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Tuesday, November 04, 2003

Germany: Whither the Structural Deficit?

Following up on the last post, just how big is big in the case of the German deficit. Morgan Stanley's Elga Bartsch has a stab at making a 'best guess' (BTW the problem with giving Brussels giving short term stimulus now for structural reductions later is that if the problem deteriorates rather than improves with time, there really will be a push-comes-to-shove situation in two or three years time.)

Even though we have to wait for the fresh tax estimates to be released in order to finalise our assessment, our best guesstimate for the general government deficit for this year now stands at 4.2% of GDP. Previously, we had expected the Maastricht deficit to amount to 3.9% of GDP this year. According to government estimates, the federal budget deficit alone likely overshot by more than 100%, forcing the finance minister to submit a supplementary budget for 2003 in order to get a net borrowing requirement of €42.3 bn approved by parliament. So far, Herr Eichel only has a mandate to run a deficit of €18.9 bn this year. Both the supplementary budget for this year and the official government estimate for the Maastricht deficit, which will likely show a 4%-plus reading, are largely water under the bridge though.

What is of more importance, however, is the outlook for next year’s budget deficit. This is because according to the Excessive Deficit Procedure, in principle at least, next year would be the year in which the German general government deficit should be back below 3%. In our view, however, it is highly unlikely that the German government will be able to reduce the deficit that drastically. Instead, we estimate the deficit to be on the order of 3.6% of GDP next year. This constitutes a slightly more optimistic view than the one held recently (see Three Cheers for the Chancellor, 22 July 2003), reflecting a more drastic consolidation of subsidies and other tax breaks as well as serious efforts to contain health care and pension spending. But this might still not be enough to prevent the EU Commission from proposing additional consolidation measures to the German government. As in the French case, it seems that the Commission would be willing to allow Germany to stay above the 3% deficit ceiling for another year in exchange for a reduction in the structural budget deficit of 1% of GDP. At the moment, however, the government has delivered half of that.
Source: Morgnan Stanley GEF

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