Merkel to Balance Budget Three Years Early in Euro-Area Signal

Germany’s federal government will balance its budget three years earlier than required by its own rules, adding ammunition to Chancellor Angela Merkel’s calls on euro-area partners not to waver on budget discipline.

The so-called structural deficit of the federal budget will shrink to 0.35 percent of gross domestic product next year, equal to the limit set in national budget rules, the Finance Ministry said today in Berlin in a mid-term forecasts report. The deficit will continue falling each year thereafter and change to a small surplus in 2016.

Merkel’s government is counting on tax-revenue growth and spending cuts to roll back the deficit, documents presented to reporters show. “We will use higher tax income to push down net credit and not expand spending,” according to the report. As the budget moves from showing a deficit to a surplus in 2016, Germany will start cutting principal in its debt and not just pay off interest, it said.

The German budget may be spotlighted in Merkel’s efforts to persuade euro-area partners that trimming budgets and revamping the economy pays dividends. Unemployment, the second showcase of German policy, slid to a new two-decade low in May, bucking a Europe-wide trend as the financial crisis rages. The adjusted jobless rate fell to 6.7 percent from 6.8 percent in April.

Germany’s composite deficit is expected to decline to 0.7 percent of GDP in 2013 from 0.9 percent this year, according to May 11 forecasts of the European Commission. That compares with 6.3 percent for Spain next year, 4.2 percent for France and a euro-area average of 2.9 percent, the commission forecast.

Zero Borrowing

According to the plan, net federal borrowing will decline from 18.8 billion euros ($23.6 billion) next year to 13.1 billion euros in 2014, 4.7 billion euros in 2015 before touching zero in 2016.

Germany’s finance agency that manages bond sales will release its third-quarter calendar next week. The volume is expected to show a slight increase as Merkel seeks cash to pay for the country’s contribution to the euro area’s rescue fund. Documents released by the Finance Ministry on June 13 show the government is switching the focus of its sales to debt of a maturity less than two years.

The federal budget is one of three components making up German national accounts. The country adopted a “debt brake” in its constitution in 2009 that obliges the nation to run a composite balanced budget by 2016, including a federal deficit that does not exceed 0.35 percent of GDP. The structural deficit marks regular spending gaps caused by outlays such as pensions.

Merkel is also bound by new euro-area budget rules embedded in a European Fiscal Pact that she hopes parliament will ratify on June 29. The pact requires its signatories to limit their structural deficits to 0.5 percent of GDP from 2013 or 2014.

Germany’s 16 federal states have threatened to veto the pact in the upper house next week unless Merkel agrees to cut their social outlays. While the debt brake allows the regional governments to balance their own budgets by 2020, the pact may apply this rule immediately when it comes into force, the states say.

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Patrick Donahue in Berlin at pdonahue1@bloomberg.net

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

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