Germany Back in the Black

The German government is set to record a rare budget surplus, which is expected to grow unless politicians get spend-happy

by Christian Reiermann

One tenth of 1 percent may sound like a tiny amount. But the figure, calculated by officials at Germany's Finance Ministry, signifies a big step for their boss, Finance Minister Peer Steinbrück, and for the entire country. It means that the federal government, the federal states, municipalities and the social insurance system will achieve a surplus this year amounting to 0.1 percent of Germany's gross domestic product (GDP).

Put simply, in terms of annual economic output, the amount of money the nation takes in this year will exceed the amount of money it spends by 0.1 percent, or about €2.5 billion ($3.6 billion).

This hasn't happened in a long time. Aside from a brief surplus in the former West Germany back in 1989, for the past four decades Germany's federal and state finance ministers have consistently borrowed funds to balance their budgets. The country has built up a mountain of debt that has reached the enormous sum of €1.5 trillion.

That process has now come to a halt. And Steinbrück's experts expect the surplus to continue growing: to 0.2 percent in 2008, 0.5 percent in 2009, 1 percent in 2010 and 1.5 percent in 2011. This, at least, is what emerges from the preliminary work on Germany's annual stability program -- a sort of accountability report for the federal government on the condition of government finances -- which Steinbrück will be required to submit to the European Commission in Brussels in December.

For the finance minister, these results come a welcome three years early, as he had not expected to balance the total state budget until 2010. But now Steinbrück has presented a clean bill of health for government finances in record time. By comparison, only two years ago, German was bumping up against the upper debt limit of 3 percent stipulated under the EU's Stability and Growth Pact, a measure intended to promote fiscal discipline among member states.

But thanks to a strong economy -- not to mention the biggest tax increase in postwar German history, which came into effect at the beginning of the year -- the country has made a strong comeback out of the red. The question remains as to whether the process of cleaning up the government's finances will last, or if it is merely a brief positive blip on the radar screen.

The favorable figures are not consistent across the board. The finances of the various regional authorities and social insurance systems are recovering at varying rates. The federal government's finances are still in the worst shape, relatively speaking.

Officially, Steinbrück plans to take on another €14.4 billion in new federal debt before the end of the year. But because the economy is doing better than the federal government had expected, he will likely get by with about €2 billion less than anticipated.

The federal budget deficit is offset by surpluses -- some of them large -- in the states, municipalities and social insurance system. For the second year in a row, German cities and municipalities will report a surplus in 2007. According to estimates by Alfred Boss, a financial expert at the prestigious Kiel Institute for the World Economy (IfW), that surplus will amount to about €5 billion in 2007.

For the states, revenues will exceed expenditures by a total of €3 billion, even though not all states have cleaned up their finances. According to Boss, five out of Germany's 16 federal states are still in the red, while the remainder have either balanced their budgets or accumulated surpluses. Bavaria is at the top of the list, with a surplus of more than €2 billion, followed by Baden-Württemberg with its budget surplus of about €1.3 billion.

The social insurance system will register a surplus of about €7 billion, principally the result of billions in excess funds in the coffers of the Federal Employment Agency. A key reason for the flood of cash into the public treasury is the economy. Continuing economic growth has enabled Steinbrück, his state counterparts and municipal administrations to collect additional billions in tax revenues.