German Budget

A Post-Brexit Spending Boost?

Britain's Chancellor of the Exchequer George Osborne (L) and Germany's Finance Minister Wolfgang Schaeuble depart at the conclusion of a news conference at the IMF/World Bank Spring Meetings in Washington April 14, 2016. REUTERS/Jonathan Ernst
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  • Why it matters

    Why it matters

    Germany is being counted on to revive growth across the Continent, and is likely to face calls to boost government spending even more.

  • Facts

    Facts

    • The German government said it would increase spending by 3.7 percent to €328.7 billion in 2017, an election year, in line with revenue gains.
    • Finance Minister Wolfgang Schäuble is confident he can balance the budget in each of the next four years.
    • The government will spend €19 billion additionally in 2017 on infrastructure to deal with the influx of refugees.
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    Audio

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Wolfgang Schäuble can be happy he doesn’t have the problems of his British counterpart.

While Britain’s chancellor of the exchequer, George Osborne, is busy adjusting his budget to keep business in Britain and stop the country from falling into recession, the German finance minister on Wednesday trumpeted a federal budget that will see spending rise steadily between now and 2020.

It’s the kind of budget Mr. Osborne would have once dreamed of: Germany intends to balance the federal budget for each of the next four years and bring its debt-to-GDP level below 60 percent by 2020. The government plans to increase spending by about 10 percent over the same time frame.

A major reason for the divergence: Mr. Osborne has Britain’s looming exit from the European Union to deal with, while Mr. Schäuble is expecting Germany’s economy to weather the Brexit storm without too much trouble.

“Any Brexit-driven slowdown of course will be much milder in Germany than it is in the U.K., and therefore any second-round effect on the budget will also be smaller than in the U.K.,” Carsten Brzeski, Frankfurt-based chief economist of ING-Diba, told Handelsblatt Global Edition.

Mr. Osborne earlier this month abandoned his one-time pledge to balance Britain’s budget by 2020 and warned of a “significant economic shock” from Britain’s June 23 referendum decision to leave the European Union.

Mr. Schäuble, by contrast, sees smooth sailing ahead and expects to continue balancing the books – something he achieved for the first time back in 2014. “Germany will remain reliable. We are strengthening the state’s ability to act in future by avoiding new debt,” he said Wednesday. “At the same time, we’re investing in important future sectors.”

Whether Mr. Schäuble’s forecasts hold up, however, is unclear, and will be closely watched. German Chancellor Angela Merkel will be hoping he can keep his promises for next year in particular: 2017 is an election year.

“Germany will remain responsible. We are strengthening the state’s ability to act in future by avoiding new debt.”

Wolfgang Schäuble, German Finance Minister

The German government sees revenues rising steadily in the coming years, up 1.8 percent this year and 3.7 percent in 2017. Most forecasters, however, expect the German economy to grow by under 2 percent in both years. Mr. Schäuble’s budget was compiled before Brexit took place, and therefore virtually ignores any possible negative effects. At a press conference, he said a “solid and reliable” budget was the best response to economic uncertainty swirling around Germany.

Not everyone believes the German economy will hold up. The Berlin-based DIW institute, for example, on Wednesday warned a Brexit could push German economic growth down as much as 0.5 percentage points in the coming year, mainly due to weakening trade. Britain is Germany’s third-largest trading partner.

“It’s at the optimistic side, clearly, even without Brexit to be honest,” Mr. Brzeski of ING-Diba said of the 2017 revenue figures. “Talking post-Brexit, these assumptions look even more optimistic,” he added, noting that most forecasters have revised their growth figures for the euro-zone downwards.

Raising Spending, Balancing the Books-01

 

Even if the forecasts hold up, Germany’s modest election-year spending spree is unlikely to be enough for everyone. Many European countries, hoping Germany’s powerhouse economy can lead the rest of the continent into a stronger economic recovery, have long encouraged Mr. Schäuble to abandon his balanced-budget pledge and increase spending more significantly.

Germany’s regions also want a bigger piece of the federal budget pie. States are demanding an additional €8 billion per year from the government to cover the cost of housing and educating hundreds of thousands of refugees who have settled in Germany over the past year.

Mr. Schäuble’s plan does foresee a major spike in spending on refugees – nearly €19 billion in 2017 and €77.5 billion in total by 2020 – but he has so far rejected states’ demands for additional direct aid.

The two sides were to meet Wednesday evening, and again with German Chancellor Angela Merkel on Thursday, in a bid to settle their differences.

Spending on security and the military are also set to get a boost – a nod to the increasing threat of terrorism and also to U.S. demands for fellow NATO members to spend more on defense.

The interior ministry will get about half-a-billion euros in additional funds in 2017, allowing it to hire about 2,000 new employees. Defense spending will rise €1.7 billion next year and more than €10 billion by 2020.

But the biggest gains were reserved for social welfare programs, which already make up about half of Germany’s budget. Social welfare spending will climb to €187 billion by 2020.

Chancellor Merkel’s cabinet signed off on the budget Wednesday. The German parliament, the Bundestag, is expected to approve the 2017 budget in September.

 

Christopher Cermak is an editor covering finance for Handelsblatt Global Edition in Berlin. To contact the author: cermak@handelsblatt.com

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