15 July 2003

EZA 547 - Germany-Economy

Eichel attempts to balance German federal budget to be unsuccessful
Finance Minister Hans Eichel will tomorrow present the budget for 2004 which will include a package of spending cuts to balance the E15.5bn (0.75% of GDP) tax cuts that will result from advancing the government’s third stage of tax reform from 2005 to next year. Despite his reassurance that the Stability & Growth Pact (SGP) 3% budget deficit ceiling will be respected, his chances of finding spending cuts that meet the approval of the opposition — which have a majority in the Bundesrat, upper house — without alienating his own party are marginal. Both the growth assumptions and the behaviour of the Bundesrat make it more likely that the deficit will be close to 4% — compared to an estimated 4.1% in 2003. Although the July 2 draft budget — which did not include the tax cuts — set positive signals in terms of reduction of subsidies and curbs in social spending, the projections of public spending until 2007 in the Medium Term Fiscal Plan are wishful thinking. There remains a gap between official assurances that fiscal policy will not become expansionary and the reality of substantial overruns in fiscal targets.

SummaryAsset Conclusions: Tax cuts to be funded by greater volumes of government debt being issued, Bund prices to fall as yield curve steepens

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© Graham Bishop