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The next Dutch government is expected to make at least 10 billion euros of budget cuts after June elections -- cutting health care costs, housing subsidies and unemployment benefits and also raising the retirement age.The Netherlands is well regarded by markets for fiscal discipline, but politicians are falling over each other ahead of the June 9 poll to show they will do what it takes to safeguard that reputation in the face of longer-term challenges.The euro zone's fifth largest economy faces soaring deficits after 2020 without structural reform, the government's analysis bureau CPB said in its latest report.The country's budget deficit and public debt are below euro zone averages and the European Commission forecasts them at 5.1 percent and 69.6 percent of gross domestic product respectively in 2011, but spending cuts are still seen as necessary."Because of financial markets' conditions and probably also due to an ageing population and expected rise in health care costs, the urgency has come to do something to prevent a difficult situation long term," said Michiel de Bruin, a euro zone bond investor at F&C Investments.Confidence in Dutch government bonds has been high, reflected in spreads versus German benchmarks which are sometimes tighter than Franco-German spreads.However, despite this positive picture at home, the spectacle of Greece's debt woes and contagion affecting other euro zone states has prompted broad social acceptance in the Netherlands of the need to cut spending."This is about restoring trust. Every country wants to prevent itself becoming the next Greece," said Dutch asset manager Corne van Zeijl at SNS Asset Management.The Liberal Party (VVD) is ahead in opinion polls and its popularity has been attributed partly to their policy of favouring the quickest budget cuts as well as the deepest in the long term.Even Dutch trade unions agree to some extent that belts must be tightened. Dutch FNV, the largest union, wants to tackle the economic crisis as long as those who earn most pay most, FNV Chairman Agnes Jongerius said last week. Dutch CNV, the numbertwo union, is willing to see budget cuts but opposes plans to curb civil servants' rights or pay.An ageing population will mean a dwindling proportion of economically active people in the Netherlands beside a steadily swelling number of senior citizens. By 2040, there will be only two people aged 20-64 for every person aged 65 or over, comparedwith a current ratio of four-to-one.Without budget reforms, this changing demographic will boost state retirement costs by 2040 to 8.5 percent of GDP from 5 percent in 2011, while health care costs will hit 14.25 percent of GDP, up from 9.75 percent, the CPB said in March.COALITION EFFECTSTo prevent a long-term rise of government spending, political parties have proposed annual spending cuts between 10 and 20 billion euros by 2015, around the time when the incoming government's term of office will expire. The actual deficit in 2009 was 30.2 billion euros."I expect a number somewhere in the middle, possibly at the upper range. Government finances have to be dealt with in the whole of Europe. The Netherlands has a good reputation and it is important that this reputation is maintained," said De Bruin.Most parties have proposed to cut social benefits. They range from about 1 billion euros in cuts by Labour to 10 billion euros by the Liberals.Raising the retirement age to 66 or 67 from 65 and cutting about 2 billion euros in health care costs is part of most parties' proposals, CPB said last week in an analysis ofparties' 2011-2015 budget plans.All parties propose to curb housing subsidies, ranging from limiting tax deductibility of mortgage interest payments to rent increases of social housing.MARKET CONFIDENCEInvestors think the measures a new government will implement will be sufficient to keep markets confident in the Netherlands."I expect spreads to remain at similar levels and not run up or tighten significantly," said Walter Leering, fixed income analyst at Dutch private bank Theodoor Gilissen.The Netherlands, where exports equalled 69 percent of 2009 GDP totalling 570.2 billion euros, can also benefit from a trade surplus."The Netherlands and Germany have always had a trade surplus, making them less dependent to finance deficits from foreign parties," Leering said.Dutch political leaders stress the importance of sound government finances, and Labour leader Job Cohen, whose party is second after the Liberals in opinion polls, detailed 10 billion euros of long-term budget cuts last week."The euro is very dear to me and others. It contains our pensions, all the money we have in the Netherlands. Therefore it is of the utmost importance to have a strong euro," Cohen said, reflecting a common Dutch view that all member states of the currency bloc must do their part to restore the market's faith in the single currency.Long term, most political parties have proposed to cut spending by more than the 29 billion euros which CPB thinks is ultimately necessary to put the budget on a sustainable long-term footing."The Netherlands is taking these measures by its own initiative and the market is not worried," said Olaf Penninga, a government bond portfolio manager at Dutch asset manager Robeco.(For more business news on Reuters India click http://in.reuters.com)
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