The Netherlands is gradually emerging from a double-dip recession with strengthened public finances and reforms on track to improve the labour and housing markets and the health care and pension systems. These reforms are paying off, says the OECD. Growth is expected to reach 1% this year and 1.3% in 2015.
Despite the overall positive outlook, important challenges remain according to three new OECD reports. Potential growth is about two percentage points lower than in 2000, and the country’s large banking sector is exposed to high household indebtedness. Small and medium sized businesses have difficulties accessing the credit needed for their development, which in turn can hamper the innovation required to secure strong economic growth in the future.
Presenting the Economic Survey of the Netherlands today alongside reviews of Dutch innovation and territorial policy, OECD Secretary-General Angel Gurría said: “The openness of the Dutch economy is a source of strength but with growth in Europe and the rest of the world poised to remain moderate at best, the country cannot expect a strong economic push from abroad. Getting the domestic policies right has become more important than ever.”
“The reforms identified in these three reports are self-reinforcing”, Mr Gurría added. “Strengthening the balance sheets of banks and households can benefit the economy as a whole. Sharpening innovation policy can contribute to advancing the country’s competitive edge in key sectors. And improving urban and territorial policy can help ensure that Dutch cities maximise their potential in terms of productivity and lifting living standards across the country.”
The OECD Economic Survey of the Netherlands argues that falling house prices have meant that many homes are worth less than the mortgages being paid on them. Nominal prices have dropped by 20% since their peak in early 2008, and one third of all households now have negative home equity.
The survey says that when the housing market starts to durably recover, higher down payments and regular amortisation requirements should be incentivised for all mortgages to ensure that the principal is not too high and its repayment not left to the end of the loan period. It recommends reducing the maximum loan-to- value ratio to below the value of the property and accelerating the reduction of mortgage interest relief. The survey also recommends that banks increase their capital adequacy ratios by issuing equity and retaining earnings. This will increase their resilience to housing sector developments.
The OECD Review of Innovation Policy in the Netherlands says that with its world-class research universities and the technological capabilities of its companies, the country is one of the most advanced knowledge economies in Europe. However, the report recommends doing more to engage small innovative businesses in the “Top Sector” strategy which focuses public resources on strengthening sectors where Dutch firms already excel. The review also suggests increasing support for business innovation through joint R&D projects with research institutions rather than just through R&D tax credits.
The OECD Territorial Review of the Netherlands recommends the creation of a national framework for urban policy to enhance the economic performance of cities. It suggests providing a longer timeframe for the current decentralisation and territorial reforms to allow local staff to adjust and for greater involvement by citizens. It also recommends aligning the Top Sector innovation strategy with the EU regional cluster policy in order to provide more coherent local incentives.