Dutch Budget Gap Will Breach EU Limit in 2014, Central Bank Says

The budget deficit of the Netherlands, forecast to meet a European Union limit for the first time in five years in 2013, will exceed the threshold again a year later, the country’s central bank said.

“This clearly shows the big challenge the government awaits, also after 2013, to shore up state finances,” the Dutch central bank in Amsterdam, led by Klaas Knot, said in its biannual economic forecast published today.

The deficit will narrow to 2.9 percent of gross domestic product next year from 4.1 percent this year, the central bank forecast. In 2014, the shortfall will widen to 3.1 percent, exceeding the EU’s 3 percent limit. The central bank said an expected increase in state income that year, fueled by economic growth, will be offset by a planned tax cut.

The Netherlands’ caretaker Cabinet agreed on an emergency austerity deal in April with three opposition parties after the Freedom Party withdrew support for the minority government. The fifth-largest economy in the euro area expects to save 12.4 billion euros ($15.6 billion) next year by raising taxes and cutting spending to meet the EU’s budget-deficit limit.

The central bank forecasts that the economy will shrink 0.6 percent this year, compared with a December projection for 0.2 percent growth. While GDP will rise 0.6 percent in 2013, that’s less than half the pace previously forecast. GDP will return to its 2008 level by 2014, the bank said.

Consumer Spending

While the economy is forecast to recover, household consumption will continue to decline in the next two years as house prices fall, inflation exceeds wage growth and unemployment rises, according to today’s report. House prices will continue to drop into 2014 because of stricter mortgage-lending rules and a reduction of a home-owner tax break, the bank forecast.

The European Commission voiced concerns last month about the austerity measures proposed by the caretaker government, saying there are “substantial implementation risks due to upcoming election.” The Netherlands faces “serious challenges in the short to medium term,” it said.

Caretaker Finance Minister Jan Kees de Jager last week postponed a decision on the reduction of a tax break for new mortgages until after September elections, raising that chance that a new parliament will withdraw support for the austerity measure. Acting Prime Minister Mark Rutte said yesterday his Liberal Party after the elections may undo the abolishment of a tax break for commuters.

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