Balanced budget foolishness

One might expect champagne corks to be popping in the C-suites of Germany's major corporations these days. Despite a flaccid global economy, with recessions plaguing multiple important emerging economies and consequent weakness in aggregate demand, the already enormously productive German economy managed to grow another 1.7 percent year-on-year in 2015.

As a result, tax revenues have grown at all levels - federal, state and municipal - as have social insurance fund revenues, including those of pension, unemployment and health insurance funds. Taken together, the various public institutions took in 20 billion euros more than they spent last year.

Luck rather than virtue

Success has many fathers, while failure is an orphan, as the saying goes. Germany's public revenues are hitting record highs in large part because the country's employment rate has also hit a high. In addition, consumer spending is up: Employees are spending more freely because most aren't in fear of losing their jobs, and they're paying far less for petrol and heating fuel than they did a year ago, leaving more in the household kitty for other things. That sluices money into retail sales, and the government treasury takes a 19 percent share of every retail sale via value-added tax.

In addition, there's the controversial zero-interest-rate policy of the European Central Bank under its president Mario Draghi. The tsunami of money pouring into financial markets has sufficed to paper over the budget deficits of southern European countries and to keep quite a number of zombie banks staggering along, which has been buying Europe's South some time as they - one hopes - try to get to grips with their structural economic challenges.

The same policy, as a side effect, is sweeping away any problems the German finance ministry might otherwise have had in balancing his budget, since he needn't pay any interest on German bonds. In fact, recently institutional investors such as pension funds, which are required by law to buy and hold triple-A risk-free highest-quality bonds, have actually been paying the German finance ministry a small amount of interest for the privilege of owning its bonds. German Bunds now carry a negative interest rate. At present, the sovereign bond corner of the European financial world is upside-down.

Underinvestment

Again, success has many fathers. But there's one player one really can't credit with the buoyancy of Germany's public revenues: Finance Minister Wolfgang Schäuble. It's not merely that he is wholly innocent of any role in generating the torrent of money flowing into state coffers. It's also that his policy of running a balanced federal budget (or even a surplus), which has become an obsession for the Minister, is increasingly being called into question by economists warning of under-investment in the country's infrastructure. It's dawning on ever more people that strict budgetary austerity should not be set up as an end in itself.

A government that refuses to invest sufficiently in roads, bridges, schools, universities and teachers is a government that's committing to a long-term decline in the quality of the country's infrastructure and human capital. How much sense does it make to put future prosperity at risk simply out of stubborn adherence to an accounting rule? Many economists have pointed out that now is an odd time for the German government to refuse to take up new credits, given that investors are actually willing to pay the government for the privilege of lending money to it.

Economists and business leaders say that If new spending were directed at productivity-enhancing infrastructure projects and skills enhancement to improve the workforce of the future, such spending would very likely cause a boost in future GDP large enough to allow a continuing fall in the public debt-to-GDP ratio despite the government's running modest annual deficits.

Business mood barometer

Maybe it's a coincidence that on the same day the public treasuries reported a record surplus, the Munich-based IFO Institute, which regularly polls a large number of German businesspeople on their near-term business outlook, reported the third monthly decline in business optimism in a row.

Industrial managers report that business is going well at the moment, but they're increasingly worried about the future - and not just because of a slowdown in global economic growth rates and the weakness of emerging economies. They're also worried that Germany's competitiveness is slowly degrading, and new contracts and orders may increasingly be lost to Chinese or Korean competitors who can deliver products more cheaply.

An inadequate level of investment in infrastructure upgrades is one way in which Germany's government is lagging. Another is in regards to structural economic reforms. Hitting new records in government revenues is a fine thing in itself, but it entails the risk of complacency. The current surplus of 20 billion euros doesn't help anyone unless it's wisely invested in making improvements. The competition isn't sitting on its hands.

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