Rivers Of Red Ink Germany Prepares Plan to Pay Back Debt Mountain
German Finance Minister Peer Steinbrück is preparing an ambitious project: He wants his government to pay off its public debt within the next 30 years. The plan would involve cutting numerous government subsidies and repealing a raft of tax credits.
German Finance Minister Peer Steinbrück is planning great changes.
The German government has long been staring at a national debt that is nearly Everest in scale. Federal government debt accounts for more than 900 billion ($1.3 trillion) out of the total public deficit of 1.5 trillion. With the economy in the midst of an upswing, though, German Finance Minister Peer Steinbrück of the Social Democrats (SPD) wants to start chipping away at the mountain.
Steinbrück is calling for the country's leaders to take greater fiscal responsibility. "Balanced budgets alone are not enough," he says. "We need surpluses in order to pay back the public debt." The finance minister is hoping those surpluses will start to materialize from 2011 onward.
Steinbrück's staff has been developing a debt reduction plan for months now. For decades, German governments (at the federal, state and regional levels) lived beyond their means, running up a massive public deficit. When they needed more money, they borrowed it on financial markets.
If Steinbrück has his way, the country will change its extravagant spending habits. With a fast graying society and shrinking population, the finance minister says Germany has no other option than to pay off its debt. "We cannot leave it to our children and grandchildren to deal with the massive debt," he says. "We will have to tackle the problem ourselves."
Germany's staggering debt has left Berlin with little fiscal wiggle room. Each year, Steinbrück's Finance Ministry transfers 40 billion ($58 billion) in interest payments -- about 15 percent of the country's total budget -- to the federal government's creditors. If the country can reduce its debt, he argues, it will free up financial means for investment in Germany's future -- in education or infrastructure, for example.
In drafting their plans, Finance Ministry staffers have been looking to Scandinavia to determine benchmarks for reasonably attainable budget surpluses. There, the average annual surplus lies somewhere between 1 and 2 percent of gross domestic product. In absolute numbers, that would account for between 25 billion ($36 billion) and 50 billion in Germany, about half of which would then go to the federal government.
Finance Ministry experts say they are seeking to create a plan that will also be able to weather recessions and other longterm economic threats. Keeping the federal budget consistently in the black requires improving the "government's revenue base" once more, they say.
Increasing State Revenues
With little leeway for tax increases -- the country dramatically increased its value-added (sales) tax to 19 percent earlier this year and income tax hikes poll poorly -- Steinbrück's staff are proposing a fresh round of cuts in government subsidies. The proposal would include the elimination of a number of tax breaks, though no specifics have been unveiled.
Steinbrück has said, however, that the surpluses wouldn't be used exclusively to pay off German debt. "One-third of the surpluses would be invested, and two-thirds would go into the amortization of the debt," he says. It would also provide the finance minister with the ability to at least partly appease those within his left-leaning SPD who are calling for greater spending.
If Steinbrück were able to pay off debts amounting to, for example, 10 billion, his ministry would save about 500 million in interest payments. He would invest a third of that sum and use the rest to continue paying off debts. As a result, the overall debt would be reduced at an ever-faster rate.
But Steinbrück's plan is also setting him on a collision course with German Economy Minister Michael Glos of the conservative Christian Democrat Union (CSU), who wants future surpluses to trickle down to all Germans in the form of lower taxes and duties.
And SPD man Steinbrück has made no secret of the fact that he is developing his plans with 2009 national elections in mind. "Germans would surely be highly supportive of this project," he says. "Most people place a high value on sound public finance." To that end, Steinbrück expects little public resistance when he presents his plan.
"Many people look at our politicians and say to themselves: I can't live off borrowed money all the time either -- I have to pay back my debts," he said. Finance Ministry experts believe the German government could become debt-free within one generation, about 30 years time, if it is able to consistently practice self-restraint in public spending.
If he is able to succeed, Steinbrück's plan would represent a tidal shift in thinking in a country where deficit spending has been as acceptable in society as smoking or drinking beer. "We need a change in mentality," Steinbrück says. "The existence of public deficits was once considered normal. But we have to reach the point where surpluses are normal."