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BUDGET

Government spending, borrowing up in 2009

A draft 2009 budget passed late Thursday by a committee from Germany's lower house of parliament would allow Berlin to spend and borrow more than other budgets proposed by Chancellor Angela Merkel's Grand Coalition government.

Government spending, borrowing up in 2009
The last budget debate gave Steinbrück pains. Photo: DPA

The Bundestag’s budget committee wants to allow the government to borrow €18.5 billion next year as the German economy grinds to near-standstill and dole out €290 billion, 2.4 percent more than in 2008.

In his budget, Finance Minister Peer Steinbrück had kept borrowing at €10.5 billion while Merkel’s cabinet wanted to cap spending at about €288 billion. The various proposals agree that the government should invest about €27 billion next year.

The proposal was hammered out in a marathon session by members of the government’s coalition government and is expected to see little resistance when the lower house reviews the budget later this month.

Budget specialist Carsten Schneider, from the left-leaning Social Democrats (SPD), said the proposal was “appropriate” but admitted the budget must be balanced in the mid-term. “It would be wrong to save going into a crisis,” he said.

His counterpart in the conservative CDU agreed, though he admitted to mixed feelings. “It’s the right thing in a difficult environment,” he said.

The new budget comes after the government ratcheted down its estimate for tax income next year by €4.6 billion due to slowing global economies. The budget committee expects a tax haul of €244.1 billion in 2008, €4.6 billion less than earlier prognoses. Additional income has been pegged at €27.4 billion.

The biggest differences between the committee’s budget and other proposals arise in how the cash is divvied up. The Transportation Ministry would get an additional €1 billion next year while the Family Ministry would enjoy an additional €124 million than in 2008.

ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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