Germany 'will make budget cuts priority for 30 years' (FT)

Germany's era of fiscal profligacy has come to an end and budget cuts will remain a priority for at least three decades, the most senior aide to Chancellor Angela Merkel has warned.

Thomas de Maizière, head of the chancellery and a close Merkel confidant, told the FT the government's efforts to bring the budget deficit back within the margins allowed by the constitution and the European Union's fiscal rules were "not the end of the road by a long stretch". "No matter how the economy turns out, my prediction is that fiscal consolidation will remain a priority of all governments for the next 30 years," he said. "For decades we have lived beyond our means and we will have to pay the price over decades."

After breaching the EU stability pact every year since 2002, Germany's public-sector deficit is set to fall back below 3 per cent of gross domestic product this year or next. The 2007 budget will also keep net borrowings under public investments, as mandated by the constitution, for the first time since 2002.

Mr de Maizière's comments should squelch any hopes within the business community that the government might reconsider its three-point rise in value-added tax next year given persistently feeble consumer spending and uncertainties regarding the solidity of the economic recovery.

Some economists also fear Ms Merkel's crackdown on deficits, could prove short-lived, as the government has favoured the immediate relief of tax rises over structural reforms that would bring longer-term savings.

They are concerned, too, about the government's ability to reverse spiralling spending on unemployment benefits after the failure of Hartz IV, for the long-term unemployed, caused a 71 per cent overrun last year.

Mr de Maizière rejected the suggestion that the government's consolidation drive would peter out in 2008 as it failed to address the structural deficit.

"We must keep reducing our net borrowing and our structural deficit, especially since we have now practically exhausted one-off revenues," he said. "Continuity and the long-term view are crucial. We cannot rule at the expense of future governments."

The comment was a thinly disguised swipe at Gerhard Schröder, Ms Merkel's predecessor, under whose second term the budget deficit ballooned, marking the first sustained break with the postwar German tradition of budgetary rectitude.

Mr de Maizière also defended the government's confrontational attitude towards the country's main lobbies, from business federations to trade unions and the myriad organisations that owe their existence to Germany's lavish social security system. "The lobbies have a legitimate right to represent their interests. They have a right to partisanship and one-sidedness," he said. "But we must treat them as such, which means we must always balance their interests against the common interest."

Draft reform of the statutory health insurance system has sparked an uproar among public-sector health insurers, prompting their seven representative bodies to announce an all-out public relations campaign against the project.

The federations are un-happy both about the draft, which they claim will send administrative cost in the statutory health insurance scheme rocketing, and about the government's failure to consult them.

"For a lobby group to conduct itself as though it were the parliamentary opposition reflects a fatal misunderstanding of the role of the lobbies," Mr de Maizière said.

Copyright The Financial Times Limited 2006