Seehofer Says New German Coalition to Craft Special Debt Fund Share | Email | Print | A A A

(Bloomberg) -- German Christian Social Union party leader Horst Seehofer, one of three top negotiators for the country’s next government, said the coalition will seek to create a special debt fund outside the budget to pay for rising unemployment and health insurance costs.

“There have been special funds before in Germany on singular historic occasions,” Seehofer said in Berlin yesterday after eight hours of negotiations. “At the moment we have special funds for medium-sized companies and corporations and a special fund for banks. Now we’re going to create a special fund for workers.”

Business lobbies and economists have said a special fund would cloak the true state of Germany’s public finances and may undermine a debt brake put in place this year that aims to keep future liabilities under control.

The decision highlights the difficulties Chancellor Angela Merkel faces as she seeks to reconcile the goals of tax relief and budget consolidation. The Free Democratic Party, one of the three prospective parties in government, called for 35 billion euros ($52.5 billion) in tax cuts in its election campaign while Merkel’s Christian Democratic Union and its Bavarian CSU sister party offered 20 billion euros in negotiations last week.

“To hide 50 billion euros in new debt for labor and health in a shadow budget is nothing more than an accounting trick,” Patrick Adenauer, head of the ASU lobby of family- owned businesses, said earlier yesterday in an e-mailed statement.

Structural Deficit

Adenauer said Merkel’s prospective coalition lacks the strength to tackle the so-called structural deficit, the budget shortfall that has to be covered by new borrowing even in times of average tax revenue. Merkel “neglects spending cuts because it’s more comfortable to raise debt,” he said.

“Aggregate net government borrowing would be much higher in 2009 than planned and we had anticipated” under the proposal, Eckart Tuchtfeld, an economist at Commerzbank AG in Frankfurt, said before yesterday’s coalition negotiations in an e-mailed statement.

Deutsche Bank AG Chief Economist Norbert Walter said all government spending should come out of one budget. He said the plan violates basic accounting principles and is similar to the off balance sheet vehicles created by banks that contributed to the financial crisis, the Handelsblatt newspaper reported.

“The special fund is part of the budget and will be published in a transparent matter and of course it has to be repaid,” Seehofer said.

Tax cuts and health spending have emerged as sticking points in discussions on an agreement, which politicians from all three parties plan to wrap up this week to elect the new government in Germany’s lower house of parliament, or Bundestag, next week.