Germany debates how to spend massive budget surplus

German economic growth plummeted in 2019, official data is expected to show Wednesday, stoking renewed debate about how to use fiscal surpluses to boost gross domestic product.

Germany debates how to spend massive budget surplus
Photo: DPA

Persistently anaemic growth and a multitude of structural challenges — from an ageing population to crumbling infrastructure and the car industry's transition to electric power — have prompted calls at home and abroad for Berlin to do more.

Critics say Chancellor Angela Merkel's successive governments have stuck too dogmatically to a no-new-debts policy known as “black zero”.

READ ALSO: 'Germany will do what's needed without new debts'

In recent years, billions of euros in government budget surpluses have not been deployed to maximum growth-boosting effect.

Figures released this week showed the federal government alone booked a surplus of 13.5 billion in 2019.

Separate data on Wednesday could highlight a surplus across all levels of government of up to 1.6 percent of GDP, Berenberg bank analysts predict, down from 1.9 percent in 2018.

A fresh tug of war is already beginning between Merkel's conservative CDU party and their SPD centre-left junior coalition partners over how to spend the bonanza.

Where the SPD favours more investment and higher social spending, many CDU politicians want tax cuts for individuals and businesses.

“Short-term stimulus is still not really needed” in Germany, ING's Brzeski said. “Instead, the surplus should be used to step up investment efforts in the well-known sectors: digitalization, infrastructure and education,” he added.

Possibly in response to such arguments, the government said Tuesday it had agreed to pump 62 billion euros into modernizing its rail network system, as part of a wider plan to incite commuters to opt for greener public transport options.

While the political battles are fought out, “Germany's attractiveness as a site for investment is gradually falling away, because economic policy is becoming less favourable”, Berenberg's Schmieding said.

READ ALSO: Germany to invest €62 billion to modernize rail network

'The fat years are over'

After 1.5 percent economic expansion in 2018, last year's figure should come out around 0.5 percent, the Bundesbank central bank and leading economic think-tanks have forecast.

“The fat years are over, at least when it comes to growth,” ING bank economist Carsten Brzeski told AFP, predicting “probably the weakest annual growth rate since 2013.”

“The golden decade Germany has seen for growth is gradually coming to an end,” agreed Holger Schmieding of Berenberg bank.

Trade conflicts, political upsets such as Brexit, slowing global growth and a near-unprecedented rate of change in the car industry have all weighed on Germany's manufacturing backbone in recent years.

Meanwhile, solid domestic consumption, buttressed by low unemployment, has helped keep the economy out of recession.

As 2020 begins, a “phase one” US-China trade deal is set to be signed Wednesday, while the next Brexit steps are clear after Boris Johnson's resounding British election victory last month.

Both could provide much-needed relief to export-oriented German manufacturers.

But ratings agency Moody's warned Tuesday of a “deteriorating global environment” that “will weigh on growth in (eurozone) member states' open economies in 2020”.

The Bundesbank sees growth this year marking time at around the 2019 level, while the think-tankers and some bank analysts including Brzeski expect a mini rebound, to around one percent.

Destatis said GDP “grew slightly” in the fourth quarter of 2019, without providing figures — “a moderately positive starting base for 2020,” tweeted analyst Oliver Rakau of Oxford Economics.

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Sweden’s new right-wing govt slashes development aid

Sweden, one of the world's biggest international donors, is planning drastic aid cuts in the coming years, the country's new right-wing government said in its budget bill presented on Tuesday.

Sweden's new right-wing govt slashes development aid

Prime Minister Ulf Kristersson’s government said it planned to reduce the country’s international aid by 7.3 billion kronor ($673 million) in 2023, and by another 2.2 billion kronor in 2024.

That is around a 15-percent reduction from what had been planned by the previous left-wing government and means Sweden will abandon its foreign aid target of 1 percent of gross national income.

International aid for refugees will be capped at a maximum of eight percent of its aid, and will also be reduced.

According to the specialised site Donor Tracker, Sweden was the world’s eighth-biggest international aid donor in terms of absolute value last year, and the third-biggest in proportion to the size of its economy, donating 0.92 percent of its gross national income, behind Luxembourg and Norway.

The new government, which is backed for the first time by the anti-immigration Sweden Democrats, had announced in its government programme last month that it would be cutting foreign aid.

Since 1975, Stockholm has gone further than the UN’s recommendation of donating at least 0.7 percent of its wealth to development aid.

Despite its growth forecast being revised downwards — the economy is expected to shrink by 0.4 percent next year and grow by 2 percent in 2024 — the 2023 budget forecasts a surplus of 0.7 percent of gross domestic product.

It calls for an additional 40 billion kronor in spending, with rising envelopes for crime fighting and the building of new nuclear reactors, as well as a reduction in taxes on petrol and an increase in the defence budget.

The new government is a minority coalition made up of Kristersson’s conservative Moderates, the Christian Democrats and the Liberal party, backed in parliament by their key ally the Sweden Democrats to give them a majority.