Appetite of politicians

Although spending is rising rapidly, Germany’s general government budget
should continue to stand out in 2018 and 2019 – courtesy of the special factors
described above. But given the uncertainties surrounding the composition of the
next federal government, risks are substantial (see “Possible new Groko –
political stability would come at high costs”), the more so as the fiscal balances
are clearly prone to setbacks owing to sharply higher expenditures (on social
security, in particular) and the increasing dependence on favourable financing
conditions and dynamic tax revenue growth.

Looking ahead to the next two
years, the general government budget ought to run a sound surplus, given our
expectation of above-potential (real) GDP growth of 2.3% for 2018 and 1.8% for
2019. Without fiscal policy measures, the general government balance could
edge up from around 0.9% of GDP in 2017 (after 0.8% in 2016) to over 1% of
GDP in 2018/19. But given the strong likelihood that the new federal
government (irrespective of its final composition) will cut (income) taxes and
step up spending (for social security and investment purposes, for instance),
fiscal surpluses ought to shrink over the next years, in our view.

For 2018 and
2019, we expect a decline to around 0.8% and 0.5% of GDP, respectively. In
the next four years, the fiscal scope at the federal level looks set to be an
accumulated EUR 30-45 bn, based on the uncommitted budget resources of
roughly EUR 15 bn earmarked in the 2018 budget draft (of the former
government) and the upward revision to the tax estimate (by c.EUR 15 bn
compared with tax revenue assumptions in the 2019-21 financial plan).

On top
of that, additional funds could be generated by partly exploiting the narrowly
confined scope for new borrowing granted under the debt brake rule (c. EUR 15
bn.).