MercoPress. South Atlantic News Agency

German cabinet approves plan to balance federal budget three years earlier

By 2016, German budget will have a surplus and zero borrowing according to Minister Schaeuble’s plan

As was anticipated and ahead of a crucial European Union leaders summit Chancellor Angela Merkel’s Cabinet approved on Wednesday a spending plan that balances Germany’s federal budget three years earlier than required by its own rules.

Cabinet members meeting in Berlin on Wednesday backed the 2013 draft budget and a spending blueprint through 2016, a government spokeswoman said.

Under the plan Germany’s net federal borrowing will decline from 18.8 billion Euros next year to 13.1 billion Euros in 2014, 4.7 billion Euros in 2015 before touching zero in 2016, according to the plan presented by the Finance Ministry on June 22 and that now goes to parliament.

The so-called structural deficit of the federal budget will shrink to 0.35% of GDP next year, equal to the limit set in Germany’s national debt-reduction rules, according to the plan.

Federal expenditures in 2013 are tabled at 302.2 billion Euros, down from the 312.7 billion Euros earmarked for the current year. Federal tax revenue is projected at 259.8 billion Euros next year, up from 252.2 billion Euros expected this year.

Other revenue is seen at E23.6 billion in 2013, down from the E28.4 billion expected for 2012.

The budget bill still must pass both houses of parliament. Traditionally, parliament lowers federal net new borrowing somewhat further.

Finance Minister Wolfgang Schaeuble said at the press conference on presenting the budget that Germany currently profits from “unnaturally low” yields on its government bonds.

Yet, the minister said he hoped that this would not stay this way “because real net negative interest rates are rather an expression of perturbation of financial markets than of stability.” “I rather prefer stabilization,” Schaeuble said.

“Then we will still have a low interest rate level because we are solid debtors.”

In its medium-term fiscal plan, the government envisions federal net new borrowing of 13.1 billion Euros for 2014 and of 4.7 billion Euros for 2015. For 2016, the government expects zero federal net new borrowing, given that it projects a slight federal budget surplus of 1.0 billion Euros.

Merkel’s government is counting on tax-revenue growth and spending cuts to roll back the deficit, documents presented to reporters show.

“We will use higher tax income to push down net credit and not expand spending,” according to the report. As the budget moves from showing a deficit to a surplus in 2016, Germany will start cutting principal in its debt and not just pay off interest, it said.
The German budget may be spotlighted in Merkel’s efforts to persuade euro-area partners that trimming budgets and revamping the economy pays dividends.

Unemployment, the second showcase of German policy, slid to a new two-decade low in May, bucking a Europe-wide trend as the financial crisis rages. The adjusted jobless rate fell to 6.7% from 6.8% in April.

The federal budget is one of three components making up German national accounts. The country adopted a “debt brake” in its constitution in 2009 that obliges the nation to run a composite balanced budget by 2016, including a federal deficit that does not exceed 0.35% of GDP.

The structural deficit marks regular spending gaps caused by outlays such as pensions.
Merkel is also bound by new Euro-area budget rules embedded in a European Fiscal Pact that she hopes parliament will ratify on Friday June 29. The pact requires its signatories to limit their structural deficits to 0.5% of GDP from 2013 or 2014.

However Germany’s 16 federal states have threatened to veto the pact in the upper house, Bundesrat unless Merkel agrees to cut their social outlays. While the debt brake allows the regional governments to balance their own budgets by 2020, the pact may apply this rule immediately when it comes into force, the states argue.