Dutch central bank warns on budget deficit

The Netherlands Bank released a stern document on March 2 demanding action to balance the country's budget. The central bank said the "highest priority" must be given to restructuring the country's public finances.

The latest edition of the central bank's regular bulletin offered "eight reasons to curb the deficit now". These included arguments relating to the scope for structural reforms to help the situation, the minimal impact of deficit reduction on growth and consumer confidence.

The first point made by the central bank was that: "The debt crisis cannot be suppressed forever with new debts." The bulletin said that "because the government has allowed the budget deficit to expand, the effects of the debt crisis on the real economy have so far been moderate."

The downside of this is that the Netherlands "now faces a bill that can no longer be left unpaid," added the bulletin.

Since the crisis began in 2007, Dutch public debt has reached 65% of GDP, an increase of 20% of GDP, said the central bank. "According to a preliminary projection (Concept-CEP-raming) by the Netherlands Bureau for Economic Policy Analysis, Dutch public debt will increase to 75% of GDP by 2015 if current policy is left unchanged. This development must be curbed," demanded the central bank.

Regarding structural reforms, the central bank said these were "necessary to reinforce economic growth potential, but are no viable substitute for deficit reduction".

While deficit reduction would slow down growth initially, the central bank said that "for the Netherlands this effect will be relatively small".

The central bank said consumer confidence in the Netherlands was currently "very low, which is having a negative impact on consumption". If government finances were allowed to "run further out of hand", the bulletin warned this would "not help to restore such confidence".

Drawing on lessons learned by other eurozone member states, the Dutch central bank said breaking budgetary regulations is no solution. "Some countries in southern regions of the euro area have run into problems because European budgetary rules were not adhered to strictly enough. The Netherlands should not make the same mistake but comply with European and national budgetary rules," said the document.

Financial market scrutiny was another reason to tackle the deficit, the central bank said. "Unless the Netherlands puts is budget in order now, there is a risk that financial markets will enforce budgetary discipline by demanding higher interest rates, like elsewhere in the eurozone."

"Very substantial" guarantees made to the European Financial Stability Facility and other entities could also spell trouble for Dutch public finances, the central bank said. "If these guarantees are called in, this will cause the debt-to-GDP ratio to increase. Another reason why rationalisation of public finances can no longer suffer any delay," the bulletin said.