THE HAGUE (Reuters) - Dutch Prime Minister Mark Rutte's Liberals agreed a coalition with the Labour Party on Monday and vowed to follow a path of austerity.
Outlining nearly 16 billion euros (12.8 billion pounds) of cuts over the next four years, the two party leaders said the measures were needed to ensure a sustainable budget and meet European Union deficit rules.
"We realise that this package will affect everyone in the Netherlands, everyone will feel it," Rutte told a press conference. "But we think it is necessary if our beautiful country is to emerge stronger from the crisis."
Rutte announced the programme alongside Diederik Samsom whose energetic campaign catapulted Labour to second place behind the Liberals in a parliamentary election on September 12.
The two parties reached a deal far more quickly than expected, underlining the urgency given the euro zone crisis and the fragile state of the Dutch economy.
The parties compromised on central elements of their programmes in the interests of budgetary discipline.
Labour agreed to the pension age rising to 67 in 2021 from 65 while the Liberals allowed the scaling back of a mortgage tax credit which is particularly popular with wealthier home owners.
The proposed fiscal policy will bring the budget deficit down to 1.5 percent of GDP by 2017 after it peaked at 2.7 percent of GDP in 2014, the state agency charged with assessing government economic policy said.
But it would reduce growth by some 0.2 percentage points a year for the next four years in a country suffering rising unemployment in a stagnant economy.
"We are staying within the 3 percent (EU) limit and bringing the deficit steadily down," Rutte said.
The Netherlands, one of a handful of economies in the euro zone still rated AAA, is already implementing a 12 billion-euro austerity programme agreed in April. But a deterioration in the economic climate means more cuts are needed.
Standing in front of a huge black and white picture of a bridge - described by Samsom as the "bridge to the future" that their coalition agreement represented - the two declined to be drawn on who would be named ministers in the new government.
Agricultural economist and Labour MP Jeroen Dijsselbloem is widely tipped to replace Jan Kees de Jager as finance minister.
Under Rutte and De Jager, a Christian Democrat whose party lost heavily in the election, the Netherlands had been at the forefront of countries calling for tight fiscal policies to tackle the euro zone's debt crisis.
In their agreement, the parties did not rule out further aid to indebted euro zone countries but stressed this would be tied to reform efforts.
"There can be no question of support from countries that take their responsibilities seriously towards those that do not," the parties wrote.
The biggest spending cuts over the next four years will be in health care, public administration and social security. Economists say the Netherlands must also introduce structural reforms in housing, the labour market and welfare benefits.
Samsom said the government would aim to protect those on lower incomes and expect the wealthier to contribute more to restoring a balanced budget.
Labour will hold a party conference on November 3 to finalise the deal.
Additional reporting by Gilbert Kreijger and Sara Webb in Amsterdam; Editing by Jon Hemming