SNAP ANALYSIS-Collapse of Dutch talks imperils budget cuts

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Saturday September 04, 2010 07:30:17 PM GMT

* Talks for right-leaning govt collapse 3 months after vote

* Caretaker govt will present limited austerity measures

* New election increasingly possible

By Ben Berkowitz and Aaron Gray-Block

AMSTERDAM, Sept 3 (Reuters) - The collapse of talks on forming a right-leaning minority Dutch government on Friday has created major uncertainty about the country's short-term budget and social plans.

The Christian Democrats and the Liberals would have formed a conservative government with parliamentary support from the Freedom Party, one expected to be tough on crime and immigration and to make substantial cuts in a range of social programmes.

But the talks collapsed over internal divisions among Christian Democrats about working with the anti-Islam Freedom Party.

* There will be no new government to offer input before the Sept. 21 presentation of the budget by the caretaker administration. That budget is expected to propose just over 3 billion euros in budget cuts, a lower figure than economists have pushed for.

* The delay also means any new government that is formed this year would have to come with an emergency budget early next year if it wants to make any substantial cuts before 2012, a prospect that looks unlikely.

* Important fiscal decisions on a range of subjects are likely to be delayed, including housing benefits, health insurance costs, infrastructure spending, international development aid and contributions to Europe.

* Dutch bond spreads over benchmark German Bunds, already the tightest in Europe, are unlikely to move materially because the Netherlands is considered fiscally healthy, notwithstanding its deficit and lack of a new government. But the uncertainty over a government will nonetheless be a risk.

* The talks' collapse opens the way for several possible coalition governments, but a new round of talks aimed at installing a new government is likely to drag on for weeks or months.

* The prospect of new elections comes a step closer. Liberal VVD leader Mark Rutte plans to write a "test government agreement" and said he is open to other parties backing his proposals, but such an attempt at forming a government is unlikely and very rare in Dutch politics.

* If new elections were held now, the Christian Democrats -- dominant for much of the last 40 years -- could slump to their lowest level ever, with a Maurice de Hond poll showing on Sunday it stands to win just 15 seats if an election were held.

* The same poll showed the anti-immigrant Freedom Party of Geert Wilders would win the election, with the Liberals a close second. But the two parties would still be left without a majority in the 150-seat parliament, raising the risk of a new round of coalition talks and encroaching policy paralysis.

* The collapse of the talks could sharpen divisions in Dutch society and strengthen Wilders, who has won support from a large group of voters worried about religious freedom, immigrant unemployment and crime, while the stagnating economy has intensified fears about jobs perceived to be at risk from migrant labour.

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