From the Ecnomist on the Budget Deficit

The following Article is take from "The Economist".
You can view the article at http://www.economist.com/node/16333407?story_id=16333407&fsrc=scn/fb/wl/ar/slashnbounce

DO NOT expect much applause when you are chopping your government’s deficit. Chancellor Angela Merkel touted as an “unprecedented feat” her plan to save €80 billion ($96 billion) from Germany’s federal budget by 2014 when she unveiled it on June 7th after a two-day cabinet meeting. But the reviews were mixed. Opposition politicians denounced the plan’s “social callousness”. Businesses targeted with higher taxes fumed. Economists noticed that the savings were neither as big nor as certain as Mrs Merkel suggested. The feat may need revising.




Yet in one sense it is a breakthrough. For the first time since her re-election last September Mrs Merkel seemed, if briefly, to be in charge. Before this the Free Democratic Party (FDP), junior coalition partner to her Christian Democratic Union (CDU), had forced tax cuts upon her that she did not really want. She reluctantly bailed out wobbly members of the euro zone. After Horst Köhler, the German president, quit suddenly on May 31st she nominated a successor to placate powerbrokers within the CDU. The budget package, by contrast, is largely her handiwork. She chose investment over redistribution.



Its main purpose is to cut the federal government’s structural deficit—that is, the part not related to the business cycle—from an expected 2.5% of GDP this year to 0.35% by 2016, as required by a recent amendment to the constitution. That is also supposed to set an example to profligate members of the euro zone. To avoid crushing a fragile European recovery, the savings will be phased in. Growth will be dampened but, says Eckart Tuchtfeld, an economist at Commerzbank, “the economy seems to be pretty resilient.” Investment in education, research and infrastructure, the sources of future growth, has been largely spared.



This does not mean that the package has been fully thought out. Many of the proposed savings are to come from schemes that do not yet exist. Producers of nuclear power are to contribute €2.3 billion a year; in return they want to keep the plants running beyond a deadline for closure set by an earlier government. That is a sure way to mobilise banner-waving crowds. Banks are to kick in €2 billion a year through a “transaction tax” as penance for the economic crisis, but that may depend on securing international agreement. Many subsidies undeservedly survived the cull.



The proposed cuts to benefits, by contrast, look brutally concrete to many Germans. The government plans to eliminate a heating subsidy for the poor and to stop paying welfare beneficiaries’ contributions into the pension system, saving €1.9 billion a year. Such cuts are defensible: the contribution subsidy raises pensions by a negligible amount, for example. But while shaking down the unemployed, Mrs Merkel proposes to spare the rich. The FDP, which reluctantly gave up the idea of further tax cuts, vetoed increases in income and consumption taxes. That apparent unfairness dismays some of the chancellor’s allies, as well as the opposition. Norbert Lammert, the Bundestag’s president and a member of the CDU, called for raising taxes on top earners.



Having just about regained the political initiative, Mrs Merkel could quickly lose it. A row over health reform between the FDP and the CDU’s Bavarian sister party, the Christian Social Union (CSU), has descended into name-calling. The Bavarians are “wild pigs”, said an FDP official in the health ministry; the liberals are “bush leaguers”, shot back the CSU’s general secretary. No one is enthusiastic about Mrs Merkel’s pick for the presidency, Christian Wulff, the stolid premier of Lower Saxony. The opposition candidate is more exciting: Joachim Gauck, an East German human-rights activist who presided over the opening of the secret-police archives after unification. Mr Wulff ought to prevail in the Federal Assembly, which convenes on June 30th to elect a new president. If not, Mrs Merkel will be in real trouble.