May 2, 2018 / 11:21 AM / 22 days ago

Germany's spending plans likely to disappoint at home and abroad

BERLIN (Reuters) - Social Democratic German Finance Minister Olaf Scholz presented spending plans on Wednesday that see public investment falling from 2020 and advised ministries demanding more funds to live within their means.

FILE PHOTO: German Finance Minister Olaf Scholz talks to the media in Meseberg, Germany, April 10, 2018. REUTERS/Fabrizio Bensch/File Photo

His package may disappoint U.S. President Donald Trump, who has called on Germany and other European allies to increase the percentage of their GDP devoted to defense spending to pull their weight in the U.S.-led NATO alliance.

Germany’s fellow euro zone members are unlikely to welcome the spending blueprint either, as they had hoped the Social Democrats, part of Germany’s governing coalition, would steer the EU’s economic powerhouse away from austerity.

Germany’s defense and development ministries, for their part, have objected in writing to the budget plan, saying it violates the coalition pact signed by Chancellor Angela Merkel’s conservatives and their Social Democratic (SPD) junior partner.

Presenting the budget plans that foresee no net new debt through to 2022, Scholz said: “I am convinced: in good economic times, a responsible fiscal policy must achieve both a reduction in debts and a rise in investments.”

Scholz’s remarks echoed those of his conservative predecessor Wolfgang Schaeuble, who insisted that euro zone partners abide to budget rules through austerity.

Under the spending plans, investment would rise from 34.0 billion euros ($40.81 billion) in 2017 to 37.0 billion this year and 37.9 billion next, before decreasing in 2020 and hitting 33.5 billion in 2022.

“All the ministries who have plans must do so within the possibilities available in our country, and we wrote into our constitution (in 2011) that we want to pursue policies that allow the states no new debt from 2020 and for the federal government only a very small amount of new debt,” Scholz said.

Defense Minister Ursula von der Leyen and Development Minister Gerd Mueller - both conservatives - met Merkel last week to demand more funds for their ministries.

They said the budget plan, as submitted by Scholz, flouted pledges to ensure that Germany’s development aid and defense spending as a percentage of economic output did not shrink.

The two ministries are seeking improvements before the cabinet debates a fuller 2019 budget on July 4.

Germany has had a “debt brake” law in place since 2011 that forces the federal and state governments to virtually eliminate their structural budget deficits over the next five to 10 years.

The German economy is growing for the ninth year in a row and the government has kept a balance budget since 2014.

“INTERNATIONAL CRISES

Mueller told reporters it was the federal government’s job to “strengthen Germany’s role in the world” and both ministries needed more money to meet their international obligations.

“International crises are increasing in which the Bundeswehr (German army) and (the development ministry) are needed,” he said, citing Yemen, Iraq and the plight of the Rohingya refugees from Myanmar.

A defense ministry source said defense spending as a percentage of economic output would rise to 1.3 percent in 2019, as Merkel had assured Trump last week, but would fall thereafter unless budget plans were adjusted.

Asked how much the pressure from Trump influenced Germany’s defense spending plans, Scholz told reporters: “Not at all.”

The source told reporters that defense spending would fall to 1.23 percent in 2022, even below the projected level for 2018, despite Germany’s pledge as a member of NATO to steadily increase its military budget toward a target of 2 percent.

The defense ministry would also have to delay some major procurement programs planned with other countries unless more funds are added in coming months, although it was not yet clear which projects could be affected, the source said.

In total, the source said, the defense ministry got only 20 percent of the 12 billion euros in funding it requested for 2019 through 2021, excluding personnel costs to be covered by the finance ministry.

Germany’s development aid, now at around 0.5 percent of GDP, would drop to 0.47 percent in 2019, and more in coming years, a development ministry source said.

To meet its obligation, the development ministry would need around 1.1 billion euros in extra funding, the source said.

($1 = 0.8331 euros)

Editing by Mark Heinrich

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