German cabinet backs balanced budget continuity after Brexit vote

By Michael Nienaber

BERLIN (Reuters) – German Chancellor Angela Merkel’s cabinet agreed on Wednesday to stick to plans for a balanced budget over the next four years, Finance Minister Wolfgang Schaeuble said, holding course despite the shock of Britain’s vote to leave the European Union.

With its plans for slowly raising state spending without taking on net new debt up to 2020, the government wants to send a message of “reliability and continuity” after Britain’s decision to leave the 28-member bloc, officials said.

The German approach contrasts with that of Britain, where finance minister George Osborne said after the Brexit vote he was abandoning his goal of eliminating Britain’s budget deficit by 2020, once the centerpiece of his fiscal policy.

“Germany remains reliable. We’re strengthening the state’s ability to act by doing without new debt,” Schaeuble told a news conference, adding that the government was raising its spending on infrastructure, security and integrating migrants.

Berlin is able to raise expenditure without incurring net new debt thanks to buoyant tax revenues brought by record-high employment and ultra-low debt refinancing costs, helped by the European Central Bank’s accommodative monetary policy.

The cabinet on Wednesday approved final details of the 2017 budget and financing plans up to 2020. Berlin expects to reduce its total public debt to less than 60 percent of gross domestic product in 2020 for the first time since 2002, meeting a criterion set out in the EU’s Stability and Growth Pact.

The Bundestag, Germany’s lower house of parliament, will vote on the budget plans in November. There are usually no major changes made during the parliamentary process.

INTEGRATION OF MIGRANTS

Schaeuble said the economic conditions for Germany’s upswing to continue were still favorable despite Britain’s decision to leave the EU. “The result of the British referendum changed nothing about that, or at least nothing noticeable,” he said.

When asked about plans from British finance minister George Osborne to cut corporation tax, Schaeuble said: “We don’t have the intention in Europe to start a new race to the bottom.”

An influx of more than 1 million migrants into Germany last year raised questions about whether the government would be able to integrate the newcomers without jeopardizing its cherished balanced budget.

But it has maintained its balanced budget while earmarking 77.5 billion euros ($86.4 billion) up to 2020 for managing the flow of migrants and tackling the causes of migration to Europe.

Merkel’s ruling coalition of her conservatives and the left-leaning Social Democrats has faced criticism – both at home and abroad – for holding to the balanced budget plans and not investing more for the future.

But Schaeuble said his budget plans do not mean excessive constraints. Next year, the government plans to raise its overall state spending by 3.7 percent to 328.7 billion euros.

He also added that the promise of a balanced budget should reassure consumers that taxes will not be raised, thereby helping the economy to stay domestically strong and to cushion any external shocks such as an economic fallout from Brexit.

The German economy is expected to grow by 1.7 percent this year, matching last year’s rate of expansion. However, industrial orders data released earlier on Wednesday pointed to the economy losing some steam in the second quarter.

(Reporting by Michael Nienaber and Gernot Heller; Editing by Paul Carrel and Raissa Kasolowsky)