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Years of Deficits

German Budget Headed for Massive Shortfalls

Chancellor Merkel's cabinet on Wednesday approved a draft budget plan which calls for 310 billion euros of new debt in the next four years. In 2010, Berlin is expected to set a post-war record for deficit spending.

In the early years of Chancellor Angela Merkel's term in office, her finance minister, Peer Steinbrück, made a name for himself as being tight-fisted, debt averse and committed to balancing Germany's budget. That, though, was before the financial crisis hit.

DDP

German Finance Minister Peer Steinbrück has said that the path out of the recession will be a difficult one.

On Wednesday, Merkel's cabinet adopted a plan presented by Steinbrück which provides the framework for the next four years of German fiscal planning. In total, it calls for €310 billion ($436 billion) in fresh debt from 2010 to 2013, including a whopping €86.1 billion ($121.2 billion) for 2010, far and away the largest single-year budgetary hole in the history of post-war Germany.

The 2010 total could even top €100 billion depending on the development of expenses related to Germany's economic stimulus packages (worth a total of €82 billion) and its bank bailout fund (worth €500 billion). Germany's previous record for fresh debt in a single fiscal year was the €40 billion borrowed in 1996. Steinbrück's new plan calls for new debt to begin falling after 2010, with €71.1 billion necessary in 2011, €58.7 billion in 2012 and €45.9 billion in 2013.

Speaking to the Berlin daily Tagesspiegel, Steinbrück spoke of a "mammoth fiscal policy task." In a Wednesday morning interview on German radio, the finance minister said that the 2010 deficit is "unique and will hopefully stay that way." He said that the deep recession has forced the government to "take anti-cyclical measures that will hopefully stabilize the labor market and restart growth."

The budget plan will likely mean that Germany will violate the European Union Stability Pact, which calls for members to keep public debt below 3 percent of gross domestic product. Steinbrück told the Frankfurter Allgemeine Zeitung that he anticipates the EU will initiate proceedings against Germany "at the end of this year or the beginning of next." He went on to say that the German budget likely wouldn't conform to Stability Pact rules until 2013 or 2014. In the face of the global recession, EU leaders have agreed to interpret the Stability Pact -- which is meant to ensure the stability of the common currency, the euro -- flexibly.

Steinbrück's budget prognosis comes just a few months before Germans go to the polls for general elections. A final plan will be hammered out by the new government, but the country's skyrocketing debt promises to play a significant role in the developing campaign. Indeed, Chancellor Merkel's Christian Democratic Union has included a pledge to cut taxes in its campaign platform -- a promise which has prompted an internal party debate about the wisdom of tax cuts amid a crisis which has led to higher public spending and debt as well as plummeting tax revenue.

Klaus Zimmermann, president of the German Institute for Economic Research (DIW), told the Munich daily Münchner Merkur on Wednesday that promises to cut taxes are "implausible" and said "I am left wondering why politicians don't place more stock in honesty."

Steinbrück, a leading member of the center-left Social Democrats -- the junior partner in Merkel's governing coalition -- pledged that his party would not support an increase in value added tax. "Right now in the middle of the crisis, we should not begin a discussion about tax increases," he told the Frankfurter Allgemeine Zeitung.

cgh -- with wire reports

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