Debtors' path

The days of the soft-peddle are over. No longer can campaigning politicians try to sweet talk citizens into a lull, trying to hide Germany's dramatic financial situation. The budget deficit has been too high for a long, long time, but nonetheless in recent years there had been clear progress toward closing the gap between earnings and expenditures.

But the banking crisis and the recession threw a wrench into the plans of Germany's last government. And not only the federal budget, but the budgets of the states and communities have become economic basket cases.

The truth must out - and soon

This development is beginning to show in the social-services budget. Growing joblessness threatens to push the deficit in unemployment insurance in the coming year to 20 billion euros ($29 billion). The aging German population is increasingly putting the squeeze on funds for retirement pensions, health care, and nursing-home care.

The truth will have to come out - when the coalition talks get underway at the very latest. It is terrifying, and forces the new government into severe belt-tightening measures as well as higher taxes and social-service co-payments.

Despite this, at the beginning of the current legislative period, the federal government wanted to pay its expenditures from tax income alone, hoping to forego new debt for the first time in decades.

They can forget about it.

On the contrary, borrowing is at a record high. Thus far in the current year, in a budget which planned for 10 billion euros in new debt, the state has already borrowed 49 billion euros. And next year it will be coming thick and fast as well: New debt in the budget will rise to nearly 90 billion euros, and the costs for a savings package for banks and industry come to 100 billion more.

Precipitous drop in tax income

The debt explosion is not solely due to increased expenditures like economic spending to fight the recession. More of it can be chalked up to falling income. As a result of the weak economy, tax income has dropped dramatically on the federal, state and local levels. According to the most recent estimates, by 2012 tax income is likely to lag 300 billion euros behind the original estimates of mid-term financial planners. But even if the economy increases its moderate growth course, it will only add to state income slightly - and then with a time delay.

And yet the option to avoid this squeeze by simply continuing to borrow no longer exists; it was blocked by the recently passed "debt break" regulation. This deems that within a few years, Germany's states and communes are required to have nearly balanced budgets.

Promises, promises

The candidates knew about all this. By talking about plans to lower taxes, the CDU/CSU and FDP have promised the voters something that just does not jibe with reality. Lower taxes can only be made on credit, meaning more debt and an increase in interest charges - as well as a breach of the debt brake.

The more reasonable thing to do would be to raise taxes, not lower them. Because the mountain of debt that Germany is carrying should not grow any higher; it has to be shaved down. It would be easiest to do like they did in the last election, raising value added tax. Inheritance tax and property tax also has room for increase; German taxes in these areas are relatively low in international comparison studies.

One can imagine that the coalition of CDU/CSU and FDP, who aren't anxious to expose themselves to criticisms of bald-faced chicanery, will go ahead and shave taxes slightly, while bumping up the costs of social-security co-payments instead. Which, in a case of six-of-one, half-dozen-of-another, won't make much of a difference for most people.

Author: Karl Zawadzky (jen)
Editor: Andreas Illmer