German cabinet backs balanced budget, wants continuity post-Brexit vote

[July 06, 2016]  By Michael Nienaber

BERLIN (Reuters) - German Chancellor Angela Merkel's cabinet agreed on Wednesday to stick to plans for a balanced budget over the next four years, a senior government official said, holding course despite the shock of Britain's vote to leave the European Union.

The government hopes its plans for slowly raising state spending without taking on net new debt up to 2020 will send a message of "reliability and continuity" after Britain's decision to leave the 28-member bloc, officials have said.

The German approach contrasts with that of Britain, where finance minister George Osborne said after the Brexit vote that he was abandoning his goal of eliminating Britain's budget deficit by 2020, once the centrepiece of his fiscal policy.

Berlin is able to raise its spending without incurring net new debt thanks to buoyant tax revenues brought by record-high employment and ultra-low debt refinancing costs, helped by the European Central Bank's accommodative monetary policy.

The cabinet on Wednesday approved final details of the 2017 budget and financing plans up to 2020. Berlin expects to reduce its total public debt to less than 60 percent of gross domestic product in 2020 for the first time since 2002, meeting a criterion set out in the EU's Stability and Growth Pact.

An influx of more than 1 million migrants into Germany last year raised questions about whether the government would be able to integrate the newcomers without jeopardising its cherished balanced budget.

But it has maintained its balanced budget while earmarking 77.5 billion euros ($86.4 billion) up to 2020 for managing the flow of migrants and tackling the causes of migration to Europe.

The government expects the economy to grow by 1.7 percent this year, matching last year's rate of expansion.

Finance Minister Wolfgang Schaeuble speaks at a news conference on 2017 budget and financial plan till 2020 in Berlin, Germany July 6, 2016. REUTERS/Stefanie Loos

Merkel's ruling coalition of her conservatives and the left-leaning Social Democrats has faced criticism - both at home and abroad - for holding to the balanced budget plans and not investing more for the future.

Economists this week called governments to stop leaning on exhausted central banks and use record low borrowing costs to kickstart a revival in private sector investment in a bid to reboot the world economy.

German officials have said its plans do not mean excessive spending constraints. Next year, the government plans to raise investment spending to 33.3 billion euros from 31.5 billion euros in 2016.

They have also said the promise of a balanced budget should reassure consumers that taxes will not be raised, thereby helping the economy to stay domestically strong and to cushion any external shocks such as an economic fallout from Brexit.

(Reporting by Michael Nienaber and Gernot Heller; Editing by Paul Carrel and Raissa Kasolowsky)

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