By Nick Mann | 11 June 2013

The Netherlands needs to cut spending by billions of euros to stop its deficit rising further above European Union limits, the country’s central bank has warned.

In its biannual Economic developments and outlook, the Dutch central bank, or DNB, said the deficit is forecast to be 3.5% of gross domestic product this year. Under EU’s rules, countries with deficits over 3% can be subject to the Excessive Deficit Procedure, facing fines if they do not bring them under control.

The DNB said that without further cuts, the deficit would increase to 3.9% next year. To bring it down to 3%, the government would have to reduce spending by €6bn–€8bn. This would also improve the country’s structural deficit, which is its underlying budget balance once growth-related fluctuations have been taken out of the equation.

‘An austerity package of that magnitude would also be enough to reverse the deterioration of the structural balance, and would also prevent the public debt from rising further after 2014,’ the DNB said in a statement accompanying the report.

‘Without additional measures being taken, public debt is likely to rise from 75.3% of GDP in 2014 to 76.1% in 2015. The said austerity package would help stabilise the debt ratio at 75% of GDP over the coming two years.’

The bank also warned over the general state of the Dutch economy, which it said was ‘going through heavy weather’. The country is currently in recession and, according to the DNB’s forecasts, the economy will shrink by 0.8% this year, before growing by just 0.5% next year and then 1.1% in 2015 as the international economic outlook becomes more favourable.

‘Households, banks, pension funds and the public sector are all attempting to repair their damaged balance sheets. As a consequence, it is proving very difficult to drag the economy out of the doldrums. Throughout the 2013–2015 forecast period, Dutch economic output will be far below its normal level,’ the bank explained.

As a result of this, the country’s unemployment rate is expected to rise sharply, peaking at 7.2% in mid-2014.

The bank claimed, however, that there were positives to be found. ‘While the Dutch economy is going through a difficult time, there are most definitely bright spots from a structural perspective, such as its strong competitiveness and the high labour participation rate by international standards,’ it said.