Germany: Fiscal Policy

Background:

In Germany just 50% of GDP pass through the hands of government largely because of the country's extensive social welfare state. Germany has long been characterized by a high debt to GDP ratio. In particular the German reunification in 1990 contributed significantly to the expansionary fiscal policy in Germany. Since joining the European Moneary Union, Germany has to comply with the Masstricht Criteria which limit the annual budget deficit to 3% and set a gross government debt limit of 60% with regards to GDP. While the government finances deteriorated further till 2003, a marked improvement took place resulting in a balanced budget deficit in 2008. While state spending further increased mildly during the period of 2004-08 in nominal terms, it decreased significantly expressed as a percentage of GDP. As a result, the upward trend of government debt started to reverse in 2005. German fiscal policy is facing challenges ahead. Unfavorable demographic changes as well as extensive fiscal stimulus plans aimed at reviving the economy, are putting severe pressure on the German fiscal deficit.