On behalf of the Dutch authorities, we would like to thank staff for the constructive policy dialogue during the virtual mission to the Netherlands and the excellent set of papers produced, including the Selected Issues Papers (SIPs) on education expenditure and the Dutch labor market. We would also like to take the opportunity to thank the team for their analytical work on the Netherlands during the year, resulting in four different IMF working papers on important topics such as capital income taxation and climate.

The Dutch authorities agree with the thrust of the staff appraisal.

The Dutch economy recovered strongly in 2021. According to the CPB September projections, the economy is expected to grow by 3.9% of GDP this year after a 3.8% of GDP contraction caused by the pandemic in 2020. With that, the economy reached its pre-pandemic level in the third quarter of this year, earlier than expected. The Dutch economy weathered the pandemic relatively well, also relative to the euro area economy that contracted -6.5% in 2020. This can be explained by the country’s low dependence on contact-intensive sectors and large-scale support packages to businesses and self-employed. Moreover, a high digitalization rate may have contributed to the adaptability of firms and consumers to a lock-down. A gradual reopening of the economy in spring 2021 contributed to a strong second quarter growth of 3.8% of GDP quarter on quarter (10.4% y-o-y), primarily driven by private consumption and exports.

The growth outlook of the Dutch authorities is broadly in line with that of staff. The economy is expected to grow by 3.5% in 2022, according to September projections, under the assumption that no further Covid-19 containment measures are needed. The authorities agree that risks to the outlook are balanced, with higher-than-expected pent-up demand reflecting an upward risk, and a negative trajectory of the Covid-19 pandemic and prolonged supply side bottlenecks being identified as downward risks.

Fiscal space enabled the Netherlands to provide the necessary support during the pandemic. Packages were designed to protect jobs and minimize the impact of the pandemic on employees, the self-employed and firms. In order to pay employees’ salaries, broad support was provided to companies with 20% or more loss in turnover, while companies could also postpone their payment of taxes. Transfers were made to eligible self-employed to secure an income equal to the social minimum. The fiscal costs of these packages totaled around 28 billion in 2020 and an estimated 40 billion in 2021, increasing the debt-to-GDP ratio from 48.6% in 2019 to 54.3% of GDP in 2020 and 57.8% of GDP in 2021. With the debt ratio expected to remain well below the 60 percent SGP limit in the medium-term, the authorities expect medium-term debt sustainability not to be a concern.

In line with the economic recovery, fiscal policy support has recently become more targeted. On the back of substantial progress with vaccination, the authorities have been able to gradually lift Covid-19 containment measures since late April, allowing most firms to resume their activities. This diminished the economic rationale for broad-based support packages. Therefore, since October, direct fiscal support only continued for firms that are still affected by existing measures, mostly targeted towards the hospitality sector. The withdrawal of government support could be crucial to an efficient allocation of resources towards the most productive activities during the economic recovery phase.

We agree with staff that government support to viable, but insolvent firms might be needed. Judicial requests for debt restructuring and bankruptcy have been unusually low during the pandemic and could increase now that fiscal policy has become more targeted. In August, the number of bankruptcies reached its lowest level since December 1990. The new restructuring law that came into effect on January 1, 2021, featuring elements of the UK Scheme of Arrangements and the US Chapter 11 procedure, enables firms or its creditors to initiate an extrajudicial restructuring plan that can be binding for all creditors once the plan is approved by at least one in-the-money creditor class and confirmed by the court. The government announced in October that it would allow the tax authority to temporarily deviate from its preferential creditor status in restructuring cases for viable firms with unsustainable debt. Furthermore, selected firms will be granted further postponement of tax obligations after October 2021. At the same time, the authorities remain committed to continue reforms to the international corporate taxation framework to help fight tax avoidance globally.

Dutch banks prove to be resilient, also to a scenario of increased solvency risks among SMEs. Dutch banks’ capital positions have not deteriorated since the pandemic, partly because the proportion of non-performing loans has shown only a limited rise. However, the withdrawn government support may increase the probability of default or write-downs of bank loans, as also pointed out by staff. Due to the relatively limited exposure to corporate sectors hit hard by the pandemic, banks are resilient to a solvency shock in the corporate sector (SMEs), as a DNB stress test shows. The resilience of the Dutch banking sector under severe scenarios is also shown by the July EBA stress test of European banks, having an impact on CET-1 ratios in line with that of the European average of around 5.3%.

To maintain financial sector resilience, housing market vulnerabilities need to be addressed. The recent sharp increase in house prices (in August by as much as 17.8% compared to a year earlier), leaves Dutch households and (via direct and indirect channels) financial institutions vulnerable to a price correction. With a total of 100% of GDP – of which almost 95% mortgage debt -household debt is among the highest in Europe. In order to increase banks’ resilience to a house price shock, DNB plans to introduce a previously announced minimum floor for the risk weighting of bank mortgages starting January 1, 2022. However, macroprudential policies can only provide so much counterweight to the build-up of vulnerabilities. Moreover, non-bank players fall outside the scope of the macro-prudential toolkit. The authorities will closely monitor developments in the non-bank financial sector to decide on the need for developing macroprudential tools to contain potential vulnerabilities.

The authorities remain committed to address supply and demand mismatches in the housing market. The maximum loan-to-value ratio of 100% is still relatively high. Although tax deductibility of mortgage interest is being partly phased out since 2013, from a tax perspective mortgage loans remain an attractive means of financing an owner-occupied home. The authorities will seriously consider staff’s proposals to make further progress with the ongoing reduction of the subsidization of owner-occupied housing, while investing an additional 100 million a year on average in the next 10 years to address supply shortages in the housing market.

A tight labor market might create inflationary pressures over the medium-term. The recent increase in inflation caused by rising gas prices is expected to be mostly temporary. However, the labor market may cause further inflationary pressure over the medium-term. With a record growth in new vacancies, the number of open positions exceeded the number of unemployed over the second quarter for the first time since the statistical office started their recordings in 2003. The number of vacancies as well as the number of new jobs reached a record high in June. The unemployment rate returned to its pre-pandemic level of 3.1% in July 2021. Despite an increase in labor supply, the unemployment rate has been rather stable since.

Climate is high on the agenda. No country is immune to natural disasters, especially a country like the Netherlands with more than 25% of its surface below sea level. Together with other European countries, the Netherlands has set ambitious targets to reduce its C02 emissions and move towards greener energy sources. Over the past years, the Dutch government has taken significant steps in this direction with the adoption of a climate law and with the national climate agreement. Additional measures were announced in this year’s budget, while acknowledging that more needs to be done to become climate neutral in 2050. The authorities very much welcome the proposal of a broad and ambitious policy package by the European Commission and trust that the next government will decide on further national measures to meet these ambitions.

The authorities welcome the analysis and recommendations to strengthen the education system. We are pleased to see that the Dutch education system performs well by international comparison. At the same time, we acknowledge that the Dutch education outcomes have deteriorated in some respects, as reflected in the decreasing PISA test scores. Furthermore, we see significant gaps in primary education among pupils from poorer households compared to the average. Therefore, the authorities agree with the importance of continued investment in education, especially in the quality of education and teachers, and in regions where needed most, and recognize the need to foster early childhood education to help pupils start strong in their curriculum.