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Impossible German Debt Target

Monday, 07 June 2010 05:17

The NYT told readers that Germany has to make big cuts in its budget because:

"Germany has its own reason for introducing cuts: It is legally bound by the “Schuldenbremse,” or debt brake, that Parliament passed last year. This means the national debt has to be limited to a maximum of 0.35 percent of gross domestic product by 2016, thus putting immense pressure on the government to find savings now. Net borrowing, which will rise to about €86 billion this year, or about €48 billion more than in 2009, is the largest since World War II, according to the Finance Ministry."

I can't tell what is intended here, but clearly not what the article says. Debt of course is a stock, but the subsequent discussion refers to annual deficits, which are flows. Furthermore, a debt limit of 0.35 percent of GDP is ridiculously low, the euro zone is supposed to set a cap of 60 percent for the debt to GDP ratio, although almost every member state is now above this cap.

Anyhow, something is clearly wrong here, hopefully an editor will get it straightened out.

Comments (5)Add Comment
written by alex, June 07, 2010 8:52
"hopefully an editor will get it straightened out"

Dean, you've crossed the threshold from dry humor to outright dessicated. Personally I like it.
The German deficit is limited to .35%, not its debt.
written by AndrewDover, June 07, 2010 9:31
The NYT article text: "This means the national debt has to be limited to a maximum of 0.35 percent of gross domestic product by 2016, thus putting immense pressure on the government to find savings now." is just factually wrong.

"Revenues and expenditures shall in principle be balanced without revenue from credits. This principle shall be satisfied when revenue obtained by the borrowing of funds does
not exceed 0.35 percent in relation to the nominal gross domestic product."

https://www.btg-bestellservice.de/pdf/80201000.pdf Page 102-103 Article 115.

The current situation is displayed graphically at http://www.spiegel.de/fotostre...629-3.html
written by charles, June 07, 2010 10:04
The German Parliament voted a change to the German
Consitution, under which the public deficit has to
fall within the 3% deficit stipulated by the Maatricht Growth and Stability Pact
Arthur Laffer
written by Daniel, June 07, 2010 11:54
Can I get some informed commentary on this article please...

Laffer's prediction of economic collapse in 2011
written by AndrewDover, June 08, 2010 10:17
Three problems with Laffer's analysis:

1) Most likely the Bush tax cuts will be extended for those earning under $200,000 per year, so there won't be a drastic change for most people.

2) Most people don't have much ability to shift income from one year to the next. That is a salaried employee has less options than those working on "deals" in which the form and timing of income is flexible.

Note) For those situations, income shifting absolutely happens. For example, "carried interest" is a tax dodge which takes advantage of lower rates for capital gains; instead of fees taxed at income rates, the manager gets a percentage ownership in the entity created by the deal, thus when it is sold a capital gain is recognized.

3) Laffer always focuses on the negative implications of taxes. But there are positives also, in that government borrowing declines, and government spending does positive things. A large part of Government spending just moves money from workers to retirees, from healthy to sick, and from civilians to soldiers. Similar blind spots occur when spending constraints are proposed; attention is drawn to the spending cut's negative effects, but not to the positive benefits of more income available to country at large.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.