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# 52012SC0322R(01)

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2012 national reform programme and stability programme for The Netherlands Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on the Netherlands' 2012 national reform programme and delivering a Council Opinion on the Netherlands' updated stability programme for 2012-2015 /\* SWD/2012/0322 final/2 \*/**

  

CONTENTS

Executive Summary . 2

1..... Introduction ... 3

2..... Economic Developments and Challenges . 4

2.1.      Recent
economic developments and outlook . 4

2.2.      Challenges . 5

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

3.1.      Fiscal
policy and taxation . 9

3.2.      Financial
sector 16

3.3.      Labour
market, education and social policies . 16

3.4.      Structural
measures promoting growth and competitiveness . 20

3.5.      Modernisation
of public administration . 22

4..... Overview table ... 24

5..... Annex ... 28

Executive
Summary

In 2012, the economic
activity of the Netherlands is expected to contract by 0.9 %, before regaining
light momentum in 2013. Unemployment is foreseen to increase from 5.7 % in 2012
to 6.2 % in 2013.

Constrained by a highly
complex political context, the Netherlands has only adopted a limited number of
far-reaching policy initiatives. As regards the pension system, the Netherlands has tabled a reform proposal aimed at gradually raising the statutory
retirement age. The Netherlands is further taking measures to increase labour
supply, especially of second-income earners. In addition, the Netherlands has implemented a strategy aimed at fostering closer science-business links through its
new enterprise policy.

The Netherlands continue to face a number of serious challenges in the short to medium term. Rigorously
pursuing the budgetary strategy for the year 2012 and specifying the measures
necessary to ensure implementation of the 2013 budget with a view to timely
correcting the excessive deficit will be of paramount importance. Important
changes to the first and second pension pillar, as well as to long-term care,
have been announced, which have to be assessed against the challenge of an ageing
population. Furthermore, participation in the labour market, particularly of
women, people with disabilities and migrants is weak and tax disincentives
remain notably for second-income earners. Innovation is high on the Dutch
political agenda; there is however a risk that is would come at the cost of
fundamental research or of the innovative firms it does not target. Finally,
structural distortions have built up in the Dutch housing market, both in the
property market and rental market, leading to a gradual increase in household
leverage and an inefficient allocation of capital.

1.
Introduction

In June 2011
the Commission proposed four country specific recommendations for economic and
structural reform policies for the Netherlands.  In July 2011 the Council
adopted these recommendations which concerned economic and structural reform
policies. The four country specific recommendations addressed to the Netherlands referred to public finances, the pension system, the labour market, innovation,
and investment in research and development. On 27 April 2012 the Netherlands presented updates of its national reform programme and stability programme
detailing progress made since July 2011 and plans going forward. This Staff
Working Document assesses the state of implementation of the 2011 country
specific recommendations in the Netherlands, identifies current policy
challenges and, in this light, examines the country’s latest policy plans.

Overall
assessment

The most pressing
challenges that the Netherlands faces are in the areas of fiscal consolidation,
the long-term sustainability of public finances (in particular pensions), the
labour market, innovation policy, education, and the housing market. Following
the recent worsening of the fiscal outlook, predominantly due to unfavourable
cyclical developments, it is crucial to secure additional consolidation efforts
while safeguarding long-term growth drivers from possible additional spending
cuts. As regards the pension system, the Netherlands has made a reform proposal
aimed at gradually raising the statutory retirement age to 66 in 2019 and to 67
in 2024, linking it to life expectancy thereafter. The proposals to increase
the statutory retirement age are not yet adopted and details of an intended increase
in the retirement age, especially in the second pillar, have as yet not been
filled in. Another important structural problem lies in the housing market.
Distortions have built up in both the rental and the property segment which,
together with uncertainty about future reforms, weigh increasingly on the
recovery of the Dutch economy. The recently announced measures are a step in
the right direction, but fall far short of what is required to address the
distortions in the housing market. The Netherlands is taking measures to
increase labour supply, especially of second-income earners, but these could
have been more ambitious and are partly offset by cuts in childcare subsidies.
Vulnerable groups are targeted as well, although concrete implementation of the
measures is liable to considerable risks. The Netherlands has implemented a
strategy aimed at fostering closer science-business links through its new
enterprise policy, but this reduces funding earmarked for fundamental research.
Also, the prioritisation of sectors in the new enterprise policy is weakly
underpinned, while overall research and development intensity remains well
below the target. The professed focus of educational policies is to improve
quality instead of quantity, but some measures under consideration adversely
affect pupils with special educational needs. On the other hand, the Netherlands can be expected to reach the target committed to for the number of early school
leavers.

The policy plans
submitted by the Netherlands are for a large part relevant. However, several
measures are insufficiently specified and/or quantified and in some areas, the
policy plans fall short of addressing the challenges in a comprehensive way.
Moreover, implementation risks are high in view of upcoming elections in
September, even though the caretaker government has secured the backing of
other parties in Parliament for now. The Netherlands is committed to complying
with the recommendations of the Excessive Deficit Procedure, to further improve
the budgetary position towards the medium-term objective, and to ensuring the
long-run sustainability of public finances. It also plans to increase labour
market participation, but there are substantial implementation risks. The strategy
for the promotion of private R&D investment is not accompanied by an impact
assessment and a monitoring framework.

2.
Economic Developments and Challenges
2.1.
Recent economic developments and outlook

Recent
economic developments

In the second half of
2011 the Dutch economy experienced a sharp downturn, recording negative
quarter-on-quarter growth of 0.4 % in the third quarter and 0.7 % in
the fourth quarter. Both quarterly growth rates are significantly lower than
the corresponding projections of 0.1 % and 0.0 % in the Commission
services' 2011 Autumn forecast. This reflects a pronounced weakening of both
internal and external demand. Consumer confidence, which was already markedly
negative in the summer, deteriorated further at the end of 2011 and was at its
lowest level since 2003 in January 2012. This was mirrored by a decrease in
consumer spending in the second half of the year. House prices fell by 2.3 %
in 2011 and the number of transactions, whilst showing some recovery in
December, has remained low. Producer confidence also stayed weak. Industrial
production in the manufacturing sector (excluding energy) shrank by 1 %
(quarter-on-quarter) in the fourth quarter of 2011. On the external side, Dutch
exports have been adversely affected by the slowdown in global trade. Over 2011
as a whole, gross domestic product (GDP) grew by 1.2 %.

Economic outlook

For 2012, the
outlook for growth remains dim. The Commission services' 2012 Spring forecast
projects real GDP to decrease by 0.9 %. The Dutch economy is expected to record
slightly negative growth of 0.1 % and 0.2 % in the first and the second
quarter. Towards the end of the year, a fragile and subdued recovery is
anticipated, which would extend over the whole of 2013, largely on the back of
improved external demand.

The growth
rate of private consumption — already negative for four consecutive quarters in
2011 — is expected to remain negative in 2012, as a result of fiscal
consolidation measures, mainly affecting households, and negative wealth
effects. The latter mainly stem from falling prices in the housing market and pension
cuts announced for 2013. Investment is likely to remain subdued, on the back of
the weak growth outlook. While net exports are expected to remain the only
component yielding a positive contribution to growth, they are likely to suffer
from weakening external demand, mainly from the rest of the euro area. HICP
inflation is expected to decline from 2.5 % in 2011 to 2.5% in 2012,
mainly as a result of subdued domestic demand.

Economic
growth is expected to return to positive territory in 2013, but only at a
modest rate of 0.7 %, with net exports being the sole significant driving
force. These projections are based on a no-policy-change assumption. The impact
of additional consolidation measures, agreed at the end of April, is not
included in the baseline forecast.

Procedural and governance issues

The Netherlands has ensured that its national reform programme and stability programme are consistent
and follow the agreed guidelines, except for fiscal targets beyond 2013, which
are missing. The two documents outline in an integrated manner the fiscal
consolidation efforts committed to and key structural reforms and reforms
underpinning macro-economic stabilisation. The national reform programme and stability
programme were submitted on 27 April 2012. Both documents include a large
number of measures that either have not yet been implemented or still are in a
conceptual phase and are not presented in detail. Clear implementation risks
derive from the upcoming elections.

In the national reform
programme, the Netherlands evaluates progress towards national
targets for the year 2020. These targets set out the longer-term development
path to modernise the Dutch economy and put imminent reform priorities in a
broader context. In addition, the national reform programme describes the
proposed measures in relation to the Euro Plus Pact. Local authorities, the
European Anti-Poverty Network and the Social Alliance were consulted on the
national reform programme.

2.2.
Challenges

The Dutch economy was
deeply affected by the financial and economic crises, causing a severe
contraction in 2009. Since then, the recovery has been gradual at best, with
growth falling back into negative territory at the end of 2011, and the growth
outlook remains dim. This suggests that underlying problems are of a structural
nature and that low growth is not only a cyclical phenomenon, and calls for a
fundamental policy response which addresses underlying structural risks to
long-term competitiveness and sustainability. The economy is in need of far-reaching
structural reforms in several areas (among which the labour and housing
markets, pensions and public finances) in order to relaunch itself on a path of
sustainable growth. Structural reforms would not only make the Netherlands
stronger in the medium to long term, but would also have an immediate positive
impact by reducing the uncertainty that is at present looming over the Dutch
economy. Against this background, while the challenges as identified in the
2011 European Semester remain, by and large, relevant for the Netherlands, the current economic situation has made dealing with them far more pressing.

In the area of public
finances, the two main challenges are (i) correcting the excessive deficit by
2013 through ‘smart’ consolidation and (ii) improving the long-term
sustainability of public finances. As regards short-term fiscal efforts, it is
crucial to safeguard long-term growth drivers from possible additional spending
cuts. In particular, although education budgets have risen slightly in nominal
terms in recent years, real expenditure on education is under pressure,
threatening the quality of future human capital resources, which are a
precondition for sustainable growth. Similarly, efforts to promote innovation
and preserve the high-quality base of basic research are essential.

With regard to long-term
sustainability, the crisis aggravated already existing concerns. The Netherlands had already been confronted with a rapidly ageing society and lower fertility
rates. The main policy areas concerned are pensions and health care. In the
area of pensions, the main challenge is to accompany the targeted rise in the
statutory retirement age (and a link to life expectancy) with a matching
agreement in the second (occupational) pension pillar, comprising an appropriate
intra- and inter-generational division of costs and risks. A supplementary
overhaul of the governance of the second pillar is overdue to help underpin
resilience to ageing. As for health care, costs in the long term are expected
to increase more than in other countries, mainly due to expected increases in
the costs of long-term care. Over the last few years, health care budgets have
experienced structural overruns. It is thus essential to take measures to curb
the structural rise in publicly funded expenditure, while preserving the
quality and accessibility of health care provision.

Other structural
deficiencies concern labour supply and the quality of the workforce. As the
country is faced with a growing structural labour shortage due to ageing, the
main issue for the Dutch labour market will be to make more use of untapped
labour potential, such as female full-time employment, and labour market
participation of disabled people, older workers, and people with a migrant
background. The recent rise in unemployment has masked underlying mismatches on
the labour market.

A major challenge with
respect to growth-enhancing macroeconomic policies is fostering the Dutch
economy’s innovation capacity by supporting investment in and orientation
towards high added-value production and services. Although the Dutch research
and innovation system has managed to maintain its innovative capacity, resting
on a historically strong educational base, the underinvestment of the
Netherlands in business research and development and growing pressures on funds
for basic research may adversely affect future economic growth and the
competitiveness of the Dutch economy, to an extent which cannot be offset by
technology transfer. In this regard, the concentration of Structural Funds on a
small number of sectors could reduce the positive effects they have on
triggering private research and development investments.

Another important
structural problem lies in the housing market (Box 1). Over the last decades,
structural distortions have built up in the housing market as a result of a
combination of factors.

In the property market,
the trend increase in labour market participation and supply restrictions have
interacted with tax incentives for home ownership (in particular full mortgage
interest deductibility, which especially favours higher-income households),
inducing a gradual increase in leverage of households. This was facilitated by
high loan-to-value ratios coupled with the development of interest-only
mortgages. The fact that savings invested in property are taxed differently
from investments in other assets and that income taxation does not treat
mortgage and equity financing of property in the same way has resulted in inefficiencies
in the allocation of capital. The programmes commit to policies to
progressively lower the maximum loan-to-value ratio and to reduce the scope for
mortgage interest payments to be tax-deductible, limiting this possibility to
amortising loans, but only for new cases.

The proposal is a step
in the right direction, but falls short of addressing the distortions that have
built up in the property market. The limitation to new cases places the
adjustment in the purchase market on younger cohorts and only entails a very
gradual positive impact on public finances. Moreover, extending this measure to
existing housing loans would speed up the reduction of the distortions,
arguably without a marked additional drag on house prices. Finally, an overly
slow transition in the purchase segment would limit the likely positive supply
effects of a gradual increase in rents in the regulated rental market.

In the rental segment,
the Netherlands has the largest social housing stock (relative to the total
housing stock) in the EU. Social policies and caps on rents and rent increases
have led to a price-inelastic supply of rental housing and have hampered labour
mobility, but do not prevent people with high incomes from benefiting from
social housing. Furthermore, the special legal status of the social housing
corporations does not provide incentives for the efficient use of the sizeable
capital stock they own. The intention outlined in the programmes to allow
differentiated rent increases again represents a step in the right direction,
but falls short of a comprehensive overhaul.

Hence, on balance the
measures for the housing market in the stability and in the national reform programmes
fall short of what is required and could in some respects even accentuate
structural problems. Against the background of negative wealth effects from
decreasing house prices and rising uncertainty of reforms of the housing
market, impeding the already sluggish recovery of the economy, the need for a
comprehensive reform of housing policies encompassing all segments of the
market has become more pressing. Reforms in the housing market should aim at
phased-in changes to both the property market (modifying the favourable tax
treatment of home ownership, especially mortgage interest deductibility,
including existing cases) and the rental market (scaling down the scope and
size of the social housing segment, allowing a more market–oriented pricing
mechanism, and reviewing the status of social housing corporations).

Box 1: The Dutch
housing market – state of play

The
private housing market is highly regulated to protect tenants and make housing
affordable. The regulations concern both the rental market and the property
market.

Substantial
tax benefits exist to support home ownership. For owner-occupied housing, home
owners enjoy the most generous mortgage interest rate deductibility (MID)
scheme in the EU and can fully deduct interest payments on their mortgage loans
from taxable income at the highest marginal tax rate (meaning that wealthier
households benefit the most). Owners pay taxes on a low level of imputed rents
and add only a small fraction of the value of their property to taxable income,
so that owner-occupied housing capital is fiscally favoured over other forms of
capital.

This
favourable tax treatment is reinforced by an additional deduction (‘wet
Hillen’). If the amount of imputed rents (that adds to taxable income) is
larger than mortgage interest payments (that can be deducted from taxable
income), the difference is granted as an additional deduction. The result is
that home owners do not pay net taxes on their property, which especially
favours wealthier households.

In
the rental market, most tenants enjoy ceilings on rents and annual rent
increases. Relatively cheap housing is provided by social housing corporations
that serve the largest social housing sector in the EU. These housing
corporations are private institutions with a statutory obligation to provide
housing at regulated rents for lower income categories. This subsidised rental
market covers by far the largest part of the rental segment and features long
waiting periods for new applicants, especially in urban areas. The non-social
housing market accounts for only a small part of the total housing stock.

The
interaction of, on the one hand, tax incentives, financial innovations, bank
mortgage policies and trends in the labour market, which push up demand, and,
on the other hand, policies limiting supply, has driven up prices. On the other
hand, restrictions to the level of rents reduce the value of (rental) property,
especially the housing stock of social housing corporations.

Due
to the increase in property prices, housing loans accounted for 27 % of
bank assets in 2009, up from 17 % in 1997 and well above the EU average
(15 %). Funding gaps have increased substantially, with concurrent
mismatches and refinancing risks.

Finally,
the government is exposed to the guarantees given under the national mortgage
guarantee scheme (NHG), which are more likely to be drawn if unemployment
increases, and the Waarborgfonds Sociale Woningbouw, which guarantees loans to
social housing corporations. This comes on top of the burden to the government
budget stemming from other policies in the housing market, for example the MID
(2 % of GDP) and the low level of taxation of imputed rents (ca. 0.5 %
of GDP).[1]

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

Budgetary developments and debt dynamics

Following the
fall of the minority government, which had governed with parliamentary support
of the Freedom Party (PVV) since 2010, leading to early elections scheduled on
12 September 2012, the caretaker government reaffirmed its commitment to fiscal
consolidation. The stability programme confirms the commitment to comply with
the recommendations of the Excessive Deficit Procedure and outlines a package
of additional measures aimed at reducing the budget deficit to a maximum of 3 %
of GDP in 2013. After 2013, the programme aims to further improve the budgetary
position towards the medium-term budgetary objective (MTO) of -0.5 % of GDP by
targeting a structural effort of at least 0.5 % per year. The MTO adequately
reflects the requirements of the Stability and Growth Pact.

The budgetary
outcome in 2011, a deficit of 4.7% of GDP, was significantly worse than the
deficit of 3.7% of GDP expected in the 2011 stability programme.  This was
predominantly due to unfavourable cyclical developments, resulting in much
lower real as well as nominal GDP growth than anticipated, in combination with
higher-than expected expenditure.

According to
the 2012 stability programme, the general government deficit is expected to
fall to 4.2% of GDP in 2012 (as against 2.2% in the 2011 stability programme)
and to reach 3 % of GDP in 2013, the deadline for correction of the excessive
deficit set by the Council in December 2009. The fiscal baseline projections of
the programme include the measures, mainly tilted to the expenditure side, which
had been previously agreed by the outgoing government covered in the 2012
budget. In addition, the deficit projections include consolidation measures of
an additional package proposed by the government in late April 2012, (the ‘Kunduz
agreement’) just after the minority government had faltered. This additional
package was presented (but not voted upon) in Parliament before being submitted
as part of the stability programme. The additional consolidation measures would
for a limited part already take effect in 2012, but are predominantly
concentrated on 2013. For 2013, the net deficit-improving impact of these
measures (around two thirds of which are on the revenue side — see Box 2) would amount to approximately 1.4 % of GDP, if fully implemented. For the remaining
years covered in the stability programme, i.e. 2014 and 2015, no targets for
the general government balance and debt are given, in breach of the
requirements of the Code of Conduct. The projections presented for public
finance variables at a lower level of aggregation derive from earlier
medium-term projections and do not take into account any subsequent impact of
the additional savings package adopted by the caretaker government in April. They
are, therefore, inconsistent with the budgetary targets provided for 2012 and
2013. Hence, the sustainability of the targeted budgetary correction in 2013
and progress towards the MTO in the outer years of the programme cannot be
assessed. According to the Commission services' 2012 Spring forecast, which
does not include the late April 2012 additional consolidation measures, the
general government deficit is projected to modestly improve to 4.4 % of GDP in
2012 and to fall back to 4.6 % of GDP in 2013.

The April
agreement on additional measures, reached under challenging circumstances,
sends a strong and welcome signal of the commitment of the Netherlands to meeting its obligations under the EU fiscal framework and to put government finances
on a sustainable footing. It fits in with a strong Dutch track record as
regards fiscal discipline. However, the programme does not sufficiently specify
and quantify the additional measures proposed in April 2012 to allow a full
assessment of their budgetary impact. Moreover, there are substantial
implementation risks due to upcoming elections. These are not solely restricted
to the newly announced consolidation measures, but also relate to uncertainties
on how to account for some of the measures already agreed upon (but not yet
formally adopted) by the previous government. This complicates an assessment of
risks surrounding the attainability of the fiscal target for 2013. Moreover,
the macroeconomic outlook appears to be optimistic, as the programme projects
economic growth of 1¼% in 2013, whereas this figure does not take into account
the negative impact of the additional consolidation measures on growth. By
contrast, the Commission services' 2012 Spring forecast projects a somewhat lower
growth rate of 0.7% (which also does not account for the second-round effects
of the recent additional measures proposed). In addition, whilst the stability programme
does not specify budgetary targets beyond 2013, the technical revenue and
expenditure projections (in essence based on a no policy change assumption from
the 2012 budget) point to a deficit significantly above the 3 % reference value
in outer years of the programme, implying that the sustainability of a possible
correction of the excessive deficit in 2013 and subsequent progress towards the
medium-term objective is not guaranteed on the basis of the information
provided.

Amongst the
measures announced in the April package, some are of a more structural nature
(although their numerical impact cannot be fully assessed, especially beyond
2013) and concern in particular the pension system and the housing market as
well as health care. However, as illustrated by box 2, the fiscal impact of
measures related to structural reforms is limited. The direction of change of
the structural reforms proposals is encouraging, especially as they concern
areas where progress had been slow previously, but they need to be followed up
and strengthened also after 2013 to assure the sustainability of fiscal
adjustment.

The 2012 stability
programme confirms the commitment towards the medium-term objective of a structural
general government balance[2]
of -0.5 % of GDP. However, whilst the 2011 stability programme targeted the
achievement of the medium-term objective in 2015, the 2012 stability programme
does not specify a date. In the absence and quantified targets for the years
beyond 2013 (for the years 2014 and 2015 there is only a commitment to a
structural effort of at least 0.5 % of GDP, in line with the requirements
emanating from the Stability and Growth Pact), an assessment regarding the
progress towards the medium-term objective cannot be made. On the basis of the
technical expenditure projections for 2014 and 2015, compliance towards the expenditure
benchmark is safely secured, as the relevant expenditure growth rates reported
would remain well below the reference rate.

Box 2. Main budgetary measures[3]

|| ||

|| Revenue || Expenditure ||

|| 2011 ||

|| Increase in the insurance tax (0.05 % of GDP) || Wage moderation in the central government (-0.2 % of GDP) International cooperation (-0.1 % of GDP) ||

|| 2012 ||

|| Limit on tax credit for single parents (0.1 % of GDP) Reversal of health care own contribution increase (0.1 % of GDP) || Health care benefits (-0.1 % of GDP) Child care benefits (-0.1 % of GDP) ||

|| 2013 ||

|| Adjustment treatment of pension deductability. (From 2013 onwards, fewer pension entitlements qualifying for tax relief can be accrued.) (0.1 % of GDP) · VAT increase by 2 percentage points as of October 2012 (0.7 %  of GDP) · Environmental friendly taxation and increase in excise duty on alcohol, tobacco and soft drinks (0.25 % of GDP) · Limiting mortgage interest deductibility for new mortgage loans (0 % of GDP; structural gains far beyond the programme horizon) || Health care benefits (-0.1 % of GDP) Primary education (-0.1 % of GDP) Increase of own contribution for specialised health care in combination with other measures (0.3 % of GDP) Increase retirement age by 1 month in 2013 up to 67 in 2024 (0 % of GDP, but sizeable structural gains beyond the programme horizon) Wage freeze (for civil servants and non-indexation of income tax brackets) (0.5 % of GDP) ||

|| 2014 ||

|| · Stimulating movement in the rental housing sector (0.2 % of GDP) || · General government: savings at central government, autonomous administrative authorities and agencies (-0.1 % of GDP) · Health care benefits (-0.1 % of GDP) ||

|| 2015 ||

|| · Impact of cutbacks in palliative care (as they lead to a reduction in healthcare insurance premiums) (0.2 % of GDP) || · Removing insured health services (medical care, medicines and psychomedical care) to treat conditions with a low impact on health from the basic insurance package (-0.2 % of GDP) · Lower levels of government: savings for autonomous administrative authorities and agencies (-0.1 % of GDP) ||

 Note: The degree of detail reflects the type of information made available in the stability programme and, where available, of a multiannual budget.

In structural
terms, the strongest planned fiscal effort is in 2013, linked to the commitment
to reduce the headline general government deficit to at most 3 % of GDP by that
year. The recalculated annual average fiscal effort over the years 2011-2013,
the adjustment period defined in the context of the Excessive Deficit Procedure,
is projected to amount to 2.3 % of GDP, or just above 0.75 pp yearly on
average, in line with the average annual fiscal effort of ¾ % of GDP
recommended by the Council.

In the 2011
European Semester, the Council adopted a country specific recommendation for
the Netherlands with a reference to budgetary developments. This recommendation
consisted of several elements. The government has broadly adhered to the first
element, i.e. the implementation of the budgetary strategy of 2012 in line with
the requirements in the context of the Excessive Deficit Procedure. National
expenditure targets have been broadly met in absolute levels, yet allowing for
some additional increases in unemployment benefits. However, expenditure plans
for 2012 and 2013 contain several cuts in areas directly relevant for growth,
notably fundamental research and education. Progress towards the medium-term
objective also does not appear to be secured. Until 2013 significant progress
is booked, particularly in 2012 and 2013, but for the outer years any further progress
towards meeting the medium-term objective is conditional on the implementation
of intentions expressed yet not backed by specified measures in the programme.

In 2008,
general government gross debt increased markedly by 13 pps. to 58.5 % of GDP
despite a budget surplus of 0.5 % of GDP. This increase was mainly caused by
government operations to stabilise the financial markets, leading to a large
debt-increasing stock-flow adjustment of around 15% of GDP. In 2009, the
general government gross debt reached 60.8 % of GDP, just above the 60 %
threshold. In 2010 and 2011, the debt ratio further increased by over 2
percentage points per year to 65.2 % of GDP in 2011.

According to
the stability programme, the debt-to-GDP ratio is expected to further rise
relatively strongly in 2012, to 70.2 % of GDP and to increase slightly further
to 70.7 % of GDP in 2013, taking into account the positive impact of the
additional consolidation measures. For 2014 and 2015, the stability programme
does not specify debt targets. The debt dynamics for 2012 are in line with the Commission
services' 2012 Spring forecast, which forecasts a debt ratio of just above 70 %
of GDP. For 2013, in the absence of additional consolidation measures, gross
government debt is projected to rise to 73.0 % of GDP and thus remains well
above the 60 % reference value. In the absence of figures provided, an
assessment of compliance with the debt reduction benchmark beyond 2013 cannot
be given. The projections in the stability programme show the debt ratio to
increase in 2012 and 2013. This development is not in compliance with the 2011
country specific recommendation for the Netherlands on setting the high public
debt ratio on a downward path as of 2012.

Long-term
sustainability

The long-term
change in age-related expenditure is clearly above the EU average. The initial
budgetary position compounds the long-term costs. Under a no-policy change
assumption, the debt ratio would increase to 79% of GDP by 2020. Additional
fiscal consolidation beyond the forecast horizon would be needed to make
progress towards the reference value for government debt beyond the short-term.
The full implementation of the programme would not be enough to put debt on a
downward path by 2020 and would still lead to a debt-to-GDP ratio above the 60 %
reference value in 2020. Given the high projected increase in age-related
expenditure, focus should be put on containing long-term public spending
trends, mainly care-related expenditure but also pension expenditure, in order
to diminish the sustainability gap. Ensuring sufficient primary surpluses over
the medium-term would improve the sustainability of public finances.

The long-term
cost of ageing is clearly above the EU average, due to relatively high expected
increases in both public pension and long-term care expenditure. The expected
increase in long-term care expenditure is by far the highest in Europe, not least because of the relatively large share of the population aged 65 years and
over receiving long-term care. Structural reforms in pensions and health care
to curb the projected increase in age-related expenditure would contribute to
reducing sustainability risks, as indicated in last year’s country specific
recommendation on public finances.

With a view to
ensuring the sustainability of public finances, but also to improving
participation, the government reached an agreement to raise the statutory
retirement age to 66 in 2020 and to link it to life expectancy thereafter. Although
the proposal was approved by the lower house of Parliament on 7 February 2012,
the government presented a different plan in the national reform programme,
indicating the intention to increase the retirement age by 1 month in 2013, in
steps to 66 in 2019, to 67 in 2024 and to link it to life expectancy
afterwards, as recommended in the country specific recommendation on long term
sustainability of public finances.

The planned increase
in the statutory retirement age in the first pillar should be accompanied by an
increase in the statutory retirement age for the second pillar. This needs
approval by the social partners. A final agreement among them has not been
reached yet. In any event, the government is expected to send a draft act to
Parliament in the first half of 2013. The law would not become effective before
January 2014. In this regard it is important that the authorities ensure intra-
and inter-generational risk sharing within the second pillar and that an
increase in the procyclicality of the financing of pension funds is averted.
Reaching an agreement on the second pillar would also be important to reduce
the uncertainty currently weighing heavily on consumers’ decisions.

The
government has provided a blueprint for the reform of long-term care in a
letter to Parliament (Programmabrief langdurige zorg), committing itself
to spending increases during its term of office combined with structural
expenditure increases to invest in additional health workers and the quality of
health care. In addition, the government intends to reform long-term health
provision, in particular by decentralising certain aspects of long-term care to
local government, by making insurers responsible for implementation, by
creating a division between long-term care and housing and by tightening the
eligibility criteria.

Compared to
earlier measures in this field, the planned reform of long-term care is
ambitious, although implementation has so far been only partial, with the most
important and challenging measures under the reform not scheduled before 2013 and
due to the existence of implementation delays (this is specifically the case
for the tightening of the eligibility criteria, which has been delayed by one
year with respect to what was stated in the Coalition Agreement). In addition,
the measures planned are in some cases not yet sufficiently specified, such as
how the planned division between care and housing costs is to be achieved.
Also, with a view to improving the sustainability of public finances, insurers
should bear a greater part of the risk. In view of the limited success of
insurers in curbing costs in the care sector, there are significant implicit
liabilities under the current proposal.

Fiscal framework

The main characteristics
of the current multi-annual trend-based fiscal framework in place in the Netherlands are: (i) the use of real expenditure ceilings, which are determined ex ante and
are applied to the entire term of office of the government; (ii) automatic
stabilisation on the revenue side; and (iii) the use of independent
macroeconomic assumptions. When a new government is formed, medium-term
budgetary targets are set by determining the desired development of general
government expenditure and the tax burden for each year until the last year of
the government’s term. Targets are not enshrined in law, but are embedded in a
coalition agreement. This framework covers the central government and the
social security sector, but does not cover local government. In this respect,
the government, in line with its commitments under the Euro Plus Pact, is
working on draft legislation that will transpose the EU fiscal rules, as set
out in the revised governance framework, into national legislation, including
provisions for local government.

The overall
performance of the Dutch medium-term budgetary framework has been strong since
its implementation in 1994. However, in the case of a protracted economic
slowdown, entailing a significant negative impact on both potential and actual
growth such as that which the Netherlands is currently experiencing, allowing
for the possibility of an exceptional downward adjustment of real expenditure
ceilings would help counter the excessively restrictive policy bias that would
occur if  ceilings had inadvertently been set too high compared to an
attainable growth path consistent with fiscal targets or if the automatic
stabilisers are not allowed to work freely.

In October
2010, the government amended the budgetary rules governing expenditure and
revenue adopted in the past, and added a few additional constraints, in particular:

(1) A
signalling margin specified as a downward deviation of 1 percentage point
relative to the base path. If the signalling margin is exceeded, additional
consolidation measures would have to be taken;

(2) Making
expenditures that are sensitive to cyclical trends (unemployment benefits,
social assistance benefits and movements in the terms of trade) once again
subject to the expenditure ceiling framework.

These rules would further limit the ability to
conduct discretionary countercyclical policy in cases where this would be
warranted, such as a severe economic downturn. However, the status of the
signalling margin in particular is unclear in the current context.

Tax system

The
tax-to-GDP ratio was 38.4 % in 2011, below the EU average (39.1 %).
The Netherlands displays a fairly centralised tax structure as local government
taxes account for only a very small fraction of total tax revenues. Concerning
the composition of revenues, indirect taxes and direct taxes each accounted for
slightly less than a third of total tax revenues, with social contributions,
among the highest in the EU, representing the rest. The share of indirect taxes
decreased in the wake of the crisis, while the share of direct taxes has
remained broadly unchanged. The implicit tax rate on labour (36.9 % in
2010) is somewhat above the EU average (36 %), while the implicit tax rate
on capital (12.5 %) is significantly lower than the EU average (27 %).

Relative to
other EU Member States, the debt bias in taxation is high for both households
and corporations. For households, this is linked to mortgage interest
deductibility (see below and Box 1). For corporations, the effective marginal
tax rate on equity-financed new investment was slightly below 30 % in
2010, (unweighted EU average: 25.5 %). Debt-financed investment faces a
negative effective marginal tax rate (-7.5 %).

The low level
of taxation of imputed rents, the treatment of pension contributions and
mortgage interest deductibility involve significant foregone tax revenues of
around 3½ % of GDP in total.

The newly
implemented measures (Belastingplan 2012) reflect several priorities
highlighted in the Annual Growth Survey. In particular, in order to improve
efficiency, the tax system is being simplified by abolishing seven minor taxes,
some of which are environmental taxes (e.g. landfilling and groundwater).

Concerning
green taxation, the national reform programme announces a green tax package,
but does not mention concrete targets or a date of publication. However, with effect
from July 2012 vehicles with lower CO2 emissions are charged less
and the difference in taxation between petrol and diesel is gradually being
phased out.
On the other hand, a low tax base for company cars exists, which results in an
estimated fiscal loss of EUR 1.5 bn per year.[4]

The fight
against tax fraud is enhanced by allowing only one bank account for refunds and
by increasing fines.

In the
context of the current economic downturn, the Netherlands would benefit from
growth-friendly taxation reforms, such as broadening tax bases, raising
indirect and green taxation, reducing direct taxation and phasing out the
growth-unfriendly tax treatment of pension contributions, imputed rents and
mortgage interest payments.

3.2.
Financial sector

The financial
soundness of Dutch banks has improved recently as exemplified by the fact that
financial institutions have paid back a substantial share of government
financial support since the conclusion of the 2011 European Semester. Of the
three financial institutions that have received financial support from the
government, one (Aegon) has repaid all its debt and the other two (SNS Reaal
and ING) have partially repaid their financial support (EUR 185 million out of
EUR 750 million and EUR 7 billion out of EUR 10 billion respectively). No decision
has yet been taken concerning sale of the shares in ABN AMRO and Fortis Bank
Nederland that the government acquired during the financial crisis.

Nevertheless,
ensuring a well-functioning and stable financial sector capable of meeting the
financial intermediation needs of the real economy remains a challenge. Dutch
banks are still exposed to substantial external risks stemming from
international activities in volatile foreign markets, although the exposure to
countries particularly affected by the sovereign debt crisis has gradually
diminished. In addition, banks face risks linked to high household
indebtedness, mainly stemming from mortgage lending. The traditional tendency of
Dutch banks to rely on securitisation to provide funding for the mortgage
portfolio has resulted in a substantial ‘funding gap’ (i.e. the amount of
outstanding mortgages exceeds the amount of domestic deposits). This partly
reflects higher spreads and reduced access to wholesale funding due to the
sovereign debt crisis. Also, Dutch pension funds are still underfunded, with
the average coverage ratio dropping well below the required level of 105 %,
resulting in a recent announcement that the vast majority of pensioners will
most likely see a cut in second-pillar pension benefits as of April 2013.

With regard
to credit supply, the Netherlands has not suffered a major retrenchment
compared to other EU Member States. However, in view of the ongoing uncertainty
on the financial markets, the worsened outlook for the Dutch economy and the
ongoing deleveraging of the financial sector, credit supply conditions could
tighten further. Against this background it is important to safeguard continued
access to credit for small and medium-sized enterprises, as is also called for
in the AGS 2012.

3.3.
Labour market, education and social policies

The Dutch
labour market is notable for relatively high participation rates, high
productivity per hour worked and low unemployment. The overall participation
rate is close to the Europe 2020 target of 80 % and above the EU average.
Following a sharp increase in unemployment in the late summer of 2011,
according to the Commission services' 2012 Spring forecast, the Dutch
unemployment rate is expected to increase from 4.4 % in 2011 to 5.7 % in 2012.
While still relatively low in an EU perspective, this would be the highest
level since the onset of the current crisis. Whereas during the first few years
of the crisis many Dutch firms hoarded workers to reduce hiring costs in any
subsequent upswing (partly facilitated by government-paid schemes), the recent
uptrend in unemployment suggests firms have started laying off workers because
of the negative economic outlook.

A number of
rigidities exist in the labour market, such as relatively strict employment
protection legislation for workers with permanent contracts, which adversely
affect labour mobility and therefore labour matching and hiring. The Netherlands committed itself to reforms in this area under the Euro Plus Pact. Reducing
barriers to increasing labour supply would help assess the extent to which the
relatively low number of average hours worked reveal a preference, which should
not be the target of policy. Despite the high overall activity rate, the
average number of hours worked in the Netherlands is among the lowest in the
EU. One of the main disincentives[5]
to work is the high marginal tax rate on second incomes, which in some cases
can exceed 80 % as a result of e.g. the general transferable tax credit[6] and losing
income-dependent credits such as childcare and rent subsidies. As of 2009, the
general transferable tax credit is being gradually phased out and is scheduled
to be fully eliminated in 2024. Eligibility criteria for the tax credit have
been tightened, but a faster phasing-out would help increase labour supply.

From 1
January 2012, the government has imposed stricter rules on childcare
allowances. To claim them, both parents must be in regular employment.
Furthermore, parents cannot claim more than 230 hours per child per month for
all types of care. The child-based budget is limited to two children and is not
indexed. Also, the state contribution to childcare costs is linked to the
number of hours worked by the partner working the least. There is a risk to the
targeted increase in labour supply, especially for second-income earners who
work only a few hours, although the aim to reduce the deadweight fiscal loss of
childcare subsidies is clear.

A second
large group whose labour potential is underused are the elderly. Although the
employment rate of people aged 55-64 increased significantly in the past
decade, once older workers enter the 60-64 age bracket, a relatively high
number exits the labour market. This is partly due to the long duration and
high level of unemployment benefits. The labour market would benefit from the
integration of partly disabled, long-term unemployed and people with a migrant
background, as these groups face a growing risk of structural unemployment. For
them, the implementation of active labour market policies has not produced effective
results. The labour market position of people with a migrant background is
deteriorating faster and more steeply compared to the native population,
thereby widening the persistent employment and unemployment gaps.[7]

Shortening
the period during which unemployment benefits are paid or lowering the
thresholds would increase incentives to work, especially for older workers, as
their employment protection is among the highest in Europe and the amount of
severance pay in the event of dismissal increases with age and experience. The
programmes announce plans to put a cap on severance payments and to have
employers pay for the first six months of unemployment benefits. Although such
a cap reduces the costs of firing (and hiring) workers, having firms pay unemployment
benefits could reduce demand for labour. Despite attempts in recent years to
loosen employment protection legislation for permanent contracts and smaller reforms,
major reforms have so far not been adopted. As older workers on permanent
contracts lack incentives to invest in their employability, their participation
in lifelong learning is limited to half the level of overall adult
participation in lifelong learning. Tackling employment protection legislation
and participation in lifelong learning, within an integrated flexicurity
approach, would improve labour market transitions.

The planned
increase in the retirement age is ambitious and the underlying broad societal
compromise is far from guaranteed.[8]
Furthermore, raising the retirement age should be backed by additional measures
for improving the participation rate of older workers. The recently adopted
Vitality scheme, due to come into force in 2013, is a step in the right
direction but the programmes announce cutbacks on funding which could limit the
impact.

The Netherlands has a well-functioning education system, which performs well in terms of both the
quantitative targets and the quality of educational outcomes, measured by PISA. The NRP’s stated aim is to focus on quality, with the ambition of becoming one of the
top five global knowledge economies by 2020. The share of early school leavers
in the Netherlands was reduced from 15.4 % (2000) to 10.1 % (2010),
below the European average of 14.1 %, and migrants also show below
EU-average drop-out rates. The national Europe 2020 target aims to reduce the
number of young people (18-24) without basic qualifications to 8 % by
2020. The national target seems to be realistic, given the current progress in
reducing the number of early school leavers. Evolving from a more targeted to a
comprehensive and inclusive system should assist in achieving the target.
Measures focus primarily on prevention and there are no specific measures for
the hard-to-reach groups or those who have already dropped out of school.

It is
important to actively invest in education to achieve growth-friendly
consolidation in a context of budgetary restrictions. There is a particular
concern regarding the long-term impact of cuts in budgets for fundamental
research (NWO) and for pedagogical support for pupils with special needs or
handicaps.

In February
2011, the government presented a new action plan, covering 2011–2015, for
secondary vocational education (MBO), focusing on skills. Therein the
newly-created Education-Business Alliance is to develop the qualification
structure. In order to reduce the drop-out rate from the 2012/2013 school year
onwards, students in vocational training will be able to enrol in fields of
training containing modules from different courses with related content, rather
than following standard courses.

The new
strategy ‘Quality in Diversity’ for higher education/advanced vocational
education and training calls for a streamlining of the existing system using
performance agreements, with less but better focused study programmes, in
particular in professional higher education, including a clear call for
additional training of teachers.

A mismatch
between labour market needs and the skills obtained in the Dutch education
system persists, in particular as regards vocational education and training.
Current reforms are intended to create institutions with a clearer profile,
better structured and targeted courses and more favourable teacher-student
ratios.

The Netherlands exhibits high and still rising completion rates in tertiary education and has
already achieved its Europe 2020 target. However, students with a migrant
background are relatively underperforming, also compared to the EU average
(tertiary education completion rates for students with a migrant background are
34.3 % versus 42 % for people without a migrant background). The
reform of higher education student support, moving from a grant-based to a
refundable loan-based system, aims to reduce relatively long study times and
allow budgetary resources to be invested in additional quality measures, in
particular teacher training. Loans instead of grants might deter students from
less privileged backgrounds from starting tertiary education, although the
previous system produced substantial deadweight losses in subsidising wealthy
people getting high private returns on higher education.

Adult
participation in lifelong learning, at 16.5 % in 2010, has already
surpassed the 15 % benchmark of EU 2020. Whilst different initiatives have
been undertaken to encourage training, a formal comprehensive framework for lifelong
learning would further increase the efficiency of the system. It also remains
to be seen how policy measures will affect some hard-to-reach individuals.

The Dutch
social protection system has been effective in coping with poverty and
protecting vulnerable groups. Single-earner households and large households are
most affected by, respectively, the restriction of the transferability of the
general tax credit and the cutbacks in childcare benefits and non-income based
child benefits. To prevent overly strong negative effects on low-income
families, income-based child benefits were raised for the first two children as
of 1 January 2012.

The most
significant measure concerning vulnerable groups is the intended merger of the reform
of the Young Disabled Persons Act (Wajong), the Work and Social Assistance Act
(WWB) and the Sheltered Employment Act (WSW) into the Work Capacity Act (WWNV).
The responsibility for implementing the new Work Capacity Act will be transferred
to the Dutch municipalities. This policy aims to boost the effectiveness of
labour market measures for vulnerable groups. The act (intended to come into
force on 1 January 2013) has not yet been approved.

The stated
main purpose of the new Work Capacity Act is to help vulnerable groups enter
the labour market, but major cutbacks are planned in the budgets for sheltered
work places and regular integration tools. If implemented, and given these
cuts, it remains to be seen whether the new set-up would result in people
making the transition to work, especially the lower skilled. Shifting the
responsibility for enactment to the municipal level entails considerable
implementation risks as regards their ability to appropriately carry out the
tasks that will be entrusted to them.

Unemployment
and poverty traps remain high in the Netherlands; single parents are most
affected by these traps. In February 2012, the Dutch government announced
measures to address low wage traps, especially for single parents. The current
12 schemes for parents with children will be merged into 4 with a view to simplifying
the system and to prevent income loss as a result of loss of subsidies when
taking up a job.

The Netherlands has implemented the country specific recommendation on labour market
participation only partially. With respect to reducing fiscal disincentives for
second-income earners, the policy response is effective but should be speeded
up. With regard to the Work Capacity Act, implementation risks prevail.

3.4.
Structural measures promoting growth and
competitiveness

Research and innovation

The Netherlands ranks among the Member States with a legal and regulatory environment that
encourages business competitiveness, but research and development intensity was
only 1.83 % in 2010, below the EU average of 2 %. Private research
and development expenditure is relatively low compared to other EU Member
States (0.87 % vs. 1.23 % in 2010). This is partly due to the fact
that the Dutch economy features a large service sector and a relatively small
manufacturing industry which is focuses on medium-tech sectors, such as
electrical machinery, food processing, chemicals and petroleum refining.
Furthermore, private research and development expenditure is concentrated in a
limited number of multinational firms. The level of public research and
development expenditure is at a reasonable level. As committed to under the
Euro Plus Pact and the Europe 2020 Strategy, the Netherlands set an ambitious
national target of 2.5 % of GDP for research and development intensity in
2020. This target is also in line with the priority to promote growth and
competitiveness as outlined in the Annual Growth Survey 2012.

According to
the Innovation Union Scoreboard 2011, the Netherlands remains an ‘innovation
follower’, but with above-average performance. It is excellent in terms of
frequently quoted scientific publications and licence or patent revenues from
abroad[9]
and it would 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 relative underperformance of the Netherlands in private
research and development expenditure may reduce future economic growth and
weaken the competitiveness of the Dutch economy to an extent that cannot be
offset by the use of licences and know-how transfer from other countries.

The new
enterprise policy ‘To the Top’ has three main pillars: a sectoral approach for
public-private partnerships in the area of research, innovation and education
(‘top sector’ approach[10]),
aimed at reducing the administrative burden, and additional mechanisms for
innovation funding via a revolving Innovation Fund.

Specific
innovation subsidies have been drastically reduced and largely transformed into
tax incentives or generic tax reductions in 2011. The key remaining specific
instruments are the wage subsidy scheme (WBSO), the Innovation Box and the Research
and Development Deduction (RDA/RDA+).

The ‘top
sector’ approach aims to bring research closer to business and foster the
practical use of results of publicly funded research as addressed in the country
specific recommendation on research and innovation. ‘Top teams’ involving
various stakeholders from the top sectors are responsible for developing sectoral
policy agendas that would be endorsed by the government. However, the
effectiveness of this new industrial policy is difficult to assess at this
stage: it is unclear whether research and development investments promised by
some ‘top sectors’ are simply ‘relabelled’ research and development investments
that companies would have made even in the absence of a new policy, rather than
representing any newly mobilised resources. It is also unclear how small
enterprises can be effectively involved. Moreover, fast-growing firms that do
not fall under one of the top sectors might be sidelined. A rationale
supporting this sector-based industrial policy has not been provided. More
developed regions benefit the most from the resources made available through
the ‘top sector’ policy, potentially increasing the innovation gap between
regions. Finally, neglecting basic research in favour of applied research may
well harm the long-term growth prospects of the economy. In this respect, the
channelling of a substantial share of the funding of fundamental research by
the Netherlands Organisation for Scientific Research (NWO) to applied uses
under the top sector approach is a cause for concern.

As the
measures taken have not yet proved to be effective, the country specific recommendation
on research and innovation has only partially been implemented and remains
valid. The measures taken so far are relevant (i.e. there is a link
between the measures presented and the challenges identified in the country
specific recommendation) in promoting closer science-business links, but the
relevance is less clear in promoting innovation and private research and
development investment. It is too early to judge the effectiveness of
the measures taken as they will mainly have an impact in the medium term. The
criteria that were used to identify the ‘top sectors’ are not fully clear. If
fully implemented, they could in principle be ambitious enough to
promote closer science-business links. A shortcoming of the strategy is the
lack of monitoring and impact assessment.

Internal market, liberalisation and
competition

The Netherlands has transposed the Services Directive in time through a horizontal law and
sector-specific amendments. However, as regards the establishment of service
providers, some measures have to be examined as to the justification put
forward and their proportionality (e.g. shareholding requirements in the
regulated professions).

The new public
procurement law, which, if cleared by the Senate, would probably come into
force as of January 2013, has the potential to considerably increase
participation of small and medium-sized enterprises in public procurement.
Starting a company will become easier, once a law reducing the minimum capital
requirements for limited companies enters into force in 2013. This is
particularly important given that the Netherlands currently has the second
highest costs in the EU when it comes to starting up a company.

Energy, transport, infrastructure and
environment

The Netherlands is still lagging behind concerning the share of renewable energy in total
energy used (3.8 % in 2010 compared to an EU average of 12.4 %). It
has indicated that current policies, which put more emphasis on renewable
heating and green gas, and less on wind energy, would lead to a share of 12 %
for renewable energy in 2020, i.e. 2 percentage points short of the Europe 2020
target. Regarding energy efficiency, the Netherlands has committed to
vigorously seek to increase energy efficiency, albeit without formulating a
quantitative (Europe 2020) target. The government should reconsider setting an
explicit energy efficiency target to highlight the importance of this policy
field and drive the implementation of concrete measures.

The Netherlands have committed to reducing greenhouse gas emissions in non-ETS sectors by 16 %
(compared to 2005) by 2020. According to the Netherlands’ projections,
emissions are expected to decrease by 18.3% (compared to 2005), leading to an
overachievement by 2 percentage points.

Environmental
sustainability does not figure prominently in the policy initiatives of the
current government, but resource efficiency is said to be mainstreamed in all
‘top sectors’ and taken up in the cross-cutting theme ‘bio-economy’. In
addition, the concept of ‘Green Deals’ encourages bottom-up initiatives by
citizens, increasing the likelihood of successful implementation and strong
local support for environmental and sustainable energy projects. The actual
effects of the ‘Green Deals’ on (additional) CO2 reductions and
other targets have not yet been quantified. Apart from this, the government
took only few environmental initiatives in 2011.

Some energy-
or emissions-intensive sectors and activities are currently subsidised (e.g.
vans, red diesel and the partially free allocation of EU Emission Trading
Scheme allowances). Ending or reducing such environmentally harmful subsidies as foreseen
in the Commission’s Roadmap to a Resource Efficient Europe[11] would reduce
emissions and increase revenues.

The measures
adopted so far are most likely insufficient to reach the policy goals mentioned
in the national reform programme. Additionally, setting an energy efficiency
target in the national reform programme would help the Netherlands evaluate its progress in this regard. On the positive side, the national reform
programme rightfully emphasises the international dimension of resource
efficiency and welcomes sustainability criteria for all biotic resources, and a
European approach to defining environmental harmful subsidies.

3.5.
Modernisation of public administration

The Netherlands has a tradition of policies promoting reliability of the public administration and
reductions in the administrative burden. Most recently, the ‘quality label for
local public administrations’ providing a good service to enterprises and
citizens has been highlighted as a best practice by the European High-level
Group of Independent Stakeholders on Administrative Burden Reduction.

Since 2010 the
government has merged several ministries, centralised support functions and
improved its IT systems. E-procurement is already being implemented:
e-notification of all contract notices for publication on a website is
mandatory and e-submission is available. Over the last few years,
the Netherlands has been a front-runner in terms of e-government, and it scores
well above the EU average in the share of business using e-government services.

However, some public
responsibilities are being transferred to lower levels of administration
without a matching increase in resources. In the area of tax compliance the
government has taken several measures, among them a risk-based approach to
inspections of companies (those with reliable internal controls are inspected
less often) and harmonised electronic data submission. Small and medium-sized
enterprises are able to deal with special units within the tax administration.
In the future, a single agency will be responsible for administering the few
remaining subsidies for enterprises. The collection of any fines for
disregarding legal obligations will also be done by a single agency.

Out of the total
consolidation effort, a sizeable share is achieved through various savings in
the size of the public sector. Although this reduction entails several
efficiency gains, it poses a risk to retaining the high quality standards of
public service provision and could lead to an increase in expenditure for
temporary workers.

The Netherlands' institutional set up includes a central function entrusted with the coordination of
state aid policy issues. However, such a body is not independent from the
granting authority, as in most instances the coordination is ensured by
Ministry of Economic affairs. In addition, and contrary to the majority of
Member States, the Ministry does not assess the content of the notification received.
In addition, it is not even entrusted with the responsibility to give
non-binding advice on draft State aid measures. The Netherlands also lacks a
central State aid registry (neither Central nor de minimis register, 
including all information on granted State aid submitted by the awarding
authorities), the existence of which would allow for better monitoring of
public expenditure. The Netherlands ranks amongst those member States with the
longest lasting cases, mainly due to the quality of notifications (number of
requests needed, and many requests for an extension of deadlines). Overall the Netherlands would gain from enhanced efficiency in the State aid field, notably through a
strengthening of the role of the central coordination body and the setting of a
central registry.

4.
Overview table

2011 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Implement the budgetary strategy for the year 2012, in line with the Council Recommendations on correcting the excessive deficit, setting the high public debt ratio on a downward path. Thereafter, progress towards the medium-term objective in line with the Stability and Growth Pact requirements, respecting the overall spending ceilings and consolidation requirements, thereby ensuring that consolidation is sustainable and growth-friendly, by protecting expenditure in areas directly relevant for growth such as research and innovation, education and training. || The government has broadly adhered to the first element, i.e. the implementation of the budgetary strategy of 2012 in line with the requirements in the context of the Excessive Deficit Procedure, as expenditure targets have been broadly met in absolute levels. However, expenditure plans for 2012 and 2013 contain several cuts in areas directly relevant for growth, notably fundamental research and education. Progress towards the medium-term objective also does not appear to be secured. Until 2013 significant progress is booked, particularly in 2012 and 2013, but for the outer years possible progress is conditional on the implementation of intentions expressed by the government, which are not backed by specified and quantified measures in the programme. Only once this is the case can sufficient progress towards compliance with the debt criterion be ensured.

CSR 2: Take measures to increase the statutory retirement age by linking it to life expectancy, and underpin these measures with others to raise the effective retirement age and to improve the long-term sustainability of public finances. Prepare a blueprint for reforming long-term care in view of an ageing population. || The Netherlands has implemented the CSR only partially: The government reached an agreement to raise the statutory retirement age in steps to 66 in 2019, to 67 in 2024 and to link it to life expectancy afterwards, but this has not yet been matched by an agreement among social partners on the reform of the second pillar. With regard to long-term care, the Dutch government has provided a blueprint for an ambitious reform, although the measures are not fully specified and implementation has so far been only partial.

CSR 3: Enhance participation in the labour market by reducing fiscal disincentives for second-income earners to work and draw up measures to support the most vulnerable groups and help them to re-integrate within the labour market. || The Netherlands has implemented the CSR only partially: With respect to reducing fiscal disincentives for second-income earners, the policy response is effective but could have been speeded up. The most significant measure concerning vulnerable groups is the intended reform of the social assistance schemes (introduction of the Work Capacity Act). The act is expected to come into force on 1 January 2013. Shifting the responsibility for enactment to the municipal level entails considerable implementation risks.

CSR 4: Promote innovation, private R&D investment and closer science-business links by providing suitable incentives in the context of the new enterprise policy (‘Naar de top’). || The Netherlands has implemented the CSR only partially: The new enterprise policy was still at a conceptual phase when CSR 4 was formulated. Although the measures taken so far under this policy are relevant, it is too early to judge whether they are effective in addressing the challenge. If fully implemented, they could in principle be ambitious enough to address part of the challenge. However, concerns remain with regard to the regional distribution of the funds and the shift from fundamental research to applied research. A further shortcoming is the lack of monitoring and impact assessment.

Euro Plus Pact (national commitments and progress)

The introduction of a new Act anchoring the rules of the Stability and Growth Pact in Dutch law. Alongside the European agreements, the new bill will also meet the Dutch parliament’s wish for budgetary rules to be enshrined in law. || The commitment has been partially implemented: The government is working on draft legislation that will transpose the EU fiscal rules, as set out in the revised governance framework, into national legislation, including provisions for local government.

Making the social security system more activating and reducing benefit dependence by introducing a scheme for the lower end of the labour market that reforms existing benefit schemes. || The commitment has been partially implemented: The new Work Capacity Act, which has not yet been adopted, is the main measure envisaged to address this commitment, but it suffers from several drawbacks. Attention needs to be paid to ensuring that getting people back to work will also help them out of poverty.

The introduction of a new business policy, comprising a sectoral, more business-driven approach, with fewer specific-purpose grants, more generic tax cuts and more scope for enterprise. The sectoral approach covers nine key areas in which the Netherlands is particularly strong, largely due to its location and history: water, agri-food, horticulture and starting materials, high-tech materials and systems, life sciences, chemicals, energy, logistics and creative industry. || The commitment has been partially implemented: Specific innovation subsidies have been streamlined in 2011 and have largely been transformed into tax incentives or generic tax reductions. The ‘top sector’ approach, however, suffers from several deficiencies.

The introduction of an Act that provides more scope for interventions regarding financial institutions than existing statutory instruments. The bill will add two new categories of powers to the existing range of intervention measures, allowing deposits, assets or liabilities, or shares of a financial institution in difficulties to be transferred to another institution or legal person. The first category relates to individual problem institutions and is designed to allow banks and insurers to be wound up in a timely and orderly fashion if they face insuperable problems. The second category serves a more far-reaching goal and provides for ways of safeguarding the stability of the financial system as a whole, if that stability is ever threatened. || The commitment has been partially implemented: The bill has passed the lower house, but is awaiting approval of the Senate. The bill gives the government and the central bank a wide range of possibilities to intervene in the financial system, including the forced transfer of assets and/or liabilities, without having to declare the institution bankrupt if it faces insurmountable problems and enables the government to intervene in more daily business and to make use of compulsory purchase in the event of severe and immediate threats to financial stability.

Europe 2020 (national targets and progress)

Employment target: 80 %. || Although progress has been made in recent years towards achieving this target (the employment rate steadily increased to 78.8 % in 2009), the employment rate decreased to 76.8 % in 2010. The phasing-out of the transferable tax credit and the incentives for the elderly and the partly disabled to enter the labour market or stay in it should help support the employment rate in the years ahead. On the other hand, decreasing subsidies for childcare poses a risk in this regard.

R&D target: 2.5 % of GDP. || Little progress has been made towards achieving this target. R&D investments were 1.82 % in 2009 and 1.83 % in 2010. The ‘top sector’ approach aimed at increasing the low share of private R&D investments has no mechanisms in place to evaluate whether the R&D investments under this approach are indeed additional investments. Through shifting funds towards more applied research, the ‘top sector’ approach also threatens fundamental research.

Greenhouse gas (GHG) emissions target: -16 % (compared to 2005 emissions; ETS emissions are not covered by this national target) || According to the Netherlands’ projections, emissions are expected to decrease by 18.3 % (compared to 2005), leading to an overachievement by 2 percentage points.

Renewable energy target: 14 %. || The Netherlands is still lagging behind concerning the share of renewable energy in total energy used (4.1 % in 2009) and is still behind its 2011/2012 interim target for renewables. Current policies put more emphasis on renewable heating and green gas and less on wind energy. The Netherlands indicated that current policies would lead to a share of 12 % for renewable energy in 2020, 2 percentage points short of the target.

Energy efficiency target: Not a target in the NRP. || The Netherlands has not yet specified a Europe 2020 target for energy efficiency.

Early school leaving target: < 8 %. || The percentage of early school leavers has fallen in recent years, to 10.1 % in 2010. Based on the decrease achieved in the last few years, achieving the target seems realistic.

Tertiary education target: >40 %, projected to amount to 45 % in 2020. || The target of 40 % was achieved in 2010 with a tertiary education rate of 41.4 % (after 40.5 % in 2009), but recent measures to partially replace study grants by loans could have a deterrent effect on students from less privileged backgrounds participating in tertiary education.

Target for reduction of the population at risk of poverty or social exclusion: -100 000 (reduction of people aged 0 to 64 in a jobless household). || There is a clear link between inclusion and employment since in-work poverty in the Netherlands is relatively low. The number of people in jobless households decreased from 1.641 million to 1.595 million and reaching the goal of 1.513 million in 2018 seems reachable, given the projections for the labour market participation rate and the expected tightness of the Dutch labour market.

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. Long-term sustainability indicators

Source: Commission, 2012 stability and convergence programmes.

Note: The ‘no policy change’ scenario depicts the sustainability gap
under the assumption that the budgetary position evolves according to the
spring 2012 forecast until 2013. The SCPs scenario depicts the sustainability
gap under the assumption that the budgetary plans in the programme are fully
implemented.

\* The required adjustment of the primary balance until 2020 to reach
a public debt of 60% of GDP by 2030.

Source: Commission, 2012 stability and convergence programmes.

Table VI. Taxation indicators

Table VII. Financial market
indicators

Table VIII. Labour market and
social indicators

Table IX. Product market performance and policy indicators

Table X: Green growth
performance

[1] See also ‘The Housing Market in the Netherlands’, European Economy

[2] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission on the basis of the information provided in the
programme, using the commonly agreed methodology.

[3] Measures from the late April 2012 budgetary agreement are marked in
italic.

[4] DG TAXUD Taxation Papers 22/2010.

[5] ‘Kosten en baten van participatiebeleid’, SEO
Economisch Onderzoek, 2007

[6] A person working in the Netherlands receives a tax credit amounting to EUR 2 000 if earning more than EUR
6 265. A non-working partner (or partner earning less than EUR 6 265)
could also receive this tax credit depending on his/her income, which could be
seen as transferability of the tax credit. If the
non-working partner were to enter the labour force, he/she would face a
marginal tax rate of 33 %.

[7] In 2010, the unemployment rate of
persons with a migrant background was 9.6 %, around twice as high as the native
unemployment rate of 4.5 %.

[8] The discussion on the side of the trade unions was intense and led
to a break-up of the existing organisational structure of the Dutch trade
unions with proposals for a new structure having been announced recently.

[9] The high level of patent and licence revenues could also be
influenced by the facts that the Dutch tax system is attractive to set up legal
headquarters of international firms and holdings and that it treats patent and
licence revenues very favourably (van Dijk, Michiel, Weyzig, Francis and
Murphy, Richard (2006), The Netherlands: A Tax Haven?, Amsterdam: SOMO).

[10] The ‘top sector’ approach is presented in two key policy documents:
‘To the Top: Towards a new enterprise policy’ (February 2011) and ‘Enterprise policy in action’ (September 2011).

[11] COM(2011) 571 final of 20.09.2011.

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