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Federal Budget: More Investment Than New Debt

The German Bundestag is deliberating this week on the 2007 federal budget. For the first time in six years, the federal government will invest more than it will incur new debt, thus ending the cycle of debt.

The draft budget is an important step towards sound public finances. The favorable economic trend, however, does not allow the government to let up in its budget consolidation efforts, Federal Finance Minister Peer Steinbrück said in the German parliament.

In its draft budget from July, the federal government had planned a total of EUR 267.6 billion in spending for the next year. Following its deliberations, the budget committee proposed an increase in spending to EUR 270.5 billion, resulting in moderate growth in the budget. The federal government is also hedging against risks, such as those involving long-term unemployment compensation.

More Investment

Investments will thus rise by EUR 414 million, to nearly EUR 24 billion, relative to the government draft. This will enable the federal government to continue providing infrastructural services at a high level. The federal government is investing more money in families and parents and placing an emphasis on research and innovation because Germany faces tough competition. If jobs are to be secured – also into the future – then Germany has to perform better than other economies.

With EUR 25 billion earmarked for stimulus programs to spur growth and employment, the federal government is setting milestones for the future. It is better to invest funds here than to pay interest on debt.

Promoting Consolidation and Growth

Economic output has risen markedly this year, a fortunate trend. Companies are investing more again. Incoming orders are on track and the domestic economy is picking up. The recovery has finally arrived on the labor market.

"The federal government has made an important contribution to this robust economic upswing. The two-pronged strategy was right from the start," Finance Minister Steinbrück said.

Higher Tax Revenues

Due to the good economic trend, significantly higher tax revenues are flowing into public coffers. According to the tax estimate from November 3, a total of EUR 220.53 billion in tax revenues have been factored into the 2007 federal budget. That's EUR 6 billion more than provided in the federal government's draft budget.

Yet the positive trend in tax revenues this year will not solve the budgetary problems in one fell swoop.

"For that reason, the marching orders are clear: We have to continue consolidating in the future," Steinbrück said. For the mountain of debt in the public budgets is still roughly

EUR 1.5 trillion. Forty billion euros in interest are paid annually on this figure alone.

Less New Debt

With the cyclically higher tax revenues, net borrowing for 2007 can even be reduced to
EUR 19.6 billion, its lowest level since reunification. In the government's July draft budget, new borrowing totaling EUR 22 billion was planned.

Reducing new borrowing sends a clear signal that balanced budgets must be achieved in the midterm. It is an obligation to future generations to reduce the high level of public debt.

Increase in VAT Tax Necessary

The VAT tax increase slated to go into effect January 1, 2007, is necessary, despite the higher revenues achieved by the flourishing economy, because the difficult structural problems inherent in the budget can only be solved through permanently higher and secure revenues.

The federal government therefore cannot forgo the increase in the value-added tax. The economic upswing can absorb the increase. Germany has every opportunity to become the economic engine of Europe again.

Reducing Non-Wage Costs

The revenues attained from the VAT tax increase will also go towards reducing the contribution to unemployment insurance. Together with a small portion of the cyclically higher tax revenues, the unemployment insurance contribution will even drop by another 0.3 percent, to 4.2 percent, as of January 1, 2007.

Already as of 2007, the co-insuring of noncontributory children in the statutory health insurance system will start to be financed through taxes.

Thus, on balance, non-wage costs will tentatively drop by over 1 percent as of January 1, 2007. The contribution rate for the entire social security system will tentatively drop from a current 41.1 percent to under 40 percent at the beginning of the coming year. Employer and employee will finance the rate at equal levels, so that both sides receive some relief. This will have a generally positive impact on employment because labor will thus become cheaper.

Reliability

The 2007 budget, without exception, is in conformity with the Basic Law, Germany's constitution. It states that borrowing cannot be higher than investments.

The European stability pact requirements will also be fully met in 2007. Already this year, the public budget deficit, at 2.2 percent of GDP, was below the allowable EU level for the first time since 2002, and may even reach 2.1 percent. The deficit is expected to be 1.5 percent of GDP in 2007.

Overall, the 2007 budget sends an important signal, also to international investors, because it shows that Germany manages its public funds well.

Reforms

Reforms make Germany a more attractive place to do business. The initiated restructuring of public financing and the planned business tax reform will strengthen confidence and the willingness of businesses to invest.

When business tax reform makes investing in Germany more attractive, then everyone benefits: employees and the public sector.

November 22, 2006

Government & Politics