German Budget Is Full of Risks

The German parliament resumed its business on Tuesday after the summer holiday by launching a contentious debate over the draft 2004 budget.

Finance Minister Hans Eichel's plans foresee government expenditures of €251.2 billion ($278.8 billion). But the government is expected to reap less in taxes, duties and fees, and thus bear the burden of a €28.8 billion deficit at the same time as it spends €24.8 billion on investments.

Eichel admitted that he had proposed a budget with the "greatest risks" of his five years in office, saying he had been forced to take those risks as a "result of three years of stagnation."

But his remarks did nothing to keep the opposition from slamming the finance minister. The Christian Democrat Union and its Bavarian sister party, the Christian Social Union, accused Eichel of having failed "personally, professionally and politically." Deputy parliamentary group leader Friedrich Merz speculated that Eichel would soon be sacked. "You (Eichel) are quite obviously fighting your last battle," he said before the Bundestag.

Unrealistic growth?

CDU/CSU budget expert Dietrich Austermann had already said the draft budget was "unconstitutional," based on "entirely unrealistic growth assumptions" and full of billions in imaginary transactions. Austermann maintained that the risks involved added up to €20 billion.

Germany's Basic Law requires that budgetary investments surpass expected debts, which is not the case in the finance minister's draft proposals. Some of the overflow comes from plans to push forward tax cuts worth €18 billion to 2004, which Eichel will partly finance by increasing state debt. But Eichel, a Social Democrat, has justified making an exception to the rule, saying the tax cuts will boost the sluggish German economy and lead to higher tax revenues.

But experts are critical of Eichel's plans. "Higher debts can have a positive effect on the economy in the short term," said Jan-Egbert Sturm, chief economist at the Institute for Economic Research in Munich, according to the Berliner Zeitung newspaper. "But in the long term they destroy confidence in politics because they signalize that the will to [introduce] reforms has not gotten very far."

Joachim Scheide, a leading German economist from the Kiel Institute for World Economics, said the state should lower its expenditures rather than increase them, saying that higher new debt would not lead to any economic growth.

A risky strategy

The risks inherent in Eichel's budget are high. It's not clear whether the finance minister will overcome resistance from the opposition and even from within the governing coalition parties to cutting government subsidies in order to finance the tax cuts. But the budget draft already assumes Eichel will get his way and reappropriates the billions that would then be at his disposal.

Eichel is also counting on an extra €2 billion being paid into government coffers when a tax amnesty program goes into effect to benefit German taxpayers sheltering money in foreign tax havens. But the amnesty hasn't even passed the bill stage yet.

Finally, Eichel based the draft proposal on the assumption that the number of unemployed in Germany would remain around 4.4 billion, the current level. If it does rise though cash injections beyond the planned €5 billion for unemployment insurance may be inevitable.

There are also concerns the government's economic growth predictions could be too optimistic. On Tuesday, the newspaper Die Welt reported that the government is only expecting 0.5 percent growth this year instead of the 0.75 predicted previously. Meanwhile, Green Party financial spokeswoman Christine Scheel said projections that growth would increase to 2 percent in 2004 had already become outdated. Eichel himself admitted that the 2 percent mark was vulnerable.

On Wednesday, it will be Chancellor Gerhard Schröder's turn to address the Bundestag about the budgetary plans. The opposition traditionally takes advantage of the chanceller's presentation to settle old scores. This could just be the beginning of the "week of controversy" predicted by Merkel.