View from City Road: Germans ducking and weaving

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The Independent Online
The Bundesbank's glacial progress in cutting interest rates has succeeded in diverting criticism from Germany's other policy problem: the federal government's equally sluggish efforts to cut the public sector deficit.

Part of the difficulty lies in translating the widespread public foreboding about tax increases into hard figures. The German budgetary process is so riddled with hidden items that Finance Ministry statements offer only a sparing insight into the real world.

Undeterred, the Bundesbank has done its sums and come up with a total PSBR for 1993 of some DM230bn, around 8 per cent of GDP (national output). What with the continuing need for massive net transfers to eastern Germany, the financing of the privatisation of the heavily indebted railways, and the burden of rising unemployment, the state's appetite for new funds will remain large. The willingness to adopt radical cuts in other areas is unlikely to grow as Germany heads into the 1994 'super-election year', with nine elections at state, European and finally national level.

Instead, the government is still ducking and weaving with tax increases. The re-introduction of the unification income tax surcharge is planned for 1995, when the government hopes the recession and the election will be memories. This may be wishful thinking. The depletion of reserves at the state pension fund will trigger an automatic increase in contributions of nearly 1 per cent, or DM20bn. Tax increases by another name are already in the pipeline.

The yawning deficit at the Federal Labour Office may also make a rise in unemployment contributions unavoidable. The same will probably be true of fuel taxes, to help finance the railway reform. On top of this come the often astronomical increases in municipal service charges.

The resulting weak prospects for consumption would be less serious if exports, the traditional engine of German recovery, could be relied upon to grow strongly. But with only modest assistance expected to come from abroad, worries about weakened consumption are leading some economists to reverse growth expectations for western Germany next year down towards zero. That in turn means German interest rates may have to stay lower for longer.