VZCZCXRO8026
PP RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHTC #2164/01 2761327
ZNR UUUUU ZZH
P 031327Z OCT 06
FM AMEMBASSY THE HAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 7002
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHFT/AMCONSUL FRANKFURT 3501
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAT/AMCONSUL AMSTERDAM 1524

UNCLAS SECTION 01 OF 02 THE HAGUE 002164 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EUR/UBI (RREITER) 
USDOC FOR 4212/USFCS/MAC/EURA/OWE/DCALVERT 
TREASURY FOR IMI/OASIA/VATUKORALA 
PARIS ALSO FOR OECD 
STATE PLEASE PASS FEDERAL RESERVE 
 
E.O. 12356: N/A 
TAGS: ECON EFIN PREL EINV ELAB PGOV NL
 
SUBJECT: DUTCH 2007 BUDGET: LET THE GOOD TIMES ROLL 
 
REF:  THE HAGUE 2140 
 
THE HAGUE 00002164  001.2 OF 002 
 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE 
ACCORDINGLY. 
 
¶1.  (SBU)  SUMMARY.  The Netherlands' center-right governing 
coalition has presented a draft 2007 budget that includes a 
surplus for the first time in five years, new tax breaks, 
and increased spending on national security.  Unveiled just 
two months before parliamentary elections on November 22, 
the ruling coalition hopes that these measures together with 
an upswing in the economy will win over Dutch voters. 
Meanwhile, official advisory bodies worry that the draft 
budget fails to address possible future challenges related 
to an aging population, global competition, and energy 
security.  END SUMMARY 
 
2007 BUDGET - SMALL SURPLUS, TAX CUTS 
------------------------------------- 
 
¶2.  (U)  Dutch Finance Minister Gerrit Zalm presented to 
Parliament on September 19 a draft 2007 national budget. 
With estimated revenues totaling 157.5 billion euros ($200 
billion) and government expenditures at 156.8 billion euros 
($199 billion), the budget forecasts for the first time in 
five years a small surplus of 887 million euros ($1.1 
billion or 0.2 percent of GDP).  The draft budget also 
assumes a projected 3.0 percent GDP growth in 2007 (slightly 
lower than the 3.25 percent growth  forecasted for 2006); a 
slight increase in inflation to 1.5 percent (up from an 
anticipated 1.25 percent in 2006); and unemployment 
decreasing further from an anticipated 5.5 percent in 2006, 
down to 4.5 percent in 2007. 
 
¶3.  (U)  Other key elements of the budget include a real cut 
in corporate taxes worth about 500 million euros ($625 
million) and reductions in consumer energy taxes and 
unemployment premiums worth about one billion euros ($1.25 
billion).  These measures will largely be financed out of a 
hard-fought discount on the Dutch contribution to the EU 
worth about 1 billion euros ($1.25 billion).  While the 
corporate tax rate will fall to 25.5 percent in 2007 from 
29.6 percent in 2006 under this plan, the overall corporate 
tax burden for most companies operating in the Netherlands, 
and especially for medium-sized firms, is not expected to 
change due to a widening of the tax base. 
 
MORE SPENDING ON DEFENSE AND COUNTERTERRORISM 
--------------------------------------------- 
 
¶4.  (U)  Under the draft budget, national defense spending 
will increase in 2007 to 7.9 billion euros ($10 billion 
dollars), 100 million euros ($127 million) more than 
originally planned.  These additional funds will help 
support the deployment in 2007 of over 5,000 troops to 
missions in Afghanistan, Bosnia, Africa, and possibly 
Lebanon.  The GONL also plans to create a separate fund of 
195 million euros ($247 million dollars) to finance crisis 
management operations.  The GONL announced on September 29 
its intention to sign before November 22 an MOU extending 
Dutch participation in the development and production of the 
Joint Strike Fighter (reported reftel).  A decision on 
procurement will be left to the next cabinet.  Other funded 
programs include the completion of a multi-year project to 
reorganize Dutch armed forces and Ministry of Defense 
participation in the C17 transport project. 
 
¶5.  (U)  The draft budget also earmarks 33 million euros 
($42 million) for Ministry of Justice (MOJ) counterterrorism 
efforts in 2007, with some 30 million euros ($38 million) 
going directly to the National Coordinator for 
Counterterrorism (NCTb).  Over the next few years, the MOJ 
is expected to spend an additional 31 million euros ($39 
million) to improve camera surveillance of railways and 
airports.  (These amounts exclude funds spent by ministries 
of Defense and Interior on counterterrorism efforts.) 
 
CASHING IN ON GOOD TIMES AHEAD OF ELECTIONS 
------------------------------------------- 
 
 
THE HAGUE 00002164  002.2 OF 002 
 
 
¶6.  (SBU)  With parliamentary elections only two months 
away, the 2007 budget marks the final part of a four-year 
strategy by the government to first implement structural 
reforms, followed by the presentation of popular policies in 
the final budget.  Unlike in previous years, the final 
budget figures and the anticipated surplus were only known 
by Minister Zalm and his senior staff and were not leaked to 
the press or other members of the government ahead of the 
September 19 presentation to parliament.  Zalm undoubtedly 
wanted the positive budget figures to reflect well on his 
party, the VVD (conservative Liberals), ahead of November 22 
parliamentary elections.  The current ruling CDA (Christian 
Democrats) and VVD coalition hopes that proposed tax breaks, 
increased spending on national security, and a strong 
performance by the economy will work in its favor in the 
upcoming elections. 
 
¶7.  (U)  This strategy has been supported by continued 
growth in the Dutch economy, up by 2.8 percent in the second 
quarter of 2007.  While this figure is slightly less than 
the 2.9 percent recorded in the first quarter, it is still 
stronger than the eurozone average.  Sources such as 
Eurostat report current Dutch unemployment at 3.9 percent, 
the lowest rate within the EU and twice as low as the 8 
percent EU-25 average.  The harmonized European inflation 
figure (HICP) for the Netherlands was 1.9 percent in August, 
lower than the eurozone average of 2.3 percent.  For the 
first time since 2002, Dutch citizens are also expected to 
experience a real increase in purchasing power. 
 
BUT ECONOMIC CHALLENGES REMAIN 
------------------------------ 
 
¶8.  (U)  Nonetheless, the draft budget is not without its 
critics.  Taking a less rosy view than the governing 
coalition, the Council of State, the highest government 
advisory body and administrative court in the Netherlands, 
has advised that the projected budget surplus should be 
greater given the current turnaround in the economy.  It 
argues that a small surplus leaves the future government 
with too little resources to address issues related to an 
aging population, global competition, and energy security. 
Similarly, the Netherlands Bureau for Economic Policy 
Analysis (CPB) warns that a projected surplus based on the 
current upswing in the economy and an increase in natural 
gas revenues may not suffice to counter the negative effects 
on the structural budget of increased spending and lower 
taxes.  The CPB also argues that the proposed corporate tax 
cuts will not lower the corporate tax burden until 2014, 
while actually increasing it by 1 billion euros ($1.3 
billion dollars) in the coming year. 
 
COMMENT: VOTING WITH THEIR POCKET BOOKS 
--------------------------------------- 
 
¶9.  (SBU)  The state of the Dutch economy is clearly playing 
a major role in the lead-up to parliamentary elections. 
With the economy on an upswing and more money to spend, the 
ruling CDA/VVD coalition certainly hopes this good economic 
news will swing significant numbers of Dutch voters in their 
direction on November 22.  So far, the strategy seems to be 
working -- recent polls show the CDA eroding the PvdA's 
(social Liberals) once-strong lead, and most experts agree 
that another CDA-VVD coalition government emerging from the 
elections is now a real possibility. 
 
BLAKEMAN