The International Monetary Fund (IMF) has issued a report on the economy of the Netherlands following discussions under Article IV of the IMF’s articles of agreement.

The recovery is stronger but growth will remain moderate at around 2% in 2015 and 2016. In the longer term the IMF expects continued growth, lower unemployment and domestic investment and consumption as the main driver of growth rather than exports. There are risks to the economy from lower than expected growth in the Euro area or in emerging markets. A slowdown in growth could affect tax revenue but a rebalancing of growth from external to domestic consumption could improve the tax composition of growth.

The IMF report suggests that tax reforms could be implemented to raise future economic growth and improve efficiency and fairness. The tax burden should be shifted away from labor and towards consumption and capital income.

The Netherlands has recently taken the decision to phase out some large subsidies on housing investment and pension savings, and a five billion Euro cut to labor taxes planned for next year is targeted at female workers and low income groups. The IMF considers that the government could consider further measures to put through reforms more quickly, to allow a growth-friendly reduction of the labor tax wedge.

More tax revenue could be raised from harmonizing the capital income and value added tax schemes, which would increase the efficiency of the system. Also, revenue shortfalls resulting from corporate tax reforms could be offset by measures to broaden the VAT base and by unifying the VAT rates.

The IMF considers that the tax system in the Netherlands favors debt and has therefore resulted in highly leveraged households and firms. Debt is preferred to equity financing owing to the tax deduction for interest. This has exacerbated business cycles and is a threat to financial and fiscal sustainability. This debt bias should be minimized by further reforms.

The government has already taken measures to deleverage the housing sector by decreasing loan to value ratios and mortgage interest deductibility and similar measure should now be taken in the corporate sector. This could be done by introducing an allowance for corporate equity (ACE) adjusted so that debt and equity finance are fiscally neutral. A similar allowance could be implemented for the housing sector.

The IMF report also notes that self-employment has increased rapidly and has added flexibility to the labor market. The self employed received large tax exemptions and usually pay lower social contributions, so labor costs are lower than for the employed. However many of the self employed are working under conditions that are similar to employment relationships. There should be tighter enforcement of the existing regulations as well as new criteria to distinguish employment from self-employment, such as a presumption of employment where hours and work location are set by the person paying for the services. The government should also address the lack of retirement benefits and sickness and disability insurance for the self-employed and move towards more equal tax treatment of employed and self-employed.