Budget consolidation

Budget consolidation basically means a reduction in the net new indebtedness of public budgets per period of consolidation . A reduction in the total government debt (absolute / relative to GDP) can, but does not have to be meant - it depends on the respective (quite differently used) indicators. Budget consolidation is mostly only related to the financial balance (expenditure / income difference) of the respective national budget within a certain budget year - a reduction of the respective debt level can not be automatically derived from budget consolidation.

The aim of budget consolidation is often the equalization of repayment structures and / or a reduction in the interest burden, the buzzword debt sustainability .

The budget consolidation affects all budget-preparing public-law corporations with budget deficits, such as the federal government, federal states, municipalities, municipal associations, public-law institutions and public-law corporations. This also applies internationally to states and their subdivisions.

Material budget adjustment

Administrative & primary balances

The balanced budget is not in a purely formal understanding your bookkeeping sense. Formally, every household is balanced. A material budget balance exists if the budget-managing body can meet the interest obligations for loans from its current income in addition to its current expenditure.

The budget is balanced if the expenditure does not exceed the income. If the income exceeds the expenditure, we speak of an income surplus. If the annual expenditure exceeds the annual income, a deficit arises in / out of the current period.

A budget deficit represents a negative deviation from the balanced budget. A budget deficit can either be financed by borrowing or by subsequent disposal of assets (such as the sale of land, rights, licenses or shares in / in companies).

Fiscal consolidation usually means reducing planned (or expected) deficits. This can be achieved in two ways - either by means of a targeted increase in income such as the traditional tax increases (+ T) in the case of the state budget or / and by means of implemented / planned expenditure cuts (-G) - at least theoretically and from a microeconomic perspective - whether the budget consolidation ultimately succeeds depends also depends on the initial economic situation as well as on the expenditure reactions of complementary economic subjects.

initial situation

Deficit & Surplus Balances

A deficit or expenditure surplus finances income surpluses of other economic agents in principle and on balance in the same amount. For example, part of the twin deficit , i.e. the current account deficit, finances the surplus of another economy. In this respect, a distinction must be made between the respective starting situation for budget consolidation - whether it is an economy that has a passive or active external contribution . Of course, a net exporting economy can use its export surplus to achieve a balanced budget (at the expense of the foreign economy).

The liabilities resulting from the government deficits (domestic / foreign) are the same amount on balance as the monetary claims (income surpluses) of private individuals. Since liabilities correspond in their amount to monetary claims (all liabilities and claims cancel each other out according to the national accounts ), the financial asset growth of one economy (all domestic sectors consolidated) can only be formed from the amount of the negative external contribution of another. The amount of the annual surplus of income of the (domestic) private sector results from the net borrowing of foreign sectors, the (own) government deficit as well as from the expenditure surplus of the (domestic) corporate sector (see also financial accounts ).

On the other hand, balancing the budget abroad requires (in the case of an economy with a positive external contribution) the (domestic) private sector to forego surpluses from foreign trade. The (additional) equalization of the domestic budget requires private individuals to forego income surpluses from the reduction of the national deficit. Despite reduced revenue surpluses, private individuals should / may not increase the overall savings rate . If the consumer sector does this anyway, the proportion of companies would have to increase their credit-financed investments (excess expenditure) in turn (with reduced sales) to compensate.

Self-financing investments, capital goods / consumer goods industry

As a result, if during an economic boom, companies increase their (mutually self-financing) investments and consumers, who are keen to spend, reduce their savings rate, the desired budget consolidation does not have to have such a dampening effect on the economy that it collapses - provided that budget consolidation can succeed.

During a phase of stagnation or economic downturn, which is also characterized by the fact that companies are reluctant to make investment decisions, experience has shown that the attempt to consolidate the budget is doomed to failure, because every government expenditure reduction (net) vis-à-vis private economic entities causes the latter to be equally reluctant to spend and the resulting macroeconomic loss of income in turn reduces the state's income and / or increases social spending (such as due to rising unemployment) - i.e. it ultimately increases its own deficit precisely because of the state spending cuts - as was also the case during the global economic crisis.

If the gross domestic product , of which government spending represents a part, collapses, the relative government debt (excluding additional expenditures) increases, since the government debt ratio shows the ratio of GDP to absolute debt.

Budget consolidation in the event of a current account deficit

A national budget can be consolidated if the internal reforms lead to current account deficits turning into surpluses. If, however, the surplus states are not willing to forego their surpluses, the imbalances in this regard can hardly be reduced - in this respect, the surplus state Germany is regularly reminded by the EU, IMF and US - the so-called internal devaluation then leads (when no foreign state is ready to inquire anymore ) only to a weakening of the domestic economy of the respective state. Its GDP decreases, the debt ratio increases (both Fiscal Pact criteria can then not be met - in such a case, the reduction in the deficit increases the debt ratio).

Repercussions

If imports are reduced, this reduces the exports of other countries. If these reduce their imports in order to preserve their surplus as much as possible, this in turn reduces the exports of the former ( competitive paradox ). In this context and from the perspective of exporting entrepreneurs, economic sanctions are often counterproductive and can provoke reciprocal beggar-thy-neighbor politics .

Consolidation obligation

Various legal requirements force budget consolidation. In Germany, at the federal level, these are the constitutionally provided regulations, referred to as the debt brake , through to consolidation aid for federal states according to Art. 143d Paragraphs 2 and 3 of the Basic Law and the budget security concept applicable to municipalities in the municipal regulations in Germany .

Based on the convergence criteria of the European Fiscal Compact , the maximum limit of the annual budget deficit with normal cyclical utilization (structural deficit) of 0.5% is practically allowed, the 3% maximum limit (cyclical deficit) is only allowed theoretically. National budgets that exceed or have exceeded the 60% debt ratio (to GDP) must repay one twentieth of the excess annually (with constant GDP, the respective national budget would have to generate a surplus in this regard, with falling GDP even an even higher [!]) .

In its constitution, Germany set the upper limit of its structural deficit from 2016 at 0.35% of the gross domestic product ( Art. 115 GG), Austria at 0.45% from 2017.

If the 3% deficit limit is exceeded, the European Commission can initiate an excessive deficit procedure and has already initiated this against Germany and other countries. As part of the procedure, the financing of further deficits can be made more difficult by the Commission, the European Investment Bank can be encouraged to do so ( Art. 126 TFEU-V).

Private sector balances and government budget balances.

In times of recessive economic development, an increased government deficit results in a direct / indirect improvement in the demand and employment situation ( deficit spending ). Although the EU treaty officially allows cyclical deficits, (a) it is practically impossible if the 60% quota is exceeded (this is undermined by the annual repatriation obligation) and (b) the respective production potential is calculated in such a way that it appears as if, for example, high unemployment was mainly structural. France and Italy doubt the (current) meaningfulness of the rigidity of the stability pact.

Economic Effects of Budget Consolidation

An increase in taxes or a reduction in government spending is known as restrictive fiscal policy (or budget consolidation). Conversely, an expansion of the budget deficit is called expansionary fiscal policy . Restrictive fiscal policy leads to a decline in production and income.

On risks from balancing the budget.

Spending cuts reduce overall economic demand, directly in particular in the case of government consumption or indirectly via contracting effects on the available income in the case of government transfer payments (such as unemployment benefits). Although tax increases lead to the desired higher government revenues, they reduce the disposable income of private households or reduce corporate profits, which only does not dampen aggregate demand if increased tax shares had not been spent on the real economy, had only been effective in increasing financial wealth.

A consolidation of the national budget can have a positive effect on the rating of rating agencies , which can ultimately reduce any financing problems (lower interest rates and increased demand for government bonds).

The IMF provides a comprehensive empirical study of the economic effects of budget consolidation with an analysis of the effects over a period of 30 years in 15 industrialized countries. According to this, budget consolidations usually lead to contractive effects, with a spending-reducing consolidation being less contracting than a tax-oriented one; both lead to an increase in net exports.

The main result of the IMF analysis is that the overall economic restraint predominates. A reduction in the government deficit by 1% of gross domestic product (GDP) typically results in a GDP reduction of 0.5% of GDP within 2 years and an increase in the unemployment rate by 0.3%. In contrast, the interest rates fall by 0.2% after 2 years, which is apparently not enough to offset the negative effects. Interestingly, the inhibitory effect was even visible in episodes in which the risk of failure is increased.

According to calculations by the Deutsche Bundesbank , the ratio of national debt to total national wealth in Germany is a reasonable 20%. The interest coverage ratio of 9.7% is at a high level, but acceptable. When it comes to sustainability issues, the focus of the discussion is the primary surplus rate. It is the difference between income and expenditure in relation to the gross domestic product, with interest expenditure being deducted from the expenditure.

See also

• Budget freeze
• Double
• National debt
• Debt brake (Germany)
• Global under-spending

literature

• Uwe Wagschal : Budget consolidation . VS Verlag, 2007, ISBN 978-3-531-15610-1
• Gunnar Schwarting: Budget consolidation in municipalities . Schmidt Erich Verlag, 3rd edition 2011, ISBN 978-3-503-07028-2
• Karl U. May: Budget consolidation through spending cuts . Peter Lang Verlag, 2002, ISBN 978-3-631-39075-7
• Hans Apel : State without measure. Financial policy in the dead end . Econ, Düsseldorf / Munich 1997, ISBN 3-430-11066-1
• Horst Böttcher: Millstones. National debt and interest charges . Servicia, Bad Soden 1996, ISBN 3-9804200-0-0
• Friedrich Halstenberg : National Debt A daring financial strategy endangers our community . Klartext Verlag, 2001, ISBN 3-88474-966-8

Web links

Wiktionary: budget consolidation  - explanations of meanings, word origins, synonyms, translations

• Recovery, Risk And Rebalancing , October 2010. IMF, World Economic Outlook (WEO).
• Duden Economy (2004). Retrieved April 25, 2010

Individual evidence

1. ↑ Brockhaus Enzyklopädie , Volume 26. Wiesbaden 1996, p. 121 ( Google.Books ).
2. ^ Uwe Wagschal, Georg Wenzelburger: budget consolidation . Wiesbaden 2008, p. 15 ( Google Books ).
3. ↑ Wolfgang Stützel, Wilfried Krug: Public debt and international capital market. In: National Debt Controversy. Cologne 1981, p. 55 f: "The current account deficit in a period is (due to balance-mechanical relationships ) equal to the sum of all expenditure surpluses of the economic agents of this country, i.e. equal to the amount that they all together spent more than they earned at the same time . The current account deficit can be expressed as the sum of the surplus expenditure of the "private households" sector (they typically spend less than they earn at the same time, so they have a surplus of revenue), of the corporate sector and of the government sector. "
4. ^ Alois Oberhauser: Changes in income distribution and interest formation. A necessary addition to the interest theory. In: Challenges of Economic Policy. Festschrift for Claus Köhler. (Eds. Wolfgang Filc, Lothar Hübl, Rüdiger Pohl) Berlin 1988, p. 104: “For example, a reduction in private investments or national debt causes, all other things being equal, a reduction in demand. If the companies want to sell all their previous production, they have to sell at (relatively) lower prices. The profit rate drops. "
5. ↑ Unilever is considering job cuts in Europe . ( Memento of August 8, 2014 in the Internet Archive ) Wirtschaftsblatt, August 2, 2014: “If markets like in Europe no longer grow because people have less real income available, we have to find ways of making our products available anyway “, Said Unilever boss Paul Polman the Wirtschaftswoche . "And that means lowering costs and sometimes closing factories [...]"
6. ↑ Franz Joachim Clauß: Abnormal balances - test field USA 1929-1940 ( Memento of the original from May 13, 2014 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF; 933.3 kB) 
7. ↑ EU reprimands Germany for export surplus . Welt online , March 5, 2014
8. ↑ Export surplus: Is Germany slowing down the global economy? Time online , March 5, 2014:
9. ↑ Greece suffers from sanctions against Russia . ( Memento from August 8, 2014 in the Internet Archive ) Wirtschaftsblatt, August 3, 2014
10. ↑ Stephan Schulmeister: The Fiscal Compact - Main Components of a System Crisis (PDF; 372 kB) October 29, 2014, p. 4 ff.
11. ↑ Heinz-J. Bontrup: Statement on the hearing in the German Bundestag on June 6, 2012 (PDF), p. 2 f.
12. ↑ Treaty on Stability, Coordination and Governance in Economic and Monetary Union (Fiscal Compact) . ( Memento of the original from October 21, 2014 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF) Article 4, p. 15. 
13. ↑ Austrian Stability Pact. In: Federal Law Gazette. (PDF) Article 4. Structural balance (debt brake). P. 3.
14. ↑ EU Commission of October 7, 2009, Ref .: IP / 09/1428
15. ↑ Glossary: Excessive Deficit Procedure . European Union
16. ↑ Stephan Schulmeister: The Fiscal Compact - Main Component of a System Crisis (PDF; 372 kB) October 29, 2014, p. 7: “The method developed for the empirical estimation of the NAWRU leads to every increase in unemployment - regardless of whether because of a financial crisis, one Oil price shocks or the austerity policy - is reinterpreted into a "structural" one, provided that unemployment does not fall again quickly. Then the (nominal) wage increases must have been too high. This circular reasoning also ensures that the potential output also follows the actual one. If the NAWRU rises after a “shock”, fewer workers are available (the “natural” unemployed are regarded as no longer usable). This also reduces the output gap and every increase in a budget deficit is reinterpreted as a predominantly "structural" one. "
17. ↑ Budget restructuring : Rome and Paris shake the stability pact . In: Süddeutsche Zeitung , June 17, 2014: "Italy and France argue that the rigid austerity policy is damaging their economies because it inhibits growth."
18. ↑ Olivier Blanchard, Gerhard Illing: Macroeconomics . 2009, p. 154
19. ^ René Geissler: Municipal budget consolidation . 2011, p. 150
20. ↑ Olivier Blanchard, Gerhard Illing: Macroeconomics . 2009, p. 157
21. ↑ Cf. Carl Föhl: Analysis of the cycle of wealth formation in the Federal Republic and the influence of its distribution. Expert opinion prepared on behalf of the Federal Ministry of Economics. Tubingen 1964.
22. ↑ Will it hurt? Macroeconomic Effects of Fiscal Consolidation . (PDF; 1.4 MB) World Economic Outlook October 2010, Chapter 3, p. 93 ff.
23. ↑ Will it hurt? Macroeconomic Effects of Fiscal Consolidation . (PDF; 1.4 MB) World Economic Outlook October 2010, Chapter 3, p. 101