Germany Borrows Heavily to Balance 2006 Budget

The German government will again be living beyond its means in 2006: Fifty billion euros ($60.1 billion) in this year's budget of 261 billion euros are not covered by state revenues.

That's why Finance Minister Peer Steinbrück plans to rely heavily on fresh borrowing -- totaling about 38 billion euros this year -- and on selling off state property to meet the expense.

In order to be able to do that he has declared a state of fiscal emergency that allows him to ignore a clause in the constitution stipulating that new government debts must not overshoot investment spending by the state. The finance minister told parliament on Tuesday that the measure was needed to boost the economy and gain financial room to maneuver for greater consolidation in 2007.

"The 2006 budget is intended to create stronger economic growth and so provide the necessary tailwind to achieve our ambitious goals in 2007," he said. "Next year we are planning to invest considerably more and notably drive our deficit below the EU's 3 percent limit."

Staggering national debt

The fresh borrowing, however, will increase Germany's national debt to a staggering 900 billion euros. This mountain of debt alone requires servicing by the state to the tune of 40 billion euros in the current year. Meanwhile these interest payments coupled with staff expenditures, state contributions to the pensions system and huge spending on social welfare make up two-thirds of the entire budget.

But Steinbrück warned against populist calls from the opposition demanding sweeping cuts to these costs.

"Abrupt cuts and sudden changes in welfare policy will only lead to social upheaval and a disintegration of our complex society," he said. "Forces would be strengthened that could undo social cohesion in Germany. But I'm afraid that those calling for sweeping changes will only come to realize that when we are facing conditions like those in Paris and other French cities."

Opposition laments extra spending

But the free-market liberal Free Democrats (FDP), who are the strongest opposition force, didn't hold back with stinging criticism of the government's budget policy. Their finance expert Jürgen Koppelin accused Chancellor Merkel of lying in public with her repeated declaration that she didn't want to repeat the mistakes of the previous government.

"I cannot see a change of political course in this budget," he said. "Mrs. Merkel is even increasing the amount of new debts by 7 billion euros compared with the previous government. There is more expenditure, less savings and a continuation of the ongoing violation of our constitution."

Other opposition speakers claimed that, contrary to what the government says, there was room for consolidation as additional revenue from rising company profits was already accumulating this year. They accused Merkel of using the dire state of the budget as an excuse for her plans to raise value-added tax by 3 percent next year.

Steinbrück replied that 2007 would be a fateful year and that it wouldn't hurt to save for a rainy day when growth and consumption are expected to drop as a result of the consolidation effort.