DUTCH ECONOMY: GOING STRONG IN LEAD UP TO ELECTIONS

UNCLAS SECTION 01 OF 02 THE HAGUE 001714 SIPDIS SIPDIS STATE FOR EUR/UBI ERIC FALLS, RICHARD REITER USDOC FOR 4212/USFCS/MAC/EURA/OWE/DCALVERT TREASURY FOR IMI/OASIA/VIMAL ATUKORALA PARIS ALSO FOR OECD STATE PLEASE PASS FEDERAL RESERVE E.O. 12356: N/A TAGS: ECON EFIN EINV ELAB NL SUBJECT: DUTCH ECONOMY: GOING STRONG IN LEAD UP TO ELECTIONS REF: THE HAGUE 1531 THE HAGUE 00001714 001.2 OF 002 ¶1. SUMMARY. The Dutch economy is running ahead of eurozone averages for the first time in seven years, and the ruling coalition government is hoping this will translate into votes in the upcoming November elections. A draft 2007 budget to be presented in September will contain new tax breaks designed to bolster the coalition's chances - and spur further debate on reform of the Netherlands' welfare state. END SUMMARY. ECONOMIC GROWTH STRONG -------------- ¶2. With rising incomes fueling increased household spending and unemployment rates falling to 5.5 percent, 2006 is proving to be an especially good year in the Netherlands. For the first time since 1999, the Dutch economy is outperforming the eurozone average. The Netherlands Bureau for Economic Policy Analysis and the Dutch Central Bank have increased their 2006 economic growth estimates to 3 and 2.5 percent respectively. Consumer confidence continues to rise, with the Netherlands showing the strongest growth in consumer confidence within the EU, especially regarding future unemployment, for the last quarter. ¶3. The CDA (Christian Democrats) and VVD (conservative Liberal) parties - the only two left in the ruling coalition since the withdrawal of the D66 (social Liberals) in July (reftel) - are portraying the economy's strong performance as a vindication of their reform policies. The Dutch economy was in a two-year slump when the CDA-VVD-D66 coalition took office in 2003. The GONL chose to implement structural reforms to increase labor participation rather than increase government spending to boost growth. Increased trade flows fueled a recovery in 2004 (2.0 percent),although private consumption lagged as real household income fell. This opened up the GONL to criticism by the opposition PVdA (Labor) party and others that such reforms were hurting consumer confidence, especially after economic growth dropped to 0.4 percent in the first quarter of 2005. The economy regained momentum in the second quarter of last year, and this trend has continued, with growth increasing to 2.9 percent in the first quarter of this year. CDA AND VVD CASHING IN ON THE ECONOMY -------------- ¶4. The reconfigured CDA-VVD government will present a draft 2007 national budget in September. Key elements 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). The next government should then be able to start with a nearly balanced budget. ¶5. With the new budget, the CDA and VVD are intent on completing the final part of a four-year strategy to first implement structural reforms, followed by the presentation of popular policies in the final budget. They are hailing the recent economic upswing as a sign that earlier structural reforms worked and hope that voters will also link their leadership to the strong performance of the economy. ¶6. Recent shifts in the polls appear to support this strategy. Until recently, polls were predicting a large victory for the opposition PvdA, led by Wouter Bos. Polls are now showing a neck and neck race between PvdA and Prime Minister Jan Peter Balkenende's CDA. BUT DIFFICULT ISSUES STILL AHEAD -------------- ¶7. Meanwhile, left-wing opposition parties, led by Bos' PvdA, have embraced more complex, controversial socioeconomic issues in their early campaign debates. Such issues include increasing the retirement age, levying higher THE HAGUE 00001714 002.2 OF 002 taxes on private pension benefits, and reducing tax breaks for homeowners. A recent IMF report (www.imf.org) praised the Netherlands for implementing sound policies that have reduced the budget deficit and strengthened the economy. It also stressed the need for further structural reforms. Although such measures will serve to prepare the country for the impact of population aging, they may not fare well with voters. COMMENT: BUDGET TALKS TO PROVIDE NEXT DEBATE FORUM -------------- -------------- ¶8. The state of the Dutch economy is sure to be a major electoral issue. The presentation of the national budget in September could provide a forum for further debate.