The
high average amount of mortgage debt – which is to a large extent down to
long-standing fiscal incentives, notably full mortgage interest deductibility –
has made households vulnerable to falling house prices. Banks have also been
offering mortgages exceeding the value of the house, leading their balance
sheets to be heavily geared towards housing finance, which as the housing
market adjusts, weighs on their credit portfolio. The rental market is
dominated by a strictly regulated social housing (around one third of total
dwellings), and the incentive for people with higher incomes to move out of
social housing is very limited.

·
Research and innovation:
Dutch firms’ relatively low investment in research (expenditure was 1.07% of
GDP in 2011, below the EU average of 1.26%), and public funding for research
are currently on a decreasing trend. There is also no significant orientation
towards research-intensive sectors (with some exceptions in the machinery and
equipment industry), skill shortages in engineering and technology, all of
which may adversely affect the future competitiveness of the Dutch economy.

1.
Introduction

In May
2012, the Commission proposed a set of country-specific recommendations (CSRs)
for economic and structural reform policies for the Netherlands. On this basis
of these recommendations, the Council of the European Union adopted five CSRs
in the form of a Council Recommendation in July 2012. These CSRs concerned fiscal
policy and public finances, the labour market, innovation policy and the
housing market. 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 Annual
Growth Survey 2013 (AGS)[1]
and the second annual Alert Mechanism Report (AMR),[2] which were
published in November 2012. 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 2013. 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 are at risk of emerging in Member States. The AMR found
positive signs that macroeconomic imbalances in Europe are being corrected. To
ensure that a complete and durable rebalancing is being achieved, the Netherlands and 13 other Member States were selected for a review of
developments in the accumulation and unwinding of imbalances.[3]

Against
the background of the 2012 Council Recommendation, the AGS and the AMR, the Netherlands presented updates of its national reform programme (NRP) and a stability
programme on 29 April 2013. These programmes provide detailed information on progress
made since July 2012 and on the government’s future plans. The information
contained in these programmes provides the basis for the assessment made in
this Staff Working Document.

The
programmes submitted went through an inclusive consultation process involving
the national parliament. The NRP was also discussed with stakeholders, the
social partners and subnational governments.

Overall assessment

The
analysis in this SWD leads to the conclusion that the Netherlands has made some progress on measures taken to address the CSRs of the Council
Recommendation. Some progress has been with respect to the CSRs on fiscal
consolidation, the long-term sustainability of public finances and the housing
market. Only limited progress has been made in response to the recommendations
concerning the labour market. Good progress has been made in response to the
recommendation on innovation and science/business links. Despite progress made,
further measures remain necessary in all areas where the recommendations have not
yet been fully achieved.

The challenges
identified in July 2012 and reflected in the AGS remain valid. In the short
term, the main challenge is to support economic recovery by addressing
structural impediments in an appropriately sequenced fashion. This involves
ensuring fiscal adjustment while improving its quality in terms of prioritising
and safeguarding growth-enhancing expenditure, and better utilising the
potential in the labour marker. Higher quality in the education and research system would help support
innovation and human capital, improve competitiveness and boost the medium- and
long-term growth prospects.

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.

2.
Economic developments and challenges
2.1.
Recent economic developments and outlook

Recent economic
developments

In 2012 and early 2013, growth and employment in the Netherlands were
strongly affected by a combination of a weak
international environment and the unwinding of distortions on the housing
market, notably through negative wealth and confidence effects. Falling house prices, a low numbers of
transactions and high gross household debt and leverage are dampening private
consumption and investment in housing. These negative effects on wealth stem from
balance sheet adjustments, whose effects have been compounded by uncertainty
and generally weak confidence among Dutch economic agents. This dynamic interacts
with the effects of adjustments in the (relatively large) financial sector
where the need for stabilisation has resulted in discretionary increases in the
public deficit and debt through interventions in the banking sector. Meanwhile,
the scope for competitive export industries to offset weakness in domestic
demand has been impeded by uncertain prospects for exports.

The
economy is in recession, weighed down by weak domestic demand. Quarter-on-quarter economic growth has been negative since the
second quarter of 2011, apart from the first half of 2012, when it was
marginally above zero. Net exports turned strongly negative, while domestic
demand continued to decline. Real GDP continued to decrease in the fourth
quarter of 2012, with private consumption falling for the eight quarter in a
row, to a level last reached in 2003. Gross domestic product shrank by 0.9 %
in 2012. Last year, HICP inflation stood at close to 3 %, having been
boosted by increases in energy prices and certain policy measures, notably the higher
VAT rate as of October 2012. In 2012 the unemployment rate averaged 5.3 %,
but it has been increasing and reached 6.4 % in March 2013.

Economic
outlook

The near-term prospects remain muted. According to the Commission’s 2013 spring forecast, real GDP growth is
forecast to remain negative in 2013 at -0.8 %. Quarterly growth is
projected to return to modest positive territory in the course of 2013, on the
back of supportive trade developments, which are set to recover from a poor end
of last year. In contrast, domestic demand is expected to remain depressed well
into 2013. The combination of increasing unemployment, budget consolidation,
continued weakness in the housing market, cuts in pension payments by some
pension schemes and a soft patch in external demand is exerting an ongoing drag
on households and corporations.

In
2014, a fragile but gradual recovery is expected to set in. The decline in domestic demand should come to a halt in the second
half of this year, with growth turning mildly positive in 2014. This is
supported by tax relief for employees, which should translate into a positive
impact on private consumption, and by a recovery in private investment,
especially for export-oriented businesses. Downside risks mainly relate to
unemployment and the strength of housing-related balance sheet adjustments.

The
macroeconomic outlook presented in the NRP and the SP is broadly realistic. The SP and the NRP share the same macroeconomic outlook, which is
fairly close to the Commission 2013 spring forecast yet slightly more positive
on the prospects for economic growth. The NRP includes an estimate of the
macroeconomic impact of structural reforms. It presents estimates of the annual
total average effect of the coalition agreement on economic growth, private
consumption, the current account balance, net exports and employment (albeit
not adjusted for the substantial later amendments). It uses the Netherlands
Bureau for Economic Policy Analysis (CPB)’s Safier II model to this end.

2.2.
Challenges

The Netherlands faces considerable challenges
as regards fiscal policy, the labour market, the housing market, investments in
research and development (R&D) and education. These challenges are broadly
the same as in the 2012 assessment.

The immediate policy challenge will be to contain balance sheet
adjustments, restore confidence, and harness growth while simultaneously stabilizing
public finances. Fiscal policy is geared to achieving
the necessary fiscal adjustment in an environment of weak economic growth,
particularly due to depressed domestic demand. Within the
overall fiscal constraints, it is important to support the Dutch economy’s long-term
growth potential.

A key challenge lies in the housing market where rigidities and distortive incentives have built up over decades to
shape house financing and sectorial savings patterns (see also Box 1). Households’ tendency to leverage gross mortgage debt against housing wealth is,
to a large extent, a reflection of long-standing fiscal incentives, notably
full mortgage interest deductibility. The high average amount of mortgage debt has made households vulnerable to falling house
prices, or a prolonged period of low or negative economic growth. Simultaneously, banks have been offering new financial instruments,
allowing home purchases to be financed entirely with borrowed money. As households leveraged against housing wealth, financial institutions’ balance
sheets became heavily geared towards housing finance. As the housing market is
adjusting, the negative impact of this process is being felt across the
economy.

The rental market for houses is characterised by the strong presence
of strictly regulated social housing, organised in a way which hampers (labour)
mobility. Efficient allocation of capital in the
social housing sector is impeded by rents that do not reflect scarcity, the
fact that social housing corporations work on a not-for-profit basis and
shortcomings in the governance framework of social housing corporations.

The
ageing of the population brings about considerable challenges in guaranteeing
the sustainability of public finances and pension systems. The main challenge in this regard is the sustained implementation
of the increase of the statutory retirement age in the second pension pillar,
including an appropriate intra- and intergenerational division of costs and
risks. Moreover, an overhaul of the governance of the second pillar pension
funds, which would help underpin resilience to ageing, is overdue. Implementation
of the plans to reform long-term care would help curb the fast-rising costs of
ageing and would thus support the sustainability of public finances. In this
regard, the quality and accessibility of long-term care has to be guaranteed.

Ageing
is also putting labour supply under pressure, although a large pool of untapped
labour supply is still available, including women, people with a migrant
background, people with a disability, the young and older workers. Stimulating labour market participation of these groups, including
by (further) reducing fiscal disincentives for second earners, measures to
promote life-long learning and ensure employability, and a further increase in the
effective retirement age will be vital to prevent labour supply shortages.

Another
challenge is fostering the Dutch economy’s
capacity for innovation. Dutch firms’ underinvestment in R&D, the
absence of a significant structural orientation towards research-intensive
sectors (with some exceptions in the machinery and equipment industry), skill
shortages especially in engineering and technology related professions, and
pressure on funds for fundamental research may adversely affect the future competitiveness
of the Dutch economy. Although the Dutch school system performs well overall, it
fails to deliver excellence; high achievers score much lower than their
international peers. There is also a mismatch between labour market needs and the
skills obtained, in particular in vocational higher education.

Box 1 — Summary of the 2013 in-depth review (IDR) under the
Macroeconomic Imbalance Procedure (MIP)

Main macroeconomic challenge

The In-Depth Review (IDR) for the Netherlands indicates that macroeconomic developments regarding private sector debt and balance
sheet adjustments, coupled with the remaining inefficiencies in the housing
market, are the main challenges. The development of the current account
deserves attention, although the large surplus does not raise risks similar to
large deficits.

The Netherlands has been tapping
financial flows from abroad on a large scale, while simultaneously shifting huge
capital flows abroad. This heightens the Dutch economy’s sensitivity to swings
in financial conditions, with uneven distribution across sectors. Household savings mostly end up with pension schemes and insurance
companies, which channel the bulk of these savings abroad. While such a
strategy could be justified by portfolio diversification and higher expected
returns, it also makes these institutional investors’ balance sheets more
sensitive to portfolio shifts, flight-to-quality, and revaluations of foreign
investments. Alongside their substantial pension savings, Dutch households are
highly leveraged against their housing wealth, encouraged by long-standing tax
incentives and financing trends. This has heightened their balance sheets’
sensitivity to negative shocks, such as falls in house prices, weak economic
growth or changes in real interest rates. In turn, the high level of
institutionalised and often mandatory households savings (related to
second-pillar pensions), coupled with changes in Dutch
households’ leveraging position have highlighted the extent to which bank
balance sheets have become geared towards housing finance, giving rise to deposit
funding gaps. Dutch banks are reconsidering their
funding model in the light of the altered market conditions and more stringent
regulatory requirements.

Policy challenge

Comprehensive, gradual and predictably
sequenced reforms in the housing market will be a defining element of a
successful adjustment process. Such reforms should extend to both the owner-occupied
and rental segments of the housing market. Although
balance sheet adjustments are likely to dampen near-term economic activity,
they will be a necessary precondition for sustainable recovery. Policy measures
should eventually improve the allocation of capital, thus supporting the Dutch
economy’s long-term growth potential. Exploiting possibilities
in the institutional framework to pursue differentiated wage increases and
pension contributions in the second pillar may help adjust household balance
sheets without unduly inhibiting domestic demand.

3.
Assessment of policy agenda
3.1.
Fiscal policy and taxation

As
outlined in the stability programme, the authorities aim to correct the
excessive deficit by 2014, one year after the original deadline set by the
Council in 2009. Since current forecasts indicate that it is unlikely that this
will be achievable without further measures, the stability programme confirms
the Dutch authorities’ commitment to bringing the headline deficit sustainably
below 3 % of GDP in 2014. For the years after 2014, it presents nominal
deficit projections which are only partly underpinned by the measures taken. As
the 2012 stability programme is silent on this matter, the medium term
objective (MTO) for the Netherlands is assumed to be kept at -0.5 % of
GDP. The MTO reflects the objectives of the Stability and Growth Pact. How the Netherlands plans to ensure sufficient progress towards its MTO is, however, not specified
and the programme does not plan to achieve the MTO within the programme period.

The
general government deficit outturn for 2012 was in line with the government’s
expectations. The budgetary outcome for 2012 was a general government deficit
of 4.1 % of GDP, very much in line with the projection of 4.2 % of
GDP in last year’s stability programme. For 2013, the deadline for the
correction of the excessive deficit, the programme expects a deficit of 3.4 %
of GDP, compared to 3.6 % in the spring forecast and 3 % in the 2012
stability programme. The deterioration compared to last year’s stability
programme is partly due to cyclical conditions, but also reflects the net
impact of additional savings measures the authorities have taken since then and
some specific one-off transactions related in particular the auction of mobile
telephony licenses and the nationalisation of SNS Reaal.

The
commitment set out in the programme to reduce the general government deficit to
3 % of GDP in 2014 is challenging. The objective is based on a
macro-economic scenario which is slightly more optimistic than the 2013 spring
forecast while the projections based on implemented measures add up to a
deficit of more than 3 % of GDP in 2014. Possible additional measures
presented to bring the headline deficit to 3 % of GDP have been withdrawn
until further notice and, on the basis of the 2013 spring forecast, would in
any case not have sufficed to achieve the improvement in the general government
deficit committed to for next year. Hence, additional measures over and above
those listed in the programme will be needed to achieve a correction of the
excessive deficit by 2014.

The
programme includes additional measures to reduce the budget deficit. These
measures are based on the current government’s coalition agreement that was
presented in September 2012. The coalition agreement includes measures until
2017, but the most significant budgetary impact of these newly-presented
measures will be felt in 2013. Although tax increases will make the main
contribution to the 2013 budgetary consolidation, the programme announces a
focus on the reduction of public expenditure in 2014 and beyond.

After
2014, the programme envisages a strong improvement in the headline deficit. This
improvement is based on an older medium-term economic scenario that is inconsistent
with the more up-to-date projections for 2013-2014. The projections for 2015
and beyond embody excessively optimistic economic growth projections which do
not take into account already adopted consolidation measures that will put an
additional drag on economic growth. While revenues are forecast to fall
slightly from 2014, expenditure is expected to be cut even more sharply. This projection
of a strong decrease in expenditure driving an improvement in the fiscal
balance is not underpinned by consolidation measures.

A
bottom-up approach, listing discretionary savings measures implemented and
decided on from 2011 onwards, confirms the very sizeable multi-annual
consolidation effort for the period 2011-2013 identified by an output gap-based
top-down approach. For the period 2011-2013 the
overall fiscal effort as calculated using the bottom-up approach amounts to 4 %
of GDP, or around 1.3 % of GDP annually, broadly equally divided between
revenue and expenditure measures. The discretionary measures identified include
the phasing-out of the 2010 fiscal stimulus, including some additional savings
measures (EUR 5 billion); an initial round of budgetary savings from September
2010 implemented by the first Rutte government (EUR 19 billion); measures
embedded in the ‘Kunduz’ agreement of April 2012 (EUR 9 billion); and, finally,
the coalition agreement of the second Rutte government outlined in September
2012 (EUR 15 billion). A draft package of some EUR 4 billion in possible
additional savings announced in April 2013 has since been withdrawn by the
government until further notice in view of an agreement with the social
partners.[4]
It is therefore not taken into account and does not figure in the breakdown
underpinning the deficit projections in the programme, although the package is
notionally presented. Significant one–off transactions, notably the sale of 4G
mobile telephony licenses and the deficit increasing nationalisation of SNS
Reaal (both affecting 2013) broadly cancel each other out. The implementation
of the consolidation measures for 2013 and beyond is on track.[5] Should the current
plans be fully implemented, the Netherlands will have taken net discretionary
measures adding up to an estimated amount of nearly 7 % of GDP between
2011 and 2017.

Specified
and agreed measures that are embedded in the multi-annual fiscal projections
imply continued consolidation in 2014. However, there are implementation risks
attached to the measures embedded in the medium-term budgetary plans. These partly relate to downside risks to the macro-economic
scenario but also may affect the implementation of plans agreed between the coalition
partners. A different type of budgetary risk relates to the sizeable planned
decentralisation measures. Some of the budgets and responsibilities concerning
youth and long-term care will be transferred to municipalities. This process
will also include cuts to the respective budgets, on top of generic cuts on
funds transferred to municipalities. It remains to be seen wether the planned
efficiency gains can be fully realised. Limited deviations will be compensated
within the expenditure ceilings set but more persistent ones would have to be
countered by fresh measures. There is a risk that growth-enhancing expenditures
on education and research will not be safeguarded. The current budgetary plans
set out some reductions in these items. Public expenditure on education and
training amounted to 5.77 % in 2011.[6]
Nominal expenditure on these categories is projected to remain roughly stable
over the coming years, implying a slight decline in their ratio to GDP, to
5.48% of GDP in 2014. Overall expenditure on innovation and research is
expected to decrease up to 2016 from the peak years of 2010-2012 due to the
expiry of crisis measures, while within the envelope there has been a shift
towards a more intensive use of R&D tax incentives. Public spending on fundamental
research not earmarked as programme-related and largely carried out by
universities and public research institutions with the status of independent
administrative public entities (zelfstandige bestuursorganen) would be
reduced by a further orientation of funds towards sectoral uses.

The
structural balance[7]
amounted to -4 %, -3.7 % and
-2.6 % of GDP in 2010, 2011 and 2012, respectively. The Commission
services’ 2013 spring forecast projects a further improvement in the structural
balance to -2.0% of GDP in 2013 but subsequent deterioration to -2.3 %
in 2014 if policies remain unchanged. The average annual apparent fiscal
effort over the 2011-2013 period is estimated at 0.7 % of GDP. When
adjusted for the significant downward revision in potential output growth since
the point at which the 2009 Excessive Deficit Procedure (EDP) recommendation
was issued and the impact of revisions to the composition of economic growth in
revenue, the average annual adjusted structural effort increases to 1.1% of
GDP. This exceeds by a substantial margin the recommended average annual fiscal
effort (¾ % of GDP) over
2011-2013 required in the 2009 Council EDP recommendation.

Following
an overall assessment of the Netherlands’ budgetary plans, using the structural balance as a reference, including an analysis
of expenditure net of discretionary revenues, a significant deviation from
the adjustment path towards the MTO is to be expected for 2015 and beyond. The structural balance calculated on the basis of the stability
programme amounts to -1.5 % of GDP in 2013, -1.6 % of GDP in 2014 and
would improve only slightly to -1.4% of GDP in 2017, leaving a structural
deficit still well above the MTO. Differences in the structural balances
estimated in the programme and the Commission’s spring 2013 forecast reflect
the somewhat different macroeconomic scenarios as well as one-off revenues that
are not accounted for in the programme. For the later years of the programme,
the recalculated structural balances are based on a medium-term scenario that
is not consistent with the short-term outlook for 2013-2014, implying an
assumed closure of the output gap in 2017.

On
the basis of the technical expenditure projections for 2014 and 2015,
compliance towards the expenditure benchmark is secured. According to the information provided in the stability programme,
government expenditure net of discretionary revenues measures in 2015-2016 is,
on average, expected to grow at a rate below the applicable reference rate. The
growth rate of this expenditure is below -0.14%, the lower rate under the
expenditure benchmark.

Box 2 — Excessive Deficit Procedure for the Netherlands

On 2 December
2009, the Council decided that an excessive deficit existed in the Netherlands and adopted the most recent Council recommendation under Art. 126(7) TEC. The
Council recommended that the Dutch authorities should put an end to the present
excessive deficit by 2013. Specifically, in order to bring the general
government deficit below 3 % of GDP in a credible and sustainable manner, the Netherlands was
recommended to (a) implement the fiscal measures in 2010 as envisaged in the
2010 budget and to start consolidation in 2011 in order to put an end to the
present excessive deficit situation by 2013; (b) ensure an average annual fiscal
effort of ¾ % of GDP over the period 2011-2013, which should also
contribute to halting the rapid rise of the government gross debt ratio, which was
forecast to breach the reference value; (c) specify the measures that are
necessary to achieve the correction of the excessive deficit by 2013, cyclical
conditions permitting, and accelerate the reduction of the deficit if economic
or budgetary conditions turn out better than currently expected.

An overview of the
current state of excessive deficit procedures, including additional steps
adopted after the finalisation of this Staff Working Document, is available on:

http://ec.europa.eu/economy\_finance/economic\_governance/sgp/deficit/index\_en.htm
(please refer to country sections at the bottom of the page).

The debt ratio is expected to increase in the first
years of the programme. On the basis of the
Commission 2013 spring forecast the debt ratio is expected to increase steadily
to 71.2 % of GDP in
2012, 74.6 % of GDP
in 2013 and 75.8 %
of GDP in 2014. This is predominantly the result of
the persistent headline deficits in combination with anaemic nominal GDP
growth, while EFSF and ESM transactions attributed to the government debt only
have a relatively small upward effect. The increase in the expected gross debt
ratio for 2013 includes debt-increasing transactions equivalent to some 1% of
GDP arising from the nationalisation of SNS Reaal in early 2013 (on top of the
deficit-enhancing measures amounting to around 0.6 % of GDP). The relatively contained development of Dutch sovereign
interest rate spreads vis-à-vis German benchmarks suggests that market
participants still have a relatively high degree of confidence.

Progress towards the debt benchmark cannot be
assessed on the basis of the information provided in the programme. For the years 2015 and beyond, the stability programme is based on
an outdated forecast that does not match the data provided for 2013 and 2014.
Due to this break in the data and the fact that it is outdated for the later
years of the programme, an assessment of the progress towards the debt
benchmark cannot be made.

Long-term sustainability

The Netherlands has to address its long-term fiscal sustainability
risk. The Netherlands does not face a risk of
fiscal stress in the short-term. The country is at high sustainability risk in
the medium to long run, influenced by the cost of ageing. Government debt (71.2 % of GDP in 2012 and expected to rise
to 75.8 % in 2014) is
above the 60 % of GDP
Treaty threshold. Risks would be lower if the structural primary balance were
to revert to the higher values observed in the past, such as the average for
the period between 1998 and 2012. The focus should, therefore, be on reducing
government debt. Moreover, further containing age-related expenditure growth (especially
related to long-term care) appears necessary to help ensure that public
finances are sustainable in the long term.

The
long-term sustainability of the pension system has been strengthened through
the implementation of a gradual increase of the first-pillar statutory
retirement age from 65 years in 2012 to 67 in 2023.
The linking of the pensionable age to life expectancy after 2023 (which is a very
early move in comparison with other Member States) takes account of future
increases in longevity and will substantially curb the pressure of age-related
expenditure on public finances. As an effect of the reform, projected pension
expenditure increases are reduced by 1.8 p.p. as a share of GDP up to 2060 in
comparison to the projections set out in the Ageing Report 2012 and will remain
only slightly above the EU average in the long term (+1.7 p.p. against an EU
average of +1.4 pp. to 2060). Similarly, the age for building up new
occupational pension rights in the second pension pillar will rise to age 67 by
2014 and thereafter be linked to increases in life expectancy. While this will
improve the long-term financial situation of second pillar schemes, the
maturing of the system and impact of the crisis on financial markets on asset
prices and interest rates have led to a significant decrease in pension funds’ coverage
ratios. Future adjustments to contribution rates and benefit levels should
ensure a fair sharing of risks within and between cohorts.

The Netherlands has fully addressed the part of the recommendation regarding increasing the
statutory retirement age and linking it to life expectancy, both for the first and
the second pension pillar. Other measures, such as
adjusting the second-pillar pension legislation and introducing accompanying
labour market measures for the older workers, have only been partially done as
discussions with the social partners are still ongoing. Further legislative
proposals in this field are planned for 2013 and 2014.

With
regard to health care, the Netherlands has undertaken reforms to improve the
cost-effectiveness and sustainability of the system while ensuring access to
high quality care. Health care providers, health care
insurers and doctors concluded several agreements in 2011/2012 to ensure controlled
development in hospital care. The Dutch government has provided a blueprint for
an ambitious reform in the area of long-term care. The blueprint aims at
upgrading the role of local governments, separating living costs from care
costs, monitoring quality issues and putting more emphasis on individual
responsibility and informal care. It will be important to implement the planned
reform in such a way that it ensures accessible, cost-effective and sustainable
provision of high-quality long-term care. While the plans entail substantial
budgetary savings, additional measures are likely to be necessary to fully
restore the long-term sustainability of public finances.

Fiscal framework

The Netherlands has a well-developed fiscal framework. The Dutch medium-term budgetary framework can be considered a
best-practice within the EU. The main characteristics of the multi-annual
trend-based fiscal framework currently in place in the Netherlands are: (i) the use of real expenditure ceilings, which are determined ex ante
and apply to the entire term of office of the government; (ii) automatic
stabilisation of revenues; and (iii) the use of independently derived
macroeconomic assumptions. When a new government is formed, medium-term
budgetary targets are set by determining the way in which general government
expenditure should evolve and the tax burden for each year until the last year
of the government’s term. The current framework does not cover local
government. In this respect, the government is working on legislation that will
transpose the EU fiscal rules into national legislation. This will entail
giving the medium-term budgetary framework a legal basis and laying out provisions
and coordination mechanisms for local government finances.

However, the economic crisis of the recent years has exposed weaknesses
in the fiscal framework and successive governments have increasingly adjusted
the budget outside the procedures laid down in the framework. Successive governments have amended their medium-term budgetary
plans with sizeable consolidation measures, partly because initial expenditure
ceilings had been based on growth paths which turned out to be overly
optimistic. According to the coalition agreement, automatic stabilisers are
free to operate within each of the separate expenditure ceilings as long as the
country’s overall fiscal position remains in accordance with European fiscal
rules. Although the Dutch authorities are fully committed to their obligations
under the Stability and Growth Pact (SGP), the Netherlands has not yet ratified
the Treaty on Stability, Coordination and Governance in the Economic and
Monetary Union. Interest payments are kept outside the overall expenditure ceiling,
whereas other expenditure that is sensitive to cyclical trends (notably
unemployment and social assistance benefits) is kept within the expenditure
ceiling framework. This impedes the working of automatic stabilisers in an
economic downturn. In addition, possible actions to put into practice the
commitment to abide by European provisions are not specified in detail.

Tax system

The
tax-to-GDP ratio was 38.4 % in 2011,
slightly below the EU GDP-weighted average (38.8 %).
Concerning the composition of revenues, indirect taxes and direct taxes each
account for slightly less than a third of total tax revenues, with social
contributions – among the highest in the EU – representing 14.8 % of GDP.

The Netherlands is frequently used by multinational companies to channel tax driven financial
flows to other jurisdictions. A recent OECD study[8]
suggests that some international corporations may shift profits to low-tax jurisdictions via the Netherlands. Indeed, the absence of withholding tax on outbound royalties and interest
payments and the fact that the Dutch tax administration gives advance clearance
(tax rulings) on the tax consequences for such activities has contributed to
companies known as Special Purpose Vehicles being registered in the Netherlands
without having a substantial physical presence there. This
generates gross financial flows made through special purpose entities through
the Netherlands that amount to USD 2,625 billion for inward stock investment
and to USD 3,023 billion for outward stock investment in
2011, both equivalent to more than 3 times Dutch GDP in
that year. The current international pressure to reform
tax rules to prevent the use of such vehicles in this way may have adverse economic
effects for the Netherlands and other Member States.

Environmental
taxation is comparatively advanced in the Netherlands. Revenues from environmental taxes were equivalent to 3.9 % of GDP in 2011—the second highest
value among EU Member States.[9]
Revenues from energy taxes are relatively high, despite below average revenues from
transport fuel taxes. The green taxation aspect of the car
taxation has been reinforced. In 2013, the upper CO2 limit for the exemption of
the vehicle tax has been further reduced, while vehicles with higher CO2
emissions are taxed more heavily. However, tax incentives
for the private use of company cars reduce the base of income tax. There is also room for phasing out hidden water subsidies. Furthermore, companies in energy-intensive industries and
horticulture pay lower taxes on energy[10]
thereby creating inter-sectoral distortions regarding
resource efficiency.

The
current tax system leaves room for growth-friendly taxation reform. This could include the broadening of tax
bases (e.g. reducing the scope of the reduced VAT rate and reducing the
deduction for small mortgage interest payments), reducing environmentally
harmful subsidies, increasing green taxes, and accelerating the planned reduction
in mortgage interest deductibility.

3.2.
Financial sector

In recent years, the Dutch financial sector has increased its
resilience, despite the worsening economic environment and the nationalisation
of a bank. With balance sheet values amounting to around
four times its GDP, the Netherlands has one of the largest financial sectors in
the EU. Since the nationalisation of SNS Reaal in February 2013, the Dutch
government owns two of the four largest banks and has given financial support
to a third. Nonetheless, the banking sector still needs to improve its capital
buffers in line with international requirements. Also, as they are highly
dependent on market funding, banks have to maintain sufficient capital. Despite
having increased slightly recently, banks’ capital buffers have remained under
pressure through increasing losses and provisions on loans. The government is
currently in discussion with stakeholders to reduce the number of mortgages that
banks have on their balance sheets, but such a measure would have several
drawbacks. Selling government-guaranteed mortgages on a large scale to a government-guaranteed
financial institution would reduce the average quality of mortgages
privately-run banks have on their books and could amplify the difficulties that
banks have in increasing their risk-weighted capital buffers. Selling them to
the pension schemes could amplify negative effects on wealth in a recession.

To boost capital and reduce funding gaps, and in view of the
relatively low level of private savings, Dutch banks appear to be withholding
profits and offering relatively high deposit interest rates compared to banks
in neighbouring countries. Lending rates, on the
other hand, are also higher and have been increasing at a faster pace in recent
years (in particular for housing loans). The charging of these higher lending
rates is probably due to the need to reduce the leverage ratio, Dutch banks’ relatively
high funding costs, which are, in turn, a reflection of their reliance on wholesale
funding, the withdrawal of a number of competitors from the market and the perceived
risk profile of the loan portfolio. Losses on loans are increasing and the
share of non-performing loans has reached the highest level since the outbreak
of the crisis. As house prices are still falling, 25 % of homes already have
a value that is lower than the gross value of the outstanding mortgage (of
which many are interest-only). Payment arrears and the number of foreclosures
are still very low compared to other countries. Dutch banks currently have
close to EUR 80 billion (13 % of GDP) of loans outstanding to real estate
companies. With provisions being at less than 2% of the portfolio, banks may
have difficulties absorbing large losses, especially since valuations of
collateralised real estate were often done more than a year ago, prices are
falling and vacancy rates are relatively high and still increasing.

The proportion
of small and medium-sized enterprises (SMEs) reported to experience problems
with access to finance in the Netherlands is higher than the EU average and
seems to have worsened further in 2012.[11] If banks were acting solely in response to an objective worsening of
economic prospects and credit conditions, this would be a welcome development.
However, if banks are shrinking their SME credit portfolios partly to adjust balance
sheets, this development could be counter-productive. The Dutch authorities
have taken a number of measures to support SMEs’ access to finance, for example
by continuing existing guarantee schemes, by re-enforcing available budgets and
by increasing the maximum ceiling for micro-credits.[12] Regarding
access to risk capital, the government closely cooperates with the European
Investment Fund and the European Investment Bank in developing additional
financial instruments for SMEs.[13]
All these measures are steps in the right direction. Nevertheless, it is
important to continue efforts to ensure appropriate access to finance for SMEs
given the stage of the business cycle, in line with the priorities identified
in 2013 Annual Growth Survey.

3.3.
Labour market, education and social policies

Labour market and social policies

The
Dutch labour market is still performing relatively well compared to other EU countries.
However, from 2011 to 2012 the unemployment rate in the Netherlands increased steadily (from 4.4 % to 5.3%) and
is projected to strongly rise further in 2013 and 2014 (to 6.9 %
and 7.2 % respectively). In view of the ambitious EU 2020
employment target of 80% and with a view to addressing future labour supply shortages,
the Dutch authorities announced in their NRP/SP comprehensive labour market
reforms in line with the 2012 country-specific recommendations (CSRs). Most of
the planned reforms have not yet been implemented.

In
2012, the Council Recommendations for the Netherlands contained a CSR on the
labour market, addressing the issue of low average number of hours worked. The average number of hours worked in the Netherlands is much lower than the EU average, especially for women. This is partially due
to the fact that many people, especially women, work part time. While to a
considerable extent this appears to reflect preferences, removing the remaining disincentives to working more hours has the
potential to alleviate future labour supply shortages. Reducing tax
disincentives on labour would make work more attractive. In order to make work more financially attractive for second income
earners, in 2009 the Netherlands started phasing out the transferable tax
credit over a period of 15 years. The double general tax credit, provided to
those on welfare benefits, is also being phased out over a period of 20 years
starting in 2012. This phasing-out is enshrined in law,
and in terms of relevance and credibility represents progress in terms of CSR3.
However, the long time span of the phasing out (15 and 20 years respectively)
is not very ambitious.

Labour
market participation and access to jobs for second-income earners would further
be facilitated through adequate provision of quality childcare. The use of full-time childcare services in the Netherlands lies well below EU average for all age cohorts. The report of the European
Network of Experts on Employment and Gender Equality Issues report on
out-of-school care emphasises the low quality of childcare facilities for 0-4
year olds, and also refers to the low quality of out-of-school care facilities
as well. In addition, only half of the care facilities offer out-of-school care
on all school days, which indicates there are bottlenecks in the availability
of care facilities. Implemented and planned budgetary cuts on childcare may
reduce some dead-weight losses (in particular by cutting subsidies to high
income households), but could also have a negative impact on the labour
participation of second-income earners, especially for those that cannot rely
on informal childcare.

Employment
rates of people with a migrant background have been falling since 2008 and
youth unemployment has been increasing. The Netherlands performs notably worse than the EU average regarding the employment gap between
people with a migrant background and nationals. Youth unemployment has been
increasing at an accelerated pace in recent months, although youth unemployment
rates in the Netherlands are still well below the European average. If the
large increase in youth unemployment could be stopped, this could potentially
help prevent labour supply shortages in the future and prevent a loss of human
capital and valuable skills. Another source of potential labour supply is
people with a disability. The labour participation rate of those entitled to
disability benefits, but with a remaining earning capacity between 20% and 65%,
is substantially lower than the overall participation rate. The Participation Act aims to improve labour market participation
through the merger and reform of several benefit schemes while shifting
responsibility for their execution to the level of municipalities and reducing
overall funding. The Act is expected to enter into force in January 2014 and
should replace the draft Work Capacity Act referred to in last year’s Staff
Working Document. Social benefits are being checked more stringently, with a
tougher approach to fraud and to social benefit recipients’ duty to seek work.
Moreover, the social partners have agreed on a target for employers to hire 100,000
partially disabled employees over a period of 12 years from 2014.

The
Participation Act reform is ambitious and relevant as it aims to boost labour
market participation. However, the reforms are not
yet enshrined in law and the time span for implementation seems rather short in
view of the substantial accompanying efforts expected from local governments,
which will coincide with significant budgetary cuts. For instance, major cuts
are planned in the budgets for sheltered work places and other regular
integration tools. A specific risk in implementing policies for people with a
disability is the scale of the shift in responsibilities to the municipalities.
They are being given responsibility for a EUR 8.5 billion budget for supporting
jobseekers with a disability, while simultaneously taking over responsibility
for the General Exceptional Care Act, which covers a large portion of the long-term
care (equivalent to some EUR 2.8 billion) previously financed by a national
entity the Algemene Wet Bijzondere Ziekekosten (see section 3.1).
Municipalities are expected to manage costs more efficiently, but the size of
budgetary cuts means that it may be difficult for them to do so. There is a
push from the central government to merge municipalities into new, larger ones
with at least 100,000 inhabitants in order to perform these new tasks
adequately. With regard to the target for disabled employees, the plans to
impose a requirement on firms with 25 or more employees to have at least 5 %
of their workforce made up of the partially disabled have been abandoned, as
the foreseen fine for breaching the quota would have likely been ineffective
and the quota could have led to labour substitution. At the same time, the
current plans seem to imply few binding obligations and have been pushed back
considerably (well beyond the term of the current government), thereby
increasing implementation risks.

Another underused source of potential labour is that of older
workers. In recent years, measures implemented to
promote labour force participation by curtailing favourable options for
effective early retirement in the 60-to-64 age bracket have already borne
fruit. The average effective retirement age increased steadily
from 61 in 2006 to 63.6 in 2012, contributing to a
narrowing of the gap between the statutory and the effective retirement age.
However, under current arrangements, older workers can still use a combination
of relatively high severance pay and generous unemployment benefits as a route
to early retirement. In addition, relatively strict employment protection
legislation for workers with permanent contracts and potentially high
(seniority-linked) severance pay give older workers in the Netherlands few incentives to change jobs (see Box 3). This has caused labour mobility to
be relatively low, and increases the risk of long-term unemployment when jobs
are lost. Older workers have adjusted less to labour market changes and would
benefit from life-long learning (LLL) and active ageing measures. Hence it is
troubling that older workers only make up less than half of all adult
participants in lifelong learning.

Box 3 — Labour market rigidities
in the Netherlands

In general, the Dutch labour market
can be regarded as quite flexible, mainly on account of the high participation
rates by both men and women, the ample possibilities to work on a temporary or
part-time basis, and the large group of self-employed people. Nonetheless, the Netherlands is characterised by relatively strict employment protection legislation (EPL)
for permanent workers. In addition, the Dutch system provides for relatively generous
unemployment benefits with a long maximum duration (38 months).

These characteristics have an
adverse effect on labour mobility. The current EPL system benefits ‘insiders’
at the expense of ‘outsiders’ and reduces incentives to seek out new opportunities,
particularly for older workers. Since accumulated severance pay rights are lost
when changing jobs, there is a particularly strong disincentive for older
workers to switch jobs. At the same time firms are reluctant to hire older
workers, due to the EPL and relatively high tenure-based pay in the Netherlands which may result in misalignments between wage costs and productivity levels.

The Netherlands could benefit from
tackling the above rigidities. In particular, while strict EPL may delay or
impede a strong rise in unemployment, it increases hiring costs. This might
lead to more long-term unemployment and could, in combination with the high
unemployment benefits, provide a disincentive for firms to hire once the
economic recovery kicks in. At the same time, however, it must be recognised
that tackling these labour market rigidities may have negative transitional
effects. There is a heightened risk that specific cases (in particular low-skilled
employees or those on a low income) would be confronted with significantly lower
incomes in combination with scant prospects of finding a new job in the
short-term. These cases should be actively monitored and supported with
appropriate measures. The coalition government and the social partners recently
reached an agreement on reforming EPL and unemployment benefits from 2016 (see below).

Against this background, the Netherlands announced reforms concerning
the unemployment benefit scheme and employment protection legislation (EPL),
which are planned to enter into force as of 2016. The
reforms, agreed on through negotiations with the social partners (‘Sociaal Akkoord’) and not yet enshrined in law have secured broad public support and
as such can be seen as fitting in a tradition of Dutch consensual decision making
(‘poldermodel’), which had been less prominently visible
in recent years. The reforms, in combination with a mobility tax credit (‘mobiliteitsbonus’) for employers who hire social security beneficiaries aged 50 or
above or people with a disability, target at the lower end of the labour market
by increasing incentives both on the demand and supply side. The agreement with
the social partners implies that publicly financed unemployment benefits will
be reduced in duration.[14] Regarding EPL, the plans to introduce uniformity in the dismissal
procedure and a cap on severance pay from 2016 onwards should enhance labour
mobility. Better protection is also envisaged for employees with flexible
contracts, particularly with regard to the right to obtain sickness benefits
and the maximum duration of flexible contracts.

The
EPL reform embodied in the social agreement adequately addresses rigidities in
labour matching and hiring, and may particularly benefit the employability of
older workers, whose relatively high severance pay and reservation wage reduce
their chances of re-entering the labour market. The expected enhancement of labour supply and the decreasing risk of
long term unemployment for specific groups are welcome. In addition, the reform
rightfully aims at preserving the flexible character of the Dutch labour
market, while reducing the gap between fixed and temporary contracts in terms
of access to schooling and other social rights, thereby adequately reflecting
the ‘flexicurity approach’. The reform of unemployment benefits go broadly
in the right direction. However, it is regrettable that the planned reduction
in the duration and generosity of unemployment benefits originally planned in
the coalition agreement, has been postponed, as this would have stimulated
people to return to the labour market (see Box 3). This is strengthened by the
fact that people will be confronted with the shortened duration of the publicly
funded unemployment benefits only from 2018 onwards. The postponement of these
labour market reforms increases implementation risks. That said, the extent to
which the delay of these reforms will have negative impact on labour market
performance will also be shaped by the overall employment outlook.

Furthermore,
a bonus to incentivise older workers to continue working is replaced by a new,
less generous one for which only those on lower incomes will qualify. It is not expected that this will significantly improve older
workers’ participation in the labour market. In contrast, abolishing the pension
allowance for partners who have not yet reached the statutory retirement age,
which will apply to all workers reaching the statutory retirement age in 2015,
is expected to stimulate older workers partners to work longer. In addition to
this the IOAW[15] will be phased out, fiscal arrangements for pension savings will be
abolished for incomes above EUR 100,000 and pension accrual rates for
occupational schemes will be lowered as of 2014.

The Netherlands has traditionally performed well on social inclusion; the at-risk of poverty
indicators are relatively low compared to the EU average. However, the figures show a worrisome trend. The number of people
in low-work-intensity households has increased by 75,000 since 2008, while the Europe
2020 target for reducing the number of people living in a low-work-intensity
household was set at 93,000. Rising unemployment rates could heighten the risk
of poverty as more people become dependent on benefits. This increase in
poverty particularly affects single parents, single people, those with a
migrant background, the self-employed, and households living on benefits other
than pensions.

The Commission comes to the overall conclusion that the Netherlands has made some progress on measures taken to address the labour market CSR.

Education

The Netherlands has a well-functioning educational system and is on
track to achieving its Europe 2020 targets. Early
school leaving already fell from 10.9 % in 2009 to 8.8 % in 2012 and
is on to hit the 8% target. The tertiary education target is an attainment rate
of 40-45 % and, at 42 % in 2012, has already been achieved.

For 2012 the most important change in
funding is the replacement of the current partly grant-based system of funding
for students in tertiary education. Students will
have to fully finance their studies privately, but can take low-interest loans
from the government. Repayment of these loans will depend on the student’s income
after graduation. Savings resulting from this measure are to be re-invested, especially in the quality of education,
although how exactly this will be done is not yet specified. This reform reduces the deadweight loss of the current grant-based
system and may also reduce the average duration of tertiary studies, as it
should sharpen the choice of study field by prospective students. On balance,
it may well be that tertiary attainment rates decrease, but that graduation
rates increase. However, the impact on tertiary enrolment and on the level of
qualifications on graduation should be closely monitored, especially for
students from underprivileged backgrounds. Plans should be amended if a
substantially larger-than-expected number of prospective students were either to
opt out of pursuing tertiary education altogether, or if there was a clear
trend to opt for ‘safer’ study choices, e.g. away from technical studies. It
will also be important to communicate to (loan-averse) prospective students the
benefits of further study even if this necessitates taking out a loan.

The Dutch educational system is, on average, of high quality. This is reflected in good PISA scores, relatively high employment
rates and the good international rankings of universities. But the educational
system suffers from a few shortcomings. Especially in primary and secondary
education high-achieving Dutch students score worse
than their international counterparts, whereas students with lower and mediums
grades score better than their international peers.[16] Due to the scarcity of excellent students in secondary education,
the high (average) level of educational performance at the secondary level does
not translate into top performance at the tertiary level. Not only is the
average duration of tertiary study longer in the Netherlands compared to the EU
average[17], but the number of top performers in tertiary education is also small.[18]

The Netherlands has an ‘Excellence Policy’[19] in place, ‘performance agreements’ signed with all individual
higher education (HE) institutions that link additional funding to meeting
targets on education quality, study success and the profiling of education and
research. Furthermore, there will be extra requirements for vocational education and for graduates who
wish to enter non-related HE programmes and there are plans to shorten vocational
education and training programmes to make the road to higher education more
attractive. The government recently submitted a draft law (‘Wetsvoorstel
kwaliteit in verscheidenheid hoger onderwijs’) whose aims include (i)
introducing pre-selection for education programmes that are currently subject
to a numerus clausus and for the pedagogical universities; (ii) improving the
transfer of students from secondary to tertiary education and from vocational
trainings to universities of applied science: (iv) making training more
appropriate for labour market needs and (v) putting greater emphasis on
excellence at the tertiary level. As most of the measures have only recently
been adopted or are still in the legislative procedure, it is unclear whether
they will be sufficient to address the shortcomings of the educational system,
but they are clearly steps in the right direction.

Adult participation in lifelong learning (LLL) reached 16.7 % in 2012. It thus already
surpassed the 15 % benchmark set out in Europe 2020. While a number of
initiatives have been undertaken to encourage training, a formal comprehensive
framework for LLL allowing for the possibility to use funds for LLL for both
intra- and inter-sectoral schooling could further increase the efficiency of
the system.

3.4.
Structural measures promoting
growth and competitiveness

Housing market

Box 4 — Main factors determining the Dutch housing and mortgage market and milestone policy measures over the recent decades The Netherlands has a long history of public involvement in housing. Households in both the rental sector and the owner-occupied sector receive substantial explicit or implicit subsidies. Crucial subsidy instruments at the national level are the income-based housing allowance for tenants and mortgage interest rate deductibility (MID) for homeowners, allowing home owners to fully deduct interest payments on their mortgage loan from their taxable income, and in place since 1893. In addition, there is government involvement in spatial planning and land policy, regula­tion and supervision of housing associations, rent policy and financial guarantees. These policies show up in house prices and have in effect furthered substantial and persistent increases in household mortgage debt. The trend was accentuated in the last few decades for a number of reasons. The existence of the National Mortgage Guarantee system (NHG) since 1993 has meant that the risk of default for mortgages under a fairly high threshold was transferred to the government. Generous mortgage lending and house prices in the Netherlands were also boosted by a combination of changing household behaviour patterns, trends in the labour market, financial innovations, and changes in financing conditions, notably increases in affordability due to lower interest rates. Banks designed instruments to allow borrowers to benefit to the maximum extent from full MID such as bullet-type mortgage loans which kept deductible interest high over the full maturity of the loan. This allowed borrowers to postpone paying off the principal until the loan matured. Moreover, lending standards were also relaxed. High loan-to-value (LTV) ratios in excess of 100 % became possible. In 2010 the vast majority (92 %) of outstanding mortgages thus consisted of non-amortising loans. Moreover, since 1993, in a period of strong employment gains, banks have taken a second household income into account when determining a household’s borrowing capacity, further driving up prices. Over the last decade, some measures have been taken to limit full and unqualified MID. Since January 2001, MID has been restricted in three ways. First, deductibility applies only to mortgage loans on the borrower’s primary residence (and not to secondary homes such as holiday homes). Second, deductibility is only allowed for a period of up to 30 years. Finally, the top income tax rate has been reduced from 60 % to 52 %. However, these changes did not have a significant impact on the rate of mortgage loan origination, mainly because of the simultaneous falls in of mortgage interest rates in line with international trends. From 1 January 2004, the tax deductibility of mortgage loan interest payments was further restricted under the Bijleenregeling, which limited interest deductibility to that part of the mortgage that equalled the price of the new property minus the net profit realised on the old one. As from August 2011, the requirements for mortgage lending have been tightened leading to a revised Code of Conduct for Mortgage Lending. Banks have committed to reducing new interest-only mortgages to a maximum of 50 % of the market value of the property. In addition, the maximum LTV-ratio will be reduced from 106 % in 2012 to 100 % in 2018. Social housing represents 33 % of total dwellings. The expansion of the social housing sector up to the mid-1990s was accompanied by a sharp fall in private renting, which currently accounts for a mere 7 % of the total housing stock, mostly rent-controlled. The Dutch authorities provide targeted subsidies for low-income households. More than three-quarters of all tenants rent a dwelling from social housing corporations, non-profit organisations that have to act on a commercial basis, but are required to use their profits for the provision of good and affordable housing.

Some progress has been achieved in addressing the 2012 Council Recommendations on the
housing market. Since April 2012 a series of
measures have been put forward by the respective Dutch governments. While these
are steps in the right direction, the overall pace of reforms to address the
underlying problems is slow and thus needs to be stepped up.

Property market

The legislative changes on
eligibility for mortgage interest deductibility are welcome as an important
first step in the direction of a healthier housing market. New mortgage initiated in 2013 and beyond
must take an annuity or linear form in order for mortgage interest to be tax-deductible
and to qualify for NHG guarantee. Also interest can only be deducted for
mortgages amortised over a maximum of 30 years. This adjustment
in the fiscal treatment of mortgages will help gradually unwind the structural
deficiencies of the housing market and support public finances over the long
run. For new loans it will eliminate the fiscal incentive not to gradually repay
the principal over the maturity of the loan, thus reducing the tax incentive to
take out mortgage loans. Since interest payments automatically decline over
time in amortising structures, the absolute size of the tax advantage also
declines. Limiting the mortgage interest tax relief to bring it in line with
full annuity repayment should also gradually relieve the Dutch banking sector’s
dependency on market funding, thus reducing the vulnerability and leverage of
both Dutch households and banks.

However, under the current
plans, the phasing in of the limitation of mortgage interest deductibility[20]
is in effect strongly back-loaded due to the very gradual restrictions on
mortgage interest deductibility for the stock of existing mortgages. The possibility to grandfather full mortgage interest deductibility for
existing loans when refinancing or moving home[21]
adds to the back-loading of the actual impact on the existing stock of
mortgages. Therefore, given the size of the outstanding stock of existing
mortgages (which for the overwhelming majority consists of interest-only loans
in various guises) the current measures will have an excessively muted effect
on the rate at which mortgage interest deductions are reduced and will be overly
slow in reducing the incentive to leverage against gross housing debt.
Moreover, in effect, these measures limit first-time homebuyers’ access to the
mortgage (and housing) market. Given that a revival of activity in the Dutch
housing market will hinge to a large degree on mobilising first-time buyers,
spreading the cost over a wider group (including those with larger financial
buffers) could help cushion the impact of a faster reduction in mortgage
interest deductibility.

Since the full effect will be phased in only very gradually, the current
plans imply a marked difference in the fiscal treatment between new and
existing mortgage loans. The latter will continue
to be treated more favourably, partly due to grandfathering provisions. Indeed,
when an old mortgage loan is being refinanced, the borrower will be able to transfer
his tax benefit to a new mortgage loan, even with a different originator.[22] The old tax
regime is portable until the date that mortgage loan matures (under the current
legislation at least 30 years after the conclusion of the mortgage). In other
words, if a borrower, at the moment of an interest reset date, opts to
refinance the loan instead of accepting a new interest rate, then, de facto,
the above mentioned reform will not apply to him.

A further aspect of the change in the
tax treatment of housing finance relates to the gradual reduction in the
deductible rate from 52 % to 38 %.
From 2014 onwards, the
maximum deduction rate of 52 % (for the highest income tax bracket) will
fall to 38 % in steps of half a percentage point per year. This
reform will be applicable to new as well as existing mortgage loans, but the
impact will only be felt very gradually because of slow phasing in and
grandfathering clauses which allow tax advantages to persist on refinancing or
relocation of an existing housing loan. A gradual
approach is needed, but the phasing-in of this measure over a period of 28
years is too slow to have a significant impact on amortising behaviour in the
coming years. In theory, it will also have an impact on existing mortgage
holders, but this will only have material effect after a protracted gestation
period. For the first 20 years only those with taxable income in the highest
income tax bracket of 52 % (who account for only
around 18 % of all households[23])
will be affected. Hence, for 20 years the bulk of existing mortgages in the
second highest tax bracket of 42% will not be affected. In other words, they will
not lose the incentive to postpone paying back the housing loan principal.

The measures proposed increase net loan servicing costs over time, thereby
affecting the affordability of housing, in particular of first-time home buyers
who are important in determining prices and in driving the number of
transactions. To partly address this, there is a
possibility to take a second interest-only mortgage for a partial repayment of the first loan. With each repayment on the
first loan, debt on the other loan builds up to reach a maximum of 50 % of the mortgage sum after 30 years. Although these second loans do not qualify
for tax deductibility of interest paid, they do allow
buyers to initially lower their monthly interest payments. However, the
duo-mortgage also induces them to build up higher residual debt compared to an
outright annuity mortgage and strongly increases the overall costs of financing
the purchase. Therefore, it remains to be seen whether people will actually opt
for up this kind of second mortgage. Nevertheless, on balance interest-only
mortgage loans are poised to lose significant market share, which is a positive
development. The popularity of other amortisation-free mortgage product
structures, such as savings, investment and insurance structures, will also fall
due to the fact that new loans of this type no longer qualify for a specific tax
discount.

First-time home buyers also bear the brunt of more restrictive bank
lending conditions, including the stepwise reduction over five years in the
maximum loan-to-value (LTV) ratio to 100 %.
Reducing the maximum LTV ratio translates into a limitation of the
borrowing capacity of more liquidity-constrained home buyers and thus
accentuates further the existing slump in the housing market, due to the
interaction with restrictions on mortgage interest deductibility for new
housing loans.

Negative equity is increasingly creating gridlock on the housing
market, since most homeowners affected are either not willing or able to take
losses if they relocate. It is estimated that for
around 25 % of housing loans the market value of
the house is currently below that of the outstanding mortgage debt. Relatively
young households are particularly affected. In order to partly address this issue,
from 2014 onwards the interest payment on residual debt will still be tax deductible
for a maximum of 5 years (up to 10 years for residual debt originating between
29 October 2012 and 31 December 2017). Nevertheless, actual costs for these
homeowners will still rise substantially if they sell their properties, as banks
will require the remaining debt to be reimbursed over a period of 10 years.
Moreover, although these measures may contribute to an orderly adjustment of
the housing market in the medium run, their short-term stimulus effect is far less
certain.

Overall, the proposed measures lead to an overly
back-loaded adjustment in the owner-occupied segment, as they are geared
towards preserving advantages for existing borrowers. Therefore, the planned
reduction in mortgage interest deductibility should be accelerated in order to
reduce disincentives to amortise and lower the fiscal drag. This will mean putting a larger part of the burden of adjustment on
existing mortgages. This should make it progressively more attractive for people
to start repaying their loan principal (through the trade-off between the
returns on savings, mortgage interest rates and the rates for tax deduction on
various sources of taxable income). A gradual approach is still important to
avoid undue destabilising effects. At a micro-level,
the turning point of individuals’ decisions on whether or not to amortise will
depend on their specific situations; at a macro-level, the transition will
inevitably still need to be gradual, but should be faster than current plans
imply.

Rental market

The planned
reforms for the rental housing market aim at addressing rental market distortions, notably
the problem of so-called ‘scheefhuurders’
(people still living in social housing, despite having higher incomes), while
protecting those who need social housing. They are relevant and are a step in the right direction,
but fall short of a full implementation of the CSR. The
parliament recently approved income-dependent rent increases for the regulated
rent sector (more than three-quarters of which consists of social housing
corporations)[24],
but with a maximum annual rent increase of 4 % above inflation[25], the
incentive for people with higher income to move out of social housing is very
limited. The measure is expected to have only marginal effect in the short- to
medium term. The additional rental income that social housing corporations receive
as a result of the rent increases will be skimmed by a higher the property tax
levy, amounting to an
additional EUR 50 million in 2013, and rapidly rising to EUR 1.7 billion by
2017 (0.3 % of GDP). There is a risk that this obligation will lead to a commensurate
reduction in investment on the part of social housing corporations, given the
wider financial constraints they are under. On the other hand, rules for
selling part of the social housing corporations’ property will be loosened to
encourage social housing corporations to focus on their prime task of building and
managing social housing. The governance of the social housing sector needs to
be strengthened to prevent the build-up of operational risk in the social
housing corporations. This is particularly the case if there is not strong
enough oversight (as in the case of Vestia) which could lead to severe financial
repercussions for public finances and other social housing corporations. It is fundamental to safeguard the housing
corporations’ social dimension. Along with other aspects, such as spatial
planning, this social role means ensuring
that social housing is available to disadvantaged citizens or socially less advantaged people, who, due to
solvency constraints, are unable to obtain housing at market conditions"[26], including in
sought-after locations. This will imply a role for targeted income support.

The
Commission comes to the conclusion that the Netherlands has made some
progress on measures taken to address the CSR on the housing market.

Research
and innovation

According to the Innovation Union Scoreboard, the Netherlands is an
‘innovation follower’ with above-average performance.[27] It is excellent in terms of frequently quoted scientific
publications and licence or patent revenues from abroad and it will be
important to maintain this level. Although the Dutch research and innovation
system has managed to maintain and in some areas improve its innovative
capacity, the Netherlands’ relative underperformance in private research and
development (R&D) expenditure may reduce economic growth and weaken the
competitiveness of the Dutch economy in the future.

Research and development intensity was 2.04% in 2011, similar to the
EU average of 2.03%. However, business enterprise research and development
expenditure (BERD) is relatively low compared to the EU average (1.07% vs.
1.26% in 2011). This is partly due to the fact that
the Dutch economy features a large service sector and a relatively small
manufacturing industry, which is geared towards medium-tech sectors. Moreover,
a significant proportion of private research and development expenditure is
concentrated in a limited number of large multinational firms. In line with its
commitments under the Europe 2020 Strategy, the Netherlands has set a national
target of 2.5% of GDP for research and development intensity in 2020.

The enterprise policy ‘To the Top’, which features a sectoral
approach to public-private partnerships in the area of research, innovation and
education (‘top sectors’), is now being implemented. The strategy enhances cooperation between businesses and research
institutions and stimulates private investment in R&D and innovation.
Stakeholders play a central role in the process and SME participation is
supported and monitored closely. This approach is expected to channel private
research funding in a mutually beneficial way. Several private investment
commitments were announced in 2012. So far, the progress seems promising, but
at this stage it is still too early to assess to what extent the strategy is
able to mobilise additional resources and investments in R&D and
innovation.

In addition to sectoral innovation policies, horizontal research and
innovation policies and funding have an important role to play. For instance, it is essential that companies with high growth
potential that do not fall under one of the chosen ‘top sectors’ can also be
brought into the enterprise policy and that the selection of top sectors can be
updated. Although some adjustments have been made to the coverage of the top
sectors, there do not seem to be plans to carry out regular revisions.
Moreover, it is important to preserve an adequate level of public funding for
not-earmarked fundamental research, in line with the priorities set out in the
annual growth survey. In the coming years, it will be critical to secure the allocation
of funding and additional expenditure for fundamental research not earmarked
for specified fields, as announced under the coalition agreement.[28]

In recent years, specific subsidies for innovation have been
considerably reduced and largely transformed into tax incentives or generic tax
reductions. All remaining financial support
measures are of a generic nature and are not limited to the top sectors. This
shift from administrative to generic instruments, irrespective of sectors, is particularly
welcome, as it limits the risk that innovative firms outside pre-selected
sectors will fall outside the scope of R&D policies. The R&D tax
incentive scheme WBSO, which allows for the deduction of R&D wages for tax
purposes, was evaluated in 2012.[29]
The evaluation points out that the scheme has had a positive impact in terms of
mobilising additional private R&D expenditure, while the thresholds seem to
ensure a particular concentration in SMEs.

Skills shortages, especially in engineering and technology related
professions, are becoming an increasing concern and a potential bottleneck for
growth. In reaction to these developments, the
government has recently announced the ‘Techniekpact’ strategy. Concrete
measures to make the educational system and the labour market better suited to the
changing requirements of the technology sector are currently being developed. It
will be important to implement this strategy effectively in order to preserve
and enhance the innovative capacity of high-tech companies in the Netherlands. Higher
education should aim at making studies for technical profiles attractive.

The measures taken so far are relevant and are steps in the right
direction in promoting closer links between science and business and in stimulating
additional private investments in R&D and innovation. There is a clear link between the measures presented and the
challenges identified in the country specific recommendation. However, it is
still too early to judge the effectiveness of these measures. It is therefore
important to remain ambitious about strengthening the innovative capacity and
competitiveness of the Dutch economy, ensuring that innovative instruments are
inclusive across sectors while safeguarding a solid base in fundamental research
which is adequately funded and delivering good quality higher education.

The Commission comes to the conclusion that the Netherlands has made
substantial progress on measures taken to address the CSR.

Energy,
Climate and Environment

The latest data suggest that the Netherlands is currently on track to
meet its target regarding reducing emissions not covered by the EU Emissions
Trading Scheme (ETS).[30] By 2020, in accordance with the Effort Sharing Decision, the
Netherlands needs to have reduced emissions that are not covered by the EU ETS
by 16% from their 2005 levels. However, the weak economic activity in the wake
of the crisis has probably partly contributed to achieving this. Emission
targets may well become more difficult to achieve should economic growth pick
up again.

The renewable energy share in the Netherlands rose from to 3.8% in
2010 to 4.3% in 2011, bringing it within reach of its
2011/2012 interim target of 4.7%. Nevertheless, despite the announced more
ambitious policies announced to promote renewables, including a continuation of
the sustainable energy production (SDE+) scheme with a budget of EUR 3 billion
for 2013, the gap between the Netherlands’ current renewable energy share
figures and the 2020 target figure is still one the widest in the EU (in
percentage points). Consequently, if additional policies are not put in place
swiftly, in particular for projects that need a long lead-time such as
off-shore wind, there is a risk that the target of 14% by 2020 (let alone the
recently announced 16 % government target) will not be achieved.

As regards energy efficiency, the Netherlands has set an indicative
national target of 1.5% energy savings per year.
However, it has not complied with the requirements of the Energy Efficiency
Directive[31] to express this target in terms of an absolute level of primary and
final energy consumption in 2020 and to provide information concerning the
basis on which this data has been calculated. As regards industry, the Covenants
(MJA3 and MEE) have not achieved the expected results, with the ETS sector only
achieving an improvement of 1.6% in 2011 (compared to an average expected
improvement of 2.7%).

The Netherlands is the largest gas producer in the EU and eighth largest
in the world. Gas makes up 40% of the Dutch energy
mix, against an EU average of 25%. With two thirds of the existing gas field
reserves used up, the Dutch government is now firmly committed to securing the
Netherlands’ position as the gas hub of north-west Europe, although the less
secure regulatory framework is jeopardising the required investments.

Over the last 20 years, there has been progress on environmental
indicators. For example, there has been a considerable decline in landfilling,
and a reduction in air emissions. Problems persist,
however, with biodiversity and nature conservation, and with meeting the targets
of the Water Framework Directive. The 2012 coalition agreements states that the
Netherlands strives to create a circular economy and intends to stimulate the
(European) market for sustainable materials and for re-use of scarce materials.
There is a need to clarify how this will be achieved. It is, for example, not
clear how skills, capital and knowledge transfer to SMEs will be organised
effectively in order to stimulate them to save costs and secure jobs by using
less resources and energy.[32]
The Netherlands rightfully emphasises the international dimension of resource
efficiency and welcomes sustainability criteria for all biotic resources, and a
European approach to defining subsidies that could result in damage to the environment.

3.5.
Modernisation of public administration

The Netherlands has a tradition of policies that promote reliable
public administration and reductions in the administrative burden. According to the World Bank’s Doing Business 2013 Report, the
Netherlands generally has a business-friendly legal and regulatory environment
that encourages business competitiveness, but there may still be scope for
further improvement or simplification in certain areas of regulation. In 2012,
a new target was announced for a further reduction in the administrative
burden. By 2017, a reduction in the regulatory burden on businesses,
professionals and citizens to the value of EUR 2.5 billion should be achieved.
In order to do so, the introduction of new regulations is to be linked to the
revision or scrapping of existing rules.

In 2012 and 2013, procedures for starting a business have been
further simplified and minimum paid-in capital requirements abolished. The Chamber of Commerce and the innovation agency Syntens are
currently being merged and restructured, which may lead to reduced local or
regional presence but should enhance electronic information and services
provided through a digital one-stop shop for entrepreneurs.[33] Moreover,
mandatory membership fees for enterprises have been abolished and the Chamber
of Commerce is now directly financed by the public budget. While this
reorganisation should produce synergies of this reorganisation it will be
important to continue to deliver high quality and ensure that key business
support services remain available.

A sizeable proportion of the total fiscal consolidation effort is
achieved through savings in the size of the public sector. Although this reduction should result in considerable efficiency
gains, there is a risk that the high quality standards of public service
provision will not be maintained and it could lead to an increase in
expenditure on temporary workers. There is clear scope for the Netherlands to introduce an integrated, systematic and transparent impact
assessment system based on the good practice demonstrated in the EU institutions’
impact assessment process. This would ensure that policies are coherent and
effective, strengthen the evidence base for planned measures and save costs
including the costs of non-action, costs caused by the lock-in effects of
inadequate measures, and indirect and long-term costs.[34] As part of a net expenditure savings effort, the government is also
planning to decentralise a large number of competences to municipalities,
ranging from youth services to long-term health care. Whether these efficiency
gains can be fully realised is very questionable, especially within the
timeframes envisaged.

In
the field of state aid the Dutch administration[35]
only coordinates the central collection data.
Additional responsibilities, such as coordinating notifications, drafting legislation,
recovering state aid and pursuing infringements are divided between different
bodies. The Netherlands does not have mechanisms of control over aid granted, such as transparency mechanisms or bodies in charge of checking the
eligibility of aid awards.

4.
Overview table

2012 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Ensure timely and durable correction of the excessive deficit. To this end, fully implement the budgetary strategy for 2012 as envisaged. Specify the measures necessary to ensure implementation of the 2013 budget with a view to ensuring the structural adjustment effort specified in the Council recommendations under the excessive deficit procedure. Thereafter, ensure an adequate structural adjustment effort to make sufficient progress towards the MTO, including meeting the expenditure benchmark, and ensure sufficient progress towards compliance with the debt reduction benchmark whilst protecting expenditure in areas directly relevant for growth such as research and innovation, education and training. To this end, after the formation of a new Government, submit an update of the 2012 Stability Programme with substantiated targets and measures for the period beyond 2013. || The Netherlands has partially implemented the CSR: The authorities fully implemented the budgetary strategy for 2012 and submitted an update of the 2012 Stability Programme. Herein, they specified substantiated targets and measures for the period 2013 and beyond, that were also foreseen to bring the general government deficit below 3% of GDP in 2013 and to ensure the structural adjustment effort specified in the Council recommendation under the excessive deficit procedure. However, according to the Commission Services' 2013 Spring Forecast the deficit is expected to reach 3.6% of GDP, due to unfavourable economic developments. In 2014 the deficit is expected to remain above the 3% of GDP threshold without additional measures. According to the 2013 stability programme sufficient progress towards the MTO, including meeting the expenditure benchmark and sufficient progress towards compliance with the debt reduction benchmark, are not guaranteed. Safeguarding expenditure directly relevant for growth will depend on budgetary implementation in the coming years.

CSR 2: Take measures to increase the statutory retirement age, including linking it to life expectancy, and underpin these with labour market measures to support raising the effective retirement age, whilst improving the long-term sustainability of public finances. Adjust the second pension pillar to mirror the increase in the statutory retirement age, while ensuring an appropriate intra- and inter-generational division of costs and risks. Implement the planned reform in long-term care and complement it with further measures to contain the increase in costs, in view of an ageing population. || The Netherlands has partially implemented the CSR: The statutory retirement age has been increased and will be linked to life expectancy. The lowering and eventual abolition of the partner allowance in the first-pillar pension is expected to have a positive effect on older workers participation in the labour market and might therefore stimulate an increase the effective retirement age. The tax credit for older workers is being replaced by a new one which targets to the lowest incomes only. It is not expected that this will contribute significantly to the effective retirement age, but given the necessity to take austerity measures the actions seem appropriate For instance, a bonus for employers who hire people with a disability or beneficiaries of social assistance aged 50 or above is being introduced). Loosening employment protection legislation and making unemployment benefits less generous is expected to increase older workers’ labour mobility, and might therefore contribute to labour participation, the effective retirement age and the sustainability of public finances. However, these reforms have been watered down or postponed based on the agreement reached with the social partners. Reforms to the second pension pillar, to mirror the increase in statutory retirement age are implemented. Increasing the statutory retirement age has been addressed, with additional plans to increase the pace at which the increase will be implemented. It is questionable to what extent the other measures will actually support an increase in the effective retirement age. Moreover, although understandable from an austerity point of view, the reduction in the ‘prolonged-working bonus’ may have a negative effect. Furthermore the second pension pillar has not yet been adjusted fully and reforms are still under being negotiated with the social partners.

CSR 3: Enhance participation in the labour market, particularly of older people, women, and people with disabilities and migrants, including by further reducing tax disincentives for second-income earners, fostering labour market transitions, and addressing rigidities. || The Netherlands has partially implemented the CSR: The Participation Act could reduce the number of people on benefits by stimulating them to work, and hence will contribute to budget savings. These reforms are still being negotiated. The phasing-out of the transferrable tax credit for single-breadwinner families is likely to contribute to the participation of second-income earners, although it is to be phased out very slowly (15 years from 2009). The phasing-out of the double tax credit for those on social assistance should reduce inactivity and help prevent low wage traps, but it, too, will be done at a slow pace (20 years from 2012). The increase in the general worker tax credit should make work more attractive and thereby promote labour market participation. The relevant tax measures have been implemented. Loosening of employment protection legislation and making unemployment benefits less generous is expected to increase individual labour mobility, and ultimately contribute to labour market participation. However, these reforms have been watered down or postponed further to the agreement reached with the social partners. Although the measures taken touch upon many aspects of the CSR, tax disincentives are only reduced at a very slow pace and no significant measures are taken to enhance the participation of people with a migrant background in the labour market.

CSR 4: Promote innovation, private R&D investment and closer science-business links, as well as foster industrial renewal by providing suitable incentives in the context of the enterprise policy, while safeguarding accessibility beyond the strict definition of top sectors and preserving fundamental research. || The Netherlands has made good progress in the implementation of the top sectors business strategy which addresses challenges for research and innovation mentioned in this CSR. However, in view of the latest budgetary measures, safeguarding of funding for fundamental research in line with priorities set out in the Annual Growth Survey does not appear certain.

CSR 5: Take steps to gradually reform the housing market, including by: (i) modifying the favourable tax treatment of home ownership, including by phasing out mortgage interest deductibility and/or through the system of imputed rents, (ii) providing for a more market-oriented pricing mechanism in the rental market, and (iii) for social housing, aligning rents with household income. || The legislative changes on eligibility for mortgage interest deductibility are welcome as a first step in the right direction, but need to be stepped up for the stock of existing mortgages. The planned reforms for the rental housing market are equally relevant, but fall short of full implementation of the CSR.

Europe 2020 (national targets and progress)

Employment rate target: 80%. || The employment rate went up from 76.8% in 2010 to 77% in 2011 and 77.2% in 2012. Given that the (rising) employment rate is already close to the target value, it is likely that the target will be met in time.

R&D target: 2.5% of GDP. || The Netherlands has set an ambitious national target of 2.5% of GDP for R&D in 2020, without indicating a subdivision between public and private expenditure. In 2011, the Dutch R&D intensity was 2.04%, similar to the EU average of 2.03%. The increase from the 2010 value of 1.85% is at least partially explained by a change in the way data is collected. Private R&D expenditure (BERD) is relatively low (1.07% vs. 1.26% EU average in 2011) and, before the change of methodology in 2011, had decreased from 1.07% in 2000 to 0.89 % in 2010. Public R&D expenditure (GOVERD and HERD as % of GDP), at 0.98% in 2011, is on the contrary well above the EU average of 0.74% GDP, and the Netherlands is ranking at 4th position. After strong increases up to 2010, public funding for R&D is currently on a decreasing trend, including by the ending of anti-crisis measures taken in 2009-2010. However, according to the NRP, the total of direct and indirect public expenditure is foreseen to be higher in 2016 than in the pre-crisis year 2008. The share of total funds for innovation and research according to the NRP increased from 0.94% of GDP in 2008 to 1.17% of GDP in 2012, notably by a more intensive use of R&D tax incentives, and is foreseen to decrease to 0.99% of GDP in 2016, as a result of the expiry of temporary crisis measures. The feasibility of reaching the EU 2020 target of 2.5% of GDP will depend heavily on a significant leverage effect of the top sector policy and tax incentive schemes on private investments, and on safeguarding the planned direct and indirect public R&D expenditure until 2016.

Greenhouse gas (GHG) emissions target: -16% (compared to 2005 emissions; ETS emissions are not covered by this national target). || Change in non-ETS greenhouse gas emissions between 2005 and 2011: -8%. According to the latest national projections submitted to the Commission and taking into account existing measures, the target is expected to be reached: -19% in 2020 compared to 2005 (with a margin of 3 percentage points).

Renewable energy target: 14 % Share of renewable energy in the transport sector: 10 % || The share of total renewable energy in gross final energy consumption was 4.3 % in 2011 and 4.6 % in the transport sector. (Source: Eurostat. April 2013. For 2011, only formally reported biofuels compliant with Art. 17 and 18 of Directive 2009/28/EC are included). To achieve its renewable energy share targets, the Netherlands would have to make sure additional policies are put in place quickly, in particular for projects that need a long lead-time.

Energy efficiency target: 1.5% per year (partial). The preliminary data suggests that the final energy consumption level in 2020 would be 52.1 Mtoe. || Netherlands has set an indicative national energy efficiency target. However, it has neither expressed it, as required, in terms of an absolute level of primary and final energy consumption in 2020, nor has provided information on the basis on which data this has been calculated.

Early school leaving target: <8% || Early school leaving rate: 10.9% in 2009, 10.0% in 2010, 9.1% in 2011 and 8.8% in 2012. Reaching the early school leaving target seems highly feasible.

Tertiary education target: 40-45% || Tertiary attainment rate: 40.5 in 2009 41.4 in 2010, 41.1% in 2011 and 42% in 2012. In 2012, 42% of those aged 30-34 years had completed tertiary education. The 40% target has thus already been reached. The trend since 2005 has been for this rate to grow by an average of 2.76% on a compound annual basis. To reach the 45% target a compound annual growth rate of 1.01% is needed, and hence this also seems feasible.

Risk of poverty or social exclusion target: -100,000 (reduction of people aged 0 to 64 in a jobless household). || The number of people (aged 0 to 59) in low-work intensity households has risen by 75,000 people since 2008, instead of falling by the required 93,000. Hence achieving this target seems highly problematic.

5.
Annex

Table I.
Macroeconomic indicators

Table II. Comparison
of macroeconomic developments and forecasts

Table III. Composition of the budgetary
adjustment

Table IV. Debt dynamics

Table V. Sustainability indicators

Table VI. Taxation indicators

Table VII. Financial market indicators

Table VIII. Labour market and social
indicators

Table IX. Product markets performance
and policy indicators

Table X. Green Growth

[1] COM(2012) 750 final.

[2] COM(2012) 751 final.

[3] Commission Staff Working Document (2013), In-depth review for the Netherlands,
SWD(2013) 121 final. 13 in-depth reviews were published on 10 April 2013. While
selected for an in-depth review in the AMR, Cyprus was ultimately not reviewed
under the Macroeconomic Imbalance Procedure in view of the advanced
preparations for a financial assistance programme.

[4] In addition, the April 2013 agreement for the health sector implies
that savings considered from a voluntary wage freeze in health care will not
materialise.

[5] Source: 30 Miljard Monitor (Miljoenennota 2013).

[6] Source: Eurostat (General government expenditure by function
(COFOG).

[7] Cyclically adjusted balance net of on-off and temporary measures.

[8] Addressing Base Erosion and Profit Shifting (OECD, 2013).

[9] Taxation
Trends in the European Union (European Commission, 2013).

[10] Taxing
Energy Use: A graphical analysis (OECD, 2013).

[11] Survey on the access to finance of SMEs in the euro area, European
Central Bank, https://www.ecb.int/stats/money/surveys/sme/html/index.en.html.

[12] E.g. the budget for the guarantee scheme 'Borgstellingskrediet MKB’
has been increased from EUR 750 million to EUR 1 billion while other guarantee
schemes such as 'Garantie Ondernemingsfinanciering’ and 'Groeifaciliteit’ are
also being continued; The maximum ceiling for micro-credits has been raised
from EUR 50 000 in 2012 to EUR 150,000 in 2013.

[13] For example, in 2012 a Fund-of-Funds has been created with an
initial capital of EUR 150 million, which will provide later stage funding for
fast growing innovative or high-tech businesses (http://www.eif.org/what\_we\_do/equity/news/2012/DVI\_PPM\_Oost.htm).

[14] The Publicly financed part of the WW will be brought back to two
years. The social partners can decide on offering an extra 14 months of
benefits (which will be financed by employers and employees). WW rights will be
built up at a slower pace than before.

[15] IOAW: income provisions for older and partially disabled unemployed
people who are no longer entitled to unemployment or disability benefits.

[16] Van der Steeg, M., Vermeer, N. and Lanser, D. (2011). Nederlandse
Onderwijsprestaties in Perspectief. CPB Policy
Brief 05.

[17] Source: OCW (2011). Key
Figures 2006-2010, Education, Culture and Science.

[18] See also: Commissie
Toekomstbestendig Hoger Onderwijs Stelsel (2010)

[19] See e.g. http://www.siriusprogramma.nl/?pid=85

[20] This favourable tax treatment is reinforced by an additional
deduction for small mortgage interest payments. The result is that home owners
do not pay net taxes on their property, which especially favours wealthier
households.

[21] It is not yet clear if, as indicated in the original version of the
reforms, borrowers would be able to keep the same, grandfathered, mortgage deal
for their existing loan amount if they move homes. If this is the case, it is
only any additional borrowing that would be subject to the rule change.

[22] The grandfathering applies to the mortgage loan product as well as
to the specific loan amount.

[23] The number of households with an owner occupied dwelling is
4 214 000. Of those, 751 000 had at least one household
member with a taxable income in the highest income tax bracket.

[24] The liberalized rental sector, currently accounting for a mere 7 %
of the total housing stock, is not bound to maximum rent increases.

[25] Tenants with a household income of less than EUR 33,614 would pay
up to 1.5 pp above the inflation rate, for tenants with and income between EUR
33,614 and EUR 43,000 the difference to inflation will be 2 pp, and those with
incomes above EUR 43,000 face rent increases up to 4 pps above inflation. Landlords will thus be allowed to differentiate the rent increases
among their properties, while tenants experiencing income decreases can obtain
rent decreases, and lower-income households are partly compensated with rent
subsidies for losses in purchasing power.

[26] See recital 11 of the Commission Decision of 20 December 2011 on
the application of Article 106(2) of the Treaty on the Functioning of the
European Union to State aid in the form of public service compensation granted
to certain undertakings entrusted with the operation of services of general
economic interest, OJ L 7, 11.01.2012, p. 3.

[27] Innovation Union Scoreboard:
http://ec.europa.eu/enterprise/policies/innovation/facts-figures-analysis/innovation-scoreboard/index\_en.htm

[28] Letter to parliament ‘Uitwerking regeerakkoord
voor versterking kenniseconomie’, 11 February 2013.

[29] http://www.rijksoverheid.nl/documenten-en-publicaties/rapporten/2012/04/02/hoofdrapport-evaluatie-wbso-2006-2010.html

[30]
Referentieraming Energie en Emissies Actualisatie 2012 (PBL 2012b)

[31] Directive
2012/27/EU of the European Parliament and of the Council of 25 October 2012 on
energy efficiency. OJ L315 of 14.11.2012, p.1

[32] NL could learn from one of the most successful initiatives in
Europe in this respect, the UK Enworks initiative (www.enworks.com), co-funded from the ERDF
programme budget.

[33] www.ondernemersplein.nl

[34] The European Commission aims to ensure that, by 2020, all Member
States carry out systematic ex-ante assessments of the environmental, social
and economic aspects of their policy initiatives (COM(2012)710 final, p.32:
Proposed Environmental Action programme to 2020.

[35] State aid coordinated by the Ministry of Economic Affairs.

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