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Germany: Social spending puts a strain on the budget – Lindner reacts

Germany: Social spending puts a strain on the budget – Lindner reacts

Germany probably has to save money. The finance minister already knows how. But his proposal will not solve all of the country’s economic problems.

The deficit in the German state budget was larger last year than previously expected. Federal, state, local and social security spending exceeded revenue by 87.4 billion euros, the Federal Statistical Office announced on Friday. An initial estimate in January only showed a loss of 82.7 billion euros. The new result corresponds to a deficit ratio of 2.1 (previously: 2.0) percent of gross domestic product, which once again remained below the EU upper limit of three percent.

“The deficit therefore remained high,” emphasized the statisticians. However, it was 9.5 billion euros lower than in 2022. The reason for this is that the state’s income rose more sharply, at 4.4 percent to 1,901.8 billion euros, than expenditure, at 3.7 percent to 1,989.2 billion Euro. Overall, the expenses were therefore higher than the income. The statistics office calculated a deficit ratio of 2.1 percent for 2023 – 0.1 percentage points more than the first preliminary calculation from January.

Federal government records higher social spending

Due to record employment, social contributions increased by 6.6 percent. Tax revenue, on the other hand, only grew by 0.7 percent. “In addition to the weak overall economic development, this was also due to extensive relief for citizens and the economy,” it said. These included, among other things, relief in the form of the Inflation Compensation Act, inflation compensation bonuses, the reduction of the VAT rate on gas from 19 to seven percent and the extension of the reduced VAT rate on food in restaurants until the end of 2023. Due to additional expenditure on the newly introduced citizen’s allowance and the statutory pension, these would have increased by 6.8 percent compared to 2022.

In view of the economic weakness, Federal Finance Minister Christian Lindner advocates not introducing any new social benefits for three years. It was basically a national sport to constantly decide on new subsidies and higher social benefits. “We’ll have to get by with this for three years,” said the FDP leader on Friday in Ghent, Belgium. There are regular increases in these benefits due to the link to wage and cost increases. These are of course fine, but there cannot be any new services for the time being. A spokeswoman for the Federal Ministry of Finance said in Berlin that steps that had already been decided, such as basic child welfare, were unaffected

Debt could fall further in 2024

However, expiring measures in connection with the corona pandemic and the energy crisis ensured that the deficit in the federal budget this time was 45.3 billion euros smaller than in 2022. Declining federal transfers combined with ongoing financial burdens to provide for those seeking protection contributed to this. that last year the states (6.4 billion euros) and municipalities (12.1 billion euros) were also in the red. In 2022 they still achieved surpluses.

Most experts expect new debt to continue to fall this year, also because of the federal government’s austerity measures following the Federal Constitutional Court’s ruling on the debt brake. The high prices and wage agreements are also likely to increase tax revenue.

Brake blocks from German industry

On the other hand, there is a much more pessimistic report for the German economy: according to the Federal Statistical Office, it is not getting anywhere. At the end of the year, gross domestic product (GDP) shrank by 0.3 percent compared to the previous quarter.

Industry, which has a comparatively high weight in Germany with around 30 percent of gross value added, is not only suffering from increased energy prices, but also from weak demand, especially from abroad. Last year, new orders in the manufacturing sector fell by 5.9 percent. Increased interest rates and costs are also slowing down construction. “In industry and the construction industry, the thick order cushions that companies had built up during the Corona period have now melted away,” explained Ifo economics boss Timo Wollmershäuser recently.

“The years in which German industry was a job and growth engine for the German economy are over for the time being,” expects Sebastian Dullien, scientific director of the Institute for Macroeconomics and Economic Research at the Hans Böckler Foundation. In particular, the energy price shock following the Russian war of aggression against Ukraine and the associated uncertainty in energy prices continued to have an impact.

In addition, the weakness of world trade is hitting the export-oriented German economy: the value of exports of goods “Made in Germany” fell last year. “In addition to high energy costs, the headwind for the German economy comes primarily from weak global demand, especially for highly cyclical goods such as cars, machine tools and chemicals,” analyzed economists at credit insurer Allianz Trade Deutschland.

Number of employed people in Germany increased

Nevertheless, the labor market in Europe’s largest economy has so far been robust, also due to the shortage of skilled workers. Many companies are still desperately looking for staff. The Bundesbank currently sees no signs “that the situation on the labor market will deteriorate noticeably as a result of the weak economy.”

According to preliminary data from the Federal Statistical Office, the number of people in employment last year reached 45.9 million, the highest annual average since reunification in 1990. Nine out of ten of the additional jobs were created in the service sector, while there was smaller growth in the manufacturing and construction industries .

Glimmer of hope for private consumption

The robust labor market and the trend towards falling inflation could help boost private consumption this year as an important economic support for Germany. “Positive news for the economy is currently difficult to penetrate, but it does exist: one such silver lining is the foreseeable recovery in private purchasing power,” said KfW chief economist Fritzi Köhler-Geib recently. Last year, many people saved on consumption because of inflation.

Regardless of slashed economic forecasts that see Germany as the bottom performer in the euro area this year, the Dax is rushing from record to record. However, the leading index only reflects a part of the German economy, which is primarily characterized by medium-sized companies. The 40 largest listed companies are represented in the Dax. It is not the domestic business that makes companies more and more valuable on the stock exchange. They generated most of their sales and profits abroad, explains analyst Konstantin Oldenburger from broker CMC Markets.

Structural problems

While countries like the Netherlands and Sweden will have to be content with similarly meager growth as Germany this year, according to EU forecasts, Greece and Spain are expected to achieve significantly more. According to economists, these countries will benefit primarily from the tourism boom after the end of the pandemic.

“So what otherwise helps us – a large industrial sector that benefits when the global economy is booming and energy prices are low – is now causing us problems,” said Ifo President Clemens Fuest “Tagesschau24”. However, Germany also has structural problems. “The auto industry is in a process of change. We are experiencing demographic change. We are heading towards a situation with a shrinking working population. And that worries many investors.”

Reliable framework conditions required

Business associations also criticize over-regulation, dilapidated infrastructure, taxes that are too high compared to international standards and political uncertainty in view of the disputes in the traffic light coalition. “Companies urgently need reliable and better framework conditions. This applies to the energy supply as well as securing skilled workers and the infrastructure,” recently warned DIHK economic expert Jupp Zenzen. Employer President Rainer Dulger warned at the turn of the year: “Out of disappointment and, above all, because of the economic disadvantages in Germany as a business location, more and more investment decisions are now being made in favor of foreign countries.”

The President of the German Institute for Economic Research, Marcel Fratzscher, warned in the “Rheinische Post” against pessimism: Talk of Germany as the “sick man” of Europe is misplaced. “The unspeakable pessimism of some business bosses and politicians is the biggest domestic brake on the German economy this year.” Economics is 80 percent psychology.

The vast majority of Germans expect the economic situation to worsen. In the ZDF political barometer, 69 percent of those surveyed said this was an expectation, as the broadcaster announced on Friday. 28 percent do not expect a major change, only two percent expect a positive development. Only ten percent describe the current economic situation as good. That’s fewer than there have been in 14 years. However, most respondents continue to describe their personal economic situation as good. 53 percent say this, 36 percent think it is mixed and ten percent think it is bad.

Source: Stern

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