Roads & Bridges

Budget Out of Balance

infrastructure
Cash for roads?
  • Why it matters

    Why it matters

    Demands to spend €4 billion to fix German roads and bridges next year could complicate the government’s plan to deliver a balanced budget.

  • Facts

    Facts

    • A new tax on German motorways is supposed to raise €500 million in 2015.
    • Germany’s industry lobby BDI and DGB union group want Germany to spend €4 billion.
    • The demands jeopardize Germany’s plans to avoid new deficit spending next year.
  • Audio

    Audio

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The German chancellor, Angela Merkel, the enforcer of European government austerity in the troubled euro currency block, wants to deliver a balanced federal budget next year.

Such a muscular act of German fiscal prudence would give Ms. Merkel the street-cred to enforce her demands on recalcitrant neighbors such as France.

But over the weekend, Ms. Merkel’s goal of creating a debt-free budget in Europe’s largest economy grew more remote when the country’s powerful industrial lobby and its labor unions demanded a sizable increase in spending to repair the nation’s roads and bridges.

In a joint communique, the powerful DGB union group and BDI Industry group demanded that Ms. Merkel spend €4 billion ($5 billion) on infrastructure. The amount is eight times the €500 million that Germany is planning to raise through a new highway toll tax.

“It is a strong and powerful signal of labor and industry going hand-in-hand to convince the government of the necessity of infrastructure spending,” said Eric Heymann, an analyst with Deutsche Bank Research, in an interview with Handelsblatt Global Edition. “The government should revise their political priorities and use the money to invest in infrastructure.”

The German chancellor, Angela Merkel, the enforcer of European government austerity in the troubled euro currency block, wants to deliver a balanced federal budget next year.

The Federation of German Industries or BDI and the German Union Federation, or Deutsche Gewerkschaftsbund, known as DGB, have raised concerns over Germany’s weak infrastructure investment in a common paper that was released on Monday and that Handelsblatt had access to. The two groups are asking for €14 billion in infrastructure spending – €4 billion more than currently planned.

Both groups are likely to have a significant impact on the government, because the grand coalition composed of Chancellor Angela Merkel’s Christian Democrats, which are traditionally more industry and employer oriented and the Social Democrats, which usually lobby for the labor market and employee’s rights, are now confronted with a unified call from their most important electorate.

“When the government worked out the coalition contract, they obviously thought that the economy will work without their guidance,” said Ingo Kramer, president of the Confederation of German Employers’ Associations (BDA), in an interview with Handelsblatt. “But many things don’t fit into our time anymore.”

 

The president of the Confederation of German Employers' Associations (BDA) told Handelsblatt that the government Needs to spend more money in long-term infrastructure projects. Source: Marc-Steffen Unger für Handelsblatt
The president of the Confederation of German Employers’ Associations (BDA) told Handelsblatt that the government Needs to spend more money in long-term infrastructure projects. Source: Marc-Steffen Unger für Handelsblatt

 

Experts say that it will not be necessary to raise new taxes to fill the gap, but to re-think spending and to allocate funds in more long term projects such as infrastructure instead of short-term electorate success stories such as retirement reforms and stay-at-home parenting credit.

“We don’t need new debt. Through shifting the budget in favor of investments, we could push for substantial conservation measures,” said Reiner Holznagel, president of Germany’s taxpayer association or Bund der Steuerzahler, known as BdS in an interview with Handelsblatt Global Edition. “The federal government has to take care that our current (infrastructure) network is going to be restored,” he said.

The last time labor and industry came together in Germany to speak with one voice was to push through a revision of the European Union Emissions Trading System. Both groups worried about rising energy prices and “the survival of companies and jobs” in the manufacturing industry, they wrote in a paper at the time.

“I don’t think labor and industry are going to reach any results on a short-term basis, but maybe in the long run.”

Eric Heymann, Deutsche Bank Research

This time, other European leaders and experts are joining the latest demand. France and Italy also started to call on Germany to loosen their firm stance on the rigid austerity drive in Germany and in other European countries.

“Our neighbors are already accusing us of preaching water while drinking wine ourselves,” Mr. Kramer said. “We ask tough retirement reforms of other European countries, and start off with an early retirement plan ourselves,” he said, referring to the German government’s plans to lower the retirement age to 63 from 65.

So far, Ms. Merkel allocated less than €11 billion for infrastructure projects, while both groups are asking for at least €14 billion.

 

Low Goverment Investments-Net-investments-Net-assets-Germany-01
If net investments are negative, capital, such as roads, is at risk of deteriorating because too little money is spent to maintain it in its current state.

 

“The infrastructural base in Germany as an industrial nation, crumbles,” the joint-paper by BDA and DGB reported, this is “no longer responsible.” The deterioration of infrastructure is threatening the “competitive position of Germany, jobs and wealth,” they wrote.

“When it comes to infrastructure, the government focused too much on proportional representation instead of putting the money where it is really needed,” Mr. Heymann said, referring to the allocation of funds to areas in Germany, where infrastructure is sound instead of busier roads such as in the South and West.

Though pundits think that Germany does not need new income to finance more infrastructure projects, transport minister Alexander Dobrindt of the sister party of Ms. Merkel’s Christian Democrats does offer an additional source of revenues. He just released a new proposal to charge foreigners for toll on German highways. Up until now, Germany’s high-speed motorways have been toll free except for trucks. The new law would generate up to €500 million annually, Mr. Dobrindt said – a small fraction of what labor and industry are calling for in additional annual infrastructure investment.

Tax income in Germany has been rising steadily since 2010 and will continue to rise until 2018, according to the statistics portal, Statista. This should be sufficient to pay for infrastructure investment, such as highway bidges. In Germany, of all 38,000 bridges, at least 2,500 have to be renovated in 2015.

“With record income and €50 billion euro from traffic and transport related taxes, the government has enough money to stop the decay of infrastructure,” Mr. Holznagel said.

The call for more infrastructure investments has been clear, but experts doubt it will have an immediate effect on politics.

“To be honest, I don’t think labor and industry are going to reach any results on a short-term basis with their appeal,” said Mr. Heymann, “but it is possible they push the government to re-think their priorities in the long run.”

 

Daniel Dalheas covers finance and business news at Handelsblatt in Berlin. Franziska Scheven is writing for Handelsblatt’s Global Edition, also based in Berlin, and mainly covers companies, markets and politics. Frank Specht and Thomas Sigmund contributed reporting. To contact the authors: delhaes@handelsblatt.com and scheven@handelsblatt.com

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