Germany's Fiscal Picture - Are Cracks Starting to Show?

Now that the German economy appears to have sideswiped by the "Euro Debt Plague" with the announcement of near zero growth, I thought that it was time for an update of Germany's fiscal picture to the end of June 2011.  This covers the first half of Germany's fiscal year which runs from January to June.

Germany's Finance Ministry provides a Monthly Report on its budget and fiscal picture.  In July's data release, the government notes that overall expenditures were down by 3.2 percent for the first 6 months of the year to €150.3 billion compared to the previous year.  Lower interest expenditures, which consume 12 percent of the national budget, were responsible for just over 50 percent of the €5 billion drop in spending.  Fortunately for Germany, total government receipts were up 4.6 percent to €128 billion with tax revenue up 10.8 percent on a year-over-year basis with much of the increase coming from value added taxes.  When the revenue and spending sides of the ledger are combined, the deficit for the first six months of 2011 came to €22.288 billion, down from €32.877 billion in the first six months of fiscal 2010.  Here is a graph showing the estimated deficit for the full year, the first six months of 2011 and the first six months of 2010:

When expenditures are looked at in detail, year-over-year increases were highest for Education, Science, Research and Cultural Affairs (up 17.3 percent) and Health, Environment, Sport and Recreation (up 22.3 percent).  Greatest year-over-year expenditure decreases were noted in Social Security, War-Related Social Tasks and Indemnification (down 3.8 percent) and General Public Services (which includes defence) (down 1.9 percent).  Within each function, the greatest expenditure increase was for Unemployment Benefits II, government housing and heating allowances which was up 44.9 percent.  For those who aren't familiar with Germany's unemployment benefits system, the country has 2 unemployment benefits systems.  In the first, Unemployment Benefit 1, the benefit paid depends on the net wage of the recipient and is financed by money from the unemployment insurance.  The Unemployment Benefits II system is different because it enables receivers to maintain a living and the amount granted depends upon the needs of each recipient.  This benefit may be covered in part by the recipient's local municipality and benefits may include accommodation and heating expenses, child care benefits and debt and addiction counselling.

On the revenue side of the ledger, the Value Added Tax, Insurance Tax, Motor Vehicle Tax, Electricity Tax and Assessed Income tax were well above half of their projections for the full year with VAT by far the most important source of revenue, bringing in €50.387 billion in the first six months of fiscal 2011.  This is up 8.6 percent from the year before and now comprises 39.4 percent of Germany's total tax revenue.  The government take from VAT is somewhat volatile since it is impacted by changes in  consumer spending.

Now let's look at the latest debt figures for Germany:

Note that the total outstanding debt has reached €1,131.385 billion on May 31, 2011.  That's up €13.976 billion from the previous month.  Just over 47 percent of Germany's debt is considered long term with maturities of four years and longer.  Here's a chart from the Eurostat website showing Germany's debt-to-GDP up to the year 2009 in comparison to its EU-27 partners:

To meet the target of reducing the annual deficit to less than 0.35 percent of GDP by 2016, Germany needs to trim its deficit by €7.5 billion annually between 2011 and 2016.  The German Finance Ministry terms this cut in the deficit “the debt brake".  While it looks like they may well meet their target for the first half of 2011, with the release of GDP growth of only 0.1 percent (a statistical positive blip), it is quite possible that Germany is being dragged into a recessional abyss along with the rest of the Eurozone.  It is interesting to note that Germany's economy, while the strongman of the EU, has hardly been robust since the 2008 Great Recession.  Growth in the first quarter of 2011 was revised downward to 1.3 percent; this followed growth of 0.5, 1.9, 0.8 and 0.4 percent for the four quarters of 2010, hardly a massive economic expansion.  Should the German economy contract over the next quarters, it will make it difficult for the country to both cut spending and increase tax revenue, both of which are essential to meeting their "debt brake" target.

In closing, let's take a brief look at one interesting economic statistic for Germany.  Here's a detailed look at both inflation and deflation in Germany's economy:

If you live in Germany and happen to like pepper, you're in luck!  If you happen to be a coffeeholic, you're not.  Overall, Germany's inflation rate reached 2.4 percent in July 2011.

It will be interesting to see if Germany and France are able to sustain their weaker Eurozone partners including Greece, Spain and Italy over the coming months.  It will not be an easy task, particularly if the German economy begins to contract over the coming months as Europe and the rest of the world are once again heading back toward recession.  When the "strongman" of Europe is showing near zero economic growth, all bets for Europe's economy are off.