Prospects for German public deficit worsen sharply: Eichel

The outlook for the German public deficit has worsened sharply and the government will have to change its forecast accordingly, Finance Minister Hans Eichel told the Die Welt newspaper.

Eichel, asked in an interview about Germany's ability to reduce its public deficit this year to below the ceiling of 3.0 percent of output as required by the euro-zone Stability and Growth Pact, replied: "Conditions have deteriorated sharply."

The government would "review and adapt its forecasts for public finances", he said.

The newspaper reported that the Socialist government headed by Chancellor Gerhard Schroeder is facing a sharp reduction of tax revenue, amounting to a fall of 4.2 percent in the first quarter of this year from the figure for the first quarter of last year.

On Tuesday the central bank, the Bundesbank, repeated its doubts that Germany would be able to reduce the public deficit to less than 3.0 percent of output this year.

The German economy, the biggest economy in the 12-nation euro zone, exceeded the 3.0-percent limit last year with a public deficit of 3.6 percent of gross domestic product.

Press reports here suggest that the government will have to change its budget for this year by 15 billion euros (16.2 billion dollars) to counter a fall of tax revenue and a rise of public expenditure reflecting mainly an increase in unemployment.

Countries which exceed the 3.0 percent limit become liable to procedures which could ultimately end in a heavy fine. France is already at risk of falling foul of the penalty arrangements.

Euro-zone countries are supposed to be moving their public deficits towards balance and ultimately surplus in times of growth, to reduce accumulated debt and to provide room to use deficits to stimulate the economy in times of recession.

The rules also require a country's debt to be less than 60 percent of output, or to be falling structurally to below this ceiling. Germany and France are experiencing difficulties in preventing their debt levels from breaching this target.

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Germany set for budget overhaul as taxes fall short
By Haig Simonian in Berlin
Published: April 23 2003 5:00 | Last Updated: April 23 2003 5:00

Germany's budget for 2003 is set for a thorough overhaul, after lower than expected tax revenues and higher than forecast unemployment have led to massive shortfalls in the figures put forward by Hans Eichel, the finance minister.

Officials confirmed yesterday that up to €7bn would be needed to plug gaps at the federal labour agency, responsible for unemployment insurance, because of the weak economy.

Ursula Engelen-Kefer, a trade union leader and executive at the agency, said this year's federal subsidy would have to be higher than the €5.6bn paid in 2002. Mr Eichel's budget, by contrast, passed only this month, assumed no cash injection would be required.

The subsidy derives from the fact that unemployment this year looks set to average 4.4m - 300,000 more than budgeted. "We have to expect that the federal transfer this year will be higher," said Ms Engelen-Kefer. Barbara Hendricks, a finance ministry official, confirmed a renewed subsidy would be required, while declining to give an estimate.

Separately, new data on tax revenues in the first quarter showed a serious shortfall because of the stagnant economy. Revenues for the federal and state governments and local authorities were 2.9 per cent below the corresponding period last year.

The full impact of Germany's virtually static growth will become apparent next month, when a specialist tax panel reveals its latest revenue forecasts. However, officials are already indicating revenues will be about €2bn below budgeted levels.

The poor figures have increased the chances of Mr Eichel being obliged to draw up a supplementary budget for 2003. They have also made it likelier than ever that Germany will fail to keep the deficit within the 3 per cent ceiling set out under the rules for the euro.

Finance ministry officials admitted yesterday that remaining below 3 per cent would be difficult this year, in what would be the second consecutive breach after last year's 3.6 per cent deficit.

The Bundesbank warned in its latest monthly report yesterday that a repetition was probable.

"From today's point of view, it seems likely that the 3 per cent limit for the total deficit will be exceeded," it said.

* The German government has three weeks to decide whether to overrule the cartel office and back the sale of a leading Berlin newspaper in what would be a sensitive political decision.

Wolfgang Clement, economics and labour minister, held a public hearing yesterday on the planned disposal of the Berliner Zeitung to the Stuttgart-based von Holtzbrinck group.

The sale, by Bertelsmann's Grüner+Jahr newspapers and magazines subsidiary, has been opposed by the cartel office and contested by other publishers on monopoly grounds.

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