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PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHTC #1836/01 2760823
ZNR UUUUU ZZH
P 030823Z OCT 07
FM AMEMBASSY THE HAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 0455
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHFT/AMCONSUL FRANKFURT 3791
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAT/AMCONSUL AMSTERDAM 3753

UNCLAS SECTION 01 OF 02 THE HAGUE 001836 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EUR/WE (TSMTIH) 
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 2008 BUDGET: REPAIRING THE ROOF WHILE THE SUN IS 
SHINING 
 
 
THE HAGUE 00001836  001.2 OF 002 
 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE 
ACCORDINGLY. 
 
¶1.  (SBU)  SUMMARY.  In presenting the 2008 national budget, the 
Netherlands' new center-left coalition government has opted for a 
series of measures aimed at promoting a "fairer" income 
distribution, while also ensuring the country's future financial 
sustainability.  By introducing new taxes and increasing existing 
ones, the GONL seeks to finance needed improvements in the country's 
education structure and impoverished urban neighborhoods while also 
attempting to impose higher environmental and health standards. 
Coalition leaders argue that funding such efforts during a time of 
stable economic growth will ensure the country's future prosperity 
without jeopardizing its ability to finance increasing burdens 
related to an ageing population.  While new Finance Minister (and 
Labor Party leader) Bos has succeeded in pushing through measures 
that support traditional Labor Party interests at the expense of tax 
payers, his more conservative coalition partners (Christian 
Democrats and Christian Union) will be wary of going too far given 
recent polling indicating a drop in public support for the new 
government since it took office in February.  END SUMMARY. 
 
MAINTAINING ECONOMIC GROWTH 
--------------------------- 
 
¶2.  (U)  On September 18, Dutch Finance Minister Wouter Bos 
presented to parliament a draft 2008 national budget, the first of 
the new center-left coalition government (Christian Democrats, 
Labor, and Christian Union).   With estimated revenues totaling 147 
billion euros ($208 billion) and expenditures at 144 billion euros 
($204 billion), the budget forecasts a surplus of 3 billion euros 
($4 billion or 0.5 percent of GDP and up from the 0.2 percent 
forecasted for 2007).  This will be the second successive year that 
the national budget has shown a surplus, which is expected to reach 
1 percent of GDP by the end of 2011.  However, the budget document 
also notes that projected budget surpluses in coming years could 
become deficits because of exposure to the U.S. subprime mortgage 
crisis. 
 
¶3.  (U)  Under this budget, the national debt is expected to fall to 
45 percent of GDP in 2008 from a projected 47 percent in 2007 and a 
longer term target of less than 40 percent in 2011.  The draft 
budget also assumes an estimated 2.5 percent GDP growth in 2008 
(slightly lower than the 2.75 percent growth forecasted for 2007); a 
slight increase in inflation to 2 percent (up from an anticipated 
1.5 percent in 2007); and unemployment decreasing further from an 
anticipated 4.5 percent in 2007 to 4 percent in 2008. 
 
¶4.  (U)  Other key elements of the proposed 2008 budget include 
increased spending to improve general education needs (2 billion 
euros or $2.8 billion), to raise labor participation (36 million 
euros or $50.4 million) and to better conditions in impoverished 
neighborhoods (920 million euros or $1.29 billion).  These measures 
will largely be financed through personnel reductions and cost 
savings in the civil service sector, efficiencies gained by the 
transfer of certain financial responsibilities to the provinces, the 
introduction of environmental taxes, increased taxes on petroleum 
products and cigarettes, and an increase in the Value-Added Tax 
(VAT) from 19 to 20 percent in 2009. 
 
PAYING FOR THE FUTURE THROUGH "FAIRER" INCOME DISTRIBUTION 
------------------------------------------ 
 
¶5.  (U)  These increases in environment and consumption taxes 
(valued at around 5 billion euros or $7 billion) will largely be set 
off by cuts in other areas, such as lower unemployment premium 
payments.  However, health care premiums will rise significantly for 
most of the population, except the chronically sick, and are 
expected to contribute to the lowering of the purchasing power of 
Dutch citizens in the short-term. 
 
¶6.  (U)  Prime Minister Jan Peter Balkenende (Christian Democrat) 
and Finance Minister Bos (Labor) have publicly defended the 
coalition's budget plan as promoting a "fairer" income distribution 
and have rejected claims that they are simply pursuing a policy of 
reducing income inequalities.  They argue that the plan will require 
financial sacrifices from most income groups while sparing lower 
income groups.  They contend such measures -- boosted by continued 
economic growth and improvements in the education system (increased 
 
THE HAGUE 00001836  002.2 OF 002 
 
 
wages for teachers, free textbooks), a focus on the country's urban 
neighborhoods (poverty reduction efforts, employment incentive 
programs targeting women and minorities) and higher environmental 
and health standards -- will ultimately benefit future generations. 
They expect that the implementation of additional measures over the 
coming years will result in a 4-5 percent increase in the purchasing 
power of all Dutch citizens by 2011. 
 
¶7.  (U)  The coalition government argues that the above measures are 
also needed to ensure the country's future financial sustainability 
and future budget surpluses.  As elsewhere in Europe, the 
Netherlands is faced with an ageing population.  Additional funds 
will be needed to cover expected increases in government 
expenditures related to pension and health care costs. 
 
SMALL INCREASES ON DEFENSE, SAFETY AND COUNTERTERRORISM 
----------------------------------------- 
 
¶8.  (U)  Under the draft budget, national defense spending in 2008 
will increase to 8.1 billion euros ($11.34 billion), up slightly 
from the 7.9 billion euros projected in 2007.  As part of this 
total, the coalition government has agreed to spend over the next 
four years 250 million euros in specific operational and personnel 
areas and 250 million euros on crisis management operations.  The 
parliament has agreed to an additional 100 million euros over the 
next two years to fund the purchase of new equipment.  The GONL has 
also earmarked 535 million euros over the next four years to fund 
"unforeseen" foreign policy expenditures, which could be used to 
cover additional costs related to the current Dutch military 
deployment in Uruzgan in Afghanistan and its possible extension. 
 
¶9.  (U)  The draft budget also includes 5.5 billion euros ($7.76 
million) to fund Ministry of Justice (MOJ) efforts, including 
programs aimed at reducing crime rates by preventing social 
derailment and tackling outbreaks of violence and crime.  The GONL 
plans to intensify its fight against juvenile crime and repeat 
offenders (specifically through school campus and tailor-made 
behavioral programs) and to improve rehabilitation programs for 
detainees and ex-detainees.  An additional 9.7 million euros in 2008 
(and up to 32.3 million euros in 2011) will target efforts to combat 
organized crime (cyber crime, financial and economic crime, and 
fraud) and to train new police officers.  The MOJ will also set 
aside an extra 1.5 million euros in 2008 (which is expected to reach 
7.7 million euros in 2011) to prevent the spread of radicalization. 
MOJ efforts in this area will focus on prevention, including the 
early recognition and reversal of radicalization and social 
polarization trends, preferably at a local level.  Multidisciplinary 
exercises will increase readiness for possible chemical, biological, 
radiological, and/or nuclear attacks. 
 
COMMENT:  REPAIRING THE ROOF WHILE THE SUN IS SHINING 
---------------------------------------- 
 
¶9.  (SBU)  While the economic outcomes of the proposed budget plan 
remain uncertain, Finance Minister and PvdA (Labor) Party Leader Bos 
has clearly made his mark by pushing through measures that support 
traditional Labor Party social targets at the expense of tax payers. 
 As he told the press shortly after taking up his position within 
the new cabinet, "you must repair the roof while the sun is 
shining."  His more conservative coalition partners (Christian 
Democrats and Christian Union) may have accepted the heavier 
taxation in exchange for promises of a healthy budget surplus by 
2011, which coincides with the end of the current cabinet's term. 
However, they are also acutely aware of recent polling indicating 
that public confidence in the new coalition government has plummeted 
since it took office in February and will be cautious about allowing 
such trends to continue.  Meanwhile, the draft budget plan is 
drawing criticism from both the left and the right, with the 
opposition conservative-liberal VVD party claiming the 
"hard-working" Dutch public will be hardest hit by the proposed tax 
increases and the opposition Social Democrats contending the 
coalition government's plan is still doing too little for the 
country's poor. 
 
GALLAGHER