Frugality Gives Germany Cushion for Crisis With Balanced Budget

(Bloomberg) -- Germany is sticking to balanced budgets and ambitious debt targets despite slower revenue growth, creating an ever-larger fiscal cushion should an economic crisis hit.

Europe’s largest economy is projected to slash its public debt to 51% of gross domestic product by 2023 from over 75% only five years ago, according to budget projections, including the 2020 proposal, presented in Berlin on Wednesday. Debt this year will fall within the EU-established guideline of 60% of GDP for the first time in 17 years.

Finance Minister Olaf Scholz is sticking to the zero deficit budget target despite a shortfall of projected revenues of 6.8 billion euros for next year, due largely to a slowdown in economic activity. German manufacturing contracted for a fifth month in June, and the Bundesbank slashed its GDP growth forecast for this year to 0.6% from 1.6% earlier. Lower interest rates helped balance the budget, pushing down debt servicing costs.

That gives Chancellor Angela Merkel considerable wiggle room to boost spending in bad times. The International Monetary Fund as well as the U.S. government have urged Germany to loosen the purse strings to help accelerate sagging economic growth. Scholz and his team argue that already rising investments will increase by another 30% over the next four years.

“No government has spent more on investments than this one,” Scholz said at a news conference in Berlin during which he presented the budget on Wednesday.

Germany has delivered a balanced budget for years and will continue to do so through 2023, the finance ministry projections show.

While social welfare spending is to rise next year, opposition politicians and business leaders complained that too few funds are available to invest in artificial intelligence and the expansion of high-speed Internet networks.

The Merkel administration will also once again fall short of demands by President Donald Trump to increase defense spending to 2% of GDP. While outlays are due to increase by 6 billion euros to 45 billion euros in 2020, that is only 1.37% of GDP, little changed from this year. Merkel has promised a target of 1.5% for 2024.

“We want to reach the target of 1.5%,” the caucus leader of Merkel’s Christian Democratic-led bloc, Ralph Brinkhaus said on Tuesday. “If we need to do more because it’s not reflected in financial planning, than we will do so in coming years.”

To contact the reporters on this story: Birgit Jennen in Berlin at bjennen1@bloomberg.net;Arne Delfs in Berlin at adelfs@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Raymond Colitt

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