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FT.com / Home UK / UK - Germany celebrates surplus for first time since 1989

Germany celebrates surplus for first time since 1989
By Bertrand Benoit in Berlin

Published: August 24 2007 03:00 | Last updated: August 24 2007 03:00

After nearly 20 years of public deficits, Germany generated a budget surplus in the first half of the year, consecrating the country's transformation from fiscal delinquent to champion of financial rectitude.

Figures released yesterday by the Federal Statistical Office showed the public sector - the federal and regional governments and the social security system - had booked a €1.2bn ($1.6bn, £812m) surplus in the six months to July against a €23bn deficit in the same period last year.

The pace of Germany's fiscal consolidation, largely due to booming tax revenues on the back of the economic recovery, has taken both observers and the finance ministry by surprise, with the government still forecasting a deficit of 0.5 per cent of gross domestic product this year.

The European Commission welcomed the news while Angela Merkel, the chancellor, said this was "something that has not happened for a long time, though we should not rest on our laurels".

Holger Schmieding, chief Europe economist at Bank of America, said that "given the magnitude of the improvement on last year, I would now likely project a minor surplus already this year".

Alfred Boss, public finance expert at the IfW economic institute in Kiel, who correctly predicted the half-year figure, now expects a full-year surplus of €2bn-€3bn.

This would be a historic milestone. With the exception of the second half of 2000, when the government booked a huge one-off windfall from the auction of third-generation mobile phone licences, Germany has achieved a net lending position only twice in 34 years - in 1989 and 1973.

From 2002 to 2005, as the economy was stagnating and unemployment rocketing, Berlin repeatedly breached the European Union's fiscal rules, which ban public-sector deficits of more than 3 per cent of GDP. Since then, however, the economy has rebounded vigorously, helping to fill the state's coffers.

"Germany has been much stricter in its expenditure control than most other countries", said Mr Schmieding, pointing to the 0.7 per cent rise in public spending in the first half. "The fiscal reins are still tighter than in France, the UK, the US and almost any other comparable economy.

"Having said that, most of the good news on the expenditure side is over," he said. "From now on we will see a very gradual erosion of public discipline."

The finance ministry warned against such a relaxation in its monthly report yesterday, saying there was "no margin for tax cuts beyond those included in the recently adopted corporate tax reform".

Peer Steinbrück, finance minister, said in a German newspaper interview, "those calling for tax cuts now are shamelessly advocating a return to the policies that left us with a €1,500bn debt mountain".

The minister is concerned that the development could weaken his hand as Ms -Merkel's cabinet, which is today concluding its mid-term conclave north of Berlin, discusses potentially costly policies.

Among the steps being floated are higher unemployment benefits, new family allowances, more spending on education and an ambitious climate-change package, including tax incentives.

Meanwhile, corporate tax reform, which takes effect next year, will cost €25.3bn between 2008 and 2011 while rising interest rates are boosting yearly repayments linked to the public debt.

The detail of the yesterdays figures showed a sharp increase in revenues from income and corporate tax - up 29.8 and 11.9 per cent respectively - reflecting the steep fall in unemployment over the past two years, a gradual rise in wages and record corporate profits.

"There is a trend," said Dietrich Stache of the Statistical Office, "but people should not extrapolate the first-half figures to the full year as the pattern of expenditures and revenues varies greatly between the first and second half."

The government, for instance, receives an inflow of money from the Bundesbank's profits in the first half while Christmas bonuses and seasonal sales generate more income and value-added tax in the second half.

Copyright The Financial Times Limited 2007