The global crisis led the Netherlands into deep recession, despite a decisive government intervention to support the financial sector and a timely fiscal stimulus. The increase in unemployment was surprisingly limited, reflecting, among other factors, a severe pre-crisis overheating of the labour market. Growth recommenced in mid-2009. Looking ahead, the recovery is expected to gather pace relatively slowly. In this context, the main challenges for the government coming in after the June 2010 general election are to exit from stimulus policies and to boost potential growth in an ageing society

Growth came to an abrupt halt in mid-2008 as the economy was hit by the global crisis, although the increase in the unemployment rate was smaller than anticipated. The economy exited recession in mid-2009, as the effects of the fiscal stimulus, easier monetary policy, improved financial conditions and an emerging recovery in world trade began to revive activity. Given the expected slowdown in household incomes, the fall in real and financial wealth of households and the need for rebuilding profits, it is likely that the domestic economy will remain sluggish in the short-term.

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.

The Dutch occupational pension system has been successful in securing high asset accumulation to fund generous pension promises. However, for the second time in this decade the pension system has been affected by a financial crisis and many pension funds’ assets fell below levels needed to meet regulatory requirements. Insufficient funding raises solvency issues, which could eventually lead to large fiscal costs in case of bail-outs. In response to the crisis, most funds were required by the regulator to draw up recovery plans to restore their funding over five years. This has raised concerns that the adjustment required by the regulator is unnecessarily sharp, with possibly adverse macroeconomic implications. On the other hand, OECD simulations indicate that under current policies, it is unlikely that funding rates will be secured that enable the funds over the long term to fulfil their promises of a replacement rate of up to 80% of average wages. This raises the challenge of implementing parametric changes that secure pension benefits without large detrimental effects on intergenerational equity and growth. Occupational pensions are transferable, which enhances labour market mobility. But it is often very difficult for workers to assess how one pension scheme compares to another, posing practical barriers to mobility that should be eased.

Congestion has become a burden for the Dutch economy. Commuters and businesses are suffering from the time lost in traffic and the unreliability of travel time. Expanding infrastructure can potentially solve such problems, albeit only in the long term and at a high cost. Thus short to medium-term solutions will have to be oriented at improvements in the use of existing infrastructure, more efficient public transport and better demand management. In this light the previous government had decided to introduce an innovative country-wide road pricing scheme. This scheme aims to make users pay for road usage and can bring about significant benefits in terms of lower congestion and less pollution. The full benefits of road pricing can be reaped by adjusting the prices to encourage more efficient economic and environmental outcomes. If the implementation of a fully-fledged road price system is delayed or aborted, the government should rely on alternative measures such as fuel taxation and congestion charges to obtain similar outcomes. Reforms to the transport system, including public transport, together with the housing market reforms proposed in the subsequent chapter should reduce the economic and environmental burden of transport, thereby improving prospects for sustainable long-term growth.

The housing market figures among the main determinants of labour mobility, as households seldom make employment and housing decisions independently of each other. This interdependence is likely to strengthen as the cost of commuting increases, due to worsening road congestion or measures that would raise fuel prices, for example to counter global warming. The Dutch housing market is more rigid than in many other OECD countries, as the result of numerous government interventions. Boosting labour mobility by easing rigidities would improve labour resource utilisation, which will be especially important as the labour force contracts with ageing. The rental sector could be made more attractive and flexible by dismantling strict rent regulation and rigid allocation mechanisms in the social housing sector. Lowering tax incentives to homeowners would improve the allocation of scarce capital and reduce house prices. Easing strict land-use and zoning regulation would increase the supply of all types of housing, reducing prices and allowing the housing stock to adjust better to residents’ needs