The Netherlands

   

Economic Policies

#4
Key Findings
Buoyed by years of stable growth, the Netherlands falls into the top ranks internationally (rank 4) for its economic policies. Its score on this measure has gained 0.7 points relative to 2014.

The Dutch economy has grown steadily and robustly in recent years. Unemployment rates are low and falling, although youth unemployment remains somewhat of a concern. Business dynamism is strong, while infrastructure, labor-force skills levels, produce-market efficiency and innovation capabilities are all areas for potential improvement

The labor market has shown an increasingly two-tier nature, with young people often in “flexible” jobs that lack employment protections. Real wages have been flat despite the economic growth. A general tax reform has focused on a two-bracket income tax, aimed at benefited middle-income employees. The lower VAT rate is being increased, and corporate taxes reduced.

The government has posted small budgetary surpluses for a number of years. State debt has declined to less than 50% of GDP. While long-term budget sustainability remains questionable, debate has shifted toward investment in business environment improvements.

Economy

#4

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
9
Having grown by 3.2%, the Dutch economy boomed in 2017, although the growth rate has declined somewhat since the third quarter of 2018 (with an overall estimate for 2018 at 2.8%). Such a high growth rate as in 2017/2018 had not been seen since 2006/2007. Overall, conventional indicators of the economic cycle are performing well – the highest among EU member states, according to the World Economic Forum’s Global Competitiveness Report 2017 – 2018. Trust indicators for business and consumers have declined from a peak in early 2018, but (in December 2018) are still quite optimistic.

The economy’s international standing has been steady, with the Netherlands still ranking 4th out of 138 countries, behind Switzerland, the United States and Singapore. The Netherlands scores highly for macroeconomic stability, labor market reforms and business dynamism. However, its performance has slightly declined with respect to infrastructure, labor force skills levels, product market efficiency (especially the complexity of tariffs) and innovation capability. There is still fierce political and policy debate about the success or failure of the new Work and Security Act.

In sum, although the Netherlands was caught in a long-term slump, strong economic recovery since 2013 has now led to a booming economy. Nevertheless, in terms of the euro zone, Dutch economic performance is average.

Citations:
CBS (2017), Economie in 2017 (www.cbs.nl, accessed 17 October 2018).

Schwab, K. (ed.). The Global Competitivenss Report 2017-2018, World Economic Forum, 2017

Macro Economische Verkenningen (MEV) 2018 (CPB.nl, consulted 17 October 2018)

Verbruggen, J., and Jeus, P. (2018). Nederlandse economie middelmoten in eurotijdperk, Economisch-Statistische Berichten, Blog, 8 February 2018.

Labor Markets

#8

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
8
In July 2017, 4.9% of the working population was unemployed, while CBS reported that this percentage had decreased to 3.7% by October 2018. The youth unemployment rate was 8.9% in June 2017, declining to 7.2% in July 2018 – only Germany and Czechia had performed better. Yet, some consider youth unemployment a serious threat to long-term prospects. An estimated 138,000 young people are not in education or employment. A large proportion of those young people lack a basic level of literacy, computer literacy or technical craft skills. Better educational and school-to-work transitional arrangements are crucial. Other labor market weaknesses include: relatively low labor market participation rates among migrants, especially young migrants; an increasingly two-tiered labor market that separates (typically older) “insiders” with significant job security and (old and young) “outsiders,” who are often “independent workers,” lack employment protection and have little-to-no job security; and high workplace pressure. Although the proportion of fixed jobs surpassed flexible jobs in 2017, flexibilization of jobs remains a highly prominent trend. At present (2018) the ratio of flexible to fixed jobs is 40% flexible to 60% fixed, while in 2003 it was 25%/75%. The majority of 15- to 25-year-old employees work flexible jobs, with a ratio of 27:73 in 2018, compared to 45:55 in 2003. Although there is strong economic growth, decreasing unemployment and even a looming labor shortage (1.6 unemployed people to 1 job vacancy in 2018, compared to 7:1 in 2013), real wage increases are practically nonexistent. Economic research points to a complex conjunction of many causal factors: automation and digitization; global production and consumption; improved employer search methods; the large gap between a net wage increase for an employee and gross increase for the employer; low interest rates and unproductive investments; limited bargaining power for un-unionized flexible workers; employees increasingly prioritizing leisure, family time or lifelong learning arrangements over monetary income; and underestimated economic growth and inflation rates resulting in excessively low demands for wage increases.

Citations:
RaboResearch. Acht redenen waarom de lonen achterblijven.Themabericht (27 augustus 2018)

CBS, Werkloosheid voor vierde maand op rij 3.9 procent (19 July, 2018)

Nederlands Jeugdinstituut, Cijfers over Jeugdwerkloosheid (nji.nl, consulted 23 October 2018)

NRC-Handelsblad, CBS: aantal vaste banen groeit harder dan flexbanen (15 May, 2018)

Taxes

#3

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
8
Taxation policy in the Netherlands addresses the trade-off between equity and competitiveness reasonably well. Looking at average income, pre-taxes in the Netherlands have a Gini coefficient of 0.563 (in 2015), after-taxes (and other redistributive measures) it is only 0.295 (in 2015). However, including wealth, the Gini index jumps to 0.92. The Netherlands has a progressive system of income taxation which contributes to vertical equity. In general, income tax rates range between 30% for lower and 52% for higher income levels. There is a separate tax for wealth. Indirect taxes and local taxes hit lower income groups most. Yet, tax pressure for every income group, from low to high, allegedly is approximately 37%. Yet, partly as a result of ad hoc measures to alleviate crisis impacts, the tax system loses credibility because of its increasingly unequal treatment of different groups. For example, between self-employed and employed workers, between entrepreneurs operating as sole traders or private limited companies, between single-parent families and families where both parents earn a living, and between small savers and the very wealthy. There is more inequality than meets the eye. In particular, middle-income families only manage to make ends meet because women are working more; increasing the number of hours worked per household and the female labor participation rate.

Therefore, the Rutte III government has announced a general tax reform based on a “social flat tax” or a two-tier system of income taxation (a 37% lower and a 49.5% higher tax bracket). The government predicts that this would benefit over five million Dutch mid-income employees. Other measures envisage an increase (from 6% to 9%) of the lower VAT rate, and an accelerated decrease in mortgage subsidies. Corporate taxes will also be lowered to 15% for SMEs, and 21.5% for larger and multinational corporations. Tax policy debates in 2017/18 were dominated by a highly contested, presumably lobby-group induced, government proposal to completely abolish dividend taxation, generally viewed as a “present to big foreign companies.” When it became clear that this proposal was politically unacceptable, the debate refocused on whether the money involved (almost €2 billion) ought to be spent on wage increases and a reduction of labor shortages in the care, police and education sectors; a further reduction of state debt; or to private enterprise to improve the Dutch investment and location climate. This latter alternative proved to be the stronger one.

Corporate income tax for foreign companies – an aspect of the trade-off between horizontal equity and competitiveness – has also come under political scrutiny. An extensive treaty network that encompasses 90 tax treaties aims at protecting foreign companies from paying too much tax, effectively making the Netherlands a tax haven.

Citations:
WRR, Economic inequality in the Netherlands in 8 figures, 2014 (Rijksoverheid, consulted 23 October 2018)

CBS, Parade van Pen: de vermogensverdeling in 2015, 8 July, 2017 (consulted 23 October 2018)

NRC-Handelsblad, Hoe lap je een regeerakkoord op, 17 October, 2018

Follow the Money, Afschaffen dividendbelasting is cadeautje voor de trust-sector, 12 May, 2018 (ftm.nl>artikelen, consulted 23 October 2018)

Budgets

#7

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
9
Although budgetary policy has considerably improved over the last few years due to strong economic growth, worries remain over its long-term sustainability. For the fourth year in a row there is a budgetary surplus of 1% of GDP, over €8 billion. Consequently, state debt has decreased to under 50% of GDP, over €400 billion. However, the sustainability index (houdbaarheidsindex), signaling whether or not the government can pay the future costs of care and education is negative (-0.4), the equivalent of €3 billion – barely within the EU-budgetary rules that allow for 0.5% of GDP. The long-term deficit may even increase now that state income from gas exports will stop (due to earthquake risks to the continued natural gas exploitation in the Province of Groningen), and special financial buffers have had to be created for security and border patrols in case of a “hard” or no-deal Brexit. Such additional outlays are being financed through ad hoc “windfalls” in social care, social benefits and low interest rates. Both the Council of State and the Center for Economic Policy Analysis have criticized the government for its expansive budgetary policy due to the of lack state income from gas sales, and because the government’s extra spending on defense, security, care and education violates the prudential budgetary rule (which states that windfalls may not be used to finance new structural policies). The government, however, views its budgetary policy as an investment in future economic growth.

Citations:
Miljoenennota 2018 (rijksoverheid.nl, accessed 24 October 2018)

Volkskrant, De begroting ziet er schitterend uit maar de rekenmeesters zijn kritisch, 18 September 2018

NRC-Handelsblad, CPB oneens met Hoekstra’s begrotingsbeleid, 15 September 2018

R. Gradus and R. Beetsma, “Houdbaarheidssaldo uitstekend kompas voor begrotingsbeleid,” Me Judice, 5 September 2017

Research, Innovation and Infrastructure

#6

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
9
In 2018, the European Innovation Scoreboard has the Netherlands as an innovation leader, ranked fourth after Finland, Denmark and Sweden). The Netherlands ranked 6 out of 138 economics in the World Economic Forum’s Global Competitiveness Report 2017 and was the third most competitive economy in Europe. The Netherlands scores above average in terms of open, excellent and attractive research systems, as well as in scientific-publication output, finances and support. Its weakness is in financial market development (with low scores for perceived efficiency, and confidence and trust in the financial sector), sales and intellectual assets.

It is unclear whether the Netherland’s R&D performance is due to government policies (coordinated by the Ministry of Economic Affairs and Climate). The country’s policymakers aim to ensure that the Netherlands is one of the top five global knowledge economies, and to increase public and non-public R&D investments to 2.5% of GDP (€650 billion). The first of these two goals was achieved and has been sustained since 2015. However, the second goal is yet to achieved, with total expenditure on R&D as a percentage of GDP stuck at 2%, lower that the EU ambition of 3%. The most recent figures, compiled by the Rathenau Institute, indicate that public and especially private R&D expenditure are lagging. Although government spending on public research institutes has remained at the level of 2014, financial support for free academic research is decreasing. The government also announced cuts to the Ministry of Education’s budget of €183 million, sparking mass protests from academic researchers.

Dutch policies used to focus on the reduction of coordination costs in creating public/private partnerships. In addition, there are increasing amounts of money in innovation credits for start-up companies and R&D-intensive SMEs – four to five times as much as for larger companies. However, SMEs struggle with obtaining access to bank credits and navigating their way through a maze of regulatory details in obtaining state funds for innovation. Since 2011, national R&D has focused on nine economic sectors identified as a top priority. In its newly launched Mission Driven Innovation Policy, the government intends to focus more on societal challenges like sustainable food production and financially accessible health care. Innovative SMEs and startups have a special place in this new initiative.

Citations:
Rathenau Instituut, Voorpublicatie Totale Investeringen in Wetenschap en Innovatie (TWIN) 2015-2021, (rathenau.nl, accessed 27 september 2017)

Rathenau Instituut, Balans van de wetenschap, 2018 (rathenau.nl, accessed 24 October 2018)

Rathenau Instituut, Bericht aan het Parlement, 30 March 2018

European Commission, Innovation Union Scoreboard 2018 (ec.europa.eu, accessed 24 October 2018)

World Economic Forum,The Global Competitiveness Report 2018 (reports.weforum.org, accessed 24 October 2018)

Topsectoren, Kabinet: innovaties en topsectorenbeleid richten op maatschappelijke uitdagingen, 13 July 2018 (rijksoverheid, accessed 24 October, 2018)

D. Lanser en H. van der Wiel (2011), Innovatiebeleid in Nederland: de (on)mogelijkheden van effectmeting, CPB Achtergronddocument (www.cpb.nl/sites/default/files/publicaties/download/cpb-achtergronddocumenten)

Global Financial System

#15

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
7
The Intervention Bill, which came into effect in June 2012, includes new powers for the Netherlands’ central bank and minister of finance. The bill grants the latter the authority to intervene in the affairs of financial institutions in order to maintain systemic stability. As a result, the capital ratio of the four largest Dutch banks has gradually moved toward compliance with the new European capitalization requirements.

Following a parliamentary inquiry into the country’s handling of the banking crisis, the Center for Economic Policy Analysis now annually produces a risk report on financial markets. In 2017, although the government considers increased policy uncertainties in the international political environment a threat, it also observes that it does not (yet) affect the stability of (Dutch) financial markets. In 2018, regarding the debate on a Europe-wide banking union that would introduce effective risk reduction and risk sharing, the Dutch government prioritized the reduction of existing risks before the creation of real risk-sharing instruments like a European Deposit Insurance Scheme or a Single Resolution Fund.

The Netherlands is slowly but surely losing its position in the important bodies that together shape the global financial architecture. In EU policymaking in the past, the Dutch tended to agree with the UK position in principle, but follow the German position in practice. After all, as a small but internationally significant export economy, the Dutch have a substantial interest in a sound international financial and legal architecture. However, given the new wave of political skepticism toward international affairs, as exemplified by a no-vote in the 2016 Ukraine referendum, until recently the Dutch should be regarded more as reluctant followers than as proactive initiators or agenda setters. Now Brexit is a near-certainty, advised by its Advisory Council on International Affairs, the Dutch government has attempted to take the lead in forming a new “Hanse” alliance of northern European states. Recent statements by Prime Minister Rutte regarding Macron’s plans for revitalizing the EU project may also signal increased “rapprochement” with the French. Nevertheless, the government has been hesitating to deal with gross inequalities in the fiscal treatment of foreign and domestic capital. This may indicate a return to a financial policy agenda driven more by national interests than by broader concern with global financial safety. After all, the Center of Economic Policy Analysis states that the Netherlands should do more to reduce opportunities for international tax evasion opportunities.

Citations:
CPB Risicorapportage Financiële Markten 2018. CPB Notitie 29 May, 2018

Nederlands Instituut voor Internationale Betrekkingen Clingendael, Conferentie “Veranderingen in het multilaterale bestel voor international economisch en financieel beleid. Uitdagingen voor Nederland en Belgie,” 22 oktober 2012, Den Haag.

H. Vollaard et al. (eds.), 2015. “Van aanvallen! naar verdedigen? De opstelling van Nederland ten aanzien van de Europese integratie, 1945-2015, Boom.

NRC-Handelsblad, CPB; Kabinet kan meer doen aan internationale belastingontwijking, 3 October 2018

NRC-next, Ruttes toenemende buitenlandse interesse goed voor Nederland, 4 July, 2018

Trouw, Zonder nieuwe bondgenoten zal Nederland het niet redden, 7 September 2018
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