Germany Freezes Outlays to Get Deficit in Line

German Finance Minister Theo Waigel on Wednesday imposed a spending freeze aimed at getting the federal government’s 1996 deficit back on target.

The freeze, which goes into effect Friday, will mean spending cuts in some areas because “extra spending” will probably be needed to meet the cost of high jobless levels, Waigel told the Bundestag, or the lower house of Parliament.

The overall size of the cuts won’t be clear until the next tax estimate in mid-May, Waigel said.

Members of the ruling coalition have said a savings of about $13.5 billion will be necessary for the federal government to meet its target of net new borrowing of $40.7 billion this year.

While acknowledging a weak economy has consequences for the 1996 and ’97 budgets, he dismissed fears of a lasting setback. The economy shrank 0.4% in the final quarter of 1995.

“There are no figures to show that the current temporary pause in growth will lead to a recession,” he said. Chances for exports are good, he said, citing projected ’96 growth in world trade of as much as 8% and a recovering U.S. dollar.

A reliable picture of federal finances won’t be available until the May tax estimates, he said. It is also too early to say how much the government has saved in areas such as debt servicing thanks to lower capital market rates.

Though meeting the borrowing target will be difficult, he said, the deficit “should orient itself in the region” of $40 billion.

Meanwhile, the freeze offers “a flexible and suitable instrument” to control spending, he said.

Under the freeze, the finance minister must grant his permission for administrative expenditures of more than $340,000, transfers or subsidies of more than $678,000 and procurement or investments of more than $3.4 million.

That applies whether these sums are foreseen in the 1996 budget or not.

Any financial commitments made this year that in 1997 will cost more than $678,000 also require Waigel’s assent.

The freeze should have a limited impact on capital spending, he said, though it will mean spending cuts in some areas.

“‘We shall make differential use of the freeze, but as much as is necessary,” he said. “Really urgent investments won’t be hindered. But it remains the goal of the freeze to spend less in certain areas than Parliament has approved.”

Waigel repeated his call for state and local governments to join with him in agreeing to a national stability pact to reduce the overall public deficit. That is the figure that counts toward whether Germany in 1997 holds its deficit to 3% of gross domestic product, the limit for European Union countries aiming to participate in the currency unification planned for 1999.