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Assessment and recommendations
After the stagnation in the first half of the decade, the Netherlands is once again in good shape. The pace of real GDP growth has strengthened since 2005, unemployment has fallen back to a low level and the fiscal position has been brought back into balance. Though the current recovery is partly cyclical, it is also built on an impressive underlying performance, which has helped to maintain income per capita among the highest in the OECD. While the Dutch economy displays a high level of productivity, the trend growth of productivity has been lower than in many other countries during the past decade, which may in part reflect the continued reliance on traditional industries. The government has taken measures to foster innovation, facilitate entrepreneurship and stimulate competition so as to spur productivity growth. These policy goals were discussed at length in the previous Economic Survey and are not addressed in detail here.
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Challenges facing the Dutch economy
The Netherlands is well out of its economic stagnation in the first half of the 2000s and is now once again in good shape. The recovery of the past years has been robust, helping to maintain GDP per capita in the OECD’s top league. The very open Dutch economy has benefited from the supportive international environment and investors have continued to be attracted by its business-friendly environment. The country has also benefitted from past structural reforms, notably reforms of pension systems, health care and disability benefits, which have contributed to putting public finances on a sounder footing and have encouraged labour market participation. Productivity growth, however, has remained sluggish, which may be partly due to the relatively high weight of traditional industries in the economy and a lack of innovation activity. Labour utilisation has therefore contributed to growth more than in most other countries. So far, this has been made possible by the availability of under-utilised labour resources, but employers are running into increasing difficulties in hiring workers. This is largely because the working-age population has virtually stopped growing. Large groups of baby-boomers are reaching retirement ages, a trend that will accelerate from 2010 onwards and persist for the following three decades. In addition, net migration flows have turned negative, as less foreign migrants are entering the country and more natives are leaving it, a rare occurrence in a high-income nation. Furthermore, labour utilisation is being reduced by the relatively short working week and the high incidence of parttime employment. If unaddressed, these hurdles will impose a constraint on growth in the medium-term. Hence, the present coalition government has decided to encourage labour market participation. The 2008 budget introduces several welcome measures in the tax-and-benefit system for this purpose. Nevertheless, more ambitious and broad-based reforms will be needed to keep growth on a strong trend in the medium-term.
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Securing fiscal sustainability
The Dutch public finances are generally in a good condition. Following the breach of the 3% limit in 2003, an impressive fiscal consolidation programme brought the budget successfully back into surplus in 2006. The fiscal stance was, however, eased somewhat in 2007 at a time when the economy was already running out of available capacity. The draft budget for 2008 shows an improvement in the structural balance, reflecting a projected rise in natural gas revenues. A gradual further improvement is planned for later years. Given the high uncertainty surrounding short-term prospects in the international economy, the authorities should be prepared to allow a flexible operation of automatic stabilisers. Over the medium-term, the challenge of ageing looms large, but less so than in other countries, thanks to the well-funded second pillar pension system. Since the last Survey, the required consolidation for achieving fiscal sustainability has increased, reflecting both a re-assessment of future cost and revenue developments, but also an increase in life expectancy. A possible strategy to cope with the "sustainability gap" would be to run large budgetary surpluses for a long period of time, but this is likely to prove politically challenging. An alternative strategy is the adoption of incentives to increase participation in the labour market, including at older ages, so as to widen the revenue basis. It would also be important to enact measures containing age-related spending. Various proposals to reform the first pillar pension scheme, which besides health care expenditures accounts for the bulk of future deficits, are discussed in this chapter.
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Coping with labour shortages
The Dutch labour market is functioning well, with employment and labour participation rates above OECD averages. Nevertheless, there are sizable pockets of under-activity, including social benefit recipients representing 17% of the workingage population, which could be mobilised in order to address short-run labour shortages and the long-run ageing-related reductions in the labour supply. Reintegrating these benefit recipients would also help to reduce spending on labour market programmes, which is among the highest in the OECD. Policies should continue to tackle the high inactivity of these groups. For people on social assistance and older workers, job search requirements should be strengthened and the authorities should continue making the tax-benefit system more work-friendly. For women with low-earning capacities, existing work disincentives should be eliminated. For (partially) disabled people, it is important to envisage labour market re-integration at an early stage. For the long-term unemployed, policies should be further strengthened by adjusting the unemployment benefit and the employment protection systems, as well as further improving current profiling and training measures.
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Increasing working hours
About two-thirds of Dutch female workers opt for part-time jobs, bringing down the country’s average working time to one of the lowest levels in the OECD. It is often said that the preference of Dutch women for part-time work reflects a social norm strongly favouring family values. This chapter shows that the Dutch-specific prevalence of part-time work also reflects the influence of public policies, notably regarding the provision of childcare and the taxation of second earners. Recent government decisions have started to make it easier for people to work longer hours and take care of children at the same time. Facilities to help parents balance their work and care responsibilities have been expanded, such as with more abundant and cheaper childcare services, but not all obstacles have been removed. Moreover, the marginal effective tax burden on second earners remains high as social benefits are conditioned on family income, which creates incentives to work part time. Thus, more emphasis is needed in further reducing the marginal effective tax rate. This could include both measures to expand existing work-related tax credits as well as reconsidering the withdrawal of benefits when the income of second earners rises as they work longer hours.
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Reaping the economic benefits of immigration
The Netherlands has been an immigration country since the 1960s. In the past decade, poor economic integration and weak labour market performance of immigrants have induced policy changes aimed at making immigration policy more selective. More restrictive measures for family-related migration were introduced that led to a reduced inflow of immigrants from non-Western countries which, in combination with higher emigration of natives, resulted in net migration outflows in recent years. A new entry scheme was enacted to facilitate entry of high-skilled workers, but at this time it is difficult to ascertain whether this has led to an increase in the inflow of such workers. Rising labour market demand for low-skilled labour has mostly been filled by workers from the new EU member states, which seems to have had limited impact on labour market changes of native workers. This chapter examines how immigration policy could be further improved to meet the needs of the labour market and how the economic integration of immigrants could be enhanced.
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