The rift between the two main coalition parties, the Christian Democrats and the Labour Party, surfaced on 2nd July during a debate on the tax package in the lower house of parliament over proposals to increase the rate of VAT by 1% to 20% in order to offset the removal of unemployment benefit contributions (WW) for employees

The Labour Party is worried that increasing VAT at a time when inflation is already climbing would serve only to increase prices further and wants the plan reconsidered.

The Christian Democrats however, argue that scrapping WW contributions for employees would put more money into the pocket of the average worker and one CD member accused Labour of "courting disaster" by trying to halt the plan, Radio Netherlands Worldwide reported.

The Dutch cabinet must finalise its plans for the budget by August.

The government initially planned for the 1% VAT hike to go ahead in 2009, but Finance Minister and Labour Party leader Wouter Bos has already hinted that the increase will be delayed by one year due to slower economic growth, according to Dutch media reports last month.

Also, increasing tax would strike an unpopular chord with the voting public at a time when, according to a recent poll, the Labour Party's support is slipping. Furthermore, Bos is under pressure from the trade unions to scrap the VAT hike plan.