Merkel Puts Germany on Financial Diet – INSM evaluate austerity measures
Berlin – On June 7, 2010 the German government introduced a major austerity package as a cure for unbalanced finance. Main aims of the plan include compliance with a new German law called “Schuldenbremse” (“debt-brake”) that limits the state’s annual non-cyclical capacity to indebt itself to no more than 0.35 percent of the gross national product (GNP). Another goal is to meet an EU-regulation that prompts its members to keep their total debts below 60 percent of their GNP. In co-operation with the magazine “WirtschaftsWoche” and economists from the “Institut der deutschen Wirtschaft (IW) Köln”, INSM has published an assessment of the austerity measures in their monthly „Deutschland-Check” in June, 2010.
In order to meet the requirements of the Schuldenbremse law, the German government has to start saving money in 2011, in order to prepare itself for 2016 and 2020 when the law becomes compulsory for the federal government and the individual states respectively.
Germany suffers from unbalanced finance
While the EU regulation on the national debt of its members also requires states to keep their annual new indebtedness below 3 percent of their GDP, the harsh “Schuldenbremse” requirements of debts amounting to no more than 0.35 percent of the GDP only refer to non-cyclical debts (i.e. the law does not prevent the government from indebting itself when there is a need to stimulate the economy or in times of severe natural catastrophes)
To meet these goals, the German government recently introduced an austerity package, a financial plan that outlines the budget for 2011 and a more general finance plan until 2014. Further motivation for an effective plan of action to combat excessive state indebtedness arises from the record-level new indebtedness that was a result of the recent international financial crisis.
In pursuing its goals, the austerity package is on the right track. Its general tendency is to cut expenditures whilst refraining from raising economy-choking taxes in sensitive areas. Moreover, the cuts are mostly made in the right segments of Germany’s social market economy, sparing crucial investments and the educational sector.
There is some criticism that the cuts made for the social expenditures of the state are socially unjust. However, one has to keep in mind that, at a whooping 54 percent of the federal budget, this sector also has the largest potential for cuts.
More Consistent Reduction of Subsidies Required
A definite weakness of the plan is that it leaves federal subsidies mostly untouched. Clearly, more than 2 billion Euros could have been saved, had the state pushed for a more consistent reduction of direct as well as indirect subsidies. The latter also include the benefits some sectors gain from Germany’s complicated value-added tax system. While the regular value-added tax for goods in services is fixed at 19 percent, successful lobbyism has left the German economy with plenty of exceptions that are taxed at the reduced rate of 7 percent; in essence, an indirect subsidy.
Lastly, it has to be pointed out that not all the measures introduced in the austerity package are definite plans for policy action. Some of the most crucial points, such as possible savings within the German military are merely declarations of intent. Add to that the fact that it remains unclear where to save a remaining 5.6 billion Euros that are necessary to comply with the “Schuldenbremse” until the year 2014 and the message is clear: The austerity package is aiming in the right direction, but misses its historic chance to break with the past and truly consolidate the German budget.