European agreements to be embedded in Sustainable Public Finances Act

The Netherlands plans to embed the recent European agreements on budget discipline in a Sustainable Public Finances Act. The Bill will also include the main principles and parameters of Dutch budgetary policy, such as the budgetary rules. The Cabinet adopted today a proposal to this effect submitted by Minister of Finance Jan Kees de Jager, Minister of the Interior and Kingdom Relations Liesbeth Spies and State Secretary for Infrastructure and the Environment Joop Atsma. 

At the European Council meetings of 26 October and 8 and 9 December the heads of state and government agreed measures to safeguard the financial stability of the EU and especially the eurozone. Member states made a commitment to incorporate the reinforced Stability and Growth Pact into their national legislation before the end of 2012. This is nothing new for the Netherlands; the Sustainable Public Finances Bill has been in preparation for months. Embedding the European agreements in a statute will help strengthen fiscal discipline, showing that the Netherlands is convinced of the need to put the Union’s economic and financial house in order.

The European demands and agreements on cutting budget deficits and public debt form the foundation of the Sustainable Public Finances Bill. This means that the cyclically-adjusted public sector deficit (EMU balance) may be no more than 0.5% of the Gross Domestic Product (GDP). This is known in Brussels as the ‘golden rule’. The upper limit for an actual deficit remains 3% of GDP. Public debt may not be any higher than 60% of GDP. As a result of the credit crisis and the debt crisis, the Netherlands – like most of the other euro countries – is not in compliance with these rules at present. The government’s policy is aimed at putting the Netherlands’ finances in order as quickly as possible, and the Sustainable Public Finances Bill should contribute to achieving this goal.

In addition to the European rules, the premises of the Netherlands’ trend-based budgetary policy will also be enshrined in the new Sustainable Public Finances Act, honouring the House of Representatives’ request to give Dutch budgetary rules a statutory foundation. These premises include a strict distinction between revenue and expenditure through the application of fixed expenditure ceilings (spending limits) and the principle of automatic stabilisation on the revenue side of the budget.

As municipalities, provinces and water authorities also contribute to the public sector deficit, the Bill provides that not only central government but also local and regional authorities must respect the targets of the reinforced Stability and Growth Pact. Consultations are under way about these authorities’ role in meeting the European targets.

Now that the Cabinet has accepted the Bill, it will be presented to the local and regional authorities for consultations, through the Association of Netherlands Municipalities (VNG), the Association of Provincial Authorities (IPO) and the Association of Water Authorities (UvW). The government expects to send the Bill to the House of Representatives before the summer of 2012, and aims to have the Act enter into force on 1 January 2013. The Sustainable Public Finances Act will be a modified and updated version of the Deficit Reduction (Central and Local Government) Bill, which will be dropped.