Germany's Economy on the Mend Berlin Budget Deficit Much Lower than Expected

With tax revenues pouring into German coffers faster than expected, 2010 budget deficit forecasts have been revised downward. Berlin may need 37 billion euros less credit than forecast over the next two years -- a fact that may increase US pressure on Berlin to abandon austerity.
German industry is doing well, meaning that government finances are not quite as bad as first thought.

German industry is doing well, meaning that government finances are not quite as bad as first thought.


Austerity is the name of the game in Germany these days. Earlier this month, Chancellor Angela Merkel's government put together an €80 billion austerity program  designed to trim the country's budget deficit substantially in coming years. Additionally, Berlin has been keeping a close eye on spending patterns in countries like Spain and Greece, which investors have decided are on shaky ground.

Now, though, it appears that German finances aren't quite as red as first thought. Whereas initial government projections foresaw the need to take on a whopping €80.2 billion in additional debt this year, new data indicates the real number could be up to €20 billion lower.

According to the Süddeutsche Zeitung on Tuesday, higher-than-expected tax revenues and lower-than-expected unemployment have resulted in a new forecast which foresees the 2010 budget deficit coming in at between €60 billion and €65 billion. Government sales of mobile phone frequencies also improved the bottom line.

Citing unnamed government sources, the paper also reported that the trend is likely to continue into 2011, resulting in new debt of €55 billion instead of a planned €72 billion.

On the Road to Health

Much of the increase in tax revenue came from value-added tax, which rose by 6.5 percent against the same month one year ago. In addition, import levies on goods from non-European Union countries rose by 23 percent. Both developments are seen as clear indications that the German economy is on the road to health.

German companies, it would seem, are optimistic as well. On Tuesday, the Ifo business climate index -- Germany's leading economic indicator, which is based on a monthly survey of some 7,000 companies -- continued its upward trend despite analyst expectations that it would fall slightly. The rise comes on the heels of news that German auto manufacturers are struggling to keep up with demand, mostly from the US and China, this summer. Together, BMW and Mercedes have hired thousands of new workers to keep the production lines humming.

The news that Berlin will have to take on less debt than expected is likely to make Merkel's position at the G-20 summit in Toronto this weekend that much more difficult to defend against a US eager to see Germany focus on economic stimulus  rather than debt reduction. Late last week, US President Barack Obama wrote a letter  to the leaders of G-20 countries in which he penned, "I am concerned about weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses." The line is likely aimed squarely at Berlin.

Still, German politicians were quoted on Tuesday as saying they plan to adhere to Merkel's new austerity package. Otto Fricke, a budget expert with the pro-business Free Democrats, Merkel's junior coalition partners, told the tabloid Bild that "the €60 billion may be a possibility, but that would still represent record new debt. There is no way to get around a strict savings regimen."

A new constitutional amendment in Germany requires that the government reduce its budget deficit to €8.5 billion by 2016. The government hopes to reduce borrowing by some €10 billion per year until then.

cgh -- with wire reports
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