By Thomas Escritt
THE HAGUE (Reuters) - Dutch Prime Minister Mark Rutte's Liberal Party and the Labor Party said they had reached a coalition deal on Monday, paving the way for a pro-austerity, pro-European government to be sworn in as early as next week.
Rutte, whose Liberals won the most seats in the September 12 election, will remain as prime minister, while Labor Party member of parliament Jeroen Dijsselbloem is widely tipped to replace Jan Kees de Jager as the new finance minister.
Under Rutte and De Jager, a Christian Democrat whose party lost heavily in the election, the Netherlands has been at the forefront of calls for tight fiscal policies across the euro zone to tackle the region's debt crisis.
The parliamentary election was held against the backdrop of the euro zone crisis, rising unemployment, lower housing prices and a stagnant economy.
Rutte and Labor leader Diederik Samsom reached a deal far quicker than expected, underlining the urgency given the European crisis and the fragile state of the Dutch economy.
Economists say the Netherlands must address structural reforms in areas such as housing, the Labor market, and welfare benefits.
Already, the two party leaders have agreed to cut state spending by a further 16 billion euros ($21 billion) in the next four years, aiming to all but eliminate the budget deficit by 2017, newspapers reported last week.
"This is a balanced package, a package that will make the Netherlands emerge from the crisis stronger," Rutte told reporters after talking to his party about the coalition deal.
The biggest spending cuts will be in healthcare, at 5 billion euros, social security, at 3 billion euros, and government overheads, at 2.5 billion euros, Dutch daily NRC Handelsblad reported, citing sources in The Hague.
People with higher incomes will be hit harder by the budget cuts, because they will have to pay more in healthcare, while purchasing power will improve slightly for the lowest income group, the paper said.
The Netherlands, one of a handful of remaining AAA-rated economies in the euro zone, is already implementing a 12-billion-euro austerity program agreed in April.
But with the deterioration in the economic environment, further cuts are now needed.
"We are in a crisis and we need to take measures to get out of it but it won't be easy," said Edith Schippers, a member of Rutte's party.
"It is a very tough package and it will be difficult for lots of Dutch people."
In June, government forecaster and think tank CPB projected a deficit of 2.6 percent of economic output for 2017.
In his budget presented to parliament last month, Finance Minister De Jager said the economy was on target to grow 0.75 percent next year with a budget deficit projected at 2.7 percent of gross domestic product (GDP), below the 3 percent EU limit.
Labor needs support from its members at a party conference set for November 3 for the deal to be finalized.
(Additional reporting by Gilbert Kreijger in Amsterdam; Writing by Sara Webb; Editing by Jon Hemming)