US embassy cable - 03THEHAGUE2750

UNCLAS SECTION 01 OF 05 THE HAGUE 002750 
 
SIPDIS 
 
STATE FOR EUR/UBI SHERRI HOLLIDAY 
 
USDOC FOR 4212/USFCS/MAC/QEURA/FALCO 
TREASURY FOR IMI/OASIA/VIMAL ATUKARALA 
PARIS ALSO FOR OECD 
FRANKFURT FOR TREASURY/WALLAR 
STATE PASS FEDERAL RESERVE FOR MICHAEL ACCORNERO 
 
E.O. 12356: N/A 
TAGS: ECON, EFIN, PREL, EINV, ELAB, PGOV, MCAP, NL 
SUBJECT: DUTCH 2004 BUDGET: TOUGH DEFICIT REDUCTION PACKAGE 
KEEPS DEFICIT WITHIN STABILITY PACT CRITERIA 
 
REF: THE HAGUE 1697 
 
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SUMMARY 
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1.  THE DUTCH PARLIAMENT HAS APPROVED A TOUGH DEFICIT 
REDUCTION PACKAGE AIMED AT LIMITING THE 2004 BUDGET DEFICIT 
TO 2.3 PERCENT OF GDP, WELL UNDER THE THREE PERCENT 
STABILITY AND GROWTH PACT (SGP) CEILING.  ON OCTOBER 1, THE 
PARLIAMENT APPROVED A CY 2004 BUDGET THAT COMBINES SHARP 
SPENDING REDUCTIONS WITH CUTS IN TRANSFER PAYMENTS INTO AN 
UNPRECEDENTED PACKAGE OF RETRENCHMENTS WORTH 16.7 BILLION 
EURO (ROUGHLY $ 19 BILLION) OVER FOUR YEARS. THE TIGHT 2004 
BUDGET IS A RESPONSE TO THE MOST DISAPPOINTING ECONOMIC 
PERFORMANCE IN A DECADE, WHICH WOULD HAVE DRIVEN NEXT YEAR'S 
DEFICIT TO 3.8 PERCENT OF GDP IN THE ABSENCE OF CORRECTIVE 
MEASURES. 
 
2.  THE GOVERNMENT HAS SO FAR SUCCESSFULLY DEFENDED THESE 
BUDGET PLANS AS NECESSARY TO REMAIN WITHIN SGP LIMITS, 
PROMOTE COMPETITIVENESS, TRIM THE DUTCH WELFARE STATE, AND 
INCREASE WORK INCENTIVES. IN DOING SO, IT IS FACING THE IRE 
OF MANY PROMINENT ECONOMISTS WHO ARGUE AGAINST FISCAL 
RETRENCHMENT DURING A RECESSION AND THE LEFT-WING OPPOSITION 
PARTIES AND LABOR UNIONS WHO WANT TO PRESERVE WELFARE STATE 
BENEFITS.  THE GONL, WARY OF RUNNING UP DEBT IN VIEW OF THE 
AGING DUTCH POPULATION, BELIEVES THAT DEMAND STIMULUS IN A 
SMALL OPEN ECONOMY SUCH AS THE NETHERLANDS' IS INEFFECTIVE. 
THE DEBATE OVER THIS BUDGET IS LIKELY TO BE REPEATED IN 
SUBSEQUENT YEARS, AS WITHOUT ADDITIONAL DEFICIT-REDUCTION 
MEASURES, THE FISCAL DEFICIT WILL CONTINUE TO BUMP UP 
AGAINST THE SGP'S 3 PERCENT DEFICIT CRITERION. THIS WILL BE 
A TEST FOR FINANCE MINISTER ZALM, WHO HAS STAKED MUCH OF HIS 
INTERNATIONAL REPUTATION ON PROMOTING STRICT ADEHERENCE TO 
GSP CRITERIA (REFTEL). END SUMMARY. 
 
---------------------------------------- 
A BUDGET GRAPPLING WITH FISCAL STABILITY 
---------------------------------------- 
3. AMIDST ECONOMIC RECESSION AND RESULTING REVENUE 
SHORTFALLS, THE CENTER-RIGHT COALITION GOVERNMENT PRESENTED 
THE DRAFT 2004 BUDGET TO PARLIAMENT SEPTEMBER 16. FOLLOWING 
POLITICAL AND FINANCIAL DEBATES THE LOWER HOUSE AGREED TO 
THE OVERALL BUDGET PARAMETERS WITH ONLY MINOR AMENDMENTS 
OCTOBER 1. PARLIAMENTARY DEBATE ON THE PARTICULAR ELEMENTS 
OF EACH MINISTRY'S BUDGET WILL CONTINUE THROUGH NOVEMBER BUT 
THE OVERALL BUDGET AND ITS ALLOCATION AMONG MINISTRIES IS 
NOW FIXED. DURING CY 2004, MINISTRIES MAY BE ABLE TO 
REPROGRAM FUNDS WITHIN THEIR INDIVIDUAL BUDGET ALLOCATIONS 
BUT A TRANSFER OF FUNDS BETWEEN ONE MINISTRY AND ANOTHER IS 
NOT FEASIBLE. DUE CHIEFLY TO STAGNATING ECONOMIC GROWTH AND 
FALLING REVENUES, PUBLIC FINANCES HAVE COME UNDER PRESSURE, 
PUTTING THE BUDGET ON A PATH TO OVERSHOOT THE EMU'S GROWTH 
AND STABILITY PACT (GSP) DEFICIT AND DEBT CRITERIA WITHOUT 
FISCAL RETRENCHMENT. ACCORDING TO THE NEW BUDGET, WHICH IS 
BASED ON PROJECTED 2004 GROWTH OF TWO PERCENT AND CONTINUED 
RESTRAINT IN PUBLIC SECTOR WAGES, CENTRAL GOVERNMENT 
SPENDING WILL RISE SLIGHTLY (LESS THAN THREE PERCENT) TO 
118.8 BILLION EURO ($136.6 BILLION) IN 2004, WITH REVENUES 
TOTALING 106.5 BILLION EURO ($122.5 BILLION), RESULTING IN A 
BASIC BUDGET DEFICIT OF 12.3 BILLION EURO ($14.1 BILLION), 
OR 2.6 PERCENT OF GDP. WITH TOTAL SPENDING OF 134.4 BILLION 
EURO ($154.6 BILLION) AND REVENUES OF 123.7 BILLION EURO 
($142.2 BILLION), THE PUBLIC SECTOR BALANCE FOR EMU PURPOSES 
(CENTRAL GOVERNMENT, LOCAL GOVERNMENT AND SOCIAL SECURITY 
FUNDS BUDGETS COMBINED) WILL BE MOVING INTO A DEFICIT OF 
10.7 BILLION EURO ($ 12.3 BILLION), OR 2.3 PERCENT OF GDP. 
THIS COMPARES WITH A SIMILAR DEFICIT OF 2.3 PERCENT OF GDP 
PROJECTED FOR 2003 AND FOLLOWS THE SURPLUS OF 2.2 PERCENT 
RECORDED IN 2000. 
 
 
TABLE 1:  THE 2004 BUDGET (EUR BN) 
---------------------------------- 
 
CENTRAL GOVT: 
--SPENDING      118.8 
--REVENUE       106.5 
--DEFICIT        12.3 
PUBLIC SECTOR: 
--SPENDING      134.4 
--REVENUE       123.7 
--DEFICIT        10.7 
 
-------------------------------------------- 
A CHOICE BETWEEN GROWTH AND FISCAL STABILITY 
-------------------------------------------- 
4. TO PREVENT THE DEFICIT IN 2004 FROM EXCEEDING THE 3 
PERCENT DEFICIT CRITERION IN THE SGP, THE 2004 BUDGET 
SUPPLEMENTS A 5.2 BILLION EURO CONSOLIDATION PACKAGE 
INHERITED FROM THE PREVIOUS "BALKENENDE I" GOVERNMENT (THAT 
FELL IN EARLY 2003) WITH ADDITIONAL BUDGET MEASURES TO THE 
TUNE OF 5.7 BILLION EURO. SUPPLEMENTAL RETRENCHMENTS RAISE 
TOTAL SPENDING CUTS AND BURDEN INCREASES (I.E., INCREASES IN 
TAXES AND FEES AND REDUCTIONS IN SUBSIDIES) IN 2004 TO 10.9 
BILLION EURO ($ 12.5 BILLION). ROUGHLY HALF OF THE PACKAGE 
IS AIMED AT IMPROVING MARKET FUNCTIONING AT THE MICRO LEVEL 
(E.G., FOR HIGHER LABOR MARKET PARTICIPATION THROUGH TIGHTER 
ENFORCEMENT OF DISABILITY BENEFIT RULES). THE OTHER HALF 
(E.G., LOWER SPENDING ON ASYLUM PROGRAMS, ON DEVELOPMENT 
AID, ON SUBSIDIES TO NGO'S, AND ON A HOST OF CARE PROGRAMS) 
CONSISTS OF STRAIGHTFORWARD MONEY-SAVING MEASURES THAT 
REFLECT THE COALITION'S DETERMINATION TO STRICTLY ADHERE TO 
THE SGP DEFICIT AND DEBT CRITERIA AND TO REDUCE THE SIZE AND 
SCOPE OF GOVERNMENT.  THE BULK OF THESE MEASURES BEAR THE 
UNMISTAKEN SIGNATURE OF FINANCE MINISTER ZALM'S LIBERAL 
PARTY (VVD), THE MOST LIMITED-GOVERNMENT-ORIENTED PARTNER IN 
THE CENTER-RIGHT COALITION. 
 
5. BY FAR THE LARGEST PORTION OF THE PACKAGE OF SPENDING 
CUTS (3.1 BILLION EURO ($3.6 BILLION) WILL BE IN MAJOR 
SOCIAL SECURITY PROGRAMS (LABOR DISABILITY AND UNEMPLOYMENT 
BENEFITS) WITH THE OBJECTIVE OF CREATING INCENTIVES FOR 
HIGHER LABOR MARKET PARTICIPATION. THE REMAINING SAVINGS 
WILL COME FROM FREEZING OF PUBLIC SECTOR WAGES AND PAY 
CONDITIONS TO THE TUNE OF 1.3 BILLION EURO, A REDUCTION OF 
PUBLIC SECTOR RED-TAPE OF 1 BILLION EURO, REDUCED FINANCING 
OF NON-ODA ITEMS AND AID TO ASYLUM SEEKERS OF 800 MILLION 
EURO, CURTAILING SEVERAL PUBLIC SUBSIDY PROGRAMS BY 1.9 
BILLION EURO, REDUCING HEALTH CARE SUBSIDIES BY 1.7 BILLION 
EURO, AND BY CURTAILING VARIOUS OTHER TAX INCENTIVES AND 
SUBSIDIES BY 1.2 BILLION EURO. DURING THE COALITION'S FOUR- 
YEAR TERM IN OFFICE, THE ACCUMULATED CONSOLIDATION PACKAGE 
OF MEASURES WILL ADD UP TO 22.9 BILLION EURO, EQUAL TO FOUR 
PERCENT OF GDP. THE GOVERNMENT PROJECTS THAT ITS MEASURES 
WILL REDUCE THE CONSOLIDATED PUBLIC SECTOR DEFICIT FOR EMU 
PURPOSES TO A PROJECTED 0.6 PERCENT OF GDP IN 2007, LOWERING 
THE PUBLIC DEBT TO GDP RATIO IN THAT YEAR TO A LITTLE OVER 
52 PERCENT. 
 
--------------------------------------------- ---- 
RAISING REVENUES AT THE EXPENSE OF TAX PAYERS 
--------------------------------------------- ---- 
6. IN THE WAKE OF BUDGET RETRENCHMENTS THE 2004 BUDGET ALSO 
PROVIDES FOR MEASURES TO RAISE REVENUES AMOUNTING TO AN 
ESTIMATED 1.2 BILLION EURO, GROWING AN TO ACCUMULATED 1.9 
BILLION EURO IN 2007. THE HIGHER TAX BURDEN IN FISCAL YEAR 
2004 IS THE BALANCE OF MEASURES AIMED AT RAISING TAX 
REVENUES ON THE ONE HAND AND THE INTRODUCTION OF TAX 
INCENTIVES AIMED AT STIMULATING THE COALITION`S LABOR MARKET 
POLICIES ON THE OTHER. WIDENING THE GENERAL INCOME TAX BASE, 
ABOLISHING TAX INCENTIVES FOR EARLY RETIREMENT, AND 
CURTAILING THE DEDUCTABILITY OF MORTGAGE INTEREST WILL RAISE 
REVENUES BY 500 MILLION EURO (OR A CUMULATIVE 4.1 BILLION 
EURO FOR 2004-2007). REALLOCATING SPENDING ON HEALTH CARE 
AND RAISING THE EXCISE TAX ON TOBACCO WILL RAISE REVENUES BY 
1 BILLION EURO (AN ACCUMULATED BALANCE OF 200 MILLION). 
INCREASING THE NUMBER OF TAX INCENTIVES CONTRIBUTING TO 
LABOR MARKET DYNAMICS AND IMPROVEMENT OF EDUCATION AND 
COMPENSATING FOR THE IMPACT OF HIGHER TAXES AND REDUCED 
SPENDING ON INCOMES OF VULNERABLE INCOME CATEGORIES WILL 
REDUCE REVENUES BY 300 MILLION EURO, OR A CUMULATIVE FOUR- 
YEAR TOTAL OF 2.1 BILLION EURO. 
 
--------------------------------------------- ---------- 
LITTLE MONEY LEFT FOR NEW POLICY SPENDING 
--------------------------------------------- ---------- 
7. THE COALITION HAS EARMARKED A RELATIVELY SPARTAN 3.9 
BILLION EURO IN 2004, GROWING TO AN ACCUMULATED 8.1 BILLION 
EURO IN 2007, ON NEW POLICY SPENDING. THE BULK WILL GO TO 
FINANCE MEASURES AIMED AT CONTROLLING COST IN PUBLIC HEALTH 
INSURANCE, REMOVING STRUCTURAL BOTTLENECKS (CAPACITY AND 
STAFFING) IN HEALTH CARE, AND STIMULATING DEREGULATION AND 
PRIVATIZATION IN HEALTH CARE (1.3 BILLION EURO). ROUGHLY 1.2 
BILLION EURO WILL GO TO FINANCE LABOR MARKET MEASURES 
INTENDED TO BOOST EMPLOYMENT AND RAISE LABOR MARKET 
PARTICIPATION BY REDUCING CLAIMS IN UNEMPLOYMENT AND LABOR 
DISABILITY BENEFITS. THE REMAINING 1.5 BILLION EURO WILL GO 
TO PAY FOR IMPROVEMENT OF THE KNOWLEDGE INFRASTRUCTURE AND 
THE QUALITY OF R&D (0.5 BILLION), A REDUCTION IN OVERALL 
CRIMINALITY BY IMPROVING THE LAW ENFORCEMENT CHAIN AND BY 
MORE AGGRESSIVELY TACKLING YOUTH CRIMINALITY (0.5 BILLION), 
AND IMPROVING MOBILITY BY UPGRADING THE TRANSPORT 
INFRASTRUCTURE (0.5 BILLION). 
 
--------------------------------------------- -------- 
DEFENSE AND DEVELOPMENT AID BUDGETS RELATIVELY UNHURT 
--------------------------------------------- -------- 
8. DEFENSE WILL GET AN EXTRA 30 MILLION EURO ($34.5 MILLION) 
(GROWING TO 100 MILLION EURO EQ $ 115 MILLION IN 2007) TO 
FINANCE MEASURES TO STRENGTHEN THE DEPLOYMENT OF DUTCH ARMED 
FORCES IN OPERATIONS RELATED TO CONTAINMENT OF REGIONAL 
CRISES. EXTRA DEFENSE OUTLAYS WILL ONLY PARTLY COMPENSATE 
FOR A 215 MILLION EURO ($ 247 MILLION) REDUCTION (OR A 
CUMULATIVE 350 MILLION EURO FOR 2004-07) THAT IS INTENDED TO 
RESULT IN DOWNSIZED BUT MORE EFFECTIVELY DEPLOYABLE ARMED 
FORCES.  INCLUDING SAVINGS ALREADY PROVIDED FOR IN THE 
GOVERNMENT'S COALITION ACCORD, TOTAL CUTS IN DEFENSE 
SPENDING WILL AMOUNT TO 470 MILLION EURO EQ $ 540 MILLION IN 
2004, AND TO ACCUMULATED 730 MILLION EURO EQ $840 MILLION IN 
2007. ON BALANCE, DEFENSE SPENDING IN 2004 WILL STILL SHOW 
AN INCREASE OF 3 PERCENT TO 1.6 PERCENT OF GDP.  ALTHOUGH 
SUBJECT TO GEOGRAPHIC AND THEMATIC RELOCATION, THE SPENDING 
TO GDP RATIO FOR OFFICIAL DEVELOPMENT ASSISTANCE (ODA) 
CONTINUES AT A HIGH OF 0.8 PERCENT.OF GDP 
 
--------------------------------------------- --------- 
ADHERING TO THE STABILITY PACT IN A CYCLICAL DOWNTURN 
--------------------------------------------- --------- 
9. UNFAVORABLE CYCLICAL DEVELOPMENTS AND POOR PERFORMANCE OF 
THE DUTCH ECONOMY SINCE 2001 HAVE GIVEN RISE TO A DRAMATIC 
DETERIORATION OF PUBLIC FINANCES. AFTER MOVING INTO THE 
FIRST SMALL (0.7 PERCENT OF GDP) FISCAL SURPLUS IN DECADES 
IN 1999, THE FISCAL BALANCE MOVED BACK INTO A 1.6 PERCENT 
DEFICIT IN 2002. DUE TO THE LOSS OF TAX REVENUES AND GROWING 
SPENDING ON SOCIAL SECURITY AND UNEMPLOYMENT RESULTING FROM 
THE SLUGGISH ECONOMY, THE PROJECTED FISCAL DEFICITS FOR 2004 
AND 2005 WOULD HAVE OVERSHOT THE SGP'S 3 PERCENT DEFICIT 
CRITERION IN THE ABSENCE OF DEFICIT-REDUCTION MEASURES, WITH 
THE BASELINE 2004 DEFICIT PROJECTED AT 3.8 PERCENT OF GDP. 
WITH ITS FOUR-YEAR, 16.9 BILLION EURO PACKAGE, THE THE 
CENTER-RIGHT COALITION EXPECTS THE PUBLIC SECTOR DEFICIT TO 
FALL FROM 2.3 PERCENT OF GDP IN 2004 TO 0.6 PERCENT BY 2007. 
SHOULD THE DEFICIT BROACH A SELF-IMPOSED CEILING OF 2.5 
PERCENT OF GDP DURING THAT PERIOD, ADDITIONAL BUDGET 
RETRENCHMENTS WILL BE TRIGGERED.  OVER THE SAME 2004-07 
PERIOD, THE CYCLICALLY-ADJUSTED STRUCTURAL DEFICIT WILL 
DECLINE SLIGHTLY, FROM 0.7 PERCENT IN 2004 TO 0.5 PERCENT IN 
2007. 
 
10. AS A RESULT OF SUCCESSIVE FISCAL DEFICTS, THE PUBLIC 
DEBT TO GDP RATIO, WHICH HAS FALLEN ANNUALLY SINCE 1995, 
WILL GROW TO 54.0 PERCENT OF GDP IN 2003 AND A PROJECTED 
54.5 PERCENT IN 2004. THE GONL PROJECTS THAT ITS DEFICIT- 
REDUCTION PROGRAM AND A REVIVAL IN GROWTH WILL CUT THE RATIO 
TO 52.2 PERCENT OF GDP IN 2007. 
 
------------------------------------- 
NEAR-TERM ECONOMIC OUTLOOK:  CAUTIOUS 
------------------------------------- 
11. THE DRAFT 2004 BUDGET WAS PRESENTED AT A TIME WHEN THE 
DUTCH ECONOMY IS SLOWLY RECOVERING FROM THE LONGEST AND 
DEEPEST RECESSION IT HAS SEEN SINCE THE EARLY 1990S. 
FOLLOWING GDP GROWTH OF JUST 0.2 PERCENT IN 2002, THE 
ECONOMY SLUMPED INTO (D0WNWARD REVISED) AVERAGE 0.7 PERCENT 
NEGATIVE GROWTH DURING THE FIRST HALF OF 2003. IN THE 
CURRENT CLIMATE OF SHARPLY LOWER PUBLIC SPENDING, EXPORTS 
WILL BECOME AN IMPORTANT DETERMINANT OF ECONOMIC EXPANSION. 
A RAPID RECOVERY OF ECONOMIC GROWTH IS NOT IMMINENT, 
HOWEVER, AS A SERIOUS LOSS OF PRICE COMPETITIVENESS WILL 
KEEP THE ECONOMY FROM FULLY BENEFITTING FROM A RECOVERY OF 
WORLD TRADE GROWTH DURING THE SECOND HALF OF 2003. LAGGING 
BEHIND WORLD TRADE GROWTH, EXPORTS ARE FORECAST TO EXPAND BY 
1 PERCENT IN 2003, FOLLOWED BY 5.25 PERCENT IN 2004. EXPORT 
GROWTH WILL BE GENERATED PREDOMINANTLY BY AN INCREASE IN THE 
VOLUME OF RE-EXPORTS (UP 4 PERCENT AND 8.5 PERCENT IN 2003 
AND 2004 RESPECTIVELY). GROWTH IN DOMESTICALLY PRODUCED 
EXPORTS IS EXPECTED TO REMAIN STAGNANT (MINUS 1.5 PERCENT IN 
2003 AND PLUS 2.75 PERCENT IN 2004). THE MODEST RECOVERY OF 
FOREIGN DEMAND WILL NOT BE SUFFICIENT TO COMPENSATE FOR 
WEAKER CONSUMER SPENDING AND FALLING INVESTMENT.  LOSS OF 
PURCHASING POWER, SLUMPING STOCK MARKETS AND GROWING 
UNEMPLOYMENT WILL KEEP CONSUMER SPENDING MORE OR LESS 
DORMANT (ZERO GROWTH FOLLOWED BY 0.75 EXPANSION IN 2003 AND 
2004 RESPECTIVELY), WHILE SURPLUS CAPACITY, ERODING MARGINS 
AND POOR PRODUCER CONFIDENCE WILL PUT A DAMPER ON NON- 
RESIDENTIAL INVESTMENT (MINUS 3.75 PERCENT AND MINUS 0.75 
PERCENT IN 2003 AND 2004 RESPECTIVELY). IN A CLIMATE OF 
RELATIVELY WEAK DOMESTIC AND FOREIGN DEMAND, THE DUTCH 
ECONOMY CONTINUES TO PERFORM WELL BELOW ITS 2.5 PERCENT 
GROWTH POTENTIAL TO SHOW ZERO GROWTH IN 2003 AND JUST ONE 
PERCENT GDP EXPANSION IN 2004. IN THE ABSENCE OF CLEAR SIGNS 
OF IMPROVEMENTS, EVEN THESE MODEST GROWTH EXPECTATIONS MAY 
PROVE TOO AMBITIOUS AND ERODE THE ECONOMIC BASIS OF THE 2004 
BUDGET. 
 
12. REFLECTING THE ECONOMIC DOWNTURN, THE OUTLOOK FOR THE 
LABOR MARKET HAS CHANGED DRAMATICALLY. FOR THE FIRST TIME IN 
EIGHT YEARS NEGATIVE EMPLOYMENT GROWTH, COMBINED WITH A 
GROWING NUMBER OF REDUNDANCIES, HAS PUSHED THE LEVEL OF 
UNEMPLOYMENT WELL BEYOND ITS EQUILIBRIUM. AS A CONSEQUENCE 
UNEMPLOYMENT IS FORECAST TO INCREASE TO A LEVEL OF 5.5 
PERCENT OF THE LABOR FORCE IN 2003 AND TO FURTHER EXPAND TO 
7 PERCENT OF THE LABOR FORCE IN 2004. THE RESULTING HIKE IN 
UNEMPLOYMENT BENEFITS IS AMONG THE FACTORS CONTRIBUTING TO 
THE UNEXPECTED PUBLIC SPENDING INCREASE. 
 
13. WITH CONSUMER PRICE INFLATION COMING DOWN TO 2 PERCENT 
IN 2003 AND TO 1.5 PERCENT IN 2004, INFLATION THUS SEEMS THE 
ONLY POSITIVE NOTE LINING ON AN OTHERWISE CLOUDY PICTURE. AN 
INCREASE IN INDIRECT TAXES (HIGHER TOBACCO EXCISE AND ROAD 
TAXES) AND BUSINESS SECTOR ATTEMPTS TO REPAIR ERODED GROSS 
MARGINS BY INCREASING PRICES WILL PUT SOME UPWARD PRESSURE 
ON CONSUMER PRICE INFLATION. IMPORTED INFLATION ON THE OTHER 
HAND HAS EASED DUE TO THE STRENGTH OF THE EURO VIS-A-VIS THE 
DOLLAR. SIMILARLY A COMBINATION OF MODERATE WAGE 
DEVELOPMENTS AND ACCELERATING LABOR PRODUCTIVITY GROWTH HAS 
SOFTENED THE IMPACT OF PER UNIT LABOR COSTS ON CONSUMER 
PRICE INFLATION. 
 
--------------------------------------------- - 
MOTIVATIONS AND REACTIONS: ECONOMISTS CRITICAL 
--------------------------------------------- - 
14. IN A FIRST REACTION TO THE DRAFT 2004 BUDGET, THE 
GOVERNMENT'S HIGHEST ADVISORY BODY, COUNCIL OF STATE (AN 
OFFICIAL PANEL OF EMINENT PERSONS CHARTERED TO ADVISE THE 
GOVERNMENT), AND A GROWING NUMBER OF ECONOMISTS HAVE 
CRITICIZED THE MAGNITUDE AND THE TIMING OF THE PACKAGE OF 
RETRENCHMENTS AND BURDEN INCREASES AS UNFORTUNATE. MANY 
ECONOMISTS ARGUE THAT NEITHER THE GOVERNMENT'S CURRENT 
FISCAL PROBLEMS NOR ITS DETERMINATION TO COMPLY WITH THE EMU 
STABILITY AND GROWTH PACT JUSTIFY RETRENCHMENTS AND BURDEN 
INCREASES AS MASSIVE AS THE ACCUMULATED 23 BILLION EURO 
(EQUAL FOUR PERCENT OF GDP) ANNOUNCED IN THE DRAFT 2004 
BUDGET. THEY CONSIDER THE COALITION'S RESPONSE TO CURRENT 
BUDGET PROBLEMS AS AN ILL TIMED AND OVERDRAWN REACTION. THE 
COUNCIL OF STATE HAS CRITICIZED THE COALITION'S PACKAGE OF 
SPENDING CUTS AND BURDEN INCREASES UNNECESSARILY MASSIVE, 
AND "PRO-CYCLICAL" IN A TIME OF RECESSION.  BUDGET CUTS AND 
BURDEN INCREASES ARE LIKELY TO DAMPEN PUBLIC AND CONSUMER 
SPENDING AND HAVE A POTENTIAL OF SERVING AS A DRAG ON 
ECONOMIC RECOVERY FORECAST FOR 2004. 
 
15. BANKING ECONOMISTS ARGUE THAT IN THE ABSENCE OF EXTRA 
MEASURES THE BUDGET WOULD MOVE INTO A DEFICIT OF 3.8 PERCENT 
OF GDP IN 2004, WHILE THE STRUCTURAL DEFICIT WOULD BE 
LIMITED TO ROUGHLY 2 PERCENT OF GDP. A CONSOLIDATION PACKAGE 
OF BUDGET CUTS AND BURDEN INCREASES OF ROUGHLY 2 PERCENT OF 
GDP WOULD HAVE BEEN SUFFICIENT TO ACHIEVE THE GOVERNMENT'S 
FISCAL CONSOLIDATION TARGETS. AND ALTHOUGH THE STRUCTURAL 
DEFICIT WOULD FALL SHORT OF THE SGP CRITERION OF "A NEAR 
BALANCED BUDGET" IN 2007, GIVING UP EXTRA BUDGET MEASURES 
WOULD ALLOW AUTOMATIC STABILISERS TO DAMPEN THE CYCLICAL 
DOWNTURN. 
 
16. WITH REGARD TO THE TIMING OF VARIOUS BUDGET MEASURES, 
ECONOMISTS ARGUE THAT THE BULK OF SPENDING CUTS AND BURDEN 
INCREASES WILL BE IMPLEMENTED IN 2004 AND 2005 WHEN CYCLICAL 
CONDITIONS ARE STILL RELATIVELY FRAGILE. THE BALKENENDE II 
GOVERNMENT HAS COME UNDER GROWING PRESSURE TO POSTPONE 
PORTIONS OF ITS CONSOLIDATION PACKAGE UNTIL AFTER 2005. A 
MUCH USED ARGUMENT IS THAT EVEN WITHOUT THE PACKAGE OF EXTRA 
MEASURES, THE DEFICIT IN 2004 WOULD STILL BE NO MORE THAN 
ROUGHLY HALF A PERCENTAGE POINT ABOVE OF THE 3 PERCENT 
DEFICIT STANDARD. THE BALKENENDE II COALITION HAS ALSO BEEN 
URGED TO HOLD LESS TO THE STABILITY AND GROWTH PACT DOCTRINE 
AND TO GIVE HIGHER PRIORITY TO MEASURES AIMED AT STIMULATING 
LONG-TERM ECONOMIC GROWTH POTENTIAL. 
 
--------------------------------------- 
GOVERNMENT FIRM ON LONG-TERM OBJECTIVES 
--------------------------------------- 
17. THE GOVERNMENT HAS SUCCESSFULLY HELD TO ITS BUDGET 
OBJECTIVES ARGUING THAT THE RETRENCHMENTS ARE KEY TO LONG- 
TERM ECONOMIC STABILITY AND REFORM. ALLOWING EVEN LARGER 
DEFICITS, THE GOVERNMEMT ARGUES, WOULD JEOPARDIZE IMPORTANT 
ECONOMIC GOALS SUCH AS REDUCING THE OVERALL DEBT BURDEN TO 
PROVIDE FOR THE NEEDS OF AN AGING POPULATION.  THE 
GOVERNMENT ALSO ARGUES THAT PUBLIC SECTOR INFLUENCE ON 
CYCLICAL DEVELOPMENTS IN A RELATIVELY SMALL AND OPEN ECONOMY 
SUCH AS THE NETHERLANDS IS VERY SMALL.  THROUGH THIS BUDGET, 
THE GOVERNMENT IS ALSO PROMOTING ITS PRIORITY SOCIAL 
OBJECTIVES - "A LANDSLIDE SHIFT IN CULTURAL MINDSET", 
ACCORDING TO PRIME MINISTER BALKENENDE - OF REDUCING THE 
ROLE OF GOVERNMENT AND REQUIRING MORE INDIVIDUAL 
RESPONSIBILITY. 
 
18. THE GOVERNMENT HAS IDENTIFIED AS IMPORTANT POLICY 
OBJECTIVES TO BE PURSUED THROUGH THIS BUDGET IMPROVING THE 
SERIOUSLY ERODED PRICE COMPETITIVE POSITION OF THE DUTCH 
BUSINESS SECTOR, INCREASING THE DUTCH ECONOMIC GROWTH 
POTENTIAL, IMPROVING THE QUALITY OF PUBLIC SERVICES, AND 
MOVING THE BUDGET INTO NEAR BALANCE CONDITIONS BY 2007 AS BY 
FAR THE MOST IMPORTANT. TO MEET ITS POLICY TARGETS, THE 
COALITION HAS PLACED REDUCING LABOR COSTS, INCREASING LABOR 
MARKET PARTICIPATION, BOOSTING PRODUCTIVITY THRU INNOVATION, 
AND COPING WITH THE FINANCIAL IMPLICATIONS OF A RAPIDLY 
AGING POPULATION PROMINENTLY ON ITS AGENDA. AS A NOVELTY IN 
DUTCH POLITICS, THE CENTER-RIGHT COALTION AGREED TO 
BENCHMARK ITS PERFORMANCE AGAINST MAJOR SOCIO-ECONOMIC 
POLICY TARGETS AGREED IN THE 2003 COALITION AGREEMENT AND 
THE DRAFT 2004 BUDGET.  MAJOR POLICY TARGETS TO BE MET BY 
2007 HAVE BEEN LISTED AS FOLLOWS. 
0    ECONOMIC GROWTH TO EXCEED THE EU-15 AVERAGE GROWTH RATE 
0    THE STRUCTURAL DEFICIT TO BE REDUCED TO 0.5 PERCENT OF 
GDP 
0    THE DUTCH COMPETITIVE POSITION TO BE IMPROVED 
SIGNIFICANTLY 
0    PUBLIC RED TAPE TO BE REDUCED BY 25 PERCENT TO ALLOW 
FOR INCREASED PRIVATE INITIATIVE 
0    THE EFFICIENCY OF DUTCH UTILITIES SECTORS (GAS, POWER, 
POST AND TELECOM) TO RANK AMONG THE EU'S TOP-FIVE PERFORMERS 
0    THE QUALITY OF DUTCH CORPORATE GOVERNANCE TO IMPROVE TO 
MATCH THE INTERNATIONAL TOP 
 
------- 
COMMENT 
------- 
19. PASSAGE OF ITS TOUGH, UNPOPULAR--BUT IN THE EYES OF THE 
COALITION PARTNERS NECESSARY--BUDGET THROUGH PARLIAMENT 
AMOUNTED TO AN IMPORTANT POLITICAL AFFIRMATION OF GOVERNMENT 
POLICY.  UPCOMING NEGOTIATIONS BETWEEN THE GOVERNMENT, 
INDUSTRY AND TRADE UNIONS ON CONTRACT WAGES AND PAY 
CONDITIONS FOR 2004 AND 2005 WILL BE ANOTHER KEY TEST. 
TRADE UNIONS HAVE ALREADY SIGNALED THAT THEY REMAIN 
SKEPTICAL OF THE SIGNIFICANT WAGE MODERATION THAT IS 
IMPORTANT TO THE SUCCESS OF THE GOVERNMENT'S ECONOMIC 
PROGRAM.  THE GOVERNMENT UNDOUBTEDLY HOPES FOR A FASTER THAN 
ANTICIPATED PICK UP IN WORLD ECONOMIC GROWTH THAT WILL 
MITIGATE THE NEED FOR ADDITIONAL BIG SPENDING CUTS NEXT 
YEAR.  UNDER THESE CONDITIONS OF BUDGET AUSTERITY, WE 
ANTICIPATE THAT THE DUTCH WILL BE RELUCTANT TO SPEND 
SIGNIFICANT AMOUNTS OF NEW POLICY INITIATIVES AS THEY NEED 
TO CUT BACK ON EXISTING ONES. (DRAFT:JERAZOUX-SCHULTZ). 
SOBEL 
 
SOBEL