US embassy cable - 05THEHAGUE2594

UNCLAS SECTION 01 OF 03 THE HAGUE 002594 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/UBI RICHARD REITER 
 
USDOC FOR 4212/USFCS/MAC/EURA/OWE/TCALVERT 
TREASURY FOR IMI/OASIA/VIMAL ATUKARALA 
PARIS ALSO FOR OECD 
FRANKFURT FOR TREASURY/WALLAR 
STATE PLEASE PASS FEDERAL RESERVE 
 
E.O. 12356: N/A 
TAGS: ECON, EFIN, PREL, EINV, ELAB, PGOV, NL 
SUBJECT: DUTCH 2006 BUDGET: REFORM, GROWTH, AND UNCERTAINTY 
 
REF: 04 THE HAGUE 2569 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE 
ACCORDINGLY. 
 
1.  (SBU)  SUMMARY.  With early indications of a long- 
awaited economic recovery as a backdrop, the Netherlands' 
center-right governing coalition presented a draft 2006 
budget that seeks to ensure continued economic growth 
through additional structural reforms of the country's 
welfare system and measures aimed at offsetting the effect 
of such changes on individual incomes.  Some policy 
observers have raised concerns that these measures could 
result in greater uncertainty over household incomes and 
actually hurt private consumption and consumer confidence. 
The GONL's success in implementing such policies could be 
hindered by its own lack of popularity among the general 
population, which holds the government responsible for the 
country's recent economic woes. 
 
2.  (SBU)  Other supply-side measures in the 2006 budget are 
intended to improve the business climate in the Netherlands 
through cuts in the corporate tax rate and a reduced 
regulatory burden, especially for small- and medium-sized 
enterprises.  Increases in spending on defense and 
counterterrorism efforts point to a larger emphasis on 
national security concerns.  END SUMMARY 
 
2006 BUDGET - LOOKING TOWARD RECOVERY 
------------------------------------- 
 
3.  (U)  Following a strong performance in the late 1990s, 
the Dutch economy has struggled in recent years, plagued by 
relatively high costs and weak domestic demand.  (On 
average, GDP growth for the years 1996-2000 was 3.7 percent, 
while it is only expected to reach an average of 0.7 percent 
for the years 2001-2005.)  GDP growth recovered in 2004 to 
1.7 percent, largely due to a turnaround in net exports, an 
increased profitability of Dutch companies, and a corporate 
investment growth rate of 3.3 percent.  Inflation fell from 
2.1 percent in 2003 to 1.2 percent in 2004, despite higher 
oil prices.  However, private consumption did not increase 
in 2004, partly because of a persistently high unemployment 
rate of 6.4 percent.  Productivity growth also remained 
negligible in comparison with the U.S. and certain other 
European country competitors. 
 
4.  (U)  With this as a backdrop, Dutch Finance Minister 
Gerrit Zalm presented to parliament on September 20 a draft 
2006 national budget aimed at ensuring continued economic 
growth through the introduction of further structural 
reforms to the country's welfare system, measures intended 
to boost private consumption, and additional supply-side 
reforms designed to improve the Dutch business climate.  The 
draft 2006 budget assumes a projected 2.5 percent GDP growth 
in 2006 (up from a forecasted 0.5 percent in 2005 and above 
the eurozone average of 1.8 percent); a further drop in 
inflation to 1 percent (down from an anticipated 1.5 percent 
in 2005); unemployment decreasing slightly to 6.25 percent 
(from an estimated 6.75 percent in 2005); estimated revenues 
totaling 137.4 billion euros (USD 166.4 billion); and 
government expenditures increasing to 146.7 billion euros 
(USD 177.7 billion).  With a resulting budget deficit of 9.3 
billion euros (USD 11.3 billion), or 1.8 percent of GDP, the 
GONL will remain below the 3 percent budget deficit 
threshold mandated in the EU Stability and Growth Pact 
(SGP).  (A detailed analysis of the Dutch fiscal situation 
is contained in the "Selected Issues" paper accompanying the 
recent IMF Article IV review of the Dutch economy, available 
at www.imf.org.) 
 
THE MAN ON THE STREET 
--------------------- 
 
5.  (U)  Structural reform aspects of the draft budget build 
on measures taken last year (see reftel), including the 
introduction of tougher disability benefit criteria and a 
compulsory healthcare insurance system on January 1, 2006 
(with higher premiums and greater care provider choices), 
the elimination of a distinction between public and private 
health insurance programs, and the discontinuation of tax 
incentives that made early retirement and pre-pension 
schemes financially attractive for employees under the age 
of 65.  Under the proposed new disability criteria, 
eligibility for benefits would be limited to individuals 
that are fully incapacitated or unable to work.  However, 
the benefits to individuals qualifying for such benefits 
would increase from 70-75 percent of the individual's 
previous earned income.  (Those partly incapacitated would 
receive partial benefits and be required to work part-time.) 
An estimated one million people (out of a work force of 7.6 
million) currently collect disability benefits in the 
Netherlands. 
 
6.  (U)  Other measures are aimed at compensating Dutch 
citizens for the anticipated higher insurance premiums noted 
above, including some 2 billion euros in tax cuts and 0.5 
billion in increased public spending.  These measures 
include income-based care benefits, a general tax credit, 
the elimination of occupancy-related property taxes, 
reductions in employees' unemployment insurance 
contributions, the elimination of school fees for certain 
groups of secondary students, and increased spending on 
education and child care benefits.  Meanwhile, the Dutch 
Labor Party (PvdA) has expressed concern that the proposed 
measures will primarily benefit high-income brackets. 
 
IMPROVING THE BUSINESS CLIMATE 
------------------------------ 
 
7.  (U)  Supply-side reform measures in the budget are 
intended to improve the business climate in the Netherlands 
through cuts in the corporate tax rate and further 
reductions in regulatory/administrative costs, especially 
for small- and medium-sized enterprises.  Under the plan, 
the corporate tax rate will fall to 29.6 percent in 2006 
from 31.5 percent this year and 34.5 percent in 2004. 
Additional cuts are planned for 2007.  (However, the overall 
corporate tax burden is not expected to change due to 
offsetting fiscal measures and a widening of the tax base.) 
New measures aimed at reducing regulatory/administrative 
costs include uniform wage definitions and simplified rules 
governing work conditions. 
 
BIGGER ROLE FOR DEFENSE AT NATIONAL LEVEL 
----------------------------------------- 
 
8.  (U)  Under the draft budget, Ministry of Defense  (MOD) 
spending will increase by 95 million to 7.2 billion euros 
(USD 8.7 billion) in 2006, or about 1.7 percent of GDP. 
(This increase will maintain the MOD's purchasing power in 
real terms, following a decade of steady declines in the 
overall MOD budget.)  MOD personnel are expected to become 
more involved in national security, with an anticipated 3000 
military personnel playing a permanent role within the 
Netherlands' national borders under civil authority.  The 
MOD also plans to draw up new plans for protecting the 
country's airspace and harbors, including joint exercises 
with the police, army, and other national security services. 
 
9.  (U)  Given shortages in the Dutch labor market, the MOD 
plans to turn to other NATO countries to recruit several 
hundred specialists for technical support tasks, especially 
within its air force.  There are plans for the creation of a 
fourth armored infantry battalion and an expanded 
intelligence battalion (Istar).  A pool of 60 special forces 
will be established to contribute to disarmament and 
demobilization programs in crisis areas.  Defense Minister 
Kamp has also announced plans to purchase two C130 Hercules 
transport aircraft and five new Chinook transport 
helicopters from the U.S. 
 
TARGETING TERRORISM 
-------------------- 
 
10.  (U)  The draft budget has earmarked an additional 37 
million euros (USD 45 million) for counterterrorism efforts 
in 2006, with another 40 million euros (USD 48 million) 
possible in 2007.  The funds will largely be spent on 
increased staffing for the National Counterterrorism 
Coordinator's Office (NCTb) and the National Prosecutor's 
office, increased efforts to combat financial crime, and 
additional resources related to wiretapping.  Under the 
proposed budget plan, the Ministry of Justice notes recent 
proposals giving police more power to arrest and search 
persons suspected of preparing terrorist attacks, expanding 
opportunities for using intelligence information in courts, 
introducing a new generation of biometric passports and 
identification cards, expanding the national alert system, 
conducting large-scale terror exercises more frequently, 
enhancing cooperation between the Interior and Defense 
Ministries, and strengthening cooperation among the NCTb, 
national security services, the National Prosecutor's 
office, and immigration services. 
 
COMMENT - REFORM VERSUS UNCERTAINTY 
----------------------------------- 
 
11.  (U)  Since taking office two years ago, Prime Minister 
Balkenende's coalition government (VVD, CDA, and D66) has 
faced much criticism over its efforts to put the 
Netherlands' economy back on the road to recovery.  The 
Council of State, the highest advisory body and 
administrative court in the Netherlands, has publicly 
questioned the logic of supporting increased spending and a 
budget deficit during the initial stages of an economic 
recovery.  Meanwhile, the parliament's Council of Economic 
Advisors and the Scientific Council for Government Policy 
(two quasi-independent advisory bodies) have raised concerns 
that measures proposed to boost private consumption and 
consumer confidence are unlikely to compensate for the 
uncertainty over household incomes that could result from 
changes and cuts to the Dutch welfare system. 
 
12.  (SBU)  In her annual speech at the opening of 
parliament and the presentation of the federal budget on 
September 20, Queen Beatrix summarized well the GONL's 
budget and policy goals for 2006: "A safer Netherlands; more 
people at work; less regulations and more quality of public 
services; and more mutual respect in our society."  However, 
the greatest obstacle facing the Balkenende government in 
pursuing these policies may prove to be its own lack of 
popularity.  Recent polling in the country indicates that as 
many as two-thirds of the population believe that government 
policies have not helped to improve the economy and more 
that half believe such policies have had a negative effect. 
 
BLAKEMAN