Germany says no new borrowing by 2020, interest bill plunges
The German government on Wednesday approved a draft budget for 2017 to 2020 and despite the arrival of over 1m refugees and migrants last year, budget surpluses are forecast for every year while €31bn in higher spending is provided for immigration services, security and infrastructure without having to borrow more money in the 3 years to 2020.
In a report Thursday, the GfK March survey of consumer confidence in Germany came in at 9.4 points, slightly below a reading of 9.5 in the previous month’s survey. On Wednesday, the IFO institute, which polls about 7,000 business managers monthly, reported the third monthly decline in business optimism in a row.
Wolfgang Schäuble, finance minister, said at a press conference Wednesday:
We are keeping our word and remain true to our solid financial policies in a difficult environment. We are investing in infrastructure, education and research, we are doing what is needed to guarantee domestic and external security and we are helping migrants — all without (net) new borrowing.
Overall spending will rise to €326.3bn in 2018, €342.1bn in 2019 and increase again to €347.8bn in 2020, mainly due to immigration-related costs. Besides security, spending will also increase in social housing, child care and state pensions.
Germany is allocating €10bn to immigration. It expects 800,000 new arrivals this year, and 600,000 next, Schäuble said.
The draft budget plan allocates 55.8% of overall spending in 2017 to social welfare, including pensions and unemployment benefits, with the ratio rising to 57.3% in 2020.
Investment spending is forecast to rise to €33.7bn in 2017, up from €31.5bn this year. It's forecast to rise further to €35.2bn in 2018, fall to €35.0bn in 2019 and dip again to €30.6bn in 2020.
The harmonised German unemployment rate was 4.3% in January 2016 — the lowest in the European Union — and last year tax revenues rose by €20bn.
In 2015 the budget surplus amounted to €12.1bn (0.7 % of GDP) and the surplus of €500m in 2014 was the first time all government levels — which include the central government, state and local governments and social security fund — reported surpluses since German reunification in 1990. It was also the first total surplus since 1969.
"Germany continues to reap the rewards of its 2004 'Agenda 2010' labour market reforms," Holger Schmieding, Berenberg Bank economist, said according to Reuters.
With core employment ... up 750,000 year-on-year, German tax receipts and revenues of the social security system are rising so nicely that Germany can afford the extra spending without having to run a deficit.
The budget plan is based on expectations that the German economy will grow 1.7% this year after growth of 1.7% in 2015.
The public finances are also benefitting from a falling interest bill (at €51bn in 2014, or 1.7% of GDP, from €67bn in 2011, 2.5% of GDP) in a historically low interest rate environment. The GDP ratio is expected to be 1.5% in 2020.
The federal interest bill was at €23bn making interest payments in 2015 and will fall to €22.4bn in 2017 — compared with a record €40.2bn it paid in 2008.
Fitch Ratings says that after a steep increase during the global financial crisis, the government debt ratio started to decline in 2013. Fitch expects debt/GDP will continue its downward trend to 66.5% in 2017, from 81% in 2010 while in 2020 the 60% Maastricht threshold should be reached.
Pic above: Dr. Wolfgang Schäuble addresses a press conference in Berlin, 23 March, 2016