German 2012 Federal Budget May Help Chancellor Merkel Push Deficit Cuts

Germany’s Finance Ministry and federal lawmakers reached agreement on the government’s 2012 budget plan, shrugging off forecasts of weaker economic growth to help push borrowing back below European Union limits.

Federal net new borrowing will total 26.1 billion euros ($35.5 billion) next year compared with 22 billion euros expected for this year, according to figures released today by parliament’s budget committee after 10 hours of negotiations. The new borrowing budget is 1.1 billion euros less than planned in an earlier draft, according to the data.

The figures are a fillip for Chancellor Angela Merkel as she touts Germany as a beacon of fiscal rectitude that other euro-area countries should emulate to foil the debt crisis. As German economic growth loses steam and revenue slows, realizing pledges to cut borrowing that climbed to a record at the height of the banking crisis in 2009 becomes more difficult.

“The spotlight’s on Germany to be best-in-class in budget discipline,” Eckart Tuchtfeld, an economist at Commerzbank AG in Frankfurt, said by phone before the figures were released. “Merkel has to walk a tightrope, balancing discipline and servicing domestic demands on her budget, including calls for tax cuts, that could spark discord if not fulfilled.”

The federal government’s 2012 borrowing limit imposed by the debt brake in Germany’s constitution is 40.5 billion euros. Borrowing will be used to pay for public projects such as roads and energy conservation for which the government has earmarked 26.9 billion euros.

The federal government will spend 306.2 billion euros next year, equal to this year’s outlays. Germany’s budget is made up of federal, state and municipal accounts. The Finance Ministry and federal lawmakers fine-tune the budget each fall, scouring outlays for last-minute savings.

Merkel’s 2012 fiscal aspirations rest on tax revenue growth of 2.7 billion euros that might permit a rolling back of gross bond sales, the plan shows. Europe’s biggest issuer of sovereign debt will sell bonds worth about 270 billion euros next year.

Europe’s biggest economy may grow 0.9 percent in 2012 after 3 percent this year, Merkel’s independent panel of economic advisers said on Nov. 9. The panel said it expects Germany to fulfill the euro’s 3 percent of gross domestic product deficit rule this year for the first time since 2008, with the composite federal, state and municipal accounts shrinking to 1.1 percent of GDP and 0.7 percent next year.

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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