pursed purse

Trump unlikely to enjoy Germany’s new budget

Germany’s Finance Minister Olaf Scholz Presents Budget Outlook
Budget man blues. Source: Bloomberg

This Friday, when Berlin presents its draft 2019 budget, Germany will be set to comply with the Maastricht criteria for the first time in nearly 20 years. But little in those 1400 pages, which includes the country’s financial planning through 2022, is likely to go down well in Washington.

The draft document, seen by Handelsblatt, boosts spending on defense but already, Germany’s development organizations are readying banners in protest and President Donald Trump is likely to be displeased. Earlier this week, media in the United States reported he had written to Chancellor Angela Merkel and other European leaders, urging them to do more to meet their NATO spending pledge ahead of a summit next week in Brussels.

Olaf Scholz, the Social Democrat finance minister, plans to raise money for defense to €42.9 billion ($50 billion), a €550 million increase, which still leaves Berlin behind its NATO peers. That sum is 1.3 percent of Germany’s GDP rather than the 2 percent target for the organization’s members. Berlin had promised to do better, though the closest thing to a commitment so far was Chancellor Angela Merkel’s promise to reach 1.5 percent of GDP by 2024.

Nor will the defense increase kick in until 2021 and 2022. Critics point out that as the economy grows, this expenditure shrinks proportionally. That means the NATO quotient will actually fall to 1.27 percent in 2021, and 1.23 percent in 2022.

04 p09 German federal budget-01

It isn’t only defense; Berlin will also spend less than hoped on development, when measured by the international Official Development Assistance target that’s recommended by the OSCE, as government aid designed to promote the economic development and welfare of developing countries. Germany will spend 0.5 percent of GDP, less than the 0.7 percent proposed. Berlin only met this target in 2016 thanks to higher expenditure on refugees.

Development Minister Gerd Müller told Handelsblatt he was disappointed with the draft and would be unable to carry out all of his programs, such as tackling the roots of displacement in Africa and the Middle East. On Wednesday, development organizations were already planning protests.

But for Berlin’s part, 2019 will mark the first time in 17 years that the country has met the Maastricht criteria — with a debt ratio at 58 percent of GDP, comfortably below the (largely non-binding) upper limit of 60 percent.

And while critics argued that the budget doesn’t spend enough on upgrading Germany’s clunky digital infrastructure, nor on education, the finance ministry defended the plans. Officials told Handelsblatt the budget is based on the more optimistic governmental growth forecast from spring, and that further increases are possible.

Annual balancing act

Mr. Scholz aims to avoid new debt during the course of this year, a stance shared by the majority of his Social Democrat peers. Most, like his predecessor, support keeping a balanced budget, though many abroad criticized Mr. Schäuble’s fixation with it. But keeping debt down also helps minimize the finance ministry’s spending on interest, at least for now: This will stay below €19 billion this year and next, until rates change.

But Social Democrat and Green politicians are unhappy that Berlin’s investment remains at €37.4 billion and isn’t increasing through 2022, even though expenditure is up by €32 billion. Again, the finance ministry defended the budget as higher than under Mr. Schäuble, the previous finance minister, who had at times invested less than €30 billion. Mr. Scholz’s ministry pointed to a €2.4 billion fund for special “digital infrastructure” projects. But it’s a far cry from the Social Democrats’ election promises of a dedicated push on investment.

But expenditure is higher in Mr. Scholz’s budget. Next year, the government expects to spend €356.8 billion, a 3.8 percent increase on the current year. That sum is set to increase to €375.5 billion by 2022, meaning that proportionally, investment is actually falling. Mr. Scholz, however, is also making an additional €3 billion available to the federal states, beyond sales tax, for investment, starting in 2020. Welfare makes up half of the budget and will increase to 51.6 percent next year, and Mr. Scholz will start channeling money towards pension reforms as of 2021.

Jan Hildebrandt is deputy chief of Handelsbaltt’s poltics bureau; Martin Greive covers politics from Berlin, and Donata Riedel specializes in economic policy. To contact the authors: hildebrand@handelsblatt.com, greive@handelsblatt.com, riedel@handelsblatt.com

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