UPDATE 1-With EU fiscal pact as backdrop, Dutch budget deal seen

Fri Apr 13, 2012 5:55am EDT

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By Sara Webb

AMSTERDAM, April 13 (Reuters) - The Dutch government and its ally are near to agreeing a multi-billion euro package of budget cuts, media reported on Friday, a temporary respite in political tensions that could have major repercussions for Europe's crisis-fighting fiscal pact.

The aim is to cut 10 billion to 16 billion euros ($13 billion to $21 billion) to curb a bloated deficit that is in danger of putting the Netherlands in the same boat as Spain and Italy.

Disagreement over the budget has threatened the stability of the minority government, raising concerns in European circles that it could either have to find a new ally to muster a parliamentary majority, or even collapse, leading to elections and putting new parties in government.

That would make passage of the Europe-wide fiscal pact, a key element of the European Union's attempts to solve its debt crisis, in doubt.

Although not all countries need to approve the pact for it to come into force, the Netherlands is a core member and one of the largest economies.

There are still hurdles, however, both to the fiscal pact and the budget.

Any package of spending cuts would need to be evaluated by the government's economic think tank, the CPB, to ensure the measures were sufficient to bring the budget deficit within the European Commission's target of 3 percent of GDP.

The proposed cuts could be presented to the CPB early next week, according to media reports, with a final deal possibly agreed by April 20.

The Liberal-Christian Democrat minority coalition has depended on Geert Wilders' Freedom Party, an anti-immigration, eurosceptic group, for a slender one-seat majority in parliament except on euro zone issues.

But that majority is no longer guaranteed after an MP quit the Freedom Party in March to run as an independent.

Prime Minister Mark Rutte has already sounded out one of the smaller opposition parties, the Christian Union Reformed Party (SGP), in an attempt to build a parliamentary majority for the proposed cuts.

But economists said the political situation remains fragile and that even with a budget agreement the government may not be able to muster support in parliament for the EU fiscal compact.

ON A KNIFE-EDGE

Wilders shot down reports of a budget deal on Friday, tweeting that it was "premature" to talk of agreement and it "could go either way".

"I'm cautious, it's very much in the balance, although they probably will get some sort of outline agreement by April 30," Alastair Newton, senior political analyst at Nomura in London, said.

"But even if the government survives on the budget, it could well fall on the fiscal compact. Given the euroscepticism of the Dutch electorate, it could make any further euro zone support impossible."

The Netherlands, long considered a core euro zone member, is one of the bloc's hard-liners in demanding that struggling countries such as Greece get their finances in order.

Now, however, the euro zone's fifth-largest economy has been in recession since July, and is expected to contract 0.9 percent this year - a bigger slump than all other euro zone states barring those on the southern periphery. [nL6E8F22AR

The Dutch fiscal gap is forecast to be 4.6 percent of gross domestic product next year without extra cuts. Under EU rules, the Netherlands must cut the gap to 3 percent of economic output next year.

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