Germany will not succeed in bringing its budget deficit down to exactly 3 per cent of gross domestic product as it hopes, the Organisation for Economic Co-operation and Development has said. The OECD has predicted Bonn will notch up a deficit of 3.2 per cent of GDP in 1997 which would be cut back to 2.7 per cent in 1998.

But it said the 1997 deficit level would not present a barrier to Germany joining European monetary union, even though the deficit forecast is slightly above a requirement for deficits to be no more than 3 per cent of GDP. "According to OECD projections, the general government deficit is likely to be around 3.25 per cent of GDP in 1997 in the absence of new measures," the OECD report said.

"The difference from 3 per cent is well within the range of normal statistical revision so, at this deficit level, the criterion could be effectively regarded as being met." The Maastricht Treaty requires countries which want to enter monetary union to cut their budget deficits to 3 per cent of GDP or less and to have debt of no more than 60 per cent of GDP or at least show progress in cutting debt.

On debt levels as well, Germany could be expected to slightly exceed the requirements laid down in the Maastricht Treaty, the OECD said, predicting a rise in debt levels this year and next to around 62 per cent of GDP. But it noted that German debt levels had been boosted by German unification. "Overall, it is estimated that more than half of the increase in public debt since 1989 is attributable to reunification," it said.

German fiscal policy could, however, enter a dilemma if economic growth did not pick up as expected this year, the OECD said, warning that it would then be hard to implement further measures to reduce the deficit as required. "A key policy question is whether it would be possible, or even desirable, in the case of deteriorating growth and employment prospects and associated further budget slippage, to tighten fiscal policy in the course of the year," it said.

An option such as raising excise taxes would be theoretically possible, but this could cause confusion over Bonn's overall tax strategy. Accelerated privatisation programmes, which "could have a major impact on the government debt ratio" were one possibility, it said.

The OECD warned that the long-term goals of reducing debt and deficits must not be subsumed by the more immediate need to meet the Maastricht goals. "Some of the ways in which the deficit has been contained - such as the rise of social security charges - have run contrary to the attainment of other longer-run fiscal objectives on which future economic performance, and the credibility of fiscal policy, depend," it said.