Government Spending Budget Gap Forecast to Widen in 2018

Germany has had a balanced budget for years, but all that could change in the 2018 when government spending is forecast to rise as revenue falls.
Finance Minister Wolfgang Schäuble is cautious on Germany's finances.

A gap in the German federal budget is projected to widen by billions of euros in 2018 despite years of historic surpluses, the deputy finance minister, Jens Spahn, told Handelsblatt.

“The current gap is growing by the billions due to recent compromises made by the coalition government which have led to increased spending and lower revenue,” he said.

The government faces a future budget gap despite a surplus of €6.2 billion in 2016. Mr. Spahn and Finance Minister Wolfgang Schäuble want to use the unexpected 2016 surplus to pay down public debt.

“When we finally start servicing our debt we will create leeway for ourselves in difficult economic times,” Mr. Spahn said.

The center-left Social Democrats, however, want to use the surplus to make investments in infrastructure, particularly the expansion of broadband Internet access. Economists have also called for increased spending on infrastructure.

“Net investment has been negative for years, which means the state is letting infrastructure decay,” said Peter Bofinger, a member of the German Council of Economic Experts that advises the government.

The shortfall was outlined in calculations that were presented to cabinet members on Feb. 1 by Werner Gatzer, a high-ranking finance ministry official. They were part of a 20-page presentation that has been made available to Handelsblatt.

The reason Germany no longer seems to be flush with cash has to do with excess burdens carried over from last summer's financial planning. Some of these additional costs stem from Germany's handling of the refugee crisis, but some are also for domestic security measures and humanitarian aid. Planned tax relief will also leave Mr. Schäuble with less money to patch the budget gap for the coming year.

The finance minister does have some reserves he can fall back on. He has put aside €5.4 billion since 2015 to pay for the costs of housing, feeding and integrating so many refugees. That money is still waiting to be spent.

Mr. Schäuble does not want to saddle Germany with an election budget full of campaign promises that will have to paid for by the next administration.

 

So there are funds bring down the budget shortfall, and Mr. Schäuble intends to do so before signing off on the draft budget for 2018 on March 15. He just doesn't plan to go all the way.

According to ministry documents, Mr. Schäuble intends to bring down the shortfall from €8.3 billion to €4.9 billion and let the next administration take care of the rest.

A paragraph in the report reads: "The financing of new political measures will be the task of the new government and therefore will not be a part of budgetary planning until after the election."

Mr. Schäuble does not want to saddle Germany with an election budget full of campaign promises that will have to paid for by the next administration. Instead he wants to avoid is German officials making promises that he then somehow has to figure out how to pay for.

And the finance minister has every reason to believe that if it weren't for him, spending would go through the roof. Ministries have been submitting their spending proposals to the finance ministry - and the lists are long.

Defense Minister Ursula von der Leyen, for instance, has already asked for billions of euros to be allocated for military spending. Environment Minister Barbara Hendricks wants an additional €500 million. Family Minister Manuela Schwesig also has a handful of projects she needs funded.

During his presentation to cabinet members, Mr. Gatzer began listing all of the things on which the German government had already spent its money. Then he went through the list of things the government had yet to pay. The longer Mr. Gatzer went on, the less optimistic the other politicians in the room became.

Mr. Gatzer's message was clear: You'll have to win over voters some other way. This country can't afford lofty, expensive assurances.

The finance ministry is in a difficult situation at the moment. On the one hand, there appears to be no shortage of money. If Germany's ruling coalition partners fail to agree on how to spend their budget surplus from 2016, as is expected, then Mr. Schäuble will be left sitting on a reserve of unspent money worth €18.9 billion.

The feeling in many ministries - with the exception of Mr. Schäuble's - is that Germany is flush with cash. The finance ministry, they say, is being alarmist and too close-fisted. They accuse Mr. Schäuble of spending months telling everyone how poor Germany is, only to somehow register one budget surplus after another when it's politically expedient. After all, they say, he managed to conjure up an investment program worth €8.5 billion and finance Germany's refugee crisis - all without creating any new debt. How poor can Germany really be?

While that much money may be burning a hole in the pockets of the other members of Ms. Merkel's cabinet, Mr. Schäuble is in no hurry to spend it.

That's because he saw the budget shortfall coming. As early as last year, Mr. Schäuble warned there would be a €4.9 billion gap in 2018 spending. But as it turned out, the budget gap turned out to be even higher.

 

09 p4 New Stresses on the Budget-01

Since summer 2016, the German government has made a number of expensive policy promises. These include sweeping tax relief, which the ruling coalition passed last autumn, as well as an increase in child allowances.

By next year, the government will be required to pay €20.4 billion - and Mr. Schäuble has no intention of borrowing any of it. On top of that, tax revenues are expected to fall next year by €11.1 billion - and the government has agreed to increase its spending for refugees and domestic security.

The government could free up around €6 billion by eliminating some precautionary allotments, and it intends to allocate the €5.4 billion from its refugee fund as well, according to the copy of Mr. Gatzer's presentation acquired by Handelsblatt. In the end, however, there are still €8.3 billion in expenses unaccounted for.

Mr. Schäuble, for his part, plans to lop off another €3.4 billion from that figure. But the rest, €4.9 billion, he intends to hand off to his successor - or himself, if Angela Merkel's Christian Democratic party is reelected and he remains finance minister. In any case, the responsibility of figuring out how to pay for those remaining costs will fall to the next administration.

09 p4 New Stresses on the Budget 2-01

Martin Greive is a correspondent for Handelsblatt based in Berlin. Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin and is deputy managing editor of Handelsblatt's Berlin office. To contact the authors: [email protected] and [email protected]