Economy

Germany has a problem with a rigid constitutional rule that narrowly limits the permissible budget deficit

Playing around with the books won’t get Europe’s biggest economy out of its downturn

The German chancellor Olaf Scholz faces a struggling economy and restrictions from constitutional spending rules. Photograph: Ralf Hirschberger/AFP via Getty Images

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John FitzGerald
Fri Feb 23 2024 - 06:00

Most people know when they are spending money. Yet because of an arcane approach to government accounting, for the first 50 years of the Irish State it was never fully clear what the government was spending on behalf of its citizens. Total government income was equally unclear.

In that period when the government shifted money from one account to another, it was usually counted as expenditure – but actual spending from secondary accounts was generally ignored. Income coming into these low-profile accounts was also frequently overlooked. It’s like counting only the money in your wallet but not what’s hidden in various biscuit tins. Local authorities operated in their own bubbles, and were slow to tell the central government what was going on. So there was no clear view of what the public sector as a whole was doing. All of this made it difficult to manage the economy properly.

This chaotic approach to government accounting was first taken in hand by the Central Statistics Office (CSO) in the late 1950s, when it published a summary set of accounts, which netted out all the transactions between public bodies and showed the true net borrowing by the State. The problem was that this publication came out between six and 12 months after the end of the financial year. By that stage the numbers were of historical interest but not very useful for managing the economy.

By the time I joined the Department of Finance in 1972, there had been some improvement. The National Accounts version of the budget gave a consolidated set of figures for central government, though it missed out on local authorities. Part of our job was to assess the likely impact of a budget on the economy, but again these relevant figures were published too late after the budget to inform budgetary policy.

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From the end of the 1970s computerisation of government accounts should, in principle, have allowed simultaneous publication of the National Accounts consolidated version alongside the traditional budget presentation but that didn’t happen. Instead, this finally occurred in the 1990s, driven by impending Economic and Monetary Union. EU rules required the government, as part of the budget, to publish what was called the General Government Balance. This nets out all the transactions between State bodies.

So the practice today is that the Government, simultaneously with the budget, publishes the estimated General Government Balance. Furthermore, this is updated a number of times over the course of the year. This allows a proper assessment of the role of the public sector in the wider economy. The figures are also audited by the CSO, on behalf of Eurostat, which provides clear quality control.

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At the time of last October’s budget the budget documentation forecasted a general government surplus for 2024 of over €8 billion. However, the Government also quoted an estimate of what is called the Exchequer Balance of only around €2 billion, a figure that is often cited by commentators. This latter concept of the Exchequer Balance is a hold-over from the past. The major reason for the difference between the two is that the Government is shifting €4 billion into a savings account. By any definition this is not spending so that the Exchequer Balance is meaningless and should be relegated to history.

When we bailed out the banks to the tune of €35 billion, CSO’s audit for 2010 added this to the general government borrowing. This reflected the real cost to the people of Ireland of the bailout.

For the last 30 years there have been clear EU rules about transparent government accounting, with countries obliged to present their consolidated financial position. That’s why I find amazing the recent row in Germany about their budget deficit. They effectively transferred large sums to a government savings account during Covid, and they planned to spend it this year. The fact that the expenditure came from a savings account could not disguise the fact that it was expenditure.

The German supreme court called a halt to this fiction. Even if the German supreme court had not done so there was no way that Eurostat could have accepted it.

Germany does have a problem with a rigid constitutional rule that narrowly limits the permissible budget deficit. As we in Ireland know only too well, the Merkel government was bitterly opposed to borrowing, and they enshrined this provision in their constitution. But the answer to today’s conundrum, when Germany should be spending more to avoid a slump, is to alter their constitutional provision, not to play around with the books.

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