Deficit spending

Germany's various layers of government had a balanced budget last year (a slight surplus was projected, but due to the sharp downturn in Q4, it probably turned into a small deficit; the final figures must be out by now, but I can't be bothered to look them up).

Official forecast for this year including the various stimulus packages is "slightly below 3 % of GDP", increasing to "3-4 %" for 2010.

I wonder if the forecasters believe their own forecasts. Probably not. But many foreign economists and journalists that have criticized Germany's stimulus measures as "far too small" apparently do. So let's see what can be said about the deficit projections:

1. It is based on an officially projected GDP growth -2.0 to -2.5 % for 2009. The way export orders in various key industries have been dropping like a brick, -3.0 to -3.5 % is probably more realistic by now.

2. Neither unemployment insurance nor public health insurance will raise premium rates this year. Worse-than-expected GDP will directly impact the deficit of both schemes (as well as Hartz IV welfare payments), and this will significantly increase the overall deficit.

3. I don't know what has been assumed regarding corporate tax receipts, but I'm quite sure it is too optimistic. Most companies are trying to avoid lay-offs at all costs (many of them have to due to agreements with the unions), and in face of collapsing export orders, profits will plummet like never before.

4. The way I understand it, the various bank bailout schemes and provide-sufficient-credit-to-companies-that-can't-get-it-otherwise schemes are totally off-budget. As are the huge amounts of government-guaranteed export credit guarantees extended by Hermes on the government's behalf.

As already commented and discussed on Brad Setser's blog a few days ago, I think it is rather pointless to compare the size of the various stimuli packages between the US, Germany and other countries. It's apples and oranges. Many things specifically legislated as part of the US stimulus is already part of the German economic system and therefore happens automatically without needing to be in a "package". In particular, unemployment benefits and health care are organised and financed differently, and state / municipal budgets are put together differently.

On a similar issue, Brad and other American economists seem to believe that Germany needs to stimulate more to bring down its high current account surplus, which according to them is an unsustainable imbalance exacerbating the current crisis. What they don't seem to see is that Germany's current account surplus is already in the process of evaporating by itself:

Germany's exports are geared towards sectors hit terribly hard by this crisis, whereas imports are much more geared towards consumer goods, which are under less pressure. So far, many companies still had solid order books dating back to early 2008 and 2007, and current export numbers still reflect the fulfillment of those orders. But in the coming months, exports in more and more sectors will fall off a cliff. I already posted on the severe drop in foreign machinery orders. Heavy trucks are even worse: Foreign orders are down 95 % yoy in February. Net of cancellations, there have been no new orders whatsoever for nearly half a year now. And it's not really surprising: Germany excels at making capital-intensive investment goods. Exactly the sort of thing nobody needs when production of just about everything is dropping, and there is ample excess capacity.

In light of all this, it is already rather optimistic if we assume that Germany's 2009 current account surplus will drop by half compared to 2008. It will most likely drop more than that. Some "imbalances" go away by themselves.