Sunday, October 14, 2007

Germany to Reduce 2007 Borrowing as Tax Revenue Rises (Update1)

By Brian Parkin

Oct. 14 (Bloomberg) -- Germany's federal government will cut borrowing and increase spending on schools this year as tax revenue has beaten its own forecasts.

Net borrowing in 2007 will drop to 14.4 billion euros ($20.4 billion) from a previously projected 19.6 billion euros, the Berlin-based Finance Ministry said today in an e-mailed statement. Asset sales valued at 4.7 billion euros now won't need to occur, it said.

An export boom that's cut unemployment to a 14-year low and fanned consumption is allowing Chancellor Angela Merkel to boost spending late in the year without jeopardizing her aim of cutting debt. Germany's public sector budget, an amalgam of federal, state and municipal spending, will be close to balance this year.

The budget revisions show the government's ``commitment to consolidation even as spending rises,'' Ulrike Abratis, a Finance Ministry spokeswoman, said in a phone interview today.

Tax revenue now is forecast to be 232.5 billion euros, 12 billion euros higher than at the start of the year and 2 billion euros more than a revision Finance Minister Peer Steinbrueck made in May.

The extra 2 billion euros in tax income will be used to fund pre-schools, the Finance Ministry said. Outlays this year are forecast at 272.7 billion euros or 0.8 percent more than planned at the start of 2007. The extra revenue and spending plans need to be anchored in a supplementary budget, according to the ministry.

Deficit Rules

Germany fulfilled the European Union's deficit rules last year, which limit the shortfall to 3 percent of gross domestic product, for the first time since 2001. The country's composite deficit will amount to 0.1 percent of GDP in 2007, the Finance Ministry said on Sept. 28.

Steinbrueck is trying to balance outlays and income without recourse to new debt. He's set a target of balancing his budget by 2011, longer than state and local council budgets that are the main agents for pushing down the national spending gap this year.

Net federal borrowing may be even lower than 14.4 billion euros by the end of 2007, the ministry said today.

Federal debt totaled 924.3 billion euros on June 30, according to the Frankfurt-based Finance Agency that manages bond sales for the government. Interest payments on that debt will amount to 43.2 billion euros next year, or about a sixth of Steinbrueck's budget.

Political pressure has mounted on Merkel to open the purse strings after the government reined in investment this decade to cope with ballooning unemployment and pension benefits.

Building new pre-schools is ``urgent'' to meet the government's pledge of providing a place for all of Germany's one-to-three year-olds by 2014, the ministry said.

The revised budget plan still requires the support of lawmakers in parliament, where Merkel's grand coalition of Christian Democrats and Social Democrats holds a comfortable majority.

Last Updated: October 14, 2007 14:32 EDT

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