Four German Lessons in ‘Fixing the Budget’

Arthur Bi summarizes some useful lessons from the recent German federal budget for our Treasurer Joe Hockey.

 

In Berlin on the 9th of September, the German Finance Minister Wolfgang Schäuble declared that for the first time since 1969, no more sovereign debt was required to fund the 2015 federal budget.

 

Here are four lessons Joe Hockey could learn from the German experience in achieving a balanced budget:

 

1) Send the right message

In comparison with our unpopular budget, the German federal budget is comparatively popular. One reason for such success might be that the German government has left the public with an impression of being consistent, stable and trust-worthy in budgetary matters. Indeed, Mr. Schäuble has preached the same ‘gospel’ of financial prudence in government spending for years. The latest example is his presentation of the 2015 budget, in which he stressed that ‘the government will implement his solid, trustworthy, and stability-oriented [budgetary] policies with calm and determination.’

 

In light of the German success, the reason for Hockey’s failure to ‘sell’ his budget to the Australian people seems threefold.

 

Firstly, the Government is incapable of abandoning its rhetoric in blaming the preceding Labor government for its budgetary problems. This has left the public with an impression of a government unwilling to take responsibility. Unlike Angela Merkel, the German Chancellor , our Government has failed to convey the positive message that the budget is a plan to bring everyone together for a better future for the economy and future generations.

 

Secondly, unlike the German government, our Government has failed to persuade the public that its budget is a fair and inclusive one. Instead, it is perceived by the public to be a budget all about ‘cuts’ driven by the LNP’s ideological ‘hostility’ towards the working people and university students.

 

Thirdly, the Government’s credibility is undermined by its changing positions on the ‘budget emergency’. During the election campaign and for some time afterwards, Hockey rushed to talk about a ‘budget emergency’. However, after this, Hockey said that the Government’s budgetary position is not as bad as expected. Such inconsistency and confusion, a stark contrast to the consistency and stability under the German approach, served only to further undermine the public confidence in our Government.

 

2) ‘Fixing the budget’ is not a means of its own

‘Fixing the budget’ is not a means of its own, and the German experience warns the danger of being obsessed with the illusory political trophy of ‘fixing the budget’.

 

For instance, according to the German parliamentary oppositions, the ‘balanced budget’ is a mere political victory achieved at the expense of ripping off education, infrastructure, and social security. Schäuble himself conceded that, ‘a balanced budget is not a mean in itself’, rather it represents ‘the trustworthiness [of the German Government]’, which is ‘elementary for investors and consumers.’

 

3) Beware of the ‘hidden debts’

The third German lesson is that a balanced budget might contain significant amount of ‘hidden debts’. These are the additional expenses in building the infrastructure anew in the future, rather than fixing it now. In other words, as reflected in the German experience, postponing the necessary investments now might lead to much heavier burdens on the budget in the future.

 

4) More, rather than less, spending for education and research

The last lesson is that it is possible for a government to achieve a balanced budget without cuts to education and research. In contrast, the German government regards the skills and knowledge of its people as Germany’s most valuable assets, and it is important to provide sufficient investment to keep Germany as the world’s leading innovator. This attitude is reflected by the fact that the amount the German government spent on education and research in 2013 is 160% of what it spent on 2005; or an increase from 2.51% to 2.98% of the gross domestic expenditure.

 

Conclusion

It might well be the case Joe’s plan to ‘fix the budget’ will never receive the same level of support as that of his German counterpart. This is potentially due to the inherent German weariness towards debts and deficits, since the word Schuld in German means both debts and moral blameworthiness. Yet, it is still not too late for Joe to learn from the German experience and make it right this time for the future of the ordinary Janes and Joes in this country.