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Securing fiscal sustainability and boosting potential growth after the crisis.

The economy contracted sharply during the crisis but began to recover slowly from mid-2009. Unemployment rose by less than might have been expected, partly as the labour market was more overheated prior to the crisis than realised at the time. Strict employment protection legislation and the government's continued focus on active labour market policies also played a role. In this context, the most pressing challenge for the near future is to prevent the cyclical increase in unemployment from becoming structural. As in other OECD countries, the upturn is still supported by exceptional fiscal and monetary stimulus. The fiscal policy response was generally well designed, but as a result the deficit widened significantly and fiscal sustainability deteriorated. As economic growth strengthens, the government coming in after the June 2010 elections will be confronted with the task of consolidating public finances without putting the recovery at risk. The most crucial longer-term challenges are to secure fiscal sustainability and raise potential growth.

Despite a deep recession, labour hoarding has surprised on the upside

After four years of strong expansion, the Dutch economy plunged into a deep recession in 2008. In five consecutive quarters of contraction the economy shrunk by over 5% (Figure 1.1). The government responded with an exceptional fiscal expansion and measures to save the financial sector while Euro-area monetary policy became exceptionally supportive. The overall drop in output was in line with other small EU15 countries (Figure 1.2, Panel A). A slow recovery began in mid-2009, as the effects of the fiscal stimulus, easier monetary policy, improved financial conditions and an emerging recovery in world trade (the importance of which is reflected in the current account balance, Box 1.1) began to revive activity. Real income growth will decelerate on the back of higher unemployment, which combined with lower real and financial wealth of households and the need for rebuilding profits will make it likely that the domestic economy will remain sluggish in the short-term and that the large output gap will only narrow significantly in mid-2011 (Table 1.1).

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Box 1.1. Current account developments

The current account has been in surplus since the early 1980s,
exceeding 9% of GDP in 2006, before falling to just above 5%
(Figure 1.3, Panel A). The main contribution comes from the large
goods trade surplus, mainly with the European Union (exceeding 16%
of Dutch GDP in late-2000s), in particularly Germany (3.5-4% of
GDP). On the contrary, the Netherlands has had a large and widening
deficits vis-a-vis Asia (6-7% of GDP), the majority of which is
with China. This pattern is largely a result of the internationally
large share of re-exports in exports (about half), which are often
goods imported from Asia by Dutch companies and subsequently
shipped across Europe (CBS, 2009). The role of re-exports and
natural gas exports has increased significantly over the 2000s.

Looking at capital flows (Figure 1.3, Panel B), the current account
surplus is largely related to foreign direct investment of Dutch
non-financial firms--particularly since 2000--reflecting companies
outsourcing production, market expansion and other exploitation of
new market opportunities. The contribution from financial companies
(which include pension funds) reflects increasing investment
opportunities abroad, but turned negative in 2008. Household
savings and government deficits, which played a major (mutually
offsetting) role in the 1990s, have had little net effect in 2008.

[FIGURE 1.3 OMITTED]


The crisis had a relatively modest effect on the labour market

A particular feature of the crisis concerns labour market developments. Unemployment picked up in late 2008, but remained low throughout the following year. The unemployment rate increased to 4.2% by early 2010, leaving the overall rise among the lowest in the OECD (Figure 1.2 Panel B). The contraction in employment was also smaller than the EU and OECD average, pointing to significant labour hoarding. This has been a prevalent feature of the Dutch labour market, due to high firing costs related to the strict employment protection legislation for workers with permanent contracts (OECD, 2008a). As an implication, initial adjustments mostly affected the flexible layer of workers with time-limited (and often part-time) contracts. Still, the observed increases in unemployment were far below what was initially expected by both national and international forecasters (Dutchnews, 2009) and labour hoarding has been more pronounced than in the economic downswing earlier in the decade.

The limited reaction of the labour market seems to be a result of the interplay of a number of forces. Firstly, the overheating of the labour market prior to the crisis appears to have been more severe than realised at the time. Unfilled vacancies have halved since the all-time peak in 2007, but remain among the highest in Europe. Moreover, the scarcity of skilled workers in the run-up to the crisis and the expectations that population ageing will restrict labour supply probably made firms reluctant to fire. The cyclical change in working time is more important than in many other OECD countries, reflecting the high share of part-time workers, but also a reduction in paid overtime work in 2009 (OECD, 2009 and CPB, 2010b). A smaller part of the adjustment can be ascribed to a reduction of working hours by the relatively numerous self-employed. A more traditional discouraged worker effect has also been at work (for example the number of students enrolled in further education has increased much more than expected by the government).

The government also contributed to curbing the unemployment increase. The government-sponsored reduced working hour programme has lowered the cost of labour hoarding by allowing companies with significant and temporary declines in activity to put partly redundant workers on unemployment benefits for the hours they do not work. (1) The scale of the Dutch programme is limited compared with similar programmes elsewhere in the OECD (e.g. in Belgium and Germany), involving only some 40 000 workers in autumn 2009. A number of checks and balances enhance the efficiency and reduce the deadweight loss of the programme. Entry requirements are relatively strict, as companies applying have to demonstrate a substantial reduction in turnover. Moreover, companies can only apply for time limited periods, which depends on participation. Companies that fire their workers during or shortly after using the scheme have to return to the state all or half of the benefits paid out. To further ensure that employers cannot "park" their employees in the programme, the latter are automatically made available for employment by other companies and have an obligation to participate in training programmes. This helps secure a continuous reallocation of workers, improving labour market matching and promoting long-term growth (OECD, 2009). The scheme is budget-dependent and hence by design limited in time--it is to cease by July 2011.

The main challenge ahead is the exit strategy from stimulus policies As in many OECD countries, the recovery is supported by a strong fiscal stimulus. The government allowed built-in automatic stabilisers to work fully during the crisis and suspended the fiscal warning rule, which otherwise would have required government spending cuts when the deficit exceeded 2% of GDP. Furthermore, in order not to induce pro-cyclical policies, unemployment benefits were (temporarily) excluded from the expenditure rule. This was topped up by discretionary fiscal measures of above 2% of GDP over 2009-2010 (including the crisis-related March 2009 fiscal stimulus package of about half of the total) which, according to OECD calculations could help sustain economic activity by a cumulated 3 3/4 to 1% of GDP over the two years (Box 1.2).

The government's reaction was timely and generally well-targeted at cushioning the shocks to the labour market, providing companies with liquidity and sustaining demand. Most measures will expire automatically by the end of 2010 and require an explicit decision to be prolonged. Nevertheless, as a result the 2008 budget surplus of 0.7% turned into a deficit of over 5% of GDP in 2009, and is expected to widen further in 2010 (Figure 1.4, Panel A). About two thirds of the deterioration is due to automatic stabilisers, the rest coming from discretionary measures and lower natural gas revenues. Together with a contraction in nominal GDP and interventions in the financial markets, this has increased the public debt to GDP ratio by some 15 percentage points with respect to pre-crisis levels to 61% of GDP at the end of 2009. This means the public-debt-to-GDP ratio was some 22 percentage points higher than expected before the crisis (Figure 1.4, Panel B).

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Box 1.2. The discretionary fiscal expansion in 2009-2010

The cumulated discretionary fiscal stimulus provided by the
government over 2009-2010 amounts to above 2% of GDP. The stimulus
broadly consisted of two sets of measures:

* Measures in the 2009 budget, mostly on the revenue side, were
taken in light of the economic slowdown in 2008. They were preceded
by an announcement that the planned 1 percentage point increase in
the VAT rate will be foregone. The unemployment insurance premiums
were lowered (scrapped for employees) and a number of tax measures
were introduced (for households: income tax credit for working
couples, earned income tax credit; and for companies: temporary
easing of depreciation rules). The cumulative stimulus over
2009-2010 is about 1 1/4 per cent of GDP.

* In March 2009 the government presented a crisis-related fiscal
stimulus package totalling another 1 1/4 per cent of GDP (over
2009-2010). The measures, a fifth of which
came from lower levels of government, were largely on the spending
side and focused on four main pillars, similar in terms of
magnitude:

** maintaining employment (eg a reduced working time scheme,
activation measures, retraining and job-search assistance, a debt
assistance programme for newly unemployed);

** shifting forward a number of planned public investment projects
(monument restoration, costal works, waterway, road and bridge
maintenance and construction works, health care centres,
maintenance and construction of youth centres, schools, etc.);

** providing liquidity to companies (relaxation of rules on carrying
over losses from 2008, broader R&D tax rebate, abolishing the air
flight tax, energy investment tax credit, various tax cuts for
SME's, etc.);

** "economic sustainability"--various environmentally-motivated
measures, including investments in energy efficiency and a car
scrapping scheme

As a result, the Dutch public finances saw the largest fiscal
expansion on record in 2009 (Figure 15). The budget for the
following year contains few new stimulus measures and can be seen
as supporting economic activity, while laying grounds for a
transition to a more restrictive stance necessary to restore fiscal
sustainability. Moreover, most measures are temporary and only
about 10% of the stimulus (0.1% of GDP) will automatically continue
beyond 2010.

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The reaction of fiscal policy to the crisis should be viewed in the context of the strong Dutch fiscal policy framework, which has been discussed in more detail in the previous Survey. The framework is viewed favourably in an international context because of the reliance on strict multi-year expenditure rules, the important role of independent bodies (namely the CPB) and the fact that it has been consistently endorsed by successive governments (Bos, 2008). Nevertheless, there may still be room for further refinement. Part of the fiscal expansion came from the fact that the 2007 expenditure rules were based on real growth expectations which have failed to materialise. However, a mechanical cutback in spending, which would be the outcome if the rules were adjusted in line with GDP, would have been pro-cyclical. Rather, excluding highly cyclical components from the expenditure rules could help reduce the tendency for pro-cyclicality of other government spending. In this respect, in March 2009 the government temporarily excluded unemployment benefits from the expenditure rule. (2) In line with OECD recommendations this measure should become permanent. The previous Survey recommended excluding non-tax revenue items, such as dividends from the ceilings and treating them as windfall profits to reduce public debt. This has been implemented for any dividends (and other revenues) arising from the interventions in the financial markets. A more radical measure would be to use the full revenues from natural gas (in the order of 1.5% of GDP per year in the recent years), and other windfall gains explicitly for debt reduction. Currently, a significant part of gas revenues is attributed to the FES (Fonds Econornische Structuurversterking) fund which is used for investment in broadly defined infrastructure. In 2008 the FES income from gas revenues was changed from a percentage share to a fixed amount due to mounting expenditure pressures. Although gas revenues are not used for the calculations of expenditure ceilings, in the past there have been some indications that including them in the general budget may lead to financing fiscal expansions (Wierts and Schotten, 2008).

The deterioration of fiscal sustainability requires an exit strategy

Fiscal sustainability has come under severe pressure. Prior to the crisis the sustainability gap of public finances was 1.3% of GDP as compared with an EU average of 3.4%, reflecting a favourable fiscal position but a large expected budgetary impact of ageing (EC, 2006). (3) Under the impact of the crisis the gap grew to 6.9% of GDP in 2009--slightly above the EU average (EC, 2009). The increase reflects the deterioration in the budgetary position (5.0 percentage points) and a small increase in the expected long-term cost of ageing (0.6 percentage points). Developments that followed the release of the Commission's estimate (larger than expected fiscal deficit and upwards revised estimates of life expectancy, Dutchnews, 2009) increased the sustainability gap estimate to 8.5%. Recent work from the CPB, confirm that the sustainability gap is substantial, though the estimates are smaller (4.5% of GDP in 2015) as they take into account expected structural improvements arising from a range of already adopted measures and lower assumed increases in ageing related spending (CPB, 2010a). (4)

There is a need for balancing fiscal stimulus against fiscal sustainability. As the economy recovers, the cyclical part of the deficits should eventually disappear. However, OECD estimates place the cyclically-adjusted deficit for 2010 at about 4% of GDP (1/2 percentage point higher than the year before), pointing to the longer term need for coupling significant consolidation effort with efforts to contain the increases in the ageing-related costs. The main short-term focus should be to withdraw the fiscal stimulus without undermining the economic recovery, which is likely to be fragile throughout 2010. The government is planning medium-term fiscal consolidation to start in 2011, if economic growth is sufficiently strong (Box 1.3). The plan stipulates a minimum of 0.5% of GDP structural improvement per year, until a structural balance is reached. Initially, the consolidation will be based largely on the withdrawal of existing stimulus (0.5% of GDP), with some savings on public administration (0.3% of GDP). As according to OECD projections, growth is likely to strengthen significantly in 2011, the government should be prepared to implement stronger consolidation.
Box 1.3. The medium-term fiscal consolidation proposal

Alongside with the 2010 budget the government has proposed a
consolidation path to achieve a structural balance. The 2010 budget
remains expansionary in order to support the fragile recovery, and
only few savings measures have been included (minor cuts in aid
budgets and workforce reintegration, frozen child benefits and
student grants). The proposal stipulated:

* The measures for 2011 to be linked directly to growth forecasts:

* if growth is above 0.5% in 2011--most of the stimulus package
will not be extended to 2011, yielding about 0.5% of GDP of
savings;

** if growth is between -0.5% and 0.5% then part of the stimulus
will remain in place;

** if growth is below -0.5% then the stimulus of about 0.5% of GDP
will be prolonged.

** In the following years, an annual structural improvement of at
least 0.5% of GDP in the balance, higher if growth permits.

* Savings in public administration and dedicated funds would yield
some 0.3% of GDP.

* Deficits of lower levels of government were to be voluntarily
limited to a total of 0.5% of GDP.


The medium-term consolidation plan is a welcome first step, but will not suffice to close the sustainability gap. According to OECD calculations to close the gap in line with the minimum consolidation effort planned by the government (0.5% of GDP per year), the medium-term plan would have to be prolonged by a decade or so. Thus as an important next step, concrete proposals should be presented on how to achieve the necessary long-term savings. In this respect, the government has identified three general areas for action (pension age increase, healthcare savings and higher property taxation). These measures are expected to improve the structural balance by 1.3% of GDP but will only materialise over the longer term. Moreover, some of the expected savings in the health sector have been judged as overoptimistic by the CPB (2009a) on the grounds that the policy to introduce more market forces in this sector may actually lead to higher demand. An important further step in the government's strategy was to setup 20 study groups in key policy areas to search for potential structural savings of 5 to 7% of GDP (Box 1.4).

Structural reforms are necessary to contain the cost of ageing and boost tax bases. The total costs of ageing for the budget, relative to GDP, are set to increase by over 9 percentage points between 2010 and 2060, the fifth highest in the EU and double the EU average (EC, 2009 and 2010). The costs of long-term care, already the highest in the EU, are expected to rise by 4.6 percentage points--four times the EU average. The expected 4 percentage point increase in pension spending is also above the EU average. These estimates are likely to increase in response to the upward revision in life expectancy. At the same time, the increase in the old-age dependency ratio is relatively low. Thus, the main concern is the generosity of the Dutch system and increases in ageing-related spending need to be curbed to secure fiscal sustainability.
Box 1.4. Fundamental Budget Review--government study groups on
budgetary savings

In October 2009 the government established 20 study groups in key
policy areas (Table 1.2) to review spending and fiscal expenditures
in its each of the areas. Each of the groups is to come up with
proposals how to find structural savings for a total of 20% within
its area. Together, the expected potential saving proposals are to
amount to EUR 30-40 billion. According to the guidelines provided,
the search for savings is to focus on: harmonising and simplifying
regulations; strengthening the interaction between different
instruments and institutions; evaluating the costs and benefits of
existing policies; reducing implementation costs and promoting
effectiveness; examining alternative funding and financing systems
(including private financing); encouraging individual
responsibility and increased use of polluter-pays principles; a new
division of responsibilities for municipalities and provinces; and
setting less ambitious national objectives and policy aims. An
additional study group on the tax system was formed to consider the
revision of taxation in light of the economic efficiency of the
system, the stability of tax revenues, the sustainability of tax
bases and the room for simplification.

The groups presented their results on April 1st 2010. Some of the
elements of the proposals most relevant for this Survey are:

* Labour market: limiting the duration of unemployment benefits to
one year (potentially with an additional 6 month benefit based on
the social minimum level); combining unemployment insurance with
individual savings accounts; reforms of the dismissal system,
including caps on severance pay, linked to employment history;
obligations for employers to pay first six (or nine) months of
unemployment benefits.

* Mobility: introducing a congestion charge and a road-pricing
system for freight (similar to that in Germany) in combination with
reducing infrastructure investment.

* Housing market: focusing implicit rent-regulation subsidies on
lower incomes, reform of the fiscal treatment of home ownership;
changing the transaction tax on house sale into a property tax;
reforming zoning procedures.


The proposed increase in the official retirement age from 65 to 67 years (in two steps in 2020 and 2025) would reduce pension spending and expand the tax base; when fully implemented the structural budget should improve by 0.7% of GDP. This is a welcome measure, and should be pursued. Some additional savings (of as much as a cumulated 2 1/2 per cent of GDP) could be reaped if the increase in pension age was more front-loaded (for example by one and a half months per year starting 2011). This would also limit the incentives for early retirement relative to the planned one year increases. As life expectancy is likely to continue increasing, the official retirement age should become structurally linked to life expectancy as recommended in previous Surveys.

Eventually, the government should exit from its participation in the financial sector

The international financial crisis brought the large and concentrated financial sector to the brink of collapse in late 2008. ABN AMRO, which had been freshly taken over by an international banking consortium in the largest banking deal in history, and one of the consortium partners, Belgian-Dutch Fortis, saw liquidity dry up following the highly leveraged transaction. The financial crisis also spread to other major Dutch financial conglomerates, including ING which was highly exposed to the US mortgage market. The government intervened with an array of measures, including nationalisation of Fortis Netherlands/ABN AMRO, recapitalising other major groups, providing direct loans, guaranteeing short-term interbank loans, taking over some risky assets and increasing depositor protection (Box 1.5). Guarantee facilities for banks lending to companies were widened. Overall, the government reserved funds worth half of annual GDP for interventions in the financial markets, though at the peak of the crisis direct interventions and guarantees issued summed up to about a quarter of GDP. Apart from the non-utilised guarantees, the measures were financed by public debt, which as a result increased by about 14% of GDP in 2008 (Table 1.3). In return, the state became the owner of a large commercial bank (Fortis Netherlands), a consortium partner in another (ABN AMRO) and holds participations in another three key players. The impact on net debt will be clear only once the state exits from the sector. The stress tests for the financial sector indicate that the sector is well capitalised and although the growth of bank lending, both to households and companies, has slowed significantly on the back of tighter lending conditions and lower demand, there are few clear signs of a credit crunch. (5)

The "fix it and exit" strategy should be pursued to reduce public debt and avoid distortions to competition. This should be done in light of two key objectives: assuring that the fragile stability is not put at risk and improving the financial framework in order to minimise the likelihood of similar developments in the future. The government has made it clear that it does not wish to remain in the financial sector and a number of the measures are designed to expire automatically (e.g. the interbank lending guarantees, the direct loans). As for the recapitalisation, the government-provided capital is significantly more expensive than ordinary shares for the companies (in terms of dividend). The relative cost of government capital will further increase in the next years, intensifying the incentive for the concerned companies to buy the shares from the state. Hence, the main unresolved issues concern the illiquid asset backup facility provided for ING and the ownership of Fortis Netherlands/ABN AMRO. No concrete strategies in this respect have been formulated so far. (6) When designing exit paths, timetables and identifying measures which will trigger the government's pull-out of the sector, the key focus should be on the credibility of the strategy, its communication and transparency, while the possibility of the state incurring capital losses should not prevent the withdrawal.
Box 1.5. Government intervention in the financial sector
Nationalisation (and related measures)

ABN AMRO and Fortis Netherlands--among the world's largest
financial groups before the crisis--were taken over in October
2008. The intervention entailed nationalisation of (mainly) the
Dutch activities of the group, direct loans and a government
guarantee against a portfolio of Dutch mortgages. Although by early
2010 the government involvement was smaller, at the peak over 12%
of GDP worth of state funds were directly engaged.

Recapitalisation

Capital provision scheme. In October 2008 the government committed
EUR 20 billion (over 3% of GDP) for the recapitalisation of
financial institutions. In return for capital, the government is to
receive non-voting shares, which pay a significantly higher
dividend than regular shares (if dividends are paid at all). The
cost of state-provided capital increases in time and the shares can
be converted to regular (voting) shares after 3 years, in which
case the government can opt for a payback plus accrued interest. In
late 2008, three large companies used the scheme (ING, Aegon
Insurances and SNS Reaal Bank) for a total of 21/2 per cent of GDP.
Nearly half of this has been paid back by early 2010.

Guarantees

Depositor protection scheme. In early October 2008, the scheme was
extended to the ceiling of EUR 100 000 per depositor per bank (from
EUR 38 000).

Bank debt guarantees. In mid-October 2008 the government committed
EUR 200 billion (one third of GDP) to guarantee short- to
medium-term debt instruments issued by banks. Banks who want to
benefit need to be solvent and the fee is inversely related to
their credit-worthiness. The scheme was subsequently extended for
loans of up to 5 years and has been extended until mid-2010. By
early 2010 the guarantees actually issued amounted to about a
quarter of available funds, with several large companies benefiting
(Leaseplan, NIBC Bank, SNS Reaal Bank, ING and Fortis Netherlands).

A Credit Guarantee Scheme for financial institutions servicing
credits to SME's was established in October 2008. The budget is
capped at 0.2% of GDP and the scheme will expire in 2012. An
additional Export Credit Guarantee Scheme was introduced to address
liquidity problems of export insurance providers. The maximum state
exposure is about 0.3% of GDP and the scheme expires by the end of
2010.

Illiquid asset back-up facility. In January 2009 (effective April)
the government took over 80% of the risk of a EUR 27.7 billion (5%
of GDP) portfolio of US mortgages from ING for a discounted price
and in return for a guarantee fee.

Other measures

The Icelandic Depositor Insurance Scheme received a loan of EUR 1.3
billion (0.2% of Dutch GDP) to assure swift payout to Dutch
depositors with accounts in Icesave (a branch of an Icelandic
bank). The loan is to be repaid by 2024 and the government topped
up the Icelandic scheme with another EUR 100 million in line with
the conditions of the Dutch equivalent (from about EUR 20 000 to
100 000).

A short selling ban for financial companies was introduced in
October 2008. It was annulled in mid-2009 and replaced by a
requirement that short positions above a certain threshold have to
be reported to the regulator.

Source: Stability Programme of the Netherlands, January 2010
Update, Dutch Government.


As called for by international organisations (for example the G20), the chances of a similar financial sector collapse in the future should be reduced by improving macro-prudential regulation and supervision in cooperation with European and other international institutions, such as the Financial Stability Board. Dutch-specific problems will also need to be addressed, such as the high concentration of financial services--an issue raised in the 2006 Survey (OECD, 2006). Furthermore, OECD research (Ahrend et al., 2009) indicates that the regulation, although in conformity with international requirements, appears relatively lax compared to the OECD average in three areas: i) rules on capital requirements, ii) accounting and provisioning rules and iii) exit rules and disciplining (rules relating to the forced exit of banks, bankruptcy procedures, and the powers of supervisors to act if the solvency of a bank is under threat). A number of sources attribute the vulnerability of the Dutch financial system to high leveraging, a likely result of the current tax system which favours debt over equity financing (Bijlsma and Suyker, 2009 and the Government Tax Study Committee). Finally, a regulatory aspect became evident when the branch of an Icelandic bank (Icesave) collapsed and government funds were effectively used to bail out the depositors, who included local municipalities (Box 1.5). In the future, the regulator should be clear about the risks associated with deposits in banks not covered by the Dutch deposit protection scheme.

Boosting potential growth requires continued efforts to enhance activation policies

The fiscal efforts should be accompanied by structural policies to improve the growth prospects. The upcoming effects of ageing have, already before the crisis, led to expectations of lower potential output growth in the future. The crisis itself is likely to have an additional negative effect on potential output through a number of channels: capital scrapping and higher real capital costs; hysteresis effects in the labour market; and potentially through subdued productivity growth (OECD, 2010). The longer-term implications are uncertain, but it seems likely that the fall in potential output growth will be temporary but even as potential growth recovers to its pre-crisis path there will be a permanent loss in the level of potential output, strengthening the case for structural efforts (Furceri and Mourougane, 2009).

Reforms should aim particularly at improving relatively low labour utilisation (Figure 1.6) which, as discussed in the previous Survey, results largely from the low average amount of hours worked per worker. To increase participation and hours worked (in particular of older and younger persons, females and immigrants), efforts should focus on extending working life, improving activation and stimulating job-search. Detailed recommendations regarding increasing hours worked, in particular of females, were discussed in the previous Survey and focused largely on lowering the marginal effective tax rates and improving the provision of childcare services. While a number of measures were implemented (Box 1.6), areas with little progress remain (Annex 1.A1). A particular challenge will come from the fact that spending on active labour market policy measures is to a large degree pro-cyclical, reducing available resources per unemployed as the labour market deteriorates. This issue is not as pressing in the Netherlands as in some other OECD countries (OECD, 2009) but increasing the counter-cyclicality of activation policies should be considered.

[FIGURE 1.6 OMITTED]
Box 1.6. Additional activation policy measures introduced in 2009
Increasing participation of older people

* Employers hiring benefit recipients older than 50 years will
receive a EUR 6 500 discount on social security contributions (for
three years).

* Employers who keep employees older than 62 years will receive an
annual EUR 2 750 reduction in social security contributions (for
three years). This reduction will be EUR 6 500 from 2013 onwards.

* Workers continuing to work after their 62nd birthday will receive
a so-called work continuation bonus of up to EUR 4 591. After their
65th birthday they can opt for receiving part of their state
pension or to suspend their state pension for up to 5 years and in
return receive a higher pension afterwards.

Increasing hours worked and activation of women

* An income-dependent combination tax credit (IACK) was introduced
to encourage the lower-earning partner to extend hours worked.

* Non-working and non-benefit receiving people are encouraged to
take up work through a new income-dependent tax credit (IAK).

* From 2009 workers with non-working spouses are gradually losing
the current tax credit pursuant to which the so-called general tax
credit can be transferred.

* Single parents on benefits with children below 5 years are no
longer obliged to apply for employment, but are required to attend
schooling as an alternative and self-employed women will become
entitled to publicly paid pregnancy and parental leave (max minimum
wage).

* Low income families will receive more non-monetary support
(computers for children and sport club memberships) from
municipalities. Municipalities will also have more scope for
providing additional financial support to families that have been
on low income for a very long time.

Activating and stimulating younger people

From 1 October 2009 onwards, under the Investment in Youth Act
young people no longer receive social security benefits, but
municipalities must either offer them work, training or both (for
which they may receive financial support). In addition,
municipalities will receive a lump sum of EUR 2 billion for
stimulating people to participate in integration, work or school.
This is basically the bundling of the three existing budgets in
these areas intended to allow a more effective use of resources.

Promoting re-integration

Employers may receive a one-year wage cost subsidy of up to half of
the minimum wage if they hire long-term unemployed less than 50
years old (on benefits for at least one year} or partially
disabled. The new employees have to be hired on full-time contracts
and for at least one year. The subsidies can also be used to
provide bridging jobs (for up to a year) for partially disabled and
can be combined with education and an (employment) bonus.

Additional work incentive measures

* Unemployment benefit contributions paid by employees were
abolished in 2009.

* The definition of suitable work was broadened. Unemployed on
benefits since one year must accept job offers with wages below
their benefits. A temporary benefit supplement will be provided to
ensure that work pays.

* Social assistance recipients, long-term unemployed and the
partially disabled can be offered placements for two years to gain
work experience. They retain their benefit plus a bonus ensuring
they are better off financially.

* The employment placement service (CWI) and the benefit providers
(UVW) are merged and a network of 100 Service Desks for Work and
Income is being created to ensure that employers and job seekers
deal with a single organisation.


From a political economy point of view, measures to increase participation are easier to implement when the economy is recovering because of the increasing employment possibilities. The activation policies in place were fully described in the previous Survey, and since then the government has implemented new measures focussing on strengthening participation incentives for older workers and female workers, search incentives for younger people and on providing better placement services to job seekers (Box 1.6). A number of measures were crisis-related, mostly centring on providing better job-placement service through improved dissemination of labour market information, more targeted services through the establishment of mobility centres and greater local-level cooperation. The room for private initiative in job counselling was expanded and more emphasis was put on training of low-skilled employees and unemployed, including retraining grants for employees with a high unemployment risk. An agreement with social partners stipulated that school-leavers that have been unemployed for three months should be offered a work traineeship place. In addition, younger people are now allowed to have four consecutive time-limited contracts, against three prior to the crisis, to improve their labour market prospects.

Despite the activation measures, outflows from benefit programmes are low and it is difficult to find empirical evidence of a substantial positive effect of the various active labour market programmes (Gautier and van der Klaauw, 2009). Thus, it appears that the activation framework needs to be supplemented by stronger search incentives in the unemployment benefit system, in particular in the early stages of unemployment, when the odds of finding a job are likely to be the highest. The system is characterised by a long maximum duration of up to 38 months (lowered in 2005 from 60 months) and a high replacement rate. Search incentives should be strengthened by further reducing the duration of benefits. To yield the desired effects, such a measure should be preferably implemented soon so that the effects materialise once the economy gains pace and hiring picks up. In addition, the replacement rate is 75% for the first two months, thereafter declining to 70%. It is capped at EUR 185.46 per day, equalling about EUR 50 000 per year. This incentive structure can be strengthened by letting the benefit level decline more steeply over time, so that it is eventually aligned with social assistance benefits. Lastly, the high ceiling for benefits should be reduced to sharpen search incentives for high-wage workers, who are not typically targeted by activation policies.

Labour market participation among older workers could be increased further

Over the past decade, the government's drive to increase the participation rate of older workers has been successful in raising the effective retirement age for males and females by 1 and 3 years to 61.9 and 61.6 years, respectively (Figure 1.7). This is partly a result of the measures implemented in the 2000s to close pathways into early retirement, although also of other developments, such as changes in the educational level of workers and increased female participation (Deelen and van Vuuren, 2009). The tax incentives for early retirement were removed and the unemployment benefit duration for older workers shortened and aligned with that of the general regime. (7) As a result, the spike in the inflow of older workers (particularly high-wage workers) into unemployment just after the age of 57 1/2 disappeared, indicating that older workers have some influence on when they are fired (van Ours and Tuit, 2010). Despite increases, the participation rate for older workers remains low compared with the Nordic and Anglo-Saxon countries, and the effective retirement age remains below the OECD average (Figures 1.7 and 1.8). Moreover, more than half of all male and female workers have retired from the labour market by the age of 58 1/2.

[FIGURE 1.7 OMITTED]

The government is aiming at further increasing the effective retirement age and, as mentioned, is planning to increase the legal retirement age. While the implementation period is comparable to or even shorter than in some other OECD countries that introduced similar reforms (e.g. Germany) the Council of State--the government's advisory body on new legislation--has argued that for intergenerational equity reasons the retirement age should be raised more quickly. Either way, to fully benefit from the increase in the official retirement age and hence improving growth prospects and fiscal sustainability it is important that the effective retirement age is increased, preferably by at least a similar amount.

[FIGURE 1.8 OMITTED]

The recently-introduced incentives for older workers to stay in the job market (Box 1.6) could be further increased by reducing the state pension, as recommended in the previous Survey. Similarly, increases in the second-pillar retirement age should follow (Chapter 2). On the other hand, the 2004 extension of the employer-paid sickness period to two years may discourage firms from hiring older workers who have higher health risks, pointing to the need for reducing the period for workers close to retirement.

Strict employment protection legislation reduces labour market dynamics

The success of activation measures depends on the flexibility of the labour market, which is hampered by the internationally strict employment protection legislation for workers with permanent contracts (EPL). The latter may result in initially delaying increases in unemployment during a downturn, but ultimately increases the risks associated with hiring. Thus, it is likely to lead to more long-term unemployment and may cause firms to be wary of hiring in the early phase of the upswing. Moreover, as workers with long job tenure who lose their job can expect that courts award them a multiple of their annual salary in severance pay, (8) the strict EPL effectively increases the attractiveness of using the (lengthy and generous) unemployment benefits as a pathway into early retirement, particularly for workers who are close to their 62nd birthday. In effect using this pathway may often generate a higher disposable income than remaining employed until retirement. (9)

For older employees as well as for their employers, the attractiveness of using the combination of generous unemployment benefits and high severance payments as a pathway into early retirement is likely to be increasing in the crisis. Employers who have to reduce their workforce often prefer to find solutions that avoid social unrest while the substantial seniority element in the Dutch wage scales makes firing older workers a more cost-efficient way to reduce labour costs, if the higher wage does not reflect their productivity. On several occasions, the government has unsuccessfully attempted to reform the dismissal law to make the system more predictable and less costly, but even the latest proposal to cap severance pay at EUR 75 000 has failed, reflecting the difficult political economy of such reform. Nevertheless, the next government should aim at making the dismissal system simpler, more predictable and less time-consuming. Court appeals should only become possible ex post as recommended in the previous Survey. In addition, capping severance pay and letting the cap decline as workers approach retirement age should be considered.

Reducing maximum unemployment benefit duration would also limit pathways into early retirement. Moreover, the truncation of duration that is effectively already in place (as unemployment benefits stop at retirement) could be further brought forward e.g. by six months, through terminating the access to unemployment benefit at the age of 64 1/2 (a truncation that would have to be adjusted as the retirement age is increased) whereby a greater element of self-financing of early retirement is introduced. Alternatively, the truncation could be linked to severance pay, where workers with substantial severance pay rights would see their access to benefits truncated at an earlier point and those with limited rights closer to retirement. Such a solution would also alleviate concerns whether the older unemployed have sufficient income levels.

The inflow into disability benefit schemes has been lowered

Since 2002, a number of measures have been implemented to curb the extensive use of the disability scheme, including tighter eligibility and testing criteria, the extension of the employer-paid sickness period from one to two years, and the introduction of a "no-risk" policy where the government covers sickness payments for recently-hired partially-disabled workers and of work-capacity related disability benefits to strengthen work incentives (OECD, 2008a). Lower inflows into the disability scheme were initially a mechanical result of the extension of the sickness period but were sustained in recent years (Figure 1.9). As a result, the number of disability benefit recipients has decreased by about 15% from the 2003 peak, although the level remains high at around 8% of the working-age population. The fall mostly reflects outflows from the system, but mostly towards other benefit systems (such as to the state pension system). Efforts to induce partially-handicapped to participate in the labour market have been less successful, having only increased by 3 000 persons over the period 2007-09. Moving disabled into employment is a huge and complicated task, calling for a broad range of policies, in areas like gatekeeper control, reassessment of disabilities, cooperation with employers, hiring incentives, etc., which were recently discussed in a special OECD publication covering the Netherlands and three other countries (OECD, 2008b).

[FIGURE 1.9 OMITTED]

Internationally, there is a tendency for increased inflows into disability schemes during economic downswings, reflecting that deteriorating employment prospects induce individuals to claim disability benefits and that employment centres have incentives to reduce unemployment through the use of such schemes (Benitez-Silva et al., 2009). As unemployment is expected to remain relatively high over the coming years, this indicates that an emerging challenge for the government will be to preserve the recent gains in reducing the use of the disability benefit scheme and to avoid that it is being used as a pathway into unemployment (Koning and Van Vuuren, 2006a and 2006b). As the system relies to an increasing extent on private providers of job-placement and other social services, a particular issue is to avoid cream-skimming, i.e. a tendency to focus efforts on relatively easy-to-employ clients, leading to "programme parking" of more difficult cases (Koning and Heinrich, 2009).

The Wajong, a special system for younger disabled people, has seen a doubling in its inflow over the past five years, mostly the result of an increase in the number of recipients for mental reasons--which does not appear to reflect an increase in the number of individuals with serious mental disorder as there was no corresponding increase in hospitalisation. A factor behind this development is that the decentralisation of activation responsibilities for social assistance recipients was transferred to the municipalities. This gave the latter incentives to offload recipients to other central government-financed programmes--as the municipalities are allowed to keep social security budget surpluses for other purposes (Gomez et al., 2009; UWV, 2008). (10)

The government reacted in the beginning of 2010 by reorienting the focus of the Wajong programme (for new participants) from providing passive income support to providing educational, training and job-finding support (the support is individually tailored and includes aspects such as supplementary income support, training, coaching, commuting, etc.). Moreover, participants in the programme will be assessed upon entry (usually around the age of 18) and again at the age of 27. Only at the second assessment can participants (who have not worked since the first assessment) transfer to permanent income support (75% of the minimum wage). The change is expected to reduce the inflow into the Wajong, nevertheless the stock is still expected to double by 2040, reaching 400 000. Moreover, the already high stock of Wajong recipients (at 190 thousand in late 2009), implies that a relatively high number of young partially-disabled are not benefitting from the same activation measures as new entrants. Thus, the panoply of support measures should be offered to existing recipients of Wajong disability benefits on the same conditions as for new entrants.
Box 1.7. Policy recommendations

Fiscal policy

* The proposed medium-term fiscal consolidation strategy is
appropriate, sustaining the recovery in 2010 and consolidating from
2011 onwards. The next government should pursue this path and
prepare measures to increase the consolidation effort in case
growth is strong enough.

* Devise a comprehensive fiscal consolidation plan to achieve
fiscal sustainability. Continue the focus on budgetary savings, in
particular on curbing long-term ageing-related spending increases.
The government should use the proposals from the committees set up
under the Fundamental Budget Review to specify more concrete
measures.

* Fine-tune the strong fiscal policy framework by making the
decision to exclude unemployment benefits from the expenditure
rules permanent.

* Use natural gas revenues (and other windfall gains) directly to
reduce public debt.

* Implement the plan to increase in the legal pension age to 67.
Supplement the proposal by linking retirement age to life
expectancy thereafter. A more front-loaded introduction of the
increase (e.g. by 1 1/2 month a year) could yield additional
savings and limit incentives for early retirement.

Financial markets

* Design and implement exit strategies to assure devolution of
government's stakes in the financial markets. The strategies must
not put the recovery at risk and should be credible and
transparent. The possibility of incurring capital losses should not
prevent withdrawal of state involvement.

* Improve macro-prudential regulation and supervision of financial
markets in cooperation with international institutions.

* Improve the awareness, in particular among local governments, of
the risks associated with deposits in banks not covered by the
Dutch depositor protection scheme.

Labour market

* Continue the focus on measures to increase activation and hours
worked. Consider making active labour market policy spending more
counter-cyclical (e.g. by adjusting spending proportionally to
unemployment level). Reduce the risks of hiring and sustain the
recovery by relaxing employment protection legislation and making
it simpler and more predictable. Court appeals should only become
possible ex post and severance pay should be capped.

* Strengthen job-search incentives of the unemployed by decreasing
unemployment benefits more dynamically throughout their duration.
Supplement this measure by shortening the long duration of
unemployment benefits. The high ceiling of benefits should be
reduced to stimulate search incentives for the high-skilled
unemployed.

* To reduce the stock of young disabled, they should be subject to
the same controls and activation measures as new applicants.

* To further increase work incentives for older workers, the level
of state pension should be lowered. The ability to use the
unemployment system as a pathway into early retirement should be
reduced by truncating unemployment benefits before the legal
retirement age or link their generosity (inversely) to severance
payments. The latter should be capped for older workers and reduced
as they approach retirement.

* Due to higher health risks of older workers, the obligation for
employers to pay up to two-years sick leave should be reconsidered
for older workers to enhance their the labour market chances.

ANNEX 1.A1

Progress in structural reform

This annex reviews actions taken to follow policy
recommendations made in the 2008 OECD Economic Survey of the
Netherlands. Recommendations that are new in this Survey are
shown in the boxes at the end of each relevant chapter.

Recommendations in previous         Actions taken and current
Survey                              assessment

                       A. Public finances

Fiscal consolidation should be      Fiscal consolidation has been
implemented as planned without      postponed given the historical
hampering the full function of      magnitude of the crisis. The
the automatic stabilisers.          government already proposed a
                                    consolidation path, starting
                                    2011, to reach a structural
                                    balance.

The fiscal framework could be
further improved

Exclude items which behave          Unemployment benefits have been
pro-cyclically (notably spending    excluded from the expenditure
on unemployment benefits) from      ceilings to allow a full
the expenditure ceilings.           response of automatic
Moreover, consider excluding        stabilisers in the recession.
certain revenue items in the        The next government will make
expenditure ceiling (such as        the decision whether this
dividends and central bank          measure remains permanent.
income).

Improve reporting on tax            All tax expenditures, and
expenditure (notably on the         important tax-deductible items
income-tax allowance for            in the income tax (e.g. the
mortgage interest payments and      fiscal treatment of mortgage
pension premiums) in the annual     interest and pension premiums,
budget, and consider a periodic     are now reported yearly in Annex
review of these expenditures by     5 of the Budget Memorandum).
an independent body to improve
fiscal spending efficiency.

Measures to secure fiscal
sustainability should include
reforming the state pension

Focus on enacting further           The government proposed raising
reforms aimed at increasing         the official retirement age (the
labour participation and reform     public pension, AOW) to 67 years
age-related institutions. Raise     in two one-year steps (in 2020
the official retirement age in      and 2025). It would be useful to
several steps to 67 years and       consider phasing in the changes
thereafter link it to               more rapidly. Linking the
developments in life expectancy.    pension age to life expectancy
                                    should follow.

                        B. Labour market

Continue activating social
assistance beneficiaries

Job search requirements for         The only general exemption in
current social assistance           job search requirements for
benefit recipients should be        social assistance benefit
strictly enforced. The              recipients is applicable to lone
authorities should not introduce    parents with children below the
exemptions for lone parents as      age 5, with an maximum exemption
is currently planned.               duration of 6 years.

Encourage participation of women
with weak labour market
attachment

Phase-out the transferability       No action taken.
of the tax credit for second
earners more rapidly than the
currently announced 15 years.

Shift more of the family-income     No action taken.
based child tax credit to the
individual or second-earner
children tax credit.

Consolidate the successful
reforms of disability benefit

Closely monitor the outflow of      A decline in the number of
former disability benefit           disability recipients was
recipients in order to assess       observed during the last years.
the success of the disability
benefit reform in reintegrating
them into the labour market.

Medical criteria for the young      Since 2010, the new participants
disabled under the Wajong scheme    in Wajong are entitled to job
should be tightened. Preferably,    support rather than passive
the young disabled should first     income support. Moreover,
receive social assistance and be    participants in the programme
granted Wajong only as a top-up     will be assessed upon entry and
after a waiting period.             again at the age of 27. Only at
                                    the second assessment can
                                    participants be transferred to
                                    permanent income support.

Continue retesting the existing     The age of disability benefit
stock of disabled under the new,    recipients subject to retesting
stricter medical testing            has been lowered from 50 to 45.
criteria, disregarding the age      Permanently disabled have the
of the benefit recipient.           opportunity to resume work
Moreover, in order to allow         again, via loan subsidies.
fully and permanently disabled
people to benefit from new
employment opportunities,
permanent disability should be
re-examined on a regular basis.

New entrants into the partial       Under the Law Stimulating Labour
disability benefit scheme should    Participation' (STAP) employers
be activated early, possibly        receive a subsidy (maximum 50%
already during their sickness       of the minimum wage) when
period. Work incentives for         employing long-term unemployed.
partially disabled should be        Moreover, people with a
further strengthened by             disability who have problems
shortening the initial period       finding a job are able to get
of the first-stage replacement      work experience through
benefit (the loongerelateerde       internships.
uitkering).

Further increase participation
of older workers

The use of tax-favoured savings     The life-course saving scheme is
schemes such as the recently        currently being evaluated.
introduced life-course savings      Starting in 2010 income from the
scheme should be monitored          life-course saving scheme will
closely. The authorities should     no longer qualify for fiscal
consider phasing-out the tax        measures aimed at increasing the
exemptions for these schemes        income of workers.
entirely.

Strengthen the job search           All workers who are unemployed
requirements for older workers      for a year or more are now
and aligned them with those for     obliged to accept any job offer.
other unemployed.

Consider indexing the official      The government has proposed
retirement age to the increase      increasing the retirement age in
in life expectancy. In order to     the state pension scheme from 65
allow older workers to be           to 67.
employed after the age of 65,
permanent contracts should be
made transformable into
temporary ones more easily.

The obligation to pay full wages    Over-65 workers who get sick
during long periods of sickness     will now receive only six weeks
for +65 years should be             full wages. Moreover, social
reconsidered.                       security premiums have been
                                    reduced for employers for
                                    keeping older workers (62 years
                                    and older) and for hiring
                                    workers of 50 years and older.

The state pension system (AOW)      The government proposed raising
should be reformed and possibly     the official retirement age (the
merged with the current Social      public pension, AOW) to 67 years
Assistance benefit scheme.          in two one-year steps (in 2020
                                    and 2025).

Further enhance activation of
the long-term unemployed

Unemployment benefits should be     No action taken.
made more activating by further
reducing benefit duration and
allowing for a gradual decrease
of the replacement rates with
the length of the unemployment
spell. This could imply an
initially higher replacement
rate for short unemployment
durations.

To reduce long-term                 Attempts to reduce employment
unemployment, employment            protection legislation failed
protection should be lowered by     due to opposition of the social
e.g. making the current dual        partners.
system of dismissal simpler and
more predictable.

The unemployed should be            No action taken.
profiled directly into different
programmes instead of different
activation categories.

                      Increase working hours

Facilitate female full-time
participation by further
developing the market for
childcare services

Support the development of the      The Childcare Act assigns
new market for childcare            municipalities the task of
services by setting provisions      supervising and enforcing
for a minimum number of opening     childcare. Schools have to offer
hours.                              childcare services from 7 a.m.
                                    to 7 p.m. (BSO).

Lower the marginal effective tax    No action taken.
rates over the income spectrum,
for instance by introducing a
flat tax system. In order to
finance such a decrease in the
marginal tax burden, existing
tax exemptions on state pensions
and second-earner tax credits
should be removed. Increase
participation by reducing the
marginal effective tax burden.

Introduce--as planned--an           Several new measures were taken
individualised work-related tax     to lower the marginal effective
credit for second earners, to       tax burden for some income
replace the current general tax     groups:
credit. Further reduce the
tapering off rate for housing       1. Income-based combination tax
and child benefits and condition    credit (TACK)
certain work-related
entitlements and tax credits on     2. Income dependent tax credit
the number of hours worked.         (EITC)
Lower the marginal effective tax
rates over the income spectrum,     Special tax credit for
for instance by introducing a       workers with non-working
flat tax system. In order to        partners is being phased out.
finance such a decrease in the
marginal tax burden, existing
tax exemptions on state pensions
and second-earnertax credits
should be removed.

To avoid the increase in            The tax deductions are replaced
marginal effective tax rates due    by direct (income-related)
to the recent childcare benefit     subsidies. These subsidies
reform, consider introducing        decrease with parental income.
flat childcare benefits,
irrespective of the family
income. Alternatively, consider
conditioning the reimbursement
rate for childcare services on
the number of hours worked.
Introduce, as planned, an
individualised work-related tax
credit for second earners, to
replace the current general tax
credit. Further reduce the
tapering off rate for housing
and child benefits and condition
certain work-related
entitlements and tax credits on
the number of hours worked.

Reducing the rate at which          No action taken.
certain benefits phase out, such
as the housing or the children
benefit. Alternatively, broaden
the existing work-related tax
credit.

Strengthen incentives to
negotiate a longer work week

In order to address pending         No action taken.
problems in the public sector
to find qualified employees in
sufficient numbers, the
authorities should consider         No action taken.
negotiating longer standard
working weeks for public sector
employees, at least for new
hires. Further ease rules on
overtime work further. In
particular, consider defining
the maximum hours worked over a
longer horizon (preferably over
a year).

      Recommendations on migration and integration policy

Improving immigration policy to
meet labour market needs

Workers with desired                From 2009 a two-year pilot
characteristics would be granted    programme has started with a
a work permit without the ex        supply-steered work permits
ante requirement of holding a       based on a point system.
job contract. Moreover, the tax     Graduates from the world's top
incentive scheme for highly         150 colleges can search for a
skilled foreign workers should      suitable job for up to one year
be made more transparent and        (subject to a minimum annual
more targeted.                      salary of EUR 25 800).

Improve labour market
integration of immigrants

Reduce employment protection        The reduction in administrative
for regular contracts to share      and regulatory burden for
economic risks more evenly          entrepreneurs who wish to employ
across the population.              labour migrants has been
                                    proposed.

Grant asylum-seekers full access    No action taken.
to the labour market if the
asylum procedure takes longer
than six months. Possibilities
for (voluntary) work and
schooling during the first six
months should be improved.

Consider more actively guiding      No action taken.
women entering for family
formation into employment at an
early stage, for example, by
increasing financial incentives
for municipalities to activate
this group.

Postpone the age at which           No action taken.
children are placed in different
streams, stimulating more mixed-
level education during the first
phase of secondary education and
creating greater second-chance
options for changing streams in
later stages.

Reduce barriers to mobility in      No action taken.
the housing market, most
notably, rental regulation and
transfer taxation.


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Notes

(1.) The technical details of the reduced working time scheme have undergone refinements, in particular regarding the entry criteria, which have been tightened in April 2009. The programme still allows maintaining workers as fully employed in the company, while their working time is reduced and the employer only pays for the time worked. For the remaining time, the employee receives an unemployment benefit.

(2.) The expenditure framework was also corrected for the so-called wage-price differential. Failure to do so would mean that lower-than-expected price and wage developments resulting from the crisis could yield cost savings which could be used to finance the expansion of other spending under the expenditure rules.

(3.) The sustainability gap defined as the required immediate increase in the structural primary balance to make public finances consistent with the governments inter-temporal budget constraint (thus allowing a financing of ageing costs with no abrupt policy changes) is labelled as the $2 indicator under European Commission nomenclature.

(4.) The 4.5% of GDP sustainability gap is measured in 2015, under the assumption that already adopted measures will decrease the gap by 2% of GDP between 2010 and 2015. These measures include improvements in the structural balance and the compensation of (part of) the increases in health-care costs through higher insurance premium. Other factors reducing the gap in the CPB scenario are lower growth of ageing costs and increases in consumption tax revenues resulting from rising pension benefits and pensioners' high propensities to consume.

(5.) In late 2009 a small retail bank (DSB Bank) collapsed. Its problems were caused by a bank run following a public discussion on its risky business strategy. Though, at least in part, the causes were not directly related to the crisis the fragile market situation contributed to the rapid developments. The collapse has not directly influenced the position of other financial institutions, but will cost the Dutch banks (via the depositor guarantee scheme) EUR 3 billion (0.5% of GDP).

(6.) The initial government plans involved merging the two nationalised banks (Fortis Netherlands and ABN AMRO) and spinning off a number of non-core activities. The European Commission has required a more substantial trim-down of activities on the grounds of competition in the Dutch market. At the same time, there remains significant uncertainty about the quality of some assets of the banks. Similarly, the Commission retrospectively introduced a number of clauses on the ING illiquid asset back-up facility, including a higher fee to be paid to the government and an obligation to sell some of ING's activities.

(7.) Before 2003, the duration of unemployment benefits for persons over 57 1/2 years old was 50% longer than for others.

(8.) The general rule for severance pay is one month salary for each year worked, increasing to two months' salary for workers above 50. Alternatively, employers can ask for firing permission from the local public employment service, involving long notice periods, bureaucratic and time-consuming dismissal procedures--see previous Survey.

(9.) There is a negative correlation between the strictness of employment protection legislation and the length of unemployment duration for older workers as it becomes easier for them to be hired when the strictness of EPL is reduced. Another issue is that the accumulated severance pay rights are lost when changing jobs, which means that older workers with substantial accumulated rights are very reluctant to change jobs (Euwals, de Mooij and van Vuuren, 2009).

(10.) A number of municipalities have relied on private job placement services with performance-related contracts. However, there seems to be little evidence that such a choice improved placement rates although it may have been less costly (Koning, 2009).
Table 1.1. Main indicators for the Netherlands

Percentage changes from previous period, at constant
prices, unless indicated

                                    Current
                                     prices
                                      Euro
                                    billion
                                      2006       2007       2008

Gross domestic product                540.2       3.6        2.0
Consumption
  Private                             254.9       1.7        1.3
  Government                          135.4       3.7        2.0
Gross fixed capital formation         106.4       4.8        4.9
  Public sector                        17.8       4.5        6.2
  Residential                          34.2       4.2        0.9
  Business                             54.3       5.3        7.0
Stockbuilding (1)                       1.7      -0.6        0.3
Total domestic demand                 498.4       2.3        2.7
Exports of goods and services         393.5       6.7        2.7
Imports of goods and services         351.7       5.1        3.7
Foreign balance (1)                    41.8       1.5       -0.4
Output gap (2)                                    1.5        1.5
Consumer price index                              1.6        2.5
Harmonised underlying inflation                   1.3        1.1
Unemployment rate (3)                             3.1        2.7
Households saving ratio (4)                      10.4        8.8
Government financial balance (5)                  0.2        0.7
Government debt (5)                              45.5       58.2

                                      2009       2010       2011

Gross domestic product                -4.0        1.2        2.0
Consumption
  Private                             -2.5        0.5        1.3
  Government                           3.2        1.1        0.5
Gross fixed capital formation        -13.0       -7.5        4.0
  Public sector                        9.7        1.3        0.9
  Residential                        -13.8       -7.5        3.8
  Business                           -19.9      -11.5        5.6
Stockbuilding (1)                     -0.7        1.1        0.0
Total domestic demand                 -4.0        0.3        1.5
Exports of goods and services         -8.2        9.6        7.0
Imports of goods and services         -8.7        9.0        6.9
Foreign balance (1)                   -0.4        1.1        0.6
Output gap (2)                        -4.1       -3.8       -2.8
Consumer price index                   1.2        1.0        1.4
Harmonised underlying inflation        1.3        1.3        1.3
Unemployment rate (3)                  3.4        4.6        4.8
Households saving ratio (4)           12.9       12.1       11.4
Government financial balance (5)      -5.3       -6.4       -5.4
Government debt (5)                   60.9       67.2       71.5

Note: National accounts are based on official chain-linked
data. This introduces a discrepancy in the identity between
real demand components and GDP.

(1.) Contributions to changes in real GDP (percentage of real
GDP in previous year), actual amount in the first column.

(2.) As a percentage of potential GDP.

(3.) As a percentage of labour force.

(4.) As a percentage of disposable income.

(5.) As a percentage of GDP.

Source: OECD Economic Outlook 87 Database.

Table 1.2. Policy areas of the study groups on budgetary savings

      Policy themes

 1    Energy and climate
 2    Living environment and nature
 3    Mobility and water
 4    Housing
 5    Child care and other schemes for children
 6    Productivity in education
 7    Higher education
 8    Innovation and applied research
 9    Distance to the labour market
10    Unemployment
11    Curative care
12    Long-term care
13    International collaboration
14    Asylum, immigration and integration
15    Public safety and terrorism
16    Tax administration
17    Supplementary benefits
18    Public administration
19    Business administration (including of independent
        administrative bodies)
20    International security

Source: Dutch Government.

Table 1.3. Financial market interventions (1)

Billions of EUR                                         2008    2009

Nationalisation and related
(loans and recap italisation)

  Fortis Netherlands/ABN AMRO                           16.8     1.4
  RFS/ABN AMRO                                           6.5
  Bridging loan                                         44.3   -36.5
  Spin-off of corporate insurance branch                        -0.4
  Further recapitalisation (partly through a loan)               2.6
  Interest paid to government                           -0.5    -0.7

Recapitalisation

  ING, Aegon, SINS Reaal                                13.8
  Repayments received by government                              -62
  Interest and dividends paid to government                     -1.3

Illiquid asset backup facility

  Obligation to ING (no cash flow)                              15.9
  Fees paid to ING                                               3.9
  Fees received by government                                   -3.9

Otherloans

  Iceland (Deposit Insurance)                            1.2     0.2
  Net cost (% of GOP)                                   13.8    -4.2

State guarantee facility an interbank loans

  Guarantees issued                                      2.7    47.5
  Guaranteed loans already expired                              -3.1
  Fees received by government                                   -0.1
  ABN AMRO Capital Relief instrument                            32.8

Exposure relative to GDP (%)                             0.5    13.1

(1.) Rounding errors possible, includes both on and off budget items.

Source: Stability Programme of the Netherlands, January 2010 Update.
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Title Annotation:Chapter 1
Publication:OECD Economic Surveys - Netherlands
Date:Jun 1, 2010
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