BMI View: Germany will not succeed in reducing its public sector debt burden to the EU-mandated 60% of GDP target level anytime soon, as political opposition to fiscal consolidation increases following the 2013 general election. The main opposition will be towards expenditure cuts, whereas tax hikes are likely to face less resistance.
It now looks like Germany's federal finance ministry will run a balanced budget (nominal deficit within 0.5% of GDP) in 2012, with fiscal policy to remain tight at least until the September 2013 general election. However, the trajectory of fiscal policy beyond the election is harder to call, with the government finding little political support for further consolidation on either the revenue or expenditure side. If there is additional consolidation beyond 2013 we believe it will come from higher taxes rather than reduced expenditure, although either way the policy dialogue looks skewed towards less rather than more fiscal consolidation.
|Germany - Nominal Fiscal Balance, % GDP|
Party positions on the fiscal policy debate have become clearer following allegations in a recent newspaper article (denied by the government) which stated that Finance Minister Wolfgang Schaeuble was seeking to raise VAT and cut social expenditure to help bring public sector debt back towards the 60% of GDP target. Here we outline the fiscal policy stance of the major parties, and our thoughts on the implications for policy beyond the election:
Christian Democrats: Present policy is driven by Finance Minister Wolfgang Schaeuble's commitment to balancing the fiscal budget well ahead of the 2016 deadline, and he will be wary of agreeing to any policy which jeopardises this goal. This view represents the conservative core of Chancellor Angela Merkel's Christian Democratic Union (CDU) and its sister party the Christian Social Union (CSU), as well as Bundesbank head Jens Weidmann, who recently criticised the fiscally conservative 2013 budget for not making more savings.
Social Democrats: Despite coming from the more centrist wing of the opposition centre-left Social Democratic Party (SPD), SPD candidate for chancellor Peer Steinbruck is basing his party's electoral platform on opposition to any cuts in social expenditure beyond 2013. The SPD's antipathy towards the government's aggressive fiscal consolidation was reiterated in late December, when SPD lawmaker Joachim Poss criticised Schaeuble for attempting to keep the spending cuts quiet until after the state elections in Lower Saxony, scheduled for January 20.
Free Democrats: Following the allegations of Schaeuble's fiscal plans Germany's Free Democrats (FDP), the junior member in Merkel's coalition, stated that they would not support any increase in the tax burden. The FDP has played a major role in ensuring specific industries retain discounted VAT rates, and if they do have any say in fiscal policy beyond 2013 it is hard to see them supporting a policy which jeopardises this.
Greens: The Green Party has taken a very similar line to that of the SPD, opposing any proposed cuts in social expenditure. Nevertheless, their priority is environmental policy, implying there may be ground for negotiation if they form any part of the next government.
As things stand, the only party clearly opposed to removing VAT exceptions for specific industries is the FDP, which based on recent poll data looks unlikely to break the 5% threshold for parliamentary representation in the election. This implies that if the next government aims to reduce the public sector debt burden towards the 60% of GDP public debt level within in the next five years, it could potentially implement a uniform VAT rate (as Schaeuble is allegedly planning to do) without a great deal of political opposition. However, with the FDP likely to be out of the picture, expenditure cuts will be harder to enforce for any future government, given that both the SPD and the Greens remain opposed.
|Improving, But Not Fast Enough|
|Germany - Total Government Debt, % GDP|
We believe that the most likely outcome of the 2013 election is a grand coalition between the CDU-CSU and SPD, and while the SPD would be the junior partner in such a coalition, it would likely have sufficient sway to prevent significant expenditure cuts. A less likely coalition between the CDU-CSU and Greens, the so-called Black-Green alliance, would probably lead to a similar outcome (with a small chance that the Greens allow some cuts as long as their environmental agenda receives stronger support).
Our core scenario, therefore, is that while Germany will succeed in running a balanced budget (a deficit within 0.5% of GDP) over the next few years, the level of fiscal consolidation will be insufficient to reduce public sector debt levels to the EU-mandated 60% of GDP level anytime soon. Moreover, given our view that Germany is one of the few eurozone states with capacity to bail out periphery states, and any future government will be unwilling to allow the single currency union to break up, this makes the 60% of GDP level an unrealistic target anytime within the next five years.
|Notes: e BMI estimates. f BMI forecasts. 1 General Government; 2 Fiscal balance stripping out interest payments on government debt. Sources: 3 Eurostat/BMI; 4 Bundesbank/BMI; 5 Bundesbank/BMI calculation.|
|Fiscal revenue, EURbn 1,3||1,066.0||1,079.8||1,148.2||1,202.7||e||1,222.0||f||1,246.4||f||1,271.3||f||1,296.8||f||1,326.6||f|
|Revenue, % of GDP 1,3||44.9||43.3||44.3||46.1||e||45.3||f||44.4||f||43.6||f||42.8||f||42.2||f|
|Fiscal expenditure, EURbn 1,3||1,142.1||1,185.8||1,173.5||1,215.7||e||1,235.2||f||1,258.7||f||1,283.8||f||1,306.9||f||1,335.7||f|
|Expenditure, % of GDP 1,3||48.1||47.5||45.3||46.6||e||45.7||f||44.9||f||44.0||f||43.1||f||42.5||f|
|Budget balance, EURbn 1,4||-76.1||-106.0||-25.3||-13.0||e||-13.2||f||-12.3||f||-12.5||f||-10.2||f||-9.1||f|
|Budget balance, % of GDP 1,5||-3.2||-4.2||-1.0||-0.5||e||-0.5||f||-0.4||f||-0.4||f||-0.3||f||-0.3||f|
|Primary balance EURbn 2,5||-12.3||-44.1||42.3||59.9||e||60.9||f||63.3||f||64.5||f||68.2||f||71.0||f|
|Primary balance % of GDP 2,5||-0.5||-1.8||1.6||2.3||e||2.3||f||2.3||f||2.2||f||2.3||f||2.3||f|