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Germany meets deficit rule for first time since 2001

Germany last year met European Union rules limiting budget deficits for the first time since 2001, as the fastest economic growth in six years boosted the government's revenue, the country's statistics office said.

The public-sector deficit, which includes shortfalls at the federal level as well as in the 16 states, municipalities and the social-security systems, shrank to 2% of gross domestic product from 3.2% in 2005, the Wiesbaden-based Federal Statistics Office said today. EU rules oblige governments to keep the shortfall below 3% of GDP. Economic institutes including the Berlin-based DIW predict Chancellor Angela Merkel's government will manage to get the budget close to balance in 2008. That would make it easier to reduce the country's $2 trillion public debt and cope with the effects of a shrinking and ageing population. „A healthy budget is the foundation of wealth, economic growth and employment,” Deputy Economy Minister Joachim Wuermeling said in a January 9 interview in Berlin. „Budget consolidation is one of the fundamental goals of this government.” Economic growth in Germany, Europe's largest economy, accelerated to 2.5% in 2006 from 0.9% the previous year, according to provisional figures published by the statistics office today.

The DIW, one of six institutes that prepare twice-yearly reports for the government, predicts the expansion of the economy will slow to 1.7% this year, damped by an increase in sales tax, before rebounding to 2.5% in 2008. The 3 percentage-point increase in value-added tax to 19%, which took effect January 1, together with other fiscal measures including subsidy cuts, will bring in about €22 billion ($28.6 billion), helping to cut the fiscal deficit to 1.2% of GDP this year and 0.6% in 2008, the DIW said January 3. Finance Minister Peer Steinbrueck in November lowered the 2006 net borrowing requirement for the federal budget to around €30 billion from the €38.2 billion forecast earlier. This year he is seeking to borrow no more than €19.6 billion, the lowest figure since East and West Germany reunited 17 years ago. The Finance Ministry will publish final figures for the 2006 budget and borrowing requirement tomorrow.

Steinbrueck, while declining to commit himself to a target year for a balanced budget, said in a November 24 speech in parliament he wants to follow the examples of Finland, Sweden and Australia and achieve budget surpluses. He'll set himself an „ambitious” target for 2008 should borrowing meet targets this year, he said. While Germany managed to comply with the EU's rule on the deficit last year, it probably violated for a ninth year in 10 a provision that calls for public debt not to exceed 60% of GDP. German debt exceeded that threshold in 1997 and rose to a record 67.9% of GDP in 2005. Figures for 2006 will be published in April, the statistics office said.

Failure to generate budget surpluses would push Germany's debt as high as 200% of GDP by 2050, the Munich-based Ifo economic institute said in 2004 in a study commissioned by Steinbrueck's predecessor Hans Eichel. The strain on the public coffers comes from an increasing number of pensioners, rising health-insurance costs and a shrinking number of workers contributing to the social-security system, the study said. In the absence of policy changes, Germany's credit rating would drop from AAA in 2006 to A in 2030 and „speculative” from 2040, Standard & Poor's said in a study on the effects of demographic change, the newspaper Boersen-Zeitung reported today. Interest payments will absorb more than 14% of planned government spending this year, budget projections show. Federal spending is expected to rise 3.4% from 2006, to €270.5 billion. (Bloomberg)