* Faces same fiscal challenge as Italy, Spain: think tank
* CPB says cuts, reforms needed to retain market confidence
* Dutch have led criticism of fiscal slippage in euro zone
* Economists see no risk yet for Dutch triple-A rating
* Say Brussels unlikely to grant Dutch fiscal leeway
By Gilbert Kreijger
AMSTERDAM, March 20 (Reuters) - The Netherlands is in the same fiscal boat as the leading peripheral euro zone states its has criticised for missing budget targets, and it needs spending cuts and structural reforms to revive a slumping economy, state think tank CPB said.
The forecaster, whose estimates are used by the cabinet to decide on budget policies, gave predictions on Tuesday for wider budget deficits both this year and next and said the country needed “credible measures” to retain investors’ confidence.
It needs to find an estimated 16 billion euros of austerity measures to trim its deficit to the EU threshold by next year while, according to European Commission estimates, its economy will shrink by 0.9 percent - worse than all euro zone states barring Greece, Portugal, Italy and Spain.
“The Netherlands is confronted with the same problems as Italy and Spain. Budget cuts are equally required in these countries in order to regain control of the government budget, whereas reforms must be implemented simultaneously in order to ensure economic growth,” the think tank said in a report.
The government is struggling to secure majority support in parliament for a large enough austerity package, meaning there is a risk the Dutch might be tempted to follow Spain’s lead in seeking leeway from Brussels on fiscal targets.
Their track record, along with Germany, as a notably harsh critic of failures by the region’s peripheral nations to hit deficit-reduction targets, suggests they will get a frosty reception.
“The Netherlands has been pushing other countries so much to reduce their deficits the cabinet (is) ...in an impossible position to go to Brussels and ask for more time,” said BNP Paribas economist Raymond van der Putten.
But while it has been in recession since July, the country has an equally solid record of hitting its economic targets.
That means its place as one of only four euro zone countries still holding a full set of AAA ratings from the three main credit agencies does not look under threat for now, despite the Dutch parliament saying last month a downgrade could occur.
“The situation in the Netherlands is ... perhaps ... a little bit worse than expected by the market,” Michiel de Bruin, head of euro government bonds at asset manager F&C Investments, said.
“(But) I think the rating is not at risk because the Netherlands has a very good track record in reducing spending and bring finances back in order,” said De Bruin.
Dutch yield spreads for 10-year debt against Germany’s benchmark Bund have been among the tightest in the euro zone, but they widened in February after a new bond was issued.
The liberal Netherlands economy has suffered setbacks including a 10 percent slump in house prices from a 2008 peak, slowing export growth due to the euro zone debt crisis, and lower pensions.
The euro zone’s other remaining untarnished AAA states - Germany, Finland and Luxembourg - all have deficits of around 1 percent, four times smaller than the Dutch.
The Netherlands needs a fresh round of austerity to hit the deficit target of 3 percent of gross domestic product next year required by the European Commission, compared with the 4.6 percent goal expected this year by the CPB.
The Liberals-Christian Democrats coalition and its political ally, the Freedom Party, are in talks on how to bridge that gap.
Finance Minister Jan Kees de Jager, who has led the chorus criticism against southern European countries for breaking budget rules, said on Monday it would be harder for the Netherlands to adhere to the EU budget regulations but it would respect them.
De Jager and Prime Minister Mark Rutte, who say budgetary discipline is crucial to keeping financial markets’ confidence, last year said “budget sinners” should be allowed to leave the euro zone in the future.
But the Dutch Labour party, which got a new leader last week and whose backing is crucial for securing parliament support on euro zone bailouts, wants more time to reduce the deficit, which may change the cabinet’s tone on fiscal issues.
It has threatened to withdraw support for the EU fiscal compact, which sets stricter budget rules, if the Netherlands does not get more time to reduce the deficit.
On Tuesday, a member of the far-right Freedom Party said he would quit in a move that would deny the government an assured majority in parliament, putting further pressure on the domestic fiscal horse-trading.
If the three coalition parties did not agree on spending cuts, van der Putten said the Dutch triple-A rating could then be at risk.
“That would be a moment for financial markets to become more cautious about the Netherlands,” he said.
The CPB think tank slightly raised budget deficit forecasts, predicting a gap of 4.6 percent of gross domestic product this year and next in the absence of spending cuts.
On March 1, the CPB had forecast a deficit of 4.5 percent of GDP for both years.
Raising the pension age, limiting tax benefits on mortgage interest payments and reducing unemployment benefits and termination benefits were examples of reforms that would stimulate economic growth, the CPB said.