While giving the rest of Europe lessons on austerity, Germany has quietly been accumulating debt, a situation that will worsen with the planned social reforms and tax cuts.
BERLIN - German Chancellor Angela Merkel appears intractable on the subject of austerity measures in Europe. And yet when it comes to budgetary rigor, Germany is actually not setting a good example, according to a report from the Berlin-based Stiftung Marktwirtschaft (Market Economy Foundation).
Instead of using the country's strong current economic situation to consolidate its position, "the federal government is planning a number of expensive gifts," says economist Bernd Raffelhüschen, noting in particular planned reforms of child care and health care, as well as pension and tax reforms.
The German debt has reached a record 83.2% of gross domestic product (GDP). To that must be added hidden implicit social security and pension debt. At 147% of GDP, this hidden debt significantly exceeds the official debt. If the government had to produce a profit and loss statement the way businesses do, it would have to create reserves amounting to the entire debt, which represents 230% of GDP.
However, as the government is not making the necessary provisions, that leaves them with a "sustainability gap" of 5.7 trillion euros, according to Raffelhüschen. "Before we rescue other countries we should rescue ourselves from ourselves," said the Chairman of the Stiftung Marktwirtschaft, Michael Eilfort.
Despite record revenues from taxes and social security payments following higher growth rates and the on-going jobs boom, the German government has not been able to put together a balanced budget. Because of the good state of the economy, however, the figures in Raffelhüschen's report show a decrease in total national debt for the third consecutive year. But the next recession will reverse the up trend – and the more paid out for benefits the stronger that reversal is.
The economist claims that the planned reforms to cut taxes --which have been blocked by the Bundesrat (the federal legislative body that represents Germany's 16 states)-- would have increased the total debt from 230% of GDP to 243%.
Raffelhüschen also says that healthcare reforms are not being financed. While contribution rates will be raised in 2013, the increased revenues will not be enough to cover a broader range of healthcare, for example for dementia patients.
The planned pension reform will be expensive long-term, particularly if the introduction of a "top-up" for low earners goes through. "It would represent a break with one of the basic principles of our social state, that is that all poor people should be treated equally," says Raffelhüschen. With a "top-up" of 850 euros a month, a poor senior would be getting better treatment from the government than a poor youth whose resources would be subject to review before benefits could be granted.
Also financed by debt would be the daycare money to be paid from January 2013 to parents whose toddlers do not go to a daycare center. "If you want this measure, it should under no circumstances be financed with borrowed money," Raffelhüschen says, because doing it that way means the children will end up paying for it.
Free Democratic Party (FDP) economist Hermann Otto Solms shared skepticism about the planned reforms. "If we expect other European countries to implement severe austerity measures, we have to set a good example in Germany," he said in reference to the daycare and "top-up" benefits. Consolidation should be our top priority right now, he added.
Read the article in German in Die Welt.
Photo - Ken Teegardin