No Free Ride

Finance Chief Schäuble, Germany's Dr. No

Schäuble Bundestag 10Sept14 Reuters
German Finance Minister Wolfgang Schaeuble speaks during the budget debate in the Bundestag in Berlin.
  • Why it matters

    Why it matters

    The reputation of German Chancellor Angela Merkel could be tarnished should her finance minister be unable to deliver on his promise of a balanced budget by 2015.

  • Facts

    Facts

    • Mr. Schäuble said additional state spending would undermine confidence in the euro currency zone.
    • Experts see a potential €3.5 billion budget shortfall amid lower tax collections and increased spending on personnel and other items.
    • The Geman coalition government is anticipating a budget gap of roughly €1.5 billion, but is looking for ways to save money.
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    Audio

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Nothing can shake German Finance Minister Wolfgang Schäuble’s dream of a debt-free budget. The conflict in Ukraine? The economic crisis in Europe? The member of the center-right Christian Democratic Union doesn’t see these flashpoints as obstacles, but rather incentives to remain firmly committed to the nation’s austerity policies.

“Anything else would lead to a new crisis of confidence,” Mr. Schäuble said. “And that would be the last thing we need in Europe.”

Yet the budget debates Tuesday in the German Parliament centered primarily on one question: Will Mr. Schäuble, like so many finance ministers before him, fall just short of his goal and be forced to run up new debts in the coming year?

One thing is certain: The risks for Mr. Schäuble are growing.

Calculations made for Handelsblatt by the Kiel Institute for the World Economy, an economic research center and think tank known by its German acronym IfW, predict that without additional cuts to the federal budget, there will be a gaping hole of €3.5 billion ($4.53 billion). The IfW projections differ from those of the finance minister because they are based on fewer tax revenues and increased spending on items such as personnel.

“If the federal state is again forced to refund the nuclear fuel rod tax, the hole would even be proportionally larger,” said Alfred Boss, director of public finance at IfW.

Earlier this year a Hamburg court ruled that a nuclear fuel rod tax imposed on Germany’s power suppliers has to be reimbursed until its compatibility with E.U. and domestic law is established. The reimbursement amounts to €2.2 billion.

The budget introduced by Mr. Schäuble sees income and expenditures balancing out at €299.5 billion each. If this projection comes true, it would be a historic achievement — the first balanced budget since 1970 without increased borrowing. And it would certainly burnish the reputation of Mr. Schäuble, who is credited with helping save the euro, as among Germany’s greatest finance ministers.

If (Mr. Schäuble's) projection comes true, it would be a historic achievement -- the first balanced budget since 1970 without increased borrowing.

Although Mr. Schäuble admits the conflict in Ukraine and the weakening economic environment in Europe is causing the German economy problems, he doesn’t see any reason to become prematurely pessimistic.

The overall economic risks remain within reasonable limits. The federal government’s spring forecast is “adequately cautious,” Mr. Boss said. According to the forecast, the nominal gross domestic product – so important to state finances – will increase by 3.5 percent and by 3.8 percent in 2015. But the effects of sanctions against Russia and the continuing sluggishness of the economy throughout much of Europe pose the major risks. If these crises have an impact on business activity, tax revenues will tumble.

German Chancellor Angela Merkel and her finance minister are under increasing pressure to increase spending. Calls for a new investment program for Europe are growing louder. The E.U. Commission, following the advice of the IMF, is pressing Germany to step up spending, not curtail it.

The expectations placed on Berlin are great because there are few other places to turn. The European Central Bank, for example, has largely exhausted its funds. “The ECB does what it can,” said Mr. Schäuble, who noted the central bank has few economic tools left in its arsenal. “Cheap money can’t force growth.”

Nevertheless, he said no to a spending program for Europe, saying it is delusional to expect more growth by creating larger deficits.

There is little room to maneuver in Mr. Schäuble’s budget. Although the budget foresees a healthy  €11.5 billion in tax revenues, Germany still faces a number of financial challenges. Implementing the government’s grand coalition agreements in the areas of education and research and the support of municipalities alone gobbles up €3 billion.

There are, additionally, a couple of one-time events in 2014 that won’t recur in 2015. This year, for example, the federal government is taking €1 billion out of the flood relief fund. And the curtailing of allocations to the health funds will no longer be as fully reflected in the 2015 budget. Furthermore, subsidies to social security are increasing by €2 billion and personnel costs are growing by €1 billion.

“The bottom line is that the additional budgetary costs add up to something over €10 billion and largely offset the increase in tax revenues,” according to the Bundesbank, Germany’s central bank. Indirectly, the bank confirms its doubts about Mr. Schäuble’s famous “schwarzer Null,” or black zero, meaning a balanced budget.

Mr. Schäuble may face his first budgetary woes later this year. The 2014 budget has been “calculated considerably tighter than last year’s budget,” said central bank sources. The IfW estimates the 2014 deficit will be €7.7 billion, roughly €1.2 billion more than Mr. Schäuble has planned.

The government coalition sets the budget gap at as much as €1.5 billion as incoming revenues are lower than expected. Budget specialists already are combing through government expenditures looking for any potential cuts that would save money.

This article was translated by David Andersen. Jeff Borden also contributed to this story. Contact the authors: hildebrand@handelsblatt.com and schrinner@handelsblatt.com

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