Economic growth is projected to remain sound, at around 2%, and broad-based. Private consumption will benefit from fiscal stimulus in 2016 and improving labour market conditions. The strengthening of the housing market and brighter business prospects continue to support investment. Inflation is projected to increase somewhat, but to remain low. The current account surplus will fall further on the back of lower gas exports and firming domestic demand, albeit from a high level.

Public finances are healthy. However, the tax system can be made more efficient, equitable and environmentally-friendly, and efforts for a broad reform should be revived. Further easing the employment protection provided by permanent contracts would reduce labour market duality. Ensuring that the self-employed are sufficiently insured against disability and have adequate pension savings would avoid the risk of future public spending pressures.

Raising productivity, which has been weak since the onset of the crisis, is essential to keep GDP growth on a sustainable and inclusive footing. To this end, more private sector investment in innovation and business capital is needed. Continuing to improve skills, particularly of immigrants and the long-term unemployed, and better matching of skills to jobs would also raise productivity and help to ensure that everyone benefits from higher growth.

Domestic demand continues to drive growth

The economy has been growing at a healthy pace, mainly driven by domestic demand. Higher employment and strong wage growth have supported private consumption, as did the ongoing recovery of the housing market. Business investment has picked up strongly owing to higher demand and a gradual normalisation of credit conditions. Business and consumer confidence are high. A reduction in gas extraction has weighed on growth and exports, and, consequently, the large current account surplus has narrowed.

Productivity and labour market

1. Real GDP divided by total hours worked.

2. Pre-crisis labour productivity trend growth is calculated between 1982 Q1 and 2007 Q4, and is projected from 2008 onwards.

Source: OECD Economic Outlook 99 database; and Statistics Netherlands (CBS).

An income tax cut in early 2016 has supported household consumption and labour supply, but the broadly neutral fiscal stance is appropriate so as not to derail the recovery. Nevertheless, the structural deficit has moved further away from the Medium-Term Objective of 0.5% of GDP as a result of lower gas revenues, and offsetting measures over the medium term could be needed. Efforts to reform the tax system stalled in 2015, but should be revived to increase tax efficiency. Priorities should be to broaden the tax base by accelerating the reduction of mortgage interest rate relief and phasing out the lower VAT rate.

Demand, output and prices

More private investment and further structural reforms would bolster productivity

Productivity growth has been weak in recent years. Business investment has picked up lately, but spending on research and development remains low and would benefit from more direct public support. Continuing efforts to raise skills and use them more efficiently would also boost productivity. In particular, strengthening skills of the long-term unemployed, immigrants and inactive youth would help their labour market integration and raise their living standards. Skill utilisation would be enhanced by further cutting tax and benefit disincentives for women’s full-time work.

Labour market conditions have been gradually improving, but job vacancies, despite their recent rise, remain scarce compared to the number of job-seekers. Easing employment protection legislation on permanent contracts by continuing to lower the cap on severance payments would reduce labour market duality. For employees with low wages in some sectors, the income stability could be strengthened by reducing tax incentives for self-employment.

Growth will be broadly stable

Economic activity is expected to continue growing at around 2% per annum. Private consumption growth should strengthen due to the tax stimulus, wage growth and improvements in labour market conditions. Residential and business investment are projected to moderate, but will continue to support growth. As the economy expands, the public deficit will fall further. Inflation will increase somewhat, but should remain low as economic slack is projected to persist in the near term. The current account surplus will continue to shrink but still remain above 7% of GDP in 2017.

Further cuts in gas production would reduce growth and fiscal revenues. Past subdued economic growth may have weakened SMEs’ balance sheets, which could reduce the sector’s dynamism and thereby lower economic growth. If the United Kingdom were to leave the European Union, it would increase uncertainty and reduce growth, although there is some fiscal space to mitigate the impact. On the positive side, the improving economic outlook might trigger investments that have so far been postponed. Private consumption could also turn out higher if the pace of the housing market recovery remains the same or increases.