New data released a month ahead of the federal election shows the economic crisis has left Germany with a gaping budget deficit. But there are increasing signs that economic recovery may be just around the corner.
Germany has pulled out of recession amid soaring debt.
Germany ran up a 17.3-billion-euro ($24.7-billion) budget deficit during the first half of 2009, according to figures released by the Federal Statistics Office on Tuesday.
Higher government spending and falling tax revenue left Germany deep in the red after posting a seven-billion-euro surplus during the same period last year. Tax revenue fell by 6.7 percent compared to the same period last year, with the biggest shortfalls recorded in income tax, corporate tax and property tax. Public spending across all levels from federal through state and local governments rose by 3.5 percent.
Germany's huge stimulus packages have helped save the economy from the worst of the financial crisis.
A large part of this increase in government spending was comprised of an 11.2 percent rise in expenditure for welfare benefits, mainly due to the recent rise in temporary or part-time workers.
For the German Institute for Economic Research (DIW), this deficit casts doubt on the tax reductions promised by the Christian Democratic Union and the pro-business Free Democratic Party, who are widely expected to take power after next month's general election.
"The promised tax reductions won't happen soon," DIW president Klaus Zimmermann told news agency Reuters, "The immediate question is more likely to be how quickly taxes can be raised."
Germany 's spiralling national debt
The deficit translates into a mere 1.5 percent of Germany's gross domestic product, which means Europe's largest economy is still comfortably within the 3 percent limit set by EU rules. But the government's 85-billion-euro fiscal stimulus packages introduced at the beginning of this year could mean that Germany will approach this critical mark by next year.
Estimates of the government's financial planning council, a body made up Germany's federal and state finance ministers, suggest that Germany will have a national debt of more than two trillion euros by 2013, partly as a consequence of the financial crisis. Many fear that young generations will feel the effects of this enormous debt for decades.
Although Germany seems to have weathered the financial crisis, the resulting state debt could still be felt by young generations.
The Wiesbaden-based statistics office on Tuesday also confirmed data released earlier this month, which showed that Germany's economy grew by a seasonally adjusted 0.3 percent in the second quarter, hinting at economic recovery. This was a welcome surprise, as analysts had predicted it to shrink by 0.3 percent.
"The economic development in the second quarter of 2009 was supported by private and government expenditure ... positive impulses also came from construction," the statistics office said in a statement.
Germany 's exports to the rescue
Germany's much-vaunted export strength recorded a mini-recovery after a depressing end to 2008. In spite of a general fall in demand for German products worldwide, exports still did better than imports, which was seen as a positive signal.
But despite these positives, German companies are still noticeably cautious, the report said, with the industrial sector investing less money in new machinery and equipment.
This marks the first time that Germany's economy has grown since the first quarter of 2008, technically pulling the country out of recession. Up until now, Europe's largest economy had been in its sharpest recession since the war, with GDP declining for four consecutive quarters.
Germany's economic pickup comes in the wake of cuts in global interest rates and a huge fiscal stimulus package.
Editor: Trinity Hartman