Germany Budget Deficit

German budget deficit for the year 2006 was only 1.7% while in 2005 it was 3.4%. For the first time in the last five years the deficit was lower than that of the predicted 2%.

In 2006 Germany had surpassed the EU Stability and Growth Pact deficit. The public deficit was 3.9% of the Gross Domestic Product.

Several statistics show that the net debt of the German government is 28.2 billion euros (which is equal to 35.8 billion U.S. dollar) in the first half of 2006. This debt is almost 12 billion euros (i.e $15.2 billion) lower than that of the first six months’ of 2005.

Reasons behind the high deficit before 2006:

The high rate of unemployment contributed to the budget deficit of Germany prior to 2006. The employment rate increased by 1.2% in 2006 from the previous year. This was the reason why deficit decreased in the first half of 2006.

Reasons behind the improvement in the budget deficit:

• Tax revenue from property tax and income has been increased by 8.8% in 2006.
• The rate of unemployment decreased which lowered the deficit.
• Since the Bundes Bank of Germany made a profit in the first half of 2006, property income revenue increased by 31.1%.
• The export performance of Germany improved and private consumption increased.

Sustainable Recovery:

To expand over the coming two years i.e. 2007 and 2008, German economy planned a sustainable recovery. The growth in domestic consumer spending was an important factor for Germany to get out of the earlier budget deficits which they wanted to increase.

The German Government is planning to increase the Value Added Tax by 16% in the beginning of 2007 which will push the Germans to buy more in this year to avoid extra incoming taxes. This implies a reduction in the consumers’ spending by 2007 which, on the other hand, might be a hindrance to GDP growth. This factor can be minimized by increasing the employment rate.