By Michelle Fitzpatrick - 20th April 2006
Soaring welfare costs are set to add over €4bn to Germany’s 2006 budget deficit putting Berlin on collision course with EU fiscal rules.
The cash shortfall will undermine German Chancellor Angela Merkel’s reform agenda and may put her in breach of euro stability rules in 2007.
FT Deutschland has seen confidential government statistics showing that a steep rise in the number of households claiming long-term unemployment benefits could bring this year’s deficit from a planned €38.3bn to well above €40bn.
The figures will severely undermine Merkel’s efforts to bring the country’s finances under control after she took power from Gerhard Schroeder last autumn.
According to the Federal Labour Agency’s public figures, the number of households claiming ‘unemployment benefit II’, or Hartz IV as the Germans know it, has risen from 2.9 million to 3.9 million since its introduction 15 months ago.
But the leaked labour ministry document claims the actual number is at around 4.2 million, showing officials underestimated the number of claimants by 200,000 a month throughout last year.
“The cost explosion is threatening to blow a hole in the budget”, an unnamed source told the FT-Deutschland.
Indeed, aides to finance minister Peer Steinbrück estimate that total payments in 2006 could reach €28bn, well above the €24.4bn provided for in the budget.
The revelation of spiralling welfare costs have led some of Merkel’s Christian Democrats to call for a lowering of the unemployment benefits.
But aides for labour minister Franz Müntefering, a Social Democrat in coalition with Merkel, was quick to deny claims that the minister “seems prepared to rethink the level of unemployment benefit II”.
He told German press agency DPA that there are no such political considerations or indications.
Social Democrats are not yet talking about cutting the monthly allowance for the unemployed, preferring to optimise the current system first.
Reforms to Hartz IV, rife with loopholes, are already underway and should lead to a cost reduction of €1.2bn.
However, this will not be enough to prevent Germany from failing to meet the EU target of three per cent of GDP inflation in 2007.
On the bright side, the FT believes that today’s news should make it easier for Merkel to justify a hefty, three-point increase in value-added tax planned for next January.
The labour ministry says benefit payments over the first quarter are a poor guide to the rest of the year because unemployment is expected to fall as economic growth accelerates in coming months.
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