Temporary fiscal space to fund refugee influx
Germany's government finances have been developing favourably in the current year, with the general government surplus set to rise once again on the year, by 0.3% of GDP compared to 2014. The Bundesbank's economists see positive one-off factors as the main reason for this out-turn, one example being the elimination of strains caused by 2014 court rulings on a scale of 0.3% of GDP, or around €8 billion. Amidst this favourable overall development, the general government debt ratio dropped from 74.9% at the end of 2014 to 72.5% at mid-year. The government debt ratio, defined as general government debt divided by GDP, is likely to continue its slide in the coming year, the economists write.
Additional government expenditure
The report goes on to add, however, that the surpluses are expected to be run down in the year ahead. Although economic activity should provide traction, and interest burdens will continue to fall, the surplus will be depleted by tax cuts and higher spending on items such as infrastructure, education and research, as well as, in particular, rising government expenditure in connection with the influx of refugees. According to the Bundesbank's economists, additional government expenditure on the scale of up to ¼% of GDP in 2015 and ½% for 2016 would not appear to be implausible at the present time. They add that any windfall revenue generated by migrants' tax and social welfare contribution payments, by contrast, would initially be minimal at best.
The Bundesbank believes that the impact of refugee migration, however, is extremely difficult to measure at the current juncture. The scale of the burden on government coffers depends, "amongst other things, Germany's ability to quickly and effectively integrate refugees into the labour force." Government action is also needed. The Bundesbank's economists stress that "integrating effectively into the labour market those migrants who have a prospect of becoming longer-term residents will thus be a decisive factor; language learning, schooling and vocational training programmes will be particularly important".
Gradual restoration of perceptible safety margins
The benefits of maintaining safety margins in government budgets, something which the Bundesbank has repeatedly highlighted, are now paying off. The relatively favourable structural budget situation means that Germany will now not have to take immediate countermeasures but can instead afford initially to accommodate the unexpected additional costs within its fiscal framework without leaving a hole in the budget. According to the Bundesbank's economists, future fiscal plans will have to allow for foreseeable structural burdens caused, for instance, by higher long-term spending on integration, and the gradual restoration of perceptible safety margins would then be advisable.
They also advocate the strict application of the European Stability and Growth Pact with a view to ensuring sound government finances, without allowing the binding effect to be undermined by excessive flexibility. The European Commission has announced that it would take into account the budgetary impact of the exceptional inflow of refugees, they write. That makes sense "if this unexpected development means that fiscal targets are missed merely on a short-term and temporary basis and by no more than the specifically documented direct net additional outlay". However, were this to engender a permanent need for increased government spending, such expenditure would have to be covered by additional revenue within the scope of the budgetary limits in order to prevent a structural breach of the fiscal rules.