Germany: Budget to deteriorate sharply
Following the sharp decline in the first quarter of the year, real GDP increased in the second quarter, helped by the temporary surge in private consumption growth in response to stimulus measures. The recovery continued in the third quarter on account of an improvement in world trade and stock-building. Going forward, the improvement in activity could be relatively slow, especially through to mid-2010. Unemployment remains unusually low, not least due to the government-sponsored short-time working scheme which allows firms to reduce labour input without layoffs. While unemployment is projected to increase rapidly during 2010 the total employment loss will be mild compared with the depth of the recession.
The budget balance is set to deteriorate sharply in 2009 and 2010 as revenues remain subdued and expenditure rise, not least due to higher unemployment. In addition, the fiscal stimulus package will worsen the budget deficit in 2010. Once economic activity is back on a sustainable growth path, the structural deficit will have to be reduced, also in view of future ageing related expenditure. The implementation of income tax cuts in 2011 should be made conditional on the ability to meet the recently enacted fiscal rule.
©OECD Observer 2010