October 21, 2009
According to recent news reports, the new German coaliton government has found a nice trick which would allow them to cut taxes in the years from 2011 onwards without having to cut spending nor having to borrow more at that time.
Sounds too good to be true? Right. It is not that Merkel and Westerwelle have found a new way to make debts simply go away, but they are rather resorting to an accounting trick. The idea behind all this is to install a special purpose entity which now borrows something like €40bn from the capital market and uses the money in future years to pay for deficits in the social security system. Thus, the recorded deficit for this year would skyrocket, but it would be lower in the years to come, making it possible to meet German constitutional requirements for deficit reduction even if taxes are cut.