title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Luxembourg and delivering a Council opinion on the 2019 Stability Programme of Luxembourg

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/97

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Luxembourg and delivering a Council opinion on the 2019 Stability Programme of Luxembourg
      (2019/C 301/16)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission also adopted the Alert Mechanism Report, in which it did not identify Luxembourg as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the Recommendation on the economic policy of the euro area (3) (‘2019 Recommendation for the euro area’) which sets out five euro-area recommendations (‘the euro-area recommendations’).

                  (2)

                  As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Luxembourg should ensure the full and timely implementation of the 2019 Recommendation for the euro area, as reflected in recommendations (1) to (4) below. In particular, focusing economic policy related to investment in the specified areas and tackling outbound payments will help address the second euro-area recommendation as regards supporting investment and aggressive tax planning, and measures to improve participation of the older people in the labour market will help address the third euro-area recommendation as regards ensuring an adequate and sustainable social protection system.

                  (3)

                  The 2019 country report for Luxembourg was published on 27 February 2019. It assessed Luxembourg’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (4), the follow-up given to the country-specific recommendations adopted in previous years and Luxembourg’s progress towards its national Europe 2020 targets.

                  (4)

                  On 30 April 2019, Luxembourg submitted its 2019 National Reform Programme and its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (5)

                  Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (‘ESI Funds’) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (5), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance.

                  (6)

                  Luxembourg is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, the government plans a decrease in the headline surplus from 2,4 % of gross domestic product (GDP) in 2018 to 1,0 % of GDP in 2019, followed by an almost steady increase thereafter, reaching a surplus of 2,2 % of GDP in 2023. Based on the recalculated structural balance (6), the medium-term budgetary objective – which has been changed from a structural deficit of 0,5 % of GDP in 2019 to a surplus, in structural terms, of 0,5 % of GDP as of 2020 – is overachieved throughout the programme period. According to the 2019 Stability Programme, the government debt-to-GDP ratio is expected to remain well below the 60 %-of-GDP Treaty reference value. The macroeconomic scenario underpinning those budgetary projections is favourable throughout the period covered by the 2019 Stability programme, except for 2023 when it is plausible. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 0,9 % of GDP in 2019 and 0,5 % of GDP in 2020, lower, in particular for 2020, than in the 2019 Stability Programme, but still above or in line with the medium-term budgetary objective. At the same time, expenditure developments should be monitored carefully in the short and the medium term, especially in light of possible future risks to the robustness of revenues. Overall, the Council is of the opinion that Luxembourg is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

                  (7)

                  In spite of recent reforms, Luxembourg’s age-related spending (pension-related, healthcare and long-term care costs) is expected to increase markedly in the long term. Assuming no policy changes are made to the current system, this could put at risk the sustainability of public finances in the long term. This is despite the current low level of public debt and the accumulated reserves of the social security system, which are expected to ensure the system’s viability until 2041. Recommendations on this challenge have been addressed to Luxembourg since 2011 but limited progress has been made to date. In its 2018 report, the government’s pensions working group discussed various ways to improve the long-term sustainability of the pensions system, including gradually increasing the contribution rate, raising the pensionable age to take account of longer life expectancy and encouraging phased retirement. The report suggests a multi-pronged strategy of calibrated reforms to guarantee the long-term sustainability of the system while minimising the impacts on both the economy and pensioners. Projected increases in age-related expenditure also threaten the long-term sustainability of the healthcare and long-term care systems. More than three quarters of long-term care expenditure comes from public sources. The long-term care insurance system should remain financially stable until 2030 if the contribution rate is gradually raised from 1,4 % to 1,7 %, according to an analysis carried out in 2013 by the General Inspectorate of Social Security, in order to keep costs in line with the proportion of dependent people. However, the impacts in terms of long-term fiscal sustainability are not yet clear. To sustain social cohesion and public finances in the long term, demographic policies would need to concur with education and training policies, taking a holistic approach to considering both the challenges and opportunities of changes in demography as well as in the digital economy, given the expected impact of population ageing on labour supply in the near future. Labour shortages have recently emerged in certain sectors, which could hinder productivity growth and reduce the long-term growth potential.

                  (8)

                  Despite an overall good labour market performance, the employment rate is stagnating and specific groups still face particular difficulties on the labour market. In particular, the employment rate of older people remains particularly low, and further measures are needed to improve their participation in the labour market. Early retirement schemes encouraging workers to leave employment remain widespread, with 57,5 % of newly attributed pensions being early old-age pensions in 2017. In 2018, the government abrogated one of the pre-retirement schemes allowing people to retire from the age of 57, but the effect of this reform was weakened by relieving restrictions on other pre-retirement schemes. Low old-age activity rates also largely result from financial disincentives to work stemming from the tax-benefit system which are comparatively high for this age group. Encouraging the employment of older workers requires a comprehensive strategy including measures to help them remain in active employment for longer. The ‘Age Pact’, a draft law submitted to Parliament in April 2014, which aims to encourage firms with more than 150 employees to hire and retain older workers through age management measures, is still pending in Parliament.

                  (9)

                  While Luxembourg remains committed to improving the regulatory environment for the business services sector, regulatory barriers are still high in several sectors, such as legal, accounting, architecture and engineering services, according to the Commission’s restrictiveness indicator (7). The OECD’s Intra-EEA Services Trade Restrictiveness Index published in December 2018 also confirmed that Luxembourg’s level of regulatory restrictiveness vis-à-vis other Member States is higher than the Single Market average for these sectors.

                  (10)

                  Luxembourg’s economic model features strong performances consistent with robust and sustained creation of qualified employment. This is supported by high productivity levels, largely reflecting efficiency gains from participation in global markets, in particular in the financial sector. However, productivity growth has stagnated in recent years, hampered by low levels of business investment in innovation and digital integration. Luxembourg’s strategy to diversify its economy, by developing key knowledge-intensive sectors in a transition to a data-driven economy, exhibits strong potential to stimulate high value-added investment and boost productivity growth. In that context, public investment remains high and focused on those sectors, including a strong Information and Communication Technology sector. However, this has not helped to stimulate private investment in innovation and digitalisation. Increased investment in research and innovation, as well as in digital integration, especially in firms and specifically in small and medium-sized enterprises, is important for improving productivity growth and further diversifying Luxembourg’s economy. Developing a coherent and integrated national framework for research and innovation policies and support instruments, including prioritisation based on robust assessment of expected economic impacts, is essential to enabling Luxembourg to exploit the full potential of its innovation eco-system.

                  (11)

                  Increased investment in skills, in particular information and communication technology skills, employability, education and training, including a better alignment of education curricula to labour market needs and fostering technological and digital transformations, is important for improving Luxembourg’s productivity, employment and long-term growth potential, and for fostering equal opportunities.

                  (12)

                  Air pollution and traffic congestion at peak times still constitute major problems for Luxembourg, from both a competitiveness and environmental point of view. In addition, the CO2 emissions from road transport contribute to climate change. According to the 2017 national projections submitted to the Commission, it is expected that in the absence of additional measures, Luxembourg will miss its 2020 greenhouse gas emission reduction target by 3 percentage points and its 2030 target by 20 percentage points. The number of cross-border workers, who currently represent about 45 % of Luxembourg’s labour force, the low taxation of transport fuel and high house prices stimulate increased car use and are an obstacle to improving air quality and traffic conditions. Meanwhile, the use of alternative fuels in new passenger cars sold in Luxembourg has increased over the past few years.

                  (13)

                  Insufficient housing supply may negatively affect Luxembourg’s attractiveness. Its strong housing demand remains driven by population growth, favourable financing conditions and a large cross-border workforce. Housing supply and investment appear insufficient, constrained by insufficient land availability and low housing density, largely due to a lack of incentives for landowners to build new housing or to sell. The supply of social housing also appears insufficient and points to a need for significant investment to alleviate rising tensions in the housing market. In that regard, policy measures set out in the governmental programme for 2018-2023 aim at increasing housing supply. These include changes to urban planning laws to increase building areas and develop affordable and social housing.

                  (14)

                  The fight against aggressive tax planning is essential to make tax systems more efficient and fair as acknowledged in the 2019 Recommendation for the euro area. Spillover effects of taxpayers’ aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement Union legislation. Luxembourg has taken measures against aggressive tax planning, but the high level of dividend, interest and royalty payments as a percentage of GDP indicates that the country’s tax rules may be used by companies that engage in aggressive tax planning. The majority of foreign direct investment is held by special purpose entities. The absence of withholding taxes on outbound (i.e. from Union residents to third-country residents) interest and royalty payments and the exemption from withholding taxes on dividend payments under specific circumstances may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction.

                  (15)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Luxembourg to make the best use of those funds in respect of the identified sectors.

                  (16)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Luxembourg’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Luxembourg in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Luxembourg, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (17)

                  In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion (8) that Luxembourg is expected to comply with the Stability and Growth Pact,

            HEREBY RECOMMENDS that Luxembourg take action in 2019 and 2020 to:

         1.

            Increase the employment rate of older workers by enhancing their employment opportunities and employability. Improve the long-term sustainability of the pension system, including by further limiting early retirement.

         2.

            Reduce barriers to competition in regulated professional business services.

         3.

            Focus economic policy related to investment on fostering digitalisation and innovation, stimulating skills development, improving sustainable transport, and increasing housing supply, including by increasing incentives and lifting barriers to build.

         4.

            Address features of the tax system that may facilitate aggressive tax planning, in particular by means of outbound payments.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

         (3)  OJ C 136, 12.4.2019, p. 1.

         (4)  OJ C 320, 10.9.2018, p. 68.

         (5)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

         (6)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

         (7)  SWD(2016) 436 final

         (8)  Under Article 5(2) of Regulation (EC) No 1466/97.


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Hungary and delivering a Council opinion on the 2019 Convergence Programme of Hungary

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/101

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Hungary and delivering a Council opinion on the 2019 Convergence Programme of Hungary
      (2019/C 301/17)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission also adopted the Alert Mechanism Report, in which it did not identify Hungary as one of the Member States for which an in-depth review would be carried out.

                  (2)

                  The 2019 country report for Hungary was published on 27 February 2019. It assessed Hungary’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (3), the follow-up given to the country-specific recommendations adopted in previous years and Hungary’s progress towards its national Europe 2020 targets

                  (3)

                  On 30 April 2019, Hungary submitted its 2019 National Reform Programme and its 2019 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (4)

                  Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (‘ESI Funds’) for 2014-2020. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance.

                  (5)

                  Hungary is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2019 Convergence Programme, the government plans an improvement of the headline deficit to 1,8 % of gross domestic product (GDP) in 2019 from 2,2 % in 2018. The deficit is planned to continue gradually improving thereafter to 1,2 % in 2021 and to reach a balanced budgetary position in 2023. Based on the recalculated structural balance (5), Hungary would be close to its medium-term budgetary objective — which has been changed from a structural deficit of 1,5 % of GDP in 2019 to 1,0 % of GDP as of 2020 — in 2022 and would achieve it in the following year. According to the Convergence Programme, the general government debt-to-GDP ratio is expected to decline gradually to below 60 % by the end of 2022. The macroeconomic scenario underpinning those budgetary projections is plausible for 2019 and markedly favourable from 2020, which poses risks to the implementation of the deficit targets. At the same time, the measures needed to support the planned deficit targets from 2020 onwards have not been sufficiently specified.

                  (6)

                  On 22 June 2018, the Council found in accordance with Article 121(4) of the Treaty on the Functioning of the European Union that a significant observed deviation from the adjustment path towards the medium-term budgetary objective occurred in Hungary in 2017. In view of the established significant deviation, on 22 June 2018 the Council issued a Recommendation (6), recommending that Hungary take the necessary measures to ensure that the nominal growth rate of net primary government expenditure (7) did not exceed 2,8 % in 2018, corresponding to an annual structural adjustment of 1,0 % of GDP. On 4 December 2018, the Council adopted Decision (EU) 2018/2028 (8), establishing that Hungary had not taken effective action in response to its Recommendation of 22 June 2018, and issued a revised Recommendation (9). In the Recommendation of 4 December 2018, the Council asked Hungary to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 3,3 % in 2019, corresponding to an annual structural adjustment of 1,0 % of GDP. On 14 June 2019, the Council adopted Decision (EU) 2019/1003 (10), establishing that Hungary had not taken effective action in response to the Council Recommendation of 4 December 2018. Moreover, based on 2018 outturn data, Hungary was found to be in significant deviation from the recommended adjustment in 2018.

                  (7)

                  In line with Article 121(4) of the Treaty and Article 10(2) of Regulation (EC) No 1466/97, the Commission issued a warning to Hungary on 5 June 2019 that a significant deviation from the adjustment path towards the medium-term budgetary objective was observed in 2018. On 14 June 2019, the Council adopted a subsequent Recommendation (11) confirming the need for Hungary to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 3,3 % in 2019, corresponding to an annual structural adjustment of 1,0 % of GDP. Based on the Commission 2019 spring forecast, there is a risk of a deviation from that Recommendation in 2019.

                  (8)

                  In its Recommendation of 14 June 2019, the Council recommended Hungary to take the measures necessary to ensure that the nominal growth rate of net primary government expenditure does not exceed 4,7 % in 2020, corresponding to an annual structural adjustment of 0,75 % of GDP. This would put Hungary on an appropriate adjustment path towards the medium-term budgetary objective. Based on the Commission 2019 spring forecast under unchanged policies, there is a risk of a deviation from that requirement in 2020. Overall, the Council is of the opinion that significant further measures will be needed as of 2019 to comply with the provisions of the Stability and Growth Pact, in line with the Council Recommendation of 14 June 2019, with a view to correcting the significant observed deviation from the adjustment path towards the medium-term budgetary objective.

                  (9)

                  The overall employment rate has improved significantly amid strong economic expansion but has not benefited all groups equally. The gaps in employment and wages between skills groups and men and women remain wide in comparison with the Union average. The gender employment gap is wide partly due to the limited supply of good quality childcare. Labour market outcomes for various vulnerable groups, including Roma and people with disabilities, are weak. Despite its reduction, the Public Works Scheme, which is not effective in leading participants to the jobs in the primary labour market, remains sizeable. Other policies to help unemployed or inactive people find work or training are insufficiently targeted. Developing digital skills could help improve employability. Recent measures are designed to get more retired workers back into jobs and to increase their number over time. Hungary’s overall poverty situation has been improving since 2013. The duration of unemployment benefits is the shortest in the Union, at a maximum of three months, which is well below the average amount of time needed to find a job.

                  (10)

                  The share of people at risk of poverty and social exclusion is falling. There has been a clear shift from social benefits towards work-related family support and in-kind benefits, which are however not sufficiently targeted to the poor. While home-ownership subsidies have expanded, there has been no improvement in the supply of social housing.

                  (11)

                  Education outcomes are below the Union average and show wide territorial disparities. Early school leaving is higher and the tertiary education attainment rate lower than the Union average. The education system hinders social mobility. Pupils are streamed early into different types of schools, with wide gaps in education outcomes and employment paths. The proportion of primary schools with majority Roma participation increased from 10 % in 2008 to 15 % in 2017. The impact of recent measures targeting the even distribution of disadvantaged pupils across schools is limited by the exemption of non-state schools from the requirement to take disadvantaged pupils. Disadvantaged children tend to be concentrated in vocational secondary schools where poorer levels of basic skills, higher dropout rates and lower pay and career prospects are more prevalent. The low participation of disadvantaged groups, in particular Roma, in quality education is a missed opportunity to build up human capital. The shortage of teachers also remains a challenge. Teachers’ salaries have risen in recent years but are still relatively low, compared to other tertiary education graduates. The low number of students participating in higher education is not in line with the strong demand for highly skilled workers and the wage premium of tertiary graduates, which is the highest in the Union. Hungarian higher education institutions have the lowest financial autonomy in the Union. In addition, the April 2017 amendment of the Higher Education Act, which set additional requirements for international universities to operate in Hungary, raised further concerns over academic freedom. In 2018, the internationally highest ranked Hungarian university signalled its intention to leave the country because of the regulatory uncertainty created by this amendment.

                  (12)

                  Health outcomes lag behind most other Member States, reflecting both unhealthy lifestyles and the limited effectiveness of healthcare provision. The prevalence of smoking, alcohol use disorder and obesity is one of the highest in the Union. Hungarians are among the most likely in the Union to suffer premature death due to bad air quality. The number of avoidable deaths is one of the highest in the Union, partly due to inadequate screening and primary care management. There are significant socioeconomic disparities in access to quality care. Public spending on healthcare is below the Union average, and citizens rely on out-of-pocket payments to access quality care, which risks further widening the socioeconomic health divide. The system remains strongly hospital-centred, with weaknesses in primary care, in particular early detection and prevention of chronic diseases. A sizeable shortage of healthcare staff, in particular general practitioners and nurses, thwarts access to care in poorer areas.

                  (13)

                  Increasing research and innovation capacities could improve Hungary’s modest innovation performance and increase productivity. The low level of intellectual asset accumulation is reflected in the low number of patent, trademark and design applications, the small number of innovative businesses and the low level of internationalisation by small and medium-sized enterprises. Smaller firms are especially reluctant to innovate, hindering their involvement in global value chains. Business R & D is concentrated in a few large, mainly foreign-owned companies and benefits from generous government support. Supporting science-business cooperation would contribute to better innovation performance and technology transfer. The quality of public science is suffering from inefficient R & D policies and underfunding as public sector R & D expenditure is well below the Union average. Recent policy measures aiming to cut the funding and limiting the independence of academic and research fora are creating uncertainty in those fora, which may result in the emigration of top research talent and risk a persistent decline in research quality.

                  (14)

                  Weak local public transport connectivity and high commuting costs are contributing to unemployment in disadvantaged areas. The poor condition of the road and rail networks hampers mobility and reduces travel safety, with more than half of the road network in bad condition, especially in disadvantaged regions. Transport networks are centred on Budapest, while local networks and transversal connections through the country are not well developed. Road congestion is a growing challenge and a barrier to productivity in Hungary’s urban areas. Moreover, greenhouse gas emissions from road transport have increased strongly in the last 5 years.

                  (15)

                  Energy efficiency in the residential sector remains weak. The electricity network needs to be prepared for the growing role of decentralised renewable electricity generation. Half of Hungary’s territory is significantly exposed to climate change risks including drought and floods, which create the need for investment in water management on the main rivers. Air pollution and water quality remain a concern. The main sources of pollution are residential solid fuel combustion, agriculture and transport emissions. The circular economy is still in an initial phase, recycling of municipal waste is underdeveloped and economic instruments are insufficient to address Hungarian environmental challenges.

                  (16)

                  Concerns remain over the prevention and prosecution of corruption. Several indicators suggest that Hungary’s exposure to corruption has increased in recent years. Corruption risks and favouritism distort the allocation of resources as these are not channelled to the most productive firms. The functioning of the prosecution service is of crucial importance to fighting corruption. While measures to fight low-level corruption appear to have been applied with some success, there are still no signs of determined action to prosecute corruption involving high-level officials or their immediate circle when serious allegations arise. Accountability for decisions to close investigations is a matter of concern, as there are no effective remedies to contest such decisions. The prevention of corruption is further hindered by public institutions applying restrictions, including dissuasive fees for access to information.

                  (17)

                  The independence, efficiency and quality of the justice system are crucial to attracting business and enabling economic growth. Checks and balances, which are crucial to ensuring judicial independence, are seen to be under further pressure within the ordinary courts system. The National Judicial Council faces increasing challenges in counter-balancing the powers of the President of the National Office for the Judiciary. Questions have been raised regarding the consequences of this for judicial independence. With regard to the Administrative Courts Law, it is noted that the government tabled a bill withdrawing the Act on the entry into force and transitional rules for the administrative courts on 30 May 2019.

                  (18)

                  The public procurement framework has improved in recent years but obstacles to competition remain. These include the use of procedures with limited publicity and systemic irregularities in the tendering processes, in particular related to inadequate selection and award criteria and unequal treatment of tenderers. While some indicators show improvements, the number of procedures with a single bidder are still high. The effective use of e-procurement could further increase efficiency and transparency.

                  (19)

                  Hungary’s social dialogue structures and processes remain underdeveloped and do not allow for meaningful involvement of the social partners in policy design and implementation. The deficiencies in stakeholder engagement and limited transparency undermine the evidence base for, and the quality of, policymaking. This results in frequent and unpredictable changes in regulations and discourages high-value-added investments.

                  (20)

                  Measures have been taken to further improve the tax system but some challenges remain. The tax burden on labour has decreased but remains high for low-income earners. Sector-specific taxes and a large number of small taxes complicate the tax system and raise compliance costs, in particular for smaller firms.

                  (21)

                  Regulatory barriers and State involvement in product markets hinder the selection of efficient enterprises and limit competition. The authorities continue to entrust certain services to State-owned firms or private firms specifically created for these purposes. Certain tailor-made legislation and measures and ad hoc exemptions from competition scrutiny hinder the functioning of the market and hamper investment. The unpredictability of the legal framework is a further problem, especially in the retail sector, which in recent years has faced frequent changes to regulations. Legislation imposing an additional special authorisation for modifications to the use or design of retail premises has been introduced in the past year. Regulation of professions also remains restrictive. The lack of competition in these sectors may become detrimental to innovation and efficiency.

                  (22)

                  The fight against aggressive tax planning is essential in making tax systems more efficient and fairer. Spillover effects of taxpayers’ aggressive tax-planning strategies between Member States call for a coordinated action of national policies to complement Union legislation. Hungary has taken measures against aggressive tax planning, but records relatively high capital inflows and outflows through special-purpose entities, which have no or little effect on the real economy. The absence of withholding taxes on outbound (i.e. from Union residents to third-country residents) dividend, interest and royalty payments made by companies based in Hungary may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction.

                  (23)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Hungary to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

                  (24)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Hungary’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Convergence Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Hungary in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Hungary, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (25)

                  In the light of this assessment, the Council has examined the 2019 Convergence Programme and its opinion (12) is reflected in particular in recommendation (1) below,

            HEREBY RECOMMENDS that Hungary take action in 2019 and 2020 to:

         1.

            Ensure compliance with the Council Recommendation of 14 June 2019 with a view to correcting the significant deviation from the adjustment path towards the medium-term budgetary objective.

         2.

            Continue the labour market integration of the most vulnerable groups, in particular through upskilling, and improve the adequacy of social assistance and unemployment benefits. Improve education outcomes and increase the participation of disadvantaged groups, in particular Roma in quality mainstream education. Improve health outcomes by supporting preventive health measures and strengthening primary healthcare.

         3.

            Focus investment-related economic policy on research and innovation, low-carbon energy, transport infrastructure, and waste management and energy and resource efficiency, taking into account regional disparities. Improve competition in public procurement.

         4.

            Reinforce the anti-corruption framework, including by improving prosecutorial efforts and access to public information, and strengthen judicial independence. Improve the quality and transparency of the decision-making process through effective social dialogue and engagement with other stakeholders and through regular, appropriate impact assessments. Continue simplifying the tax system, while strengthening it against the risk of aggressive tax planning. Improve competition and regulatory predictability in the services sector.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

         (3)  OJ C 320, 10.9.2018, p. 72.

         (4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

         (5)  Cyclically adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

         (6)  Council Recommendation of 22 June 2018 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Hungary (OJ C 223, 27.6.2018, p. 1).

         (7)  Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a four-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

         (8)  Council Decision (EU) 2018/2028 of 4 December 2018 establishing that no effective action has been taken by Hungary in response to the Council Recommendation of 22 June 2018 (OJ L 325, 20.12.2018, p. 29).

         (9)  Council Recommendation of 4 December 2018 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Hungary (OJ C 460, 21.12.2018, p. 4).

         (10)  Council Decision (EU) 2019/1003 of 14 June 2019 establishing that no effective action has been taken by Hungary in response to the Council Recommendation of 4 December 2018 (OJ L 163, 20.6.2019, p. 64).

         (11)  Council Recommendation of 14 June 2019 with a view to correcting the significant observed deviation from the adjustment path towards the medium-term budgetary objective in Hungary (OJ C 210, 21.6.2019, p. 4).

         (12)  Under Article 9(2) of Regulation (EC) No 1466/97.


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Malta and delivering a Council opinion on the 2019 Stability Programme of Malta

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/107

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Malta and delivering a Council opinion on the 2019 Stability Programme of Malta
      (2019/C 301/18)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission also adopted the Alert Mechanism Report, in which it did not identify Malta as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the Recommendation on the economic policy of the euro area (3) (‘2019 Recommendation for the euro area’), which sets out five euro-area recommendations (‘the euro-area recommendations’).

                  (2)

                  As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Malta should ensure the full and timely implementation of the 2019 Recommendation for the euro area, as reflected in recommendations (2) and (3) below. In particular, focusing economic policy related to investment on the specified areas and tax measures will help address the second euro-area recommendation as regards supporting investment and combating aggressive tax planning.

                  (3)

                  The 2019 country report for Malta was published on 27 February 2019. It assessed Malta’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (4), the follow-up given to the country-specific recommendations adopted in previous years and Malta’s progress towards its national Europe 2020 targets.

                  (4)

                  Malta submitted its 2019 National Reform Programme on 16 April 2019 and its 2019 Stability Programme on 30 April 2019. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (5)

                  Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (‘ESI Funds’) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (5), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance.

                  (6)

                  Malta is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, the government plans a decrease in the headline surplus from 2 % of gross domestic product (GDP) in 2018 to 0,9 % of GDP in 2019, followed by a marginal increase to 1,0 % of GDP in 2020 and further to 1,1 % of GDP in 2021 and 2022. Based on the recalculated structural balance (6), the medium-term budgetary objective — a balanced budget in structural terms — continues to be overachieved throughout the programme period. According to the Stability Programme, the general government debt-to-GDP ratio is expected to remain below the 60 %-of-GDP Treaty reference value and to gradually decline from 46 % of GDP in 2018 to around 33 % in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 0,6 % of GDP in 2019 and 0,8 % of GDP in 2020, above the medium-term budgetary objective. Overall, the Council is of the opinion that Malta is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020. At the same time, expenditure developments should be monitored carefully in the short and the medium term, especially in light of possible future risks to the robustness of revenues.

                  (7)

                  The increase in age-related spending represents a risk to the long-term sustainability of public finances. Age-related public spending in the pension and healthcare systems is expected to increase significantly compared to other Member States, indicating a risk of rising debt in the long term. Several measures aim to increase the adequacy of pensions also through strengthening incentives for private pension savings and voluntary occupational retirement pensions. Ongoing efforts have helped to increase the supply of labour and prolong working lives, with a positive impact on employment rates for women and older workers. In 2018, the government made adjustments to include contributions made after pensionable age and allowed self-employed and part-time working pensioners under 65 years to pay contributions proportionate to their earnings, thereby promoting longer working lives. However, the statutory retirement age, gradually increasing from its current level at 63 years, is set to remain unchanged after 2027 at 65 years despite a projected further growth in life expectancy. The Pension Strategy Group established in 2018 is expected to publish a report by December 2020, outlining recommendations for improving the adequacy and sustainability of the pension system. With regard to healthcare, measures to decentralise services from hospitals to primary care and to improve the provision of long-term care services are ongoing. Current plans to expand the capacity of public-hospital outpatient care can help in tackling long waiting times for certain specialties. Nevertheless, other measures to reduce unnecessary referrals to specialists and redirect inappropriate use of emergency care to outpatient care have so far not been fully utilised, thereby preventing improvements in the efficiency of the system from being made. A new concept for primary-care centres and investments to gradually expand the use of e-health are carried out with a view to decentralising services from hospitals to primary-care level. Reflecting increasing demand for long-term care, new types of community-based and home care services were introduced in 2017-2018. Despite their potential, the impact of the measures in the area of pensions and healthcare on fiscal sustainability has yet to materialise.

                  (8)

                  In the last decade, Malta experienced a pronounced shift towards the services sector, with a strong focus on internationally oriented areas such as financial services, tourism and remote gaming. The expansion of the services sector contributed to fuel economic growth and to develop a large surplus in the current account. At the same time, the increasing reliance on sectors that are considered vulnerable to financial integrity risks creates challenges to the governance framework, putting pressure on the supervisory and enforcement capacity. In particular, the size of the financial and the gaming sector, the efforts to attract crypto-currency operators require an effective anti-money-laundering enforcement. The recent increase in the human and budgetary resources of the Financial Intelligence Analysis Unit as well as the enhancement of its procedures and processes are positive steps. Governance shortcomings, particularly in the fight against corruption, may also adversely affect the business environment and weigh negatively on investment. In particular, there is a risk of conflict of interest at various levels of government. Furthermore, the police’s Economic Crimes Unit is currently understaffed. In this context, it is important to couple a strengthened legislative framework with timely and thorough implementation. Improving the governance framework and ensuring effective implementation is a key element in preserving Malta’s attractiveness and protecting the economy from reputational risks.

                  (9)

                  The insurance sector is exposed to risks of passive supervision, where cooperation between domestic and external supervisors is essential. In contrast to the banking sector, the supervision of subsidiaries in the insurance sector are subject to home supervision, i.e. insurance companies registered in Malta and writing business in other countries are under the direct supervision of the Maltese regulator. However, the supervisory capacity has not been sufficiently strengthened yet. In addition, the complexity of insurance business models and products, coupled with the increased appetite for establishing and expanding specialised insurance vehicles, calls for stringent supervision.

                  (10)

                  Reforms aimed at continuing to improve the independence of the judiciary and the justice system are ongoing. This includes, in particular, the establishment of a new prosecution service, independent from the Attorney General and the police, as also recommended by the Council of Europe’s Commission for Democracy through Law (the Venice Commission) in an opinion on Malta adopted in December 2018. Moreover, a strengthened governance framework, including effective judicial and anti-corruption enforcement, is a prerequisite to obtaining the full benefits of investment.

                  (11)

                  The proportion of innovative enterprises is still lagging behind. Research and innovation performance need to be strengthened by smart specialisation so that this may contribute to growth in productivity. Malta has not yet formulated a coherent, comprehensive and long-term competitiveness strategy for moving the domestic economy up the value chain. Given Malta’s specialisation in fast-growing services and its aspirations for block-chain technology, it is critical to invest even more in administrative and supervisory capacity. In addition, increasing Malta’s innovation performance will require further investments in intangible assets, including research and development (R & D), addressing skills deficits and gaps and facilitating science-business links, all within more effective governance of the research and innovation system.

                  (12)

                  Malta needs to promote the shift towards a more sustainable and resource-efficient economy, for example by investing in the untapped potential for energy efficiency and renewables, the water-management cycle, waste management, tackling the growing emissions from air conditioning, climate action and sustainable mobility, which will contain emissions from road transport. Due to limited transport and commuting alternatives to driving as well as high car penetration, road congestion is one of the weakest aspects of Malta’s business environment and remains a major challenge. Moreover, greenhouse gas emissions from road transport have increased over the last 5 years. The share of renewables in the energy mix has increased to 7,2 % in 2017, slightly above the 2017/2018 indicative trajectory level of 6,5 %. However, Malta’s final energy consumption is continuously increasing. Further investments across sectors are needed in the short term in order to meet the 2020 national renewable energy and energy efficiency targets. R & D funding or support measures should be implemented to develop new/improved technologies addressing environment and climate change. The environmental and social costs of the housing boom require closer monitoring. Circular economy principles should be applied to the disposal of construction waste to limit its environmental impact. The economic and social consequences of the increase in the cost of housing require attention.

                  (13)

                  The employment rate in Malta, now above Union average, is still increasing. A special emphasis in this regard could benefit people with disabilities. The gender employment gap remains the largest in the Union and women’s participation in the labour market declines after 40 years of age, largely due to caring responsibilities. More labour market support for unemployed informal carers could address this gap. The increasing reliance on foreign labour to address the labour and skills shortages creates social and sustainability challenges. Policy initiatives in the areas of the labour market, skills and social inclusion could benefit from better monitoring and evaluation.

                  (14)

                  Malta invests relatively high amounts in education and training; and, while overall participation and attainment have increased, this is not yet reflected in better outcomes for all. The investment strategy would benefit from further focus on correcting social disadvantage, to be in line with the European Pillar of Social Rights principle on quality and inclusive education. Measures taken over the last decade have led to a reduction in early school leaving, but the rate is still one of the highest in the Union. Recent measures also seek to improve the inclusiveness of tertiary education, but attainment at this level remains below the Union average and results in skills challenges. Participation in adult learning is increasing but is still low for the low-skilled and the inactive.

                  (15)

                  The fight against aggressive tax planning is essential in making tax systems more efficient and fairer, as acknowledged in the 2019 Recommendation for the euro area. Spillover effects of taxpayers’ aggressive tax-planning strategies between Member States call for a coordinated action of national policies to complement Union legislation. Malta has taken measures against aggressive tax planning, but the high level of royalty and dividend payments as a percentage of GDP indicates that Malta’s tax rules may be used by companies that engage in aggressive tax planning. The absence of withholding taxes on outbound (i.e. from Union residents to third-country residents) dividends, interest and royalty payments made by Malta-based companies may lead to those payments avoiding tax altogether, if they are also not subject to tax in the recipient country. While Malta’s Notional Interest Deduction regime will help to reduce the debt equity bias, the scheme’s anti-abuse rules, combined with a generous rate and a stock-based regime, warrant close monitoring to prevent any misuse for aggressive tax planning. Although the Malta Individual Investor Programme and the Malta Residence and Visa Programme do not automatically grant residence for tax purposes, income may, if certain requirements are met, be exempt under the ‘non-dom’ regime without substantial physical presence requirements, provided that income is not remitted to Malta. They may facilitate aggressive tax-planning practices and have been listed by the OECD as having a potentially high risk for being misused to circumvent the automatic exchange of financial accounts

                  (16)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Malta to make the best use of those funds in respect of the identified sectors.

                  (17)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Malta’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Malta in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Malta, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (18)

                  In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion (7) that Malta is expected to comply with the Stability and Growth Pact,

            HEREBY RECOMMENDS that Malta take action in 2019 and 2020 to:

         1.

            Ensure the fiscal sustainability of the healthcare and pension systems, including by restricting early retirement and adjusting the statutory retirement age in view of expected gains in life expectancy.

         2.

            Address features of the tax system that may facilitate aggressive tax planning by individuals and multinationals, in particular by means of outbound payments. Strengthen the overall governance framework, including by continuing efforts to detect and prosecute corruption. Continue the ongoing progress made on strengthening the anti-money-laundering framework, in particular with regard to enforcements. Strengthen the independence of the judiciary, in particular the safeguards for judicial appointments and dismissals, and establish a separate prosecution service.

         3.

            Focus investment-related economic policy on research and innovation, natural resources management, resource and energy efficiency, sustainable transport, reducing traffic congestion and inclusive education and training.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

         (3)  OJ C 136, 12.4.2019, p. 1.

         (4)  OJ C 320, 10.9.2018, p. 76.

         (5)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

         (6)  Cyclically adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

         (7)  Under Article 5(2) of Regulation (EC) No 1466/97.


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of the Netherlands and delivering a Council opinion on the 2019 Stability Programme of the Netherlands

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/112

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of the Netherlands and delivering a Council opinion on the 2019 Stability Programme of the Netherlands
      (2019/C 301/19)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified the Netherlands as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the Recommendation on the economic policy of the euro area (3) (‘2019 Recommendation for the euro area’) which sets out five euro-area recommendations (‘the euro-area recommendations’).

                  (2)

                  As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, the Netherlands should ensure the full and timely implementation of the 2019 Recommendation for the euro area, as reflected in recommendations (1) and (3) below. In particular, investment measures and measures supporting wage growth will help address the first euro-area recommendation as regards euro area rebalancing, tax measures will help address the second euro-area recommendation as regards fight against aggressive tax planning, and reducing the debt bias for households will help address the fourth euro-area recommendation as regards reducing the debt bias in taxation.

                  (3)

                  The 2019 country report for the Netherlands was published on 27 February 2019. It assessed the Netherlands’ progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (4), the follow-up given to the country-specific recommendations adopted in previous years and the Netherlands’ progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019. The Commission’s analysis led it to conclude that the Netherlands is experiencing macroeconomic imbalances. In particular, the high stock of private debt and the large current account surplus constitute sources of imbalances, with cross-border relevance. Supported by economic growth, the private debt-to-GDP ratio has continued its downward trend both for corporate and households debts, although it is still high. Nevertheless, nominal household debt is slowly increasing on the back of rising house prices.

                  (4)

                  On 29 April 2019, the Netherlands submitted its 2019 National Reform Programme and its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (5)

                  Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (‘ESI Funds’) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (5), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance.

                  (6)

                  The Netherlands is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, the government plans a decrease in the general government surplus from 1,5 % of gross domestic product (GDP) in 2018 to 0,0 % of GDP in 2022. Based on the recalculated structural balance (6), the medium-term budgetary objective — a structural deficit of 0,5 % of GDP — continues to be overachieved throughout the programme period. According to the 2019 Stability Programme, the government debt-to-GDP ratio is projected to fall from 52,4 % of GDP in 2018 to 44,6 % of GDP in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. Based on the Commission 2019 spring forecast, the structural balance is projected to decline from a surplus of 0,8 % of GDP in 2018 to 0,7 % of GDP in 2019 and 0,2 % of GDP in 2020, above the medium-term budgetary objective. General government debt is forecast to remain on a firm downward path. Overall, the Council is of the opinion that the Netherlands is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020. At the same time, while respecting the medium-term budgetary objective, it would be important to use fiscal and structural policies to support an upward trend in investment.

                  (7)

                  With respect to fiscal sustainability, the projected increase in public expenditure on long-term care points to medium risks in long-term sustainability. In 2015, the government moved a large part of the long-term care system to the municipal domain to improve its efficiency and lower public expenditures. The impact of this reform on fiscal sustainability needs to be monitored.

                  (8)

                  As of November 2018, the funds of the Deposit Guarantee Fund, an independent legal entity, have been moved from a segregated account in the Dutch central bank to an account with the Treasury. The Dutch Deposit Guarantee Fund was being built up gradually and had so far accumulated around EUR 1 billion, with an additional EUR 4 billion to be paid by banks by 2024, which should have been invested in a diversified portfolio of low-risk assets in line with Directive 2014/49/EU of 16 April 2014 of the European Parliament and of the Council (7) (the Deposit Guarantee Scheme Directive). The transfer of the account of the fund reduces the gross debt level, but has no effect on the public deficit. Following this transfer, the Treasury will be able to use the funds for the financing of government expenditures, but will have to make the funds available in case there is a need to make pay-outs to depositors or finance interventions in accordance with its legal mandate, which may have an impact on financial stability.

                  (9)

                  Dutch households combine large illiquid assets in housing and pensions with high household debt. Long balance sheets make households vulnerable to financial and economic shocks. High household debt is explained by generous tax relief on mortgage interest payments, but also by a lack of a well-functioning middle segment on the rental market and high compulsory pension savings. A key challenge in addressing high household indebtedness lies in the housing market, where the rigidities and distortive incentives that have built up over decades shape the patterns of housing financing and sectoral savings. Since 2012, a series of measures has been implemented that partly addresses this. The announced acceleration of the reduction in mortgage interest tax deductibility has been put into law and will start in 2020. Despite this, the tax relief on mortgage payments remains generous and continues to result in a substantial debt bias for households. At the same time, the private rental market, as the only non-subsidised segment, remains underdeveloped accounting for 13 % of total dwellings. The lack of a well-functioning middle segment on the rental market encourages households to buy rather than rent, leading to high debt-to-income ratios and financial vulnerability.

                  (10)

                  While the pension system performs well on pension adequacy and fiscal sustainability, it has drawbacks in terms of intergenerational fairness, transparency of pension rights and flexibility. Moreover, occupational pension contributions are high and fluctuate depending on how pension funds perform. As such it may affect household spending in a pro-cyclical way. A reform of the pension system could, over the life cycle, lead to lower compulsory pension contributions and more stable consumption (or ‘consumption smoothing’). The government has the intention to substantially reform the second pension pillar in order to improve coverage and create a more transparent, more flexible and actuarially fairer system. A simultaneous reform of housing market institutions and the pension system has the potential to shorten household balance sheets, and make the household sector less vulnerable to financial and economic shocks with beneficial effects for macroeconomic resilience and economic growth.

                  (11)

                  Despite low unemployment, high job vacancy rates and growing shortage of workers, nominal wage growth has remained moderate so far (1,1 % in 2017 and 2,4 % in 2018). Wages in collective agreements increased on average by 2,1 % in 2018, while public wages increased at a faster rate (by 3 % in the second half of 2018). Furthermore, wage agreements were reached leading to a nominal increase of 7 % in two years for all civil servants in central government. Additional funding has been provided to increase the salaries of primary school teachers. In addition, the government adopted several fiscal measures which reduce the tax burden on labour and aim to increase the net disposable household income of those who work. Further boosting disposable household income by strengthening the conditions that support wage growth and reforming the second pillar of the pension system to make it more transparent, inter-generationally fairer and more resilient to shocks would support domestic demand and help to rebalance the euro area.

                  (12)

                  The fight against aggressive tax planning is essential to make tax systems more efficient and fair as acknowledged in the 2019 Recommendation for the euro area. Spillover effects of taxpayers’ aggressive tax-planning strategies between Member States call for a coordinated action of national policies to complement Union legislation. The Netherlands has taken measures against aggressive tax planning, but the high level of dividend, royalty and interest payments made via the Netherlands suggests that the country’s tax rules are used by companies that engage in aggressive tax planning. A large proportion of the foreign direct investment stock is held by special purpose entities. The absence of withholding taxes on outbound (i.e. from Union residents to third-country residents) royalties and interest payments may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction. The announcement of the reform agenda on taxation, including withholding taxes on royalty, and interest payments in case of abuse or payments to low-tax jurisdictions, is a positive step to decrease aggressive tax planning and should be monitored closely.

                  (13)

                  Growth in employment in recent years has mainly been due to temporary employment and self-employment, although job growth for employees with permanent contracts has recently outpaced job growth for temporary employment. Nevertheless, the share of flexible employment remains high and represents a substantial share of the labour market. The high percentage of temporary contracts and the rapid increase in self-employment without employees is observed in the context of great differences in applicable labour regulations, labour protection, and in the differences in tax and social security legislation. A package of measures has been adopted (Law on labour market in balance, ‘Wet Arbeidsmarkt in Balans’) to make it easier to hire permanent employees and make flexible contracts less flexible. The implementation of these measures (which should enter into force in 2020) should be closely monitored. Moreover, measures have been announced to ease the obligation of employers to continue to pay salaries for two years in case of illness. However, no other concrete measures have been adopted so far. Therefore, some of these institutional factors still create financial incentives for employees to start working as self-employed or favour of the use the status of self-employed without employees. The self-employed are more often under-insured against disability, unemployment and old age, which could affect the sustainability of the social security system in the long run. In addition, the enforcement of measures to tackle bogus self-employment has been suspended until 2020.

                  (14)

                  Despite a labour market that is performing well overall, fostering equal opportunities regarding employment and active inclusion remains an important challenge, in particular for people with a migrant background, for those operating at the margins of the labour market and for those who are economically inactive. In addition, there is still untapped labour potential, in particular among the high number of part-time working women.

                  (15)

                  Technical and digital skills and qualified professionals are crucial for the Dutch economy’s capacity to innovate and for productivity growth. This points to the need to invest more in training, including training in digital skills, and to promote flexible upskilling and reskilling opportunities. Improving society’s capacity to innovate also requires investments to support education in science, technology, engineering and mathematics. Moreover, increased investment in skills, education and training is crucial to improving access to the labour market and the employability of those at the margins of the labour market, while fostering equal opportunities and active inclusion.

                  (16)

                  While the research and development investment intensity for the Netherlands rose to over 2 %, it is still well below the 2,5 % national target and the level of top performers. In terms of productivity, the Netherlands is one of the best performing countries in many sectors. Continued productivity growth is therefore highly dependent on innovation. Additional investment in research and development, and innovation, especially in the private sector, would support this.

                  (17)

                  The energy transition and the reduction of greenhouse gas emissions require substantial investments to ensure a more sustainable and resource efficient economic development. The Netherlands is likely to overachieve its 2020 targets in the field of greenhouse gas reductions, while reaching the 2030 targets will require additional measures. The 2020 primary energy efficiency and renewable energy targets will not be reached without additional measures. The Dutch target for renewable energy by 2023 as defined by the Dutch Energy Agreement target should be within reach thanks to investments in off-shore wind farms. By the end of 2019, the government aims at adopting a National Energy and Climate Plan which will provide an overview of its investment needs until 2030 for the different dimensions of the Energy Union, including renewable energy, energy efficiency, security of supply, and climate mitigation and adaptation.

                  (18)

                  Congestion remains a challenge in the Netherlands, which is a dense and well equipped country and a key player in Union logistics with the biggest Union port in Rotterdam and one of the biggest airports in Schiphol. The issue has been alleviated with additional infrastructure works but it still remains an issue with high social costs and hours wasted stuck in traffic.

                  (19)

                  The programming of Union funds for the period 2021-2027 could help address some of the needs identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow the Netherlands to make the best use of those funds in respect of the identified sectors.

                  (20)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of the Netherlands’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to the Netherlands in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the Netherlands, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (21)

                  In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion (8) that the Netherlands is expected to comply with the Stability and Growth Pact.

                  (22)

                  In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) and (3) below. Those recommendations also contribute to the implementation of the 2019 Recommendation for the euro area, in particular the first and fourth euro-area recommendations. Fiscal policies referred to in recommendation (3) contribute inter-alia to addressing imbalances linked to the current account surplus,

            HEREBY RECOMMENDS that the Netherlands take action in 2019 and 2020 to:

         1.

            Reduce the debt bias for households and the distortions in the housing market, including by supporting the develop-ment of the private rental sector. Ensure that the second pillar of the pension system is more transparent, inter-generationally fairer and more resilient to shocks. Implement policies to increase household disposable income, including by strengthening the conditions that support wage growth, while respecting the role of social partners. Address features of the tax system that may facilitate aggressive tax planning, in particular by means of outbound payments, in particular by implementing the announced measures.

         2.

            Reduce the incentives for the self-employed without employees, while promoting adequate social protection for the self-employed, and tackle bogus self-employment. Strengthen comprehensive lifelong learning and upgrade skills in particular of those at the margins of the labour market and the inactive.

         3.

            While respecting the medium-term budgetary objective, use fiscal and structural policies to support an upward trend in investment. Focus investment-related economic policy on research and development in particular in the private sector, on renewable energy, energy efficiency and greenhouse gas emissions reduction strategies and on addressing transport bottlenecks.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  OJ L 306, 23.11.2011, p. 25.

         (3)  OJ C 136, 12.4.2019, p. 1.

         (4)  OJ C 320, 10.9.2018, p. 80.

         (5)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

         (6)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

         (7)  Directive 2014/49/EU of 16 April 2014 of the European Parliament and of the Council on deposit guarantee schemes (OJ L 173, 12.6.2014, p. 149).

         (8)  Under Article 5(2) of Regulation (EC) No 1466/97.