GERMAN CHANCELLOR Angela Merkel’s new government plans to hive off debts of up to €50 billion into an off-balance sheet fund, prompting cries of budget fraud from the opposition.
Dr Merkel revealed the so-called “shadow budget” in attempts to reconcile competing demands in ongoing coalition talks: to manage deteriorating public finances while satisfying the tax cut demands of her junior coalition partner, the Free Democrats (FDP).
The FDP polled the best result in its history last month with a promise of immediate tax cuts worth €35 billion to stimulate the economy. Party leader Guido Westerwelle has stuck doggedly to this promise, rejecting offers from Dr Merkel’s Christian Democrats (CDU) for €20 billion in tax cuts over several years.
To accommodate the FDP leader, however, the chancellor has to find the extra billions in a budget already soaked with red ink – and face down opposition in her own party.
Among the greatest tax cut sceptics are Germany’s federal state governors, who stand to lose most of the tax income.
They point out that, even before tax cuts, Berlin will have to borrow an extra €100 billion next year just to balance its books. Without their support in the upper house of parliament, the Bundesrat, the tax cut plan has no chance of being passed.
“I’m a little concerned that not everyone [in the talks] seems to be equally concerned with the question of responsible public finances,” said Günther Oettinger, CDU governor of Baden-Württemberg, in a dig at the FDP.
The new government’s first budget contains several black holes. The most serious one is a €17 billion deficit at the state labour agency, caused by rising dole payments and a state-financed short-time working programme. Another €7 billion deficit is likely in the state healthcare fund.
The coalition parties are in agreement that it would be economic suicide to cover these deficits by increasing social contributions.
So, to create room for tax cuts without increasing non-wage costs, the coalition partners are considering shifting the labour agency and healthcare bills into an off-balance sheet loan.
Striking this loan from the regular budget would get around a regulation called the “debt brake”, introduced by the last government at the start of the financial crisis.
With an eye on the euro zone stability pact, the “debt brake” obliges future administrations to start balancing their budgets from 2011 on. By shifting debts out of the budget, that problem is solved, for now.
The plan has given Germany’s opposition parties their first stick with which to beat the government-in-waiting.
“If we had done something like this,” said Johannes Kahrs, Social Democrat (SPD) budget expert, “then we would have been run out of town by the CDU, FDP, economic experts and the finance press.” Prof Henrik Enderlein, an economist at Berlin’s Hertie School of Governance, called the plan a “cheap conjurer’s trick”.
“This is an attempt to hide from the taxpayer the costs of something they will have to pay eventually,” he said.
Despite the howls of protest, “shadow budgets” are nothing new in German politics: the last government created such funds to pay for extra childcare facilities and the bank rescue fund; Helmut Kohl’s government created an off-balance sheet fund to pay for the costs of German unification.
Still, the plan has drawn sardonic remarks from the German media.
The Süddeutsche Zeitung newspaper commented: “With this, the CDU-FDP government has blown a hole in the theory that right-wing parties have more of a grip of public finances than the left.”