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10/22/2009

Accusations of trickery and deception have been thrown at Germany's new government after its plans to create a special off-budget fund emerged this week.

The move to create a so-called "shadow budget" forms part of tough negotiations on forming a governing coalition between the pro-business Free Democrats (FDP) and the conservative Christian Democrats (CDU). The challenge facing the parties is how to deal with a budget deficit that is growing due to the economic crisis while at the same time making good on their election campaign pledges to cut taxes.

With the FDP pushing for significant slashes and the CDU, along with its Bavarian sister party the Christian Social Union (CSU), balking at introducing sweeping cuts to social spending, it seems the only option left is to increase the public debt. But that will be tricky in light of a recent "debt ceiling" amendment to the German constitution, which from 2011 obliges Berlin to start balancing the budget and will impose a maximum deficit of 0.35 percent of GDP by 2016.

To get over that budgetary constraint, the FDP and the CDU/CSU are considering setting up a special fund, being dubbed a "shadow budget," that would essentially allow Berlin to borrow money to cover the spiralling costs of unemployment benefits and healthcare yet avoid the debt appearing in the federal budget. According to Bild newspaper, the extra loans would push up the public deficit from €50 billion to €90 billion.

The planned plunge into the red is partly due to the FDP's insistence that its election promises of significant tax cuts be included in the new coalition deal. The party received 15 percent of the vote, its best result ever, in German elections at the end of September, partly on the strenth of its tax cut pledges. While Chancellor Angela Merkel has attempted to meet them half way with an offer of €20 billion in tax relief, the FDP leader Guido Westerwelle is holding out for €35 billion in cuts.

Yet there are already serious shortfalls in the budget. The proposed special fund could help cover these gaps by covering, for example, the lack of funds at the Federal Labor Agency (BA), as well as the expected deficit in the state health care fund.

The howls of derision and cries of foul play from the opposition may well prompt the parties to rethink their plans for a shadow budget. According to Thursday's edition of the Frankfurter Rundschau, experts in the Chancellery and the Interior Ministry have been asked to find a justification for the planned fund that is in compliance with the constitution. If they fail, then the plan may have to be scrapped.

The Greens' budget expert Alexander Bonde said on Wednesday that the plans were "the biggest budgetary deception in German history," adding: "The CDU/CSU and the FDP are getting around the debt ceiling with extremely dirty tricks."

The Social Democrats (SPD) were equally scathing. The party's budget expert Johannes Kahrs told the Hamburger Abendblatt on Wednesday: "If the SPD had suggested something like that, then we would have been run out of town by the CDU, FDP, economic experts and the financial press."

The attacks on the coalition partners' plans have even come from within their own ranks. On Thursday the CDU budget expert Oswald Metzger said the plans for the shadow budget were "organized self delusion."

Coalition parties have been quick to defend themselves. "It is not about concealment," CDU budget expert Steffen Kampeter told reporters on Thursday. The aim, he said, was transparency about the consequences of the financial crisis for the social welfare system.

The future governing parties are meeting again for further coalition talks on Thursday and are expected to agree on the final draft of the coalition deal by Saturday.

German papers on Thursday are divided on whether to slam the proposed special fund as a cheap trick to circumvent the debt ceiling or to praise the increase in state borrowing as a realistic way to deal with the consequences of the economic crisis.

The center-left Süddeutsche Zeitung writes:

"The world wants to be duped. This is a very old insight and one that the new governing coalition is using for its own ends. The CDU/CSU and FDP are dealing with the financial consequences of the banking crisis with the exact same trick that pushed the banks into the crisis. The banks worked with shadow balance sheets, and pushed off risky businesses. The black-yellow coalition is now doing a similar thing: It is pushing massive debts into a shadow budget -- in order to incur more debts and to be able to fulfil an election promise to cut taxes."

"Everyone knew during the election campaign that these tax cuts could not be financed in any realistic way, and so they are now being made possible through unrealistic means: the debt ceiling, which has been installed in the constitution, will simply be bypassed.... Is this deception? Of course it is deception, but it will not be punished, because the voters are implicit in this deception. Everyone knew that the country cannot afford tax cuts. And yet people still wanted to hear the FDP's enticing promises."

The center-right Frankfurter Allgemeine Zeitung writes:

"The federal budget lacks money, a lot of money.... The public deficit is bigger than ever. And what do the FDP and the CDU/CSU do? They exclude any unpleasant decisions from their coalition talks. Instead they prepare a massive shadow budget. In instituting the new debt ceiling, the parties couldn't be strict enough. Now instead of sticking to the rules they have imposed upon themselves, they are attempting to get around them. Instead of honestly describing the constraints to running the economy, they attempt to conceal them. Instead of solving problems, they are concerning themselves with budgetary cosmetics. This won't end well -- German citizens are not too stupid to realize this. It is unlikely that a government who begins in this manner will get its act together later on."

The left-leaning Die Tageszeitung writes:

"Critics are decrying the 'budget fraud' and the 'biggest budgetary deception in German history.' The dishonesty is striking. Didn't the same people make sure back in May that an economically damaging 'debt ceiling' be given constitutional force right in the middle of a recession. Just six months later this rule has come back to haunt them. That is a good thing, because this law has always been at odds with the political reality. The debt ceiling makes about as much sense as telling a doctor how much blood he can use during an operation. The new coalition is now coming to its senses and ignoring these rules. Otherwise Germany would be facing sweeping cuts in social spending right after the peak of the global economic crisis, just in order to finance futile tax cuts."

"Merkel and Westerwelle have chosen the pragmatic path. That is gratifying because no one should be allowed to complain about the rising public debt when the state has just saved the economy from the biggest crisis in generations."