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Bonds News

Despite record surplus, Germany ignores calls to spend more

BERLIN, Aug 28 (Reuters) - Germany posted a record-breaking 21 billion euro surplus in the first half of 2015 but has turned a deaf ear to criticism from home and abroad that it should cut taxes or raise public spending to help alleviate pressures in the euro zone.

Despite calls from its European Union (EU) partners and the United States to ramp up spending on infrastructure after years of neglect, the government said it will stick to its austerity course and goal of achieving sustainable balanced budgets.

Economists believe Chancellor Angela Merkel’s conservative-led government is also tacitly trying to teach other EU governments the virtues of balanced budgets as a cure for the euro zone crisis. Her party is expected use Germany’s return to budget surpluses as a cornerstone of its 2017 election campaign.

“Balancing the budget was a central pledge in the 2013 election and they want to tick that box,” said Carsten Brzeski, chief economist at ING-Diba, adding Finance Minister Wolfgang Schaeuble wants to show Europe he “practices what he preaches.”

“There’s a horrible lack of investment in the economy yet the government is running an enormous surplus. It doesn’t add up. More flexibility would be good. With such low interest rates they should reconsider. But flexibility isn’t in the German DNA.”

In Brussels, the European Commission urges Germany to use its “fiscal space” to promote growth in the EU..

French Economy Minister Emmanuel Macron told a Berlin audience this week Germany may have gone too far with austerity. “Germany can make a mistake of ‘over-consolidating’,” he said.

But Brzeski said foreign leaders are giving up arm-twisting “because Schaeuble has convinced them he won’t spend any more”.

SCHAEUBLE MANTRA

The government said on Tuesday Germany’s budget surplus was 21.1 billion euros in the first half, or 1.4 percent of gross domestic product (GDP). About half of the surplus came from the federal budget, which was boosted by a 4.4 billion euro windfall from the sale of mobile phone frequencies.

The first half surplus was larger than Iceland’s entire 2014 GDP.

Whereas France, the euro zone’s second biggest economy, is still struggling to bring its deficit down to below the EU’s 3 percent cap, leaving Paris little room to boost still-fragile growth rates.

Schaeuble planned a balanced budget in 2015, not a surplus. He and officials in his ministry have kept mum about the surplus but last month he told trade magazine DBB: “The plan through to the 2019 budget is no new debt. If there were to be added scope, we’d use that for important investments for the future.”

Defying the euro zone crisis that crippled growth and caused tensions, Germany’s federal government posted a 500-million euro budget surplus in 2014 - its first surplus since 1969.

At the same time, Germany’s infrastructure investment has lagged for years. A group of mayors said last year that 118 billion euros of investment was needed for roads and buildings, while another public committee has called for investments of 7.2 billion euros a year to fix public transport infrastructure.

Charles Blankart, a public finance professor at Humboldt University, says the government has scope to raise infrastructure spending. “But it won’t help French or Spanish companies if Germany builds more roads.”

The budget surplus has also prompted calls for tax cuts, especially the so-called “cold progression” (or bracket creep) as well as a “Solidarity Tax” used to finance unification.

“This record surplus shows the ‘Solidarity Tax’ is no longer needed,” Frank Steffel, a member of parliament in Merkel’s party, told Reuters. “It would cause no pain to cut that now.”

Steffel added Germany should open its wallet now.

“The considerable surplus should be given back to taxpayers,” he said. “And investment spending, especially for education and infrastructure, would be a most effective instrument.” (Additional reporting by Alastair Macdonald in Brussels and Andreas Rinke in Berlin; Writing by Erik Kirschbaum; Editing by Rene Wagner and Toby Chopra)

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