VZCZCXRO5954
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHTC #0771/01 2621507
ZNR UUUUU ZZH
P 181507Z SEP 08
FM AMEMBASSY THE HAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 1968
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAT/AMCONSUL AMSTERDAM 4016
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 THE HAGUE 000771 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4212/USFCS/MAC/EURA/OWE/DCALVERT 
TREASURY FOR IMI/OASIA/VATUKORALA 
 
E.O. 12356: N/A 
TAGS: ECON EFIN PGOV NL
SUBJECT: NETHERLANDS 2009 BUDGET: SURPLUS DESPITE ECONOMIC SLOWDOWN 
 
THE HAGUE 00000771  001.2 OF 002 
 
 
SENSITIVE BUT UNCLASSIFIED; PLEASE HANDLE ACCORDINGLY. 
 
¶1. (U) SUMMARY.  The Dutch economy is slowing but is well positioned 
to weather a downturn.  The 2009 budget forecasts a 1.2 percent 
surplus.  High gas prices, generating more tax revenue for the 
government's coffers, flatter this figure, but they provide a source 
of fiscal strength nonetheless.  The government has introduced 
several measures in an effort to maintain the purchasing power of 
Dutch citizens in the face of higher inflation.  END SUMMARY. 
 
---------------------------- 
Bad News on the Growth Front 
---------------------------- 
 
¶2. (U) The Dutch government released its EUR 179 billion (USD 254 
billion) 2009 budget on September 16.  The accompanying Budget 
Memorandum set the tone plainly:  ?The Netherlands will not remain 
unscathed by turbulence in the international economy.?  There are 
several risks ahead: 
 
-- Economic growth is slowing:  The Dutch government expects GDP 
growth to be 2.25 percent in 2008 and only 1.25 percent in 2009 
(compared to 3.5 percent in 2007).  The Dutch economy, with its 
heavy reliance on international trade flows, is vulnerable to 
cooling global economic activity. 
 
-- Inflation is picking up:  Inflation is expected to reach 2.75 
percent in 2008 and 3.25 percent in 2009.  Although this is below 
average Eurozone inflation levels, politicians and policy makers are 
preoccupied with limiting the impact of higher inflation on the 
average Dutchman's purchasing power.  To that end, the government 
has taken two major steps:  postponing the planned January 2009 VAT 
increase (from 19 to 20 percent), and committing to eliminate 
unemployment insurance contributions (estimated to save EUR 335 [USD 
476] for the average income earner). 
 
-- Shaky surplus:  Although the projected 1.2 percent budget 
surpluses in 2008 and 2009 would be the envy of many EU governments, 
analysts have already raised the alarm that only natural gas 
revenues, boosted by higher commodity prices, are keeping the budget 
out of the red.  (Note: Tax receipts from natural gas production are 
projected to account for EUR 10.2 billion [USD 14.5 billion], or 5.6 
percent of 2009 government income.  End note.)  Several other 
one-time items also prop up the 2009 budget, including a EUR 3 
billion (USD 4.3 billion) windfall in lower EU contributions to 
Brussels and special dividends from the government's stakes in the 
Schiphol airport group and the national railway company. 
 
-------------------------- 
Good News on Fiscal Health 
-------------------------- 
 
¶3. (SBU) The Netherlands heads into the slowdown in robust financial 
health compared to other EU member states.  The government claims to 
have used recent prosperous years to prepare for an inevitable 
downturn.  Based on a number of factors, it is hard to disagree with 
this self-assessment. 
 
-- Better growth relative to EU:  Despite the Netherlands' 
susceptibility to global trade trends, the economy is holding up 
well in relative terms.  The latest 2008 GDP growth forecasts show 
the Netherlands achieving 2.25 percent versus a Euro area average of 
1.3 percent. 
 
-- Low unemployment:  The unemployment rate has dropped to 4 percent 
this year and is expected to remain stable at that level.  Dutch 
policy makers are using this tight labor market as an opportunity to 
tackle the demographic challenge of its ageing population.  The 2009 
budget includes new measures to boost labor force participation. 
For example, those who work after age 62 can earn a bonus each year 
they remain employed. 
 
-- Public finances look strong:  Measured against the European 
Monetary Union (EMU) maximum parameters of 60 percent debt to GDP 
and 3 percent budget deficit, the Dutch have plenty of fiscal policy 
headroom.  The government is using its surplus to pay down national 
debt, which is on track to fall below 40 percent of GDP in 2009. 
Even after stripping out high natural gas prices and other items, 
the 2009 budget deficit would still be a manageable 2.1 percent. 
 
-- Limited concern for housing prices:  Mortgage growth in the 
Netherlands had been declining even before the credit crunch hit. 
Dutch Central Bank (DNB) regulators have told us they hope real 
estate prices will not fall sharply because the upcycle was gradual 
and long.  Despite high loan-to-value ratios in the Netherlands, 
severe supply constraints in this densely populated country should 
 
THE HAGUE 00000771  002.2 OF 002 
 
 
provide a counterbalance.  DNB has run stress-tests to model the 
effect of a 30 percent decline in home values on banks; they found 
the results ?quite comforting.?  Dutch observers remain far more 
concerned about what happens in the U.S. housing market and the 
potential knock-on effects for global finance. 
 
------------------------------ 
View from the Financial Sector 
------------------------------ 
 
¶4. (SBU) In recent conversations with major Dutch financial 
institutions and DNB, our interlocutors have expressed concern about 
the global financial sector's pro-cyclical nature.  DNB favors 
regulations that would require banks to retain more capital in good 
times as a hedge.  This is in keeping with the Dutch government's 
concern for smoothing the business cycle's impact on public finance. 
 They aim to calibrate fiscal policy by moderating spending in the 
good years and spending more in the down years.  The 2009 budget 
bears the mark of this strategy. 
 
¶5. (SBU) DNB sees Dutch economic growth and momentum slowing through 
¶2009.  Senior ING Bank and Rabobank officials have also told us they 
do not see the credit crisis abating in 2009.  Although ING and 
Rabobank are comfortable with their liquidity positions (they adhere 
to simpler business models) and appear to be weathering the crisis, 
Dutch-Belgian bank Fortis faces greater difficulties, with concerns 
about its capital base fueling a 60 percent decline in its stock 
price since January 2008. 
 
¶6. (U) Further reporting on the 2009 Dutch budget and its 
implications for U.S. interests, as well as the impact of the U.S. 
crisis on the Dutch financial sector, will follow septel.