Minister: Germany to Meet EU Deficit Rules in 2007

Germany's economy will grow more strongly than expected his year pushing down the national budget deficit to below limits set by the 12-nation eurozone for the first time since 2002, Finance Minister Peer Steinbrück said Tuesday.

"We are experiencing a classic economic upswing," he said, predicting that the 2006 gross domestic product (GDP) would expand by two percent or more.

Due to higher than expected tax revenue and declining unemployment, Germany is expected to post a budget deficit of 2.8 percent this year, Steinbrück said.

Germany still spending more than it takes in

Though he called the upswing in the euro zone's largest economy "broad and robust" during the parliamentary debate on the 2007 budget, he also added that Germans may not want to get too excited since he could not say "how sustainable this growth is."

The 2007 federal budget, totaling 267.6 billion euros ($343.5 billion), will still spend more than it takes in, forcing the government to borrow 22 billion euros to help pay its bills but will meet the euro bloc's three percent deficit limit.

Germany fell back within the EU Growth and Stability Pact rules in the first half of 2006 by reducing its national deficit to 2.5 percent, the Federal Statistics Office announced in August. But the 2007 budget is the first time since 2002 Berlin is forecasting it will stay within the rules.

Much of the additional revenue helping shore up Germany's financial plans comes from its biggest post-war tax increase, which was approved earlier this year and takes effect in January. The hike will raise the value-added tax rate three percentage points to 19 percent, increase income taxes for high earners and slash tax write-offs.

EU pleased with German progress

A spokeswoman for European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said Steinbrück's prediction that the German budget deficit would stand at 2.8 percent this year was "good news."

Almunia has been pressing Steinbrück to put Germany's economy back on track for several months, arguing that faster German growth is vital to spur the euro zone's overall recovery.

The EU added that while it was important that Germany fell in line with bloc rules, it should aim to bring the national debt down from its current 69 percent to under 60 percent of the GDP and have a "balanced budget by the end of the decade."

Opposition questions tax increase

Green Party budget expert Anja Hajduk said the government had done too little as the tax burden for the German public increases next year.

Members of the free-market liberal FDP, the largest opposition party, called on the government to call off its plans to increase the value-added tax.

"The people are being called on to pay," the FDP's Hermann Otto Solms said. "That is the bottom line of this policy."