The economic downturn in the Netherlands, like the boom that preceded it, has been more marked than in most other European countries. This is partly attributable to greater exposure to international trade, especially with the US, and to greater sensitivity to international stock price movements. But there are also some structural policies - pension fund regulation, housing and wage setting institutions that have undermined economic efficiency and contributed to the amplitude of the cycle. Furthermore there has been a marked deterioration in public finances, part of which is structural. Longer term growth trends too are unfavourable. In view of these developments, the main challenges are to reform those policies that have reduced efficiency and increased volatility, put public finances on a sustainable path, and, most importantly, increase trend growth by increasing both employment and productivity.
Tough zoning restrictions should be eased to make housing supply more price elastic and hence reduce increases and volatility in real house prices. Phasing out high tax subsidies for owner occupiers could also partly reduce volatility and, more importantly, would increase the efficiency of the tax system. The vigorous tightening in pension fund regulation greatly reduces the risk of future solvency crises and the associated sharp increases in pension fund contributions, which depress economic activity and raise the efficiency costs of these contributions. It also should improve pension fund transparency, helping members to plan effectively for retirement. Relaxing strict EPL could speed up labour market adjustment, bringing the economy back to trend more quickly.
While the economic downturn has contributed to a sharp decline in the general government budget balance in recent years, there has also been a significant structural deterioration. The government’s determination to put public finances on a sustainable path by 2007 is welcome as this should minimise the efficiency costs of taxation over time and treat future generations fairly. Careful monitoring will be required to ensure that the fiscal targets set in the next coalition agreement, starting in 2007, are compatible with sustainable public finances. In the meantime, the government needs to ensure that its consolidation measures are fully implemented.
The planned reform of the disability scheme is vital for increasing labour force participation. It should significantly reduce flows into the full disability scheme and strengthen work incentives in the partial disability scheme. The partial disability reform should, however, be strengthened to discourage misuse of the scheme to subsidise reduced working time or early retirement. This would entail, maintaining incentives for using the remaining earnings capacity, and reducing the duration of first-stage (and unemployment) benefits for older workers, respectively. Tax incentives for early retirement schemes should be as fully as possible ended in 2006, as planned. An easing in EPL, as suggested above, could facilitate employment of groups with relatively low participation rates. Barriers to increased hours worked, such as regulations that unnecessarily inflate childcare costs and reduced working time in collective agreements and a high tax burden on labour, should be reduced.
Competition in product markets, which is vital for raising productivity growth, has been strengthened through the Competition, Deregulation and Legislative Quality project (MDW) and the creation of a competition authority (NMa). Competitive pressures should be strengthened by giving the NMa greater investigative and sanctioning powers, as planned, and the power to propose structural remedies in appropriate cases. Unwarranted anti-competitive practices among the liberal professions should also be eliminated and barriers to competition in the network industries should be removed, notably through greater unbundling and privatisation of retail activities. The planned reduction in the administrative burden will also help to strengthen competition, by reducing barriers to business start-ups and the expansion of small businesses, as well as lowering business costs. Tertiary education policies could contribute more to productivity growth by greater reliance on private funding and by making public funding more dependent on performance. Strengthening the corporate governance framework, as planned, will also increase productivity.
In the area of sustainable development, the government should seek to reduce the costs of climate change policies by equalising marginal abatement costs and should strengthen the use of economic instruments to reduce water pollution and manage natural resources.
The full edition of the OECD Economic Survey for the Netherlands is available from:
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A printer-friendly Policy Brief (pdf format) may also be downloaded. The Policy Brief contains the OECD assessment and recommendations, but does not include all of the charts available from the above pages