Tax Analysts Blog

In Germany Deficits Can Wait

Posted on Oct 27, 2009

"I am fully convinced that not only the year 2010 but also the year 2011 will be strongly marked by this crisis." With these words German Chancellor Angela Merkel announced the start of her new fiscal program. At the core are big tax cuts and spending hikes. Never mind the high levels of public debt. Never mind Germany's well known "fetish" for budget austerity. Conservative Christian Democrats led by Merkel and their coalition partner, the business-friendly Free Democratic Party, have agreed to postpone deficit reduction in favor of fiscal stimulus until the German economy has fully recovered.

Merkel, who will be formally re-elected Chancellor on October 28, said the coalition was "banking on growth," She added that there "is no guarantee that it will work but it offers the chance that it might." That's hardly a ringing endorsement. . . . And you thought Wall Street investment bankers were the only ones making risky bets with excessive leverage.

Photo by German GovernmentFinance Minister-designate Wolfgang Schäuble (pronounced "SHOY-bil", photo right), known for his plain speaking, toughness, and fiscal conservatism, said it would "naturally" be impossible for German budget to produce a balanced budget by the end of Merkel's four-year term in 2013. This may be the last chance for conservatives to enact major tax cuts. Recently enacted changes to the German constitution require budget deficits to be nearly totally eliminated by 2016.

The moves by Merkel & Co. are not foreign to U.S. politicians. The new coalition is following tried-and-true political tactic of taking the path of least resistance. Tax cuts--especially for a conservative bunch like this coalition--are pure joy. Cutting the deficit is pure pain. If you can get away with defict-financed tax cuts, what politician can resist? Yes, high unemployment is terrible, but it does offer the perfect excuse.

The Obama administration has repeatedly stated that its efforts at deficit reduction will begin in earnest with its 2011 fiscal year budget (to be released in February). But one can only wonder with 10 percent unemployment staring the electorate in the face right up to the 2010 election, will the Obama administration have the will power to resist the siren song of continued fiscal stimulus?




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