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Berlin to push budget discipline at G8

01.01.70

By Bertrand Benoit in Berlin and Mark Schieritz in Frankfurt

Published: November 17 2006 02:00 | Last updated: November 17 2006 02:00

Germany will put budget discipline on the agenda of its presidency of the G8 group of industrial nations next year in a move partly aimed at mending Berlin's tarnished reputation for fiscal rectitude.

The government of Angela Merkel, chancellor, together with the International Monetary Fund, will put forward a series of fiscal policy guidelines at the G7 meeting of finance ministers and central bank governors in Essen in February.

The move reflects mounting concern among finance ministers and central bankers that the world's leading industrial nations are poorly prepared for the heavier financial burden that rapidly ageing societies will inflict on public coffers and welfare systems in the next decade.

"This is about raising the quality of public finances," a Berlin official involved in preparing the initiative said, adding that governments should exploit the supportive economic cycle to accelerate fiscal consolidation.

"When should you consolidate if not now?" the official asked. "The question is how do you achieve a sustainable fiscal policy at the global level. The IMF will advise and support us there."

The guidelines, in part inspired by the European Union's stability pact and based on IMF recommendations, will ask governments to balance budgets over the economic cycle and provision for demographic costs.

If the initiative is well received by other member states, the finance ministry hopes to put the item on the programme of the June summit of G8 heads of states and governments in the Baltic sea resort of Heiligendamm.

The non-binding rules will also set qualitative criteria for government spending, with a preference for investment over consumption, officials familiar with the draft said. Early reactions from G7 members had been positive, they added.

Although the project originated in the finance ministry, it is in line with Ms Merkel's wish to put economic policy co-ordination at the top of the German G8 presidency's agenda as a tool to counter mounting global economic imbalances.

At the same time, bycalling for global fiscalbest practice rules, MsMerkel hopes to capitalise on the remarkable improvement in Germany's public finances since she took office a year ago.

A robust economic recovery that has boosted tax revenues and social security contributions, a crackdown on subsidies and a three-point rise in value added tax in January, the biggest in postwar history, should help bring Germany's deficit down to 19.6bn ($25.1bn) next year, the lowest level since 1989.

This year's expected shortfall of 30bn, while still among the highest in recent years, will be well under3 per cent of gross domestic product, back in line with the stability pact for the first time since 2002.

The costs of reunification 16 years ago and half a decade of stagnation up to the end of last year put tremendous strain on the public purse, severely denting Germany's image as a model of prudent fiscal policymaking. Under Gerhard Schrder, Ms Merkel's predecessor, Berlin and Paris successfully linked to water down the stability pact, making Germany the leader of a revolt by Europe's fiscal delinquents against the rules it had itself inspired.

Ms Merkel made it her government's top priority to fix public finances. Two weeks ago, her cabinet agreed to use the bulk ofthe tax revenue windfall, generated by faster-than-expected recovery, to bring down the deficit.

Economists have criticised the chancellor for over-relying on tax increases and the closing of tax loopholes to shore up state finances and for not focusing enough on spending cuts.

Expert opinion

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