Welcome to Hard Times

The Fiscal Consequences of German Unity

Despite recent success in consolidating the budget deficit, many observers of the German economy are asking whether its fiscal problems can be solved without a "second economic miracle." This book is a comprehensive study of the fiscal and economic implications of present and mid-term budgetary planning for Germany. The authors conclude that the fiscal conservatism implied in the current budgetary planning may succeed by 1998 in reducing the German deficit/GDP quota by at least half. This consolidation, however, will not come without considerable cost to the real economy. Given the dim mid-term perspective of west German growth--a prerequisite for east Germany's ability to catch up--the government's fiscal plan will leave per capita income nearly stagnant. This ambitious deficit reduction package makes no effort to stimulate economic growth; nor does it guard against possible contractionary effects, raising doubts about the political feasibility of the current fiscal plan.

The authors make a number of suggestions to restructure the revenue side of the budget and argue for a somewhat less ambitious attitude toward Germany's deficit position. This would free some funds for a reduction of direct taxes which are currently at their highest level in history. It would also allow for an expenditure structure that improves Germany's competitiveness and growth. That, the authors believe, is the best hope for resolving one of the most serious economic challenges facing Germany for the rest of the decade.

Ullrich Heilemann is vice president of the Rheinisch- Westfalisches Institut fur Wirtschaftsforschung, Essen and professor of economics at the Westfalische Wilhelms-Universitat, Munster. Wolfgang H. Reinicke is a research associate in the Foreign Policy Studies program at Brookings.