The Refugee Bill Budget Battle Begins over Germany's New Residents

No one knows how much integrating the hundreds of thousands of refugees in Germany will ultimately cost. Yet the battle over financing has already begun. Finance Minister Schäuble doesn't want to borrow money or raise taxes, but his approach may be wrong.

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When it comes to calculating the refugee bill in Germany, things can get very tricky, real fast. On the one hand, no one can seriously say how much money is going to be required in order to manage the influx of refugees coming into Germany. On the other, government ministers and officials, politicians and commissions need the most reliable figures possible in order to create plans and make forecasts so they can move ahead at all.

As such, it's always good to have someone who knows exactly what they want. And that is a perfect description of Wolfgang Schäuble, of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU). Schäuble, the German finance minister, is certain that he doesn't want to borrow money. He wants Germany to maintain its current balanced budget -- all the way through to 2020. That conviction is laid out in Finance Ministry documents on medium-term financing prepared by Schäuble's staff and sent to various divisions of the federal government.

Doing so will be relatively easy for Schäuble in 2016 and 2017. He closed 2015 with a budget surplus of around €12 billion ($13 billion) after breaking even in 2014. The government plans to apply half of that surplus to each of the next two years to finance the costs of the refugees.

After that, though, things get a bit tighter. Even in Schäuble's calculations, the fiscal burdens for the government created by asylum-seekers are expected to increase each year. He's calculating around €10 billion for this year and about double that in 2020. This is forcing the government to address difficult questions about how it intends to raise this money. Will it do so through borrowing? Or will the country have to raise taxes?

At this point, Schäuble is ruling out both. He wants to plug the holes in the budget created by the unforeseen expenses at least in part through cyclical tax revenues (e.g. government revenues that are growing as a result of positive economic developments) and the rest through general cuts across the federal budget.

Should Costs Be Viewed as Expense or Investment?

Critics argue this is the wrong approach, symptomatic of a compulsion to save in Germany that has become almost Pavlovian. Expenditures for integrating refugees, they argue, are in fact an investment in the country's future and should be treated as such.

The political debate about how to deal with the refugee crisis is now also becoming a battle over money. State governments, in particular, are assuming that expenditures will be greater than so-far planned.

In a joint letter penned to Schäuble last week, North Rhine-Westphalia Finance Minister Norbert Walter-Borjans of the center-left Social Democratic Party (SPD) and his Bavarian counterpart Markus Söder of the Christian Social Union, the Bavarian sister party to Merkel's CDU, said states face extra expenditures of up to €25 billion in 2016 alone. That's far higher than previous forecasts.

The typical political back and forth followed. Walter-Borjans and Söder demanded that Schäuble increase the federal government's share to 50 percent of actual expenditures and complained that Berlin thus far hasn't even provided half that amount. And Schäuble played his role to perfection as well -- with a knee-jerk rejection of the demand.

The bizarre aspect of this dispute is that the calculations of all involved are exceedingly flimsy. Nobody knows how many refugees will ultimately make their way to Germany. Calculations by the federal government assume that 3.6 million refugees will flow in to Germany between 2015 and 2020.

In 2015, over a million refugees came to Germany. The government is now estimating 800,000 asylum-seekers will arrive in 2016, with that figure sinking to 600,000 in 2017 and 400,000 in each of the subsequent years until 2020.

1.1 Million Refugees or 770,000?

But even when it comes to the number of refugees currently in Germany, the data is far from reliable. The government simply knows too about the huge numbers of people who have entered the country. It doesn't even have an accurate count of how many refugees are actually here.

It's actually quite probable that of the people who fled to Germany last year, far fewer than a million are still in the country. Many refugees were counted twice and many who were registered in 2015 have likely left the country. "The net immigration of refugees, due to return-migration and out-migration, is likely to be around 65 to 70 percent of the gross in-migrations," states the Nuremberg-based Institute for Employment Research, which is part of the Federal Employment Agency. Based on that figure, of the 1.1 million refugees believed to have entered into Germany, only around 770,000 are still here.

When it comes to costs, the numbers floating around the country couldn't be any more disparate, either. The Institute for the World Economy at the University of Kiel has calculated a number of scenarios -- one with a migration rate as high as the one currently being experienced or even higher, and others with fewer migrants and with either less or greater out-migration. Its lowest estimate for all these different scenarios puts annual costs at €24 billion, with the highest coming in at €55 billion.

'Sufficient Scope' for Carrying Burden

At first glance, these appear to be immense sums, but they also have to be measured against Germany's economic strength. The International Monetary Fund (IMF) currently estimates that refugee costs in 2016 will account for only 0.35 percent of total German gross domestic product (GDP) of over €3 trillion, meaning an absolute cost of around €11 billion.

Graphic: How much do refugees cost?

Graphic: How much do refugees cost?

Germany's central bank, the Bundesbank, which is not known for rose-tinted glasses, estimates that additional expenditures relating to refugees in 2016 will add up to about 0.25 percent of GDP as compared to 2015 spending. "The massive influx of asylum-seekers poses tough challenges for Germany in many respects," the Bundesbank wrote in its current monthly report. "Thanks to the current favorable economic situation, however, there is sufficient scope within government budgets to absorb the associated financial burdens without breaching the deficit ceilings."

Beyond all the statistical uncertainties remains the fundamental question of how to assess the economic and political costs of integration. Should they be viewed purely as expenditures or also as investments? There's much to suggest the latter.

The fact is that the stream of refugees is hitting Germany at the most fortuitous conceivable moment. Thanks to a healthy economy, state and federal treasuries are flush. The labor market is robust, with many jobs in need of filling.

At the same, government expenditures for refugees are more than just costs -- they could also have a positive knock-on effect. The reason being that only part of the money goes straight to the refugees, with some also getting pumped directly into the economy. Take manufacturers of container buildings, for example, who are providing temporary housing for refugees, the carpenters helping to erect these facilities or the wages of people who are providing services to the asylum-seekers. Finally, the government funds paid to the refugees often returns to the economy in the form of consumer spending. All these factors combined could actually lead to economic growth.

The IMF is calculating that the increased government expenditures will boost economic growth in Germany during the next year by 0.3 percent over previous forecasts. The Bundesbank has arrived at a similar figure. For the year 2020, the IMF expects that the refugee developments in Germany will lead to between 0.5 percent and 1.1 percent in additional economic growth, assuming that the country is successful in integrating the newcomers into its labor market. Either way, the German economy is currently experiencing stronger growth than would without immigration. And if they successfully enter the labor market, Germany's new residents will also help finance the German state in the form of taxes and social security contributions.

Good News and Bad News

Ultimately, the costs of the refugees are also an investment in tomorrow. And there is an opportunity for Germany to better integrate its immigrants than it did in the past. Robert Beyer, a researcher at the Institute for Monetary and Financial Stability at the University of Frankfurt, has conducted a study for the IMF on the integration of migrants into the German labor market from 1980 to the present. The good news is that, even if integration is difficult, and even if unemployment is considerably higher for migrants at first than it is for Germans, the share of immigrants without jobs falls over time as they acquire the language and obtain professional qualifications. The longer migrants live in Germany, the higher the percentage that find gainful employment. Without any knowledge of the German language, migrants initially earn up to 30 percent less than a native German would earn in the same role. But once immigrants begin to acquire German, this earning gap slowly begins to close.

The bad news is that regardless how well-qualified migrants are, how long they have lived here, whether they have completed their training here in Germany and if their German is excellent, the wage gap never fully closes. Immigrants' risk of becoming unemployed is also greater than for Germans. "The finding is surprising and also alarming," Bayer says, adding that "even after they have been in Germany for long periods of time, companies are generally employing them at levels beneath their actual qualification."

This presents a challenge for Germany -- not only for ethical reasons, but also because it also represents an economic loss in the sense that these people aren't working as productively as they could be. "Employers have no excuses for this gap," says Beyer. If Germany wants the positive economic effects of this new wave of immigrants to outweigh the negative effects in the medium and long term, the economist warns, then the state will need to begin investing in refugees as soon as possible.

The question remains as to how the government can best address the current financial burdens created by the refugee crisis in order to at least create the possibility of a net benefit to the country in the future.

Doubts over Schäuble Plan

There are in fact legitimate doubts about the economic sense of Schäuble's plan and its potential consequences, given that the budget surpluses Germany is seeing have been paid in their entirety by current taxpayers. If it's true that the integration of millions of refugees will remain the task for at least an entire generation, there's an argument to be made that it would also be unfair to place this burden entirely on the shoulders of today's taxpayers and let future taxpayers off the hook completely.

Indeed, it would not be difficult to arrange for future generations to cover part of the costs. Rather than financing the integration of the refugees through budget surpluses, Schäuble would simply have to cover the costs through new borrowing. While this would cause Germany's deficit to grow again, it would also mean that future taxpayers would be required to make their own contribution. They would have to cover the interest and pay down the principle.

This, of course, would mean bidding farewell to a balanced budget, which Schäuble has made his chief policy priority as finance minister. After two years of balanced budgets, the idea of new borrowing seems almost outmoded. Many fear that if the finance minister were to borrow fresh money, it would mark the end of Germany's newfound era of budget discipline.

It's not an unjustified concern, but it is still one that can be easily addressed. For example, it would be possible to move the refugee costs into a special budget separate from the normal federal one. All borrowing related to the admission, care and integration of the new arrivals could be pooled there. A special fund like that would have the additional benefit of providing greater transparency that would in turn make it harder for the government to succumb to the temptation of secretly borrowing money for other purposes.

Prominent German Economist Thomas Straubhaar, of the University of Hamburg, also cites another reason. "A fund would allow money to be mobilized immediately," he says, even if he personally would prefer to see the money raised through savings and reallocations within the existing budget. He argues it would make more sense to spend money in the right ways now than to have to pay even more later on to repair mistakes.

Favorable Borrowing Conditions

The debt in the special fund would be serviced through yearly allocations from the federal budget. Depending on the interest rate and amortization, the fund could be paid off in 10, 20 or 30 years' time. And, with interest rates currently at their lowest since World War II, conditions for fresh borrowing are extremely favorable at the moment.

But what happens to the €12 billion that Schäuble has already earmarked for managing the refugee crisis if a special fund is created instead? The money could be used by the federal government to finance an investment program or lower taxes. Both moves would also drive further economic growth.

Besides, there's a political advantage to that approach: It would prevent prejudice against and resentment toward refugees, because it would mean that no one could make the argument that money is available for the asylum-seekers, but not for the normal population. The creation of the special fund would also enable the government to say that migrants, too, will later be helping to pay back some of the debts that were created as a result of their arrival.

The Integration Puzzle

Discuss this issue with other readers!
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ath1politis 02/29/2016
1. Greece against Europe
As Tsipras already promised, his aim to destroy Europe is beginning to give results. His idea to let all immigrants (they are not refugees since they are safe far away from the war) pass to Europe, and specially to Germany, has created the conditions to take his revenge against Merkel, who has forced him to sign the last agreement. After he succeeds to put Merkel under pressure, she will allow him to do what he really wants - do nothing and so Greeks will continue to live at the Europeans expences...
petertx 02/29/2016
2. Two flies in the ointment
A very upbeat analysis, but could I add a word of warning? The authors seem to regard 'integration' as a one-off process. This has not been the experience in Sweden, where social security payments, etc. Continue to be transferred disproportionately to non-EU immigrants apparently indefinitely. There is no reason to think that Germany will do better. The perpetrators of the horrifying crimes in Köln seem to be long-term non-EU immigrants who are clearly not integrated. Why, therefore, does the authors' hope triumph over experience?
robertbudtxu 02/29/2016
3. Schauble's plan
Authorities in Germany are having a hard time dealing with mind boggling numbers involved. They have a certain tendency to view the refugee crisis through rose colored glasses. The Schauble plan is a stretch but it might be a viable economic model. Given the fact there could be (far more) than 3.6 million refugees living in Germany by 2020 it makes sense.
myrnabelluzzo 03/01/2016
4. immigration
I think Madam Merkel together with her government has made her worst mistake: no consideration of time. Time in the EU process is not considered sensibly (see Greek question- it will be Italian question soon and Austria gave another example of time when it told Germany to go and get immigrants by plane. Let's consider time on immigration a)moves have to be fast (and this is not possible due to economic influx in Europe) b) Europe is in depression again so time has to be diluted over very long periods in order to get economy back in place - something Europe won't or doesn't want to consider. Put it to immigration it's a tragic situation where somebody has to lose and usually it's the middle and low class real citizens of the nation who in the turmoil of taxes and what other cannot adjust adeguately to the present situation thus creating further problems.
Inglenda2 03/01/2016
5. As the SPD says, this will cause a swing to the right
The German government must decide whether it is offering Arab refugees asylum, or a permanent residence. In the first case, only temporary accommodation is needed, until these unfortunate victims of war are able to return home. What we can observe at the moment however, is a chaotic contrivance, to provide illegal immigrants with an extravagant range of help, which would only make sense if these migrants intend to remain here perpetually. This is a completely different matter. It will mean, that the German standard of living will fall, in order to provide the necessary help needed for those arriving. Already the 12 billion Euros, that Mr. Schäuble has earmarked for managing the refugee crisis, have resulted in a shortage of money for German lower income groups. It would appear, that the German finance minister has forgotten whose cash it is, that he is spending.
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