German Finance Minister Hans Eichel was forced to deny rumours recently that the German budget deficit will reach 4% of GDP this year, well above the 3% deficit threshold required by the EU's Growth and Stability Pact.
The rumours are based on a leaked document from within the Finance Ministry which estimates that government borrowing requirements will hit EUR31 billion. This is substantially higher than previous estimates, according to a report from Der Spiegel.
Refuting the allegations that the government has under-estimated German debt and borrowing levels, Eichel told reporters at a Social Democratic Party conference in Nuremburg: "There is nothing to suggest that, at least not as regards the state." He went on to add that barring "major risks" in the national health insurance sector, he did not anticipate the deficit rising to 4%.
Germany's fiscal woes have been compounded by poor economic performance and declining tax revenues in recent months. At the end of the first quarter of 2003, total tax revenues were estimated at 2.9% lower than for the first quarter of 2002. This has prompted speculation by economists in recent weeks that the government may be forced to raise VAT by one percentage point in order to plug the growing hole in the nation's finances. Local governments are said to have accumulated a collective deficit of EUR11 billion in the first two months of 2003 alone.
The German government is now facing an EU imposed fine for fiscal indiscipline after the county's budget deficit hit 3.6% last year. To make matters worse for the Schroeder administration, it has recently had to cut its own economic growth forecast for 2003 from 1% to 0.75%, the third downward revision in six months.
http://reuters.com/newsArticle.jhtml?type=topNews&storyID=2684872
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