April 1, 2016 / 9:11 AM / 2 years ago

Concerns raised about German spending despite balanced budget

BERLIN (Reuters) - Germany’s spending on social security could get out of hand as the population ages, a budget specialist in Chancellor Angela Merkel’s conservatives warned on Friday, contrasting current optimism over plans for no new net borrowing until 2020.

German Finance Minister Wolfgang Schaeuble addresses a news conference to presents budget plan 2017 in Berlin, Germany, March 23, 2016. REUTERS/Fabrizio Bensch

Buoyed by record-low unemployment, rising wages and steady economic growth, the German government agreed last month to its biggest increase in the state pension in more than two decades.

It has also raised housing allowances, expanded parental benefits, improved disability allowance benefits and will increase the federal subsidy for healthcare by 500 million euros ($568.85 million) next year to 14.5 billion euros.

As a result, spending on social security benefits is expected to leap by almost 10 billion euros in 2017 to 171.1 billion, equivalent to 52.6 percent of the overall federal budget. In 1990, social spending accounted for just 27.2 percent of the total budget.

“The development of the social security benefit ratio is problematic,” Eckhardt Rehberg, budget spokesman for the conservatives in parliament told Reuters.

“We need to watch out that we don’t establish a trend by setting the wrong course that comes back to bite us the next time the economy takes a downturn or in the long run,” he said.

The extra social security costs come at a time when the government has said it plans to get by without new net borrowing up to 2020 due to rising tax revenues, despite higher spending on migrants, security and infrastructure.

The finance ministry’s plans envisage a 30.9 billion euros rise in spending to 347.8 billion euros by 2020.

While record-low unemployment has boosted tax revenues, Germany’s ageing workforce will start to make itself felt on the state coffers by the middle of the next decade, according to Martin Beznoska, a budget specialist at the Cologne Institute of Economic Research.

Berlin estimates its working age population will shrink by 6 million people by 2030 as the number of deaths outstrips births.

By 2040, the number of people aged over 67 percent is expected to rise by 42 percent by 2040, while those aged between 20 and 66 will shrink by a quarter in the same period, according to the Federal Statistics Office.

After the next federal election in the autumn of 2017, it will be important for the next government to adjust the spending balance, Beznoska said.

If higher spending continues to diminish the leeway in the budget, it will become difficult for the government to stick to its balanced budget goal, he added.

Reporting by Matthias Sobolewski; Writing by Caroline Copley Editing by Jeremy Gaunt

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