Red faces as budget deficit rises

4 December 2003

AMSTERDAM — The Netherlands faces major embarrassment as new financial estimates issued by the government’s macroeconomic thinktank, the Central Planning Bureau, indicate that the budget deficit will exceed 3 percent of Gross Domestic Product (GDP) next year, breaching the EU Stability Pact.

The Dutch government has been a strong advocate of the Pact, which obliges the 12 eurozone states to restrict budget deficits to below 3 percent. It was designed, and pushed through with French and German backing, to maintain the stability of the euro and stave off high interest rates.

Breaching the budgetary limit would represent a major embarrassment for the Dutch government. Finance Minister Gerrit Zalm — who places strong emphasis on reducing the budget deficit — recently lost a battle with Germany and France over their continued breaches of the deficit rules.

Zalm demanded in November that the pact’s disciplinary mechanism be enforced, resulting in billions of euros in fines being levied on the offending countries.

But he failed to gain majority support from the other EU member states. Instead, the EU sided with the German and French claim that the pact is too restrictive and essentially called for finance ministers to adapt budgets to prevailing economic conditions.

And the latest CPB figures indicating that this year’s Dutch budget deficit will be 3 percent comes despite recent assurances from Minister Zalm that it will be restricted to 2.75 percent. But the worst is yet to come, with the CPB estimating the deficit will hit 3.25 percent of GDP in 2004.

The planning bureau attributed the rising deficit this year and next to a longer-than-expected stagnation of Dutch economic activity. This is despite the fact that forecast economic growth for next year remains at 1 percent, the same as what the CPB predicted before the budget was unveiled in September.

Whether Zalm will take extra economising measures to reduce the budget deficit is not yet certain, but he will request the Finance Ministry examine the CPB figures.

After the Dutch economy slid into recession this year, the Christian Democrat CDA, Liberal VVD and Democrat D66 coalition Cabinet unveiled EUR 5.7 billion in cuts planned for next year and said it intended to save EUR 17 billion between now and 2007.

In light of the record cuts, it is uncertain if the government can economise any further and it is also doubtful whether the Lower House of Parliament (Tweede Kamer) will accept additional economizing measures. Opposition MPs have already been highly critical of what was described as an “anti-social” budget.

But Prime Minister Jan Peter Balkenende told RTL news on Wednesday night that the new figures were concerning. Despite the “heavy weather”, he did not want to speak prematurely about possible economising measures.

Social Affairs Minister Aart Jan de Geus was tightlipped about the new CPB estimates. The minister had previously opposed Minister Zalm about the extent of the government’s budget cuts and said the Cabinet will discuss the latest figures on Friday. He did not expect immediate economising measures to be taken.

But VVD MP Frank de Grave said extra budget cuts were needed and would be implemented if the CPB estimates were correct. He labelled the figures as a disappointment and added that “this is not good news”.

Government coalition partners CDA and D66 have also demanded answers about the new figures, but will not consider any talk of extra budget cuts until it has been determined whether the rising deficit is due to structural or cyclical factors.

The Cabinet will examine financial matters again in the Spring of 2004, when it discusses the interim budget report (Voorjaarsnota). The coalition parties had agreed in the government accord to take extra economising measures if the 2004 budget deficit reached 2.5 percent, slightly above its 2.3 percent objective.

Subject: Dutch news