The Dutch Rethink the Welfare State

By Nima Sanandaji

When the Netherlands’ newly coronated king made his first annual appearance before parliament, he turned some heads when he addressed the deficiencies of the Dutch welfare state.   “Due to social developments such as globalisation and an ageing population, our labour market and public services are no longer suited to the demands of the times”, the king said in a speech written by Liberal prime minister Mark Ruttes cabinet. “The classical welfare state is slowly but surely evolving into a ‘participation society’”, Willem-Alexander continued. By this he meant that the public systems should start encouraging self-reliance over government dependency.

It is worthwhile to reflect on the challenges faced by the Dutch welfare system. In a knowledge based economy, influenced by strong global competition and dynamic economic development, public policy must encourage thrift, education and build-up of social capital. Discouragingly high taxes and encouragingly high benefits are no way of doing so. Such policies are therefore likely to become even greater obstacles to social and economic development as they are today.

Concern over the welfare state is not new in the Netherlands.

During the beginning of the 1980s the Netherlands ranked as a top spender in terms of welfare policy. Whilst the US and the UK allocated some 22 and 27 percent respectively of GDP to welfare spending, the Netherlands spent fully 40 percent – the same level as the famously generous Swedish public system.  But since then the pattern has been to reduce the welfare state. Indeed as most OECD-countries public spending rose significantly from the 1980s a report from the OECD notes that the Netherlands, alongside Ireland, gradually scaled theirs down. A combination of economic growth, tightening of welfare state generosity and privatization of sick-pay led to a decline in public social spending in these two countries. In 1980 public social spending was 25 percent of GDP in the Netherlands, much higher than the OECD-average of 16 percent.

In the beginning of the 2000s the average OECD-country had expanded its welfare state, so that public social expenditure had reached 21 percent of GDP – whilst the Netherlands had reduced its share to the same level. According to another study, benefit expenditure was reduced from 27 to 22 percent of GDP in the Netherland between 1980 and 2001, compared to the EU15 average which rose from 21 to 24 percent during the same period.

Although the Netherlands does not lie in Scandinavia, there are significant similarities between this advanced European nation and the Nordic countries. The similarities go beyond the fact that the Dutch are tall and blond, and live in a small trade-dependent nation. Shared cultural traits and political beliefs can explain why the Dutch adapted similar welfare policies as the Nordic nations. Similarly to as in Denmark and Sweden, the Netherlands has with time reformed its system, for example by introducing legislation which increases employer’s responsibility for the provision of sickness benefits. In some ways the Dutch have been even keener to reform than the Nordic countries.

Privatisation of social security and a shift from welfare to workfare have been coupled with the introduction of elaborate markets in the provision of health care and social protection. Not only other European welfare states, but in some regards even the US, can learn much from the Dutch policies of combining a universally compulsory Social health insurance scheme with market mechanisms. Netherlands has, similarly to Denmark, moved towards a “flexicurity” system where labour market regulations have been significantly liberalized within the frame of the welfare system. Taxes in the country peaked at 46 percent of GDP in the late 1980s, but have since fallen to ca. 38-39 percent. The Netherlands has moved from being a country with a large to a medium-sized welfare system, something that still cannot yet be said about culturally and politically similar Sweden and Denmark. The Dutch seem to have been earlier than their Nordic cousins in realizing that overly generous welfare systems and high taxes led to not only sluggish economic growth, but also exclusion of large groups from the labour market.

Societal challenges are not difficult to find in the Netherlands, at least not if we look at the difficulty to integrate foreign-born individuals and those with low skills. These problems are shared with other European welfare models, not least the Scandinavian ones. However, the Netherlands overall continues to rank highly in terms of societal measures such as good school results, high life expectancy, strong civic participation and high life satisfaction. Reforming the welfare state to a smaller size, and introducing more market mechanism within the system, have clearly not lead to a social disaster as some would like to believe.

The Dutch continue to support the welfare society. This does however not mean supporting an overly generous “cradle to grave” system, with demands that everybody have similar living standard regardless of their individual achievements. As shown in the book “Contested Welfare States: Welfare Attitudes in Europe and Beyond”, Netherlands ranks at second place, following closely after Switzerland, in having the most limited support for the idea that government should be responsible for peoples’ life prospects. A likely reason is that whilst the Dutch are in favor of welfare policies in general, they believe in fostering individual responsibility within the system. The “participation society” that the Dutch king recently spoke about has thus already gained ground.

There is a strong case to be made that the Dutch can benefit in going further in reducing the size of the state, introducing market reforms and liberalizing the labour market. Such changes would indeed be in line with OECD recommendation. Recently even the IMF recommended the nation to continue structural reforms to enhance growth potential. In addition, considerable savings seem to be possible in the Dutch welfare state, in areas such as health care and education. Luckily, the country can rely on previous positive experience with reforms.

There is a good chance that the Netherlands will continue on a long-term route towards smaller government and greater prosperity. This does not mean abandoning the idea of public welfare for its citizens but focusing more on enabling people to take care of themselves. The positive experience of past changes, coupled with the realization that change is needed, can catalyze change. If change indeed happens, it will likely not occur over-night. Continuous small steps towards change are more likely. The direction of European nations such as the Netherlands might not excite a US audience, but perhaps there is a lesson to be learned about the value of pragmatic and steady reforms?  

Dr. Nima Sanandaji has written several books and reports in Sweden, Finland and the UK about subjects such as urban development, entrepreneurship and women's career opportunities.