Britannia Radio

WALL STREET JOURNAL     14.1.08
The Election Stimulus

Only weeks after blasting British stimulus plans as "crass 
Keynesianism," German Finance Minister Peer Steinbrück has helped 
midwife Berlin's own ?50 billion pump-priming.  [Yes - -BUT!  The 
German pump-primoing is half the British figure for a country 50% 
bigger!  Mmmm -cs]

The mix of infrastructure spending and small tax cuts that the grand 
coalition approved late Monday had been in the works for a while. The 
only surprise is the timing: The tax cuts in these "emergency" 
measures won't come into effect until July 1 -- four quarters into 
the recession.

Perhaps not coincidentally, July 1 is also the unofficial start of 
the hot phase of the campaign for the general election, which is 
scheduled to be held on Sep. 27. Could it be that the Christian 
Democratic-Social Democratic government wants to wait to disburse the 
goodies until three months before the election to make sure that 
voters notice? The minor income- and payroll-tax cuts won't turn 
around the economy. But they could give the governing parties an 
advantage over the smaller opposition parties.

Berlin plans to cut the starting income-tax rate to 14% from 15%, 
raise the tax-free allowance to ?8,000 from ?7,664 and cut mandatory 
health-care premiums by 0.6 percentage points. That's not exactly the 
stuff economic miracles are made of. The tax cuts benefit mostly low-
income groups, with negligible impact on the middle class. A worker 
with an annual income of ?30,000 can expect a monthly relief of just 
?15.50, according to the German Taxpayer Association.

The stimulus plan also includes the usual government handouts -- such 
as a one-off ?100 child-benefit payment, and a ?2,500 check for 
replacing any car at least nine years old with a new one. Those 
measures will have no effect on long-term growth. That's bad news as 
the economy is expected to contract by as much as 3% in 2009 while 
unemployment could rise by one million to four million.
The timing of the ?18 billion infrastructure plan is still unclear. 
But even if it's green-lighted before July, this extra government 
spending is unlikely to kick in before the end of 2009 given the 
lengthy approval and planning procedures. So apart from burning a big 
hole in public finances, any temporary boost to the economy from 
these public works programs won't come anytime soon.

Christian Democratic parliamentary leader Volker Kauder said 
yesterday that the plan "gives people hope." It's best, though, if 
Germans don't get their hopes up too much.
==========================
FINANCIAL TIMES   14.1.09
Germany to ban excessive borrowing
By Bertrand Benoit in Berlin

Germany will change its constitution to ban excessive public 
borrowing and impose strict new rules to ensure the extra debt 
created by its latest fiscal stimulus package is paid off as soon as 
possible, Angela Merkel, the chancellor, said on Tuesday.

Underlining Berlin's concern about the erosion of fiscal discipline 
in Europe, the chancellor said she was determined to balance public-
sector budgets in the medium term.

"We will have to borrow more," she said. "But we must also be 
credible vis-à-vis future generations when we say we intend to repay 
this debt."   [Are you listening , Mr Brown? -cs]

Ms Merkel's comments were made as she unveiled a two-year ?49.25bn 
($65.5bn, £44bn) package of growth measures, including public 
investments and tax cuts. These will raise the amount Berlin is 
spending to fight the economic crisis this year to 1.5 per cent of 
gross domestic product.
Under the constitutional amendment outlined on Tuesday it will be 
illegal for any government to raise the state's public deficit above 
0.5 per cent of GDP "in normal economic times". For 2008, such a rule 
would have capped borrowings at ?12bn.

The finance ministry is also to set up a "redemption fund", with 
binding rules that commit the government to repaying the cost of the 
stimulus package by a set time. The fund would be similar to one 
created in 1995 to manage the repayment of the ?171bn in extra 
borrowings linked to German unification - a goal finally met last year.

This measure could force future governments to tap windfall tax 
revenues to repay debt once economic growth reached a given 
threshold, Ms Merkel said. Alternatively, it could earmark Bundesbank 
profits for debt repayment.

Ms Merkel is keen for Germany to remain a fiscal role model despite 
adopting the biggest stimulus since the federal republic was created 
60 years ago - and the largest in Europe since the start of the 
financial crisis.
Senior members of the chancellor's coalition gave warning on Tuesday 
that Berlin was facing a borrowing spiral that would take decades to 
reverse.

"I am expecting a federal deficit of ?60bn this year," Steffen 
Kampeter, public finance expert for Ms Merkel's Christian Democratic 
Union in parliament, said. This would be ?20bn above the postwar 
record. "The government is giving the impression that it is again 
opening the deficit floodgates."
=-=-=-=-=-=-=-=-=-=-=-=-=-=-
MAIN MEASURES
Public investment ?17.33bn, two-thirds on education

Income tax
Cuts worth ?8.94bn

Social security
?12bn cut in contributions to health & unemployment insurance

Benefits
?2.3bn, mainly targeted at families

Auto industry
?1.5bn incentives for car buyers, ?500m for innovation

Companies
Up to ?100bn in credit guarantees and loans
=-=-=-=-=-=-=-=-=-=-=-=-=-=-

With its fiscal package, the government is raising long-term public 
investment by ?17.3bn, two-thirds of which will go into education. 
The plan also includes almost ?20bn in tax and social security 
contribution cuts.

Berlin will set up a ?100bn "Germany fund", managed by the KfW public 
sector development bank, to provide companies with loans and credit 
guarantees as banks tighten lending conditions.

The chancellor described "the biggest economic stimulus in the 
history of the federal republic" as "a rounded package".

However, many economists saw a loose collection of half-hearted 
measures designed to appease warring factions in the government. 
Thomas Mayer, chief economist at Deutsche Bank, said: "As political 
considerations played a significant part in the design [of the 
package], its effectiveness in our view is likely to be less than it 
could have been."

Holger Schmieding, an economist at Bank of America, wrote in a note 
that Tuesday's package was "a very mixed batch".

The package could be diluted as it passes through parliament. 
Coalition MPs were frustrated with the speed with which they had to 
pass last October's bank rescue measures. Under less pressure, they 
may want to make a bigger mark on the final product.