GERMAN CHANCELLOR Angela Merkel’s cabinet has approved a 2011 federal budget that includes €11 billion in cuts – or 3.8 per cent of total spending.
The budget draft, which now goes to parliament for approval, is the first stage of Berlin’s controversial four-year, €82 billion austerity package to wean Germany off debt and budget stimulus measures.
Germany has defended the package as essential for economic recovery and for adhering to new “debt brake” measures: next year will see fresh borrowing fall by 12 per cent to €57.5 billion.
Critics of the plan, including Washington, are concerned that the measures will stifle economic growth in Germany, the euro zone and beyond.
“Our aim is to scale back excessive deficits and ensure our economic development is sustainable,” said finance minister Wolfgang Schäuble of his plan. “This budget and the mid-term spending plan are influenced heavily by the banking and economic crisis of the last couple of years.”
After cutting its deficit last year to 3.1 per cent of gross domestic product (GDP), Berlin’s budget deficit is expected to hit 5.5 per cent this year. Though far below levels in other euro zone countries, it is still almost double levels permitted by euro-zone rules.
Finance ministry officials in Berlin insist the measures are weighted to add momentum to Germany’s economic recovery.
Unemployment has been falling for a year while, amid growing orders and consumer demand, business confidence has hit a two-year high.
The plan includes drastic cuts to many federal ministry budgets. Hardest hit is the labour ministry, with drastic reductions in welfare benefits to cover an 8 per cent budget cut. Next is the agriculture ministry with a 6 per cent cut.
Excluded from the austerity measures are spending on education and the environment, set to rise by 7 and 6 per cent respectively.
The austerity plan includes a tax on financial transactions estimated to generate €2 billion from banks. A similar amount may be earned from a yet-to-be-agreed tax on nuclear power plants.
A prominent victim of the spending cutbacks is the project to rebuild the Prussian palace in Berlin, demolished by the East German authorities in 1950. The ambitious endeavour, costing at least €550 million, has been put on ice indefinitely.
Unions have complained that the cuts are unbalanced, and unfairly target the weakest in society. They are planning widespread industrial action ahead of November’s parliamentary vote on the 2011 budget.
“This austerity package needs to be taken off the table, the government is quite clearly making savings at the expense of the poorest of our society,” said Claus Matecki of the German Federation of Unions.
This is the first time a budget has to take into account Germany’s “debt brake” law which forces the federal government to reduce the structural deficit to 0.35 of economic output from its current level of about 2.2 per cent.