Pressure Eases As Dutch Political Parties Agree Budget Deal

The Dutch minority coalition government, formed of the centre-right People's Party for Freedom and Democracy (VVD) and the Christian Democratic Appeal (CDA), yesterday (26 April) agreed to a package of austerity measures with three opposition parties that should permit its passage through parliament. Ministers claimed yesterday that the deal will succeed in reducing the country's budget deficit to 3% of GDP in 2013, meeting EU rules.

The minority government collapsed last weekend (21/22 April) following the refusal of its parliamentary partner, the Freedom Party (PVV), to support a new austerity package worth around EUR14.2 billion (USD18.8 billion) that aimed to bring the budget deficit under 3% of GDP, as stipulated by EU rules. Prime Minister Mark Rutte subsequently handed in his resignation, and an early election will take place on 12 September. The agreement reached last night with three smaller parliamentary opposition parties—Democrats 66 (D66), Green Left (GL), and the Christian Union (CU)—should provide a slim parliamentary majority and enable the measures to be passed in time to meet the EU-imposed deadline of 30 April.

Given the necessity of the caretaker government to reach an agreement on the new budget before 30 April, the deal contains a number of compromises and concessions to the three supporting opposition parliamentary groups. The main measures include:

• An increase in value-added tax (VAT) from 19% to 21%.
• A reduction in tax breaks for mortgages, and for home-to-work travel.
• A public-sector pay freeze, including teachers and police.
• Higher taxes on tobacco and alcohol.
• A rise in healthcare fees.
• A rise in the state pension age of one month in 2013 and two or three months in subsequent years.
• A new "crisis" tax for high earners and an income tax cut for lower earners to compensate for some of the VAT increase.

In addition, certain measures intended to be carried out by the caretaker government will be scrapped as the price of securing agreement for the deal. These include: cuts in special educational needs budgets and personal healthcare; planned cuts to development aid; increases in court fees; VAT on theatre tickets and solar panels; and plans to flood a significant tract of low-lying land in Zeeland. In announcing the deal, the Dutch Finance Ministry commented, "At the EU level, the absolute priority is restoring the stability of the euro zone. At the national level, the task is to remain competitive in a continuously changing world, to lower private and public debt levels, and to prepare for increases to government spending on healthcare and pensions as the population ages."

Remaining Opposition

The deal was opposed by the Labour Party (PvdA), the Socialist Party (SP), and the populist anti-immigrant PVV, which claimed that the cuts went too far, too quickly, and risked exacerbating the recession. New PvdA leader, Diederik Samsom, stated that he could not support measures that did not share the pain of cuts fairly, adding that he was particularly unhappy with the decision to bring forward an increase in the state pension age. Both the PvdA and the PVV believe that cutting the deficit to 3% of GDP in 2013 is unnecessarily harsh and advocate a gentler reduction, to 3.6% or even 4.0%. According to current estimates, the Dutch budget deficit is expected to be 4.6% of GDP in 2013, if no action is taken. Dutch debt is currently at about 65.2% of GDP, well below the highest levels in the Eurozone.

Outlook and Implications

Provided that the forecasts in the agreement are accurate, the Netherlands looks set to maintain its reputation for tough fiscal discipline, at least in the short term. This will be a relief to Germany and other hawkish Eurozone states perturbed by the prospect of the Netherlands breaking the very rules it had so persistently encouraged others to follow.

In the medium term, the Netherlands' hawkish stance on fiscal consolidation is less certain. An early election is expected in September, and polls indicate strong support for the left-wing SP and the centre-left PvdA. Both advocate a slower, gentler pace of austerity, and a different mix of cuts and tax rises. Moreover, recent polling suggests that this chimes with public opinion, with one survey reporting 58% of the population to be in favour of cutting the deficit to 3.5% of GDP or higher. Should the SP or PvdA form part of the next government, a greater emphasis on growth measures can be expected. It is also possible that a more left-leaning government may decide to scrap some of the austerity measures agreed by the previous administration. That said, it should be remembered that a far-reaching rejection of austerity, or new stimulus injections, remain very unlikely. All parties recognise the need to balance the budget and implement austerity measures. The debate centres on how far and how fast these should progress, and where the burden should fall.