Germany springs deficit drop in draft budget

6th July 2011, Comments 0 comments

Germany flagged an unexpected sharp drop in its public deficit on Wednesday in a draft budget for 2012, opening a possibility of tax cuts in time for elections in 2013.

Germany, a pillar of debt rescues in the eurozone, is getting its finances in order with the help of strong economic growth.

Meanwhile Greece struggles to avoid a disastrous sovereign default and Britain, France and Ireland run huge deficits.

The news magazine Spiegel said that Berlin deserved the title "best in class."

Next year, the government expects to take in 4.4 billion euros ($6.3 billion) more in fiscal revenues than estimated in March.

Falling unemployment has cut social costs, and the national deficit is expected to drop to 27.2 billion euros from the previous estimate of 31.5 billion euros.

The German deficit will have been slashed by more than 17 billion euros in two years from a peak in 2010 which arose in large part from rescue plans needed to pull out of the economic crisis.

The German budget deficit is a large part of the public deficit scrutinised by European Union bodies in Brussels, and which includes regional state budgets along with those of municipalities and the national social security system.

The deficit is not expected to exceed 2.5 percent of gross domestic product (GDP) this year, which would put Germany among the best performers in Europe. The EU permitted ceiling is 3.0 percent, but in times of growth EU countries are committed to moving into surplus.

The German deficit should continue to decline in 2013, but by less than expected in March.

The reason is that Finance Minister Wolfgang Schaeuble has had to take into account contributions to a European Stability Mechanism designed to help heavily indebted eurozone countries.

Germany, which has the biggest economy in Europe, will be the biggest creditor to ESM, with an estimated payment of 4.3 billion euros per year.

Berlin and other European capitals will also have to stump up more money this year to keep Greece from falling into bankruptcy, a major irritant to many in Germany, including lawmakers within the governing conservative coalition.

On Tuesday, judges at the country's highest court began in-depth hearings of complaints filed last year against the eurozone rescue plans.

But Chancellor Angela Merkel's government hopes to have found a way to calm the unrest, by adopting the principle of tax cuts in 2013.

Schaeuble did not want to hear of cuts because he wants to balance the budget first, but he finally gave in to insistent demands from Merkel's junior coalition partners, the liberal FDP party.

Those demands were reiterated a few weeks ago by new Economy Minister Philipp Roesler.

"On January 1, 2013, we are going to lighten the tax burden for people with small- and medium-sized incomes," Roesler said Wednesday.

The precise amount and kind of cuts are to be unveiled in a few months.

The 2013 date was not chosen by chance, since the country will go back to the polls for a national election that year.

The most recent surveys of popular sentiment put the conservative sister CDU/CSU parties and the FDP behind an alliance of the socialist SPD party and the Greens, though the latter did not have an absolute majority.

But if Berlin decides to allot seven billion euros to tax cuts, a figure that has been in recent circulation, the decline per household would come to less than 200 euros per year.

That amounts to 20 euros per month, or "a frozen pizza for everyone," the left-of-centre daily taz quipped.

© 2011 AFP

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