The
Refugee Bill: Budget Battle Begins over Germany's New Residents
By
Markus Dettmer and Christian Reiermann
No
one knows how much integrating the hundreds of thousands of refugees
in Germany will ultimately cost. Yet the battle over financing has
already begun. Finance Minister Schäuble doesn't want to borrow
money or raise taxes, but his approach may be wrong.
When
it comes to calculating the refugee bill in Germany, things can get
very tricky, real fast. On the one hand, no one can seriously say how
much money is going to be required in order to manage the influx of
refugees coming into Germany. On the other, government ministers and
officials, politicians and commissions need the most reliable figures
possible in order to create plans and make forecasts so they can move
ahead at all.
As
such, it's always good to have someone who knows exactly what they
want. And that is a perfect description of Wolfgang Schäuble, of
Chancellor Angela Merkel's conservative Christian Democratic Union
(CDU). Schäuble, the German finance minister, is certain that he
doesn't want to borrow money. He wants Germany to maintain its
current balanced budget -- all the way through to 2020. That
conviction is laid out in Finance Ministry documents on medium-term
financing prepared by Schäuble's staff and sent to various divisions
of the federal government.
Doing
so will be relatively easy for Schäuble in 2016 and 2017. He closed
2015 with a budget surplus of around €12 billion ($13 billion)
after breaking even in 2014. The government plans to apply half of
that surplus to each of the next two years to finance the costs of
the refugees.
After
that, though, things get a bit tighter. Even in Schäuble's
calculations, the fiscal burdens for the government created by
asylum-seekers are expected to increase each year. He's calculating
around €10 billion for this year and about double that in 2020.
This is forcing the government to address difficult questions about
how it intends to raise this money. Will it do so through borrowing?
Or will the country have to raise taxes?
At
this point, Schäuble is ruling out both. He wants to plug the holes
in the budget created by the unforeseen expenses at least in part
through cyclical tax revenues (e.g. government revenues that are
growing as a result of positive economic developments) and the rest
through general cuts across the federal budget.
Should
Costs Be Viewed as Expense or Investment?
Critics
argue this is the wrong approach, symptomatic of a compulsion to save
in Germany that has become almost Pavlovian. Expenditures for
integrating refugees, they argue, are in fact an investment in the
country's future and should be treated as such.
The
political debate about how to deal with the refugee crisis is now
also becoming a battle over money. State governments, in particular,
are assuming that expenditures will be greater than so-far planned.
In
a joint letter penned to Schäuble last week, North Rhine-Westphalia
Finance Minister Norbert Walter-Borjans of the center-left Social
Democratic Party (SPD) and his Bavarian counterpart Markus Söder of
the Christian Social Union, the Bavarian sister party to Merkel's
CDU, said states face extra expenditures of up to €25 billion in
2016 alone. That's far higher than previous forecasts.
The
typical political back and forth followed. Walter-Borjans and Söder
demanded that Schäuble increase the federal government's share to 50
percent of actual expenditures and complained that Berlin thus far
hasn't even provided half that amount. And Schäuble played his role
to perfection as well -- with a knee-jerk rejection of the demand.
The
bizarre aspect of this dispute is that the calculations of all
involved are exceedingly flimsy. Nobody knows how many refugees will
ultimately make their way to Germany. Calculations by the federal
government assume that 3.6 million refugees will flow in to Germany
between 2015 and 2020.
In
2015, over a million refugees came to Germany. The government is now
estimating 800,000 asylum-seekers will arrive in 2016, with that
figure sinking to 600,000 in 2017 and 400,000 in each of the
subsequent years until 2020.
1.1
Million Refugees or 770,000?
But
even when it comes to the number of refugees currently in Germany,
the data is far from reliable. The government simply knows too about
the huge numbers of people who have entered the country. It doesn't
even have an accurate count of how many refugees are actually here.
It's
actually quite probable that of the people who fled to Germany last
year, far fewer than a million are still in the country. Many
refugees were counted twice and many who were registered in 2015 have
likely left the country. "The net immigration of refugees, due
to return-migration and out-migration, is likely to be around 65 to
70 percent of the gross in-migrations," states the
Nuremberg-based Institute for Employment Research, which is part of
the Federal Employment Agency. Based on that figure, of the 1.1
million refugees believed to have entered into Germany, only around
770,000 are still here.
When
it comes to costs, the numbers floating around the country couldn't
be any more disparate, either. The Institute for the World Economy at
the University of Kiel has calculated a number of scenarios -- one
with a migration rate as high as the one currently being experienced
or even higher, and others with fewer migrants and with either less
or greater out-migration. Its lowest estimate for all these different
scenarios puts annual costs at €24 billion, with the highest coming
in at €55 billion.
'Sufficient
Scope' for Carrying Burden
At
first glance, these appear to be immense sums, but they also have to
be measured against Germany's economic strength. The International
Monetary Fund (IMF) currently estimates that refugee costs in 2016
will account for only 0.35 percent of total German gross domestic
product (GDP) of over €3 trillion, meaning an absolute cost of
around €11 billion.
Germany's
central bank, the Bundesbank, which is not known for rose-tinted
glasses, estimates that additional expenditures relating to refugees
in 2016 will add up to about 0.25 percent of GDP as compared to 2015
spending. "The massive influx of asylum-seekers poses tough
challenges for Germany in many respects," the Bundesbank wrote
in its current monthly report. "Thanks to the current favorable
economic situation, however, there is sufficient scope within
government budgets to absorb the associated financial burdens without
breaching the deficit ceilings."
Beyond
all the statistical uncertainties remains the fundamental question of
how to assess the economic and political costs of integration. Should
they be viewed purely as expenditures or also as investments? There's
much to suggest the latter.
The
fact is that the stream of refugees is hitting Germany at the most
fortuitous conceivable moment. Thanks to a healthy economy, state and
federal treasuries are flush. The labor market is robust, with many
jobs in need of filling.
At
the same, government expenditures for refugees are more than just
costs -- they could also have a positive knock-on effect. The reason
being that only part of the money goes straight to the refugees, with
some also getting pumped directly into the economy. Take
manufacturers of container buildings, for example, who are providing
temporary housing for refugees, the carpenters helping to erect these
facilities or the wages of people who are providing services to the
asylum-seekers. Finally, the government funds paid to the refugees
often returns to the economy in the form of consumer spending. All
these factors combined could actually lead to economic growth.
The
IMF is calculating that the increased government expenditures will
boost economic growth in Germany during the next year by 0.3 percent
over previous forecasts. The Bundesbank has arrived at a similar
figure. For the year 2020, the IMF expects that the refugee
developments in Germany will lead to between 0.5 percent and 1.1
percent in additional economic growth, assuming that the country is
successful in integrating the newcomers into its labor market. Either
way, the German economy is currently experiencing stronger growth
than would without immigration. And if they successfully enter the
labor market, Germany's new residents will also help finance the
German state in the form of taxes and social security contributions.
Good
News and Bad News
Ultimately,
the costs of the refugees are also an investment in tomorrow. And
there is an opportunity for Germany to better integrate its
immigrants than it did in the past. Robert Beyer, a researcher at the
Institute for Monetary and Financial Stability at the University of
Frankfurt, has conducted a study for the IMF on the integration of
migrants into the German labor market from 1980 to the present. The
good news is that, even if integration is difficult, and even if
unemployment is considerably higher for migrants at first than it is
for Germans, the share of immigrants without jobs falls over time as
they acquire the language and obtain professional qualifications. The
longer migrants live in Germany, the higher the percentage that find
gainful employment. Without any knowledge of the German language,
migrants initially earn up to 30 percent less than a native German
would earn in the same role. But once immigrants begin to acquire
German, this earning gap slowly begins to close.
The
bad news is that regardless how well-qualified migrants are, how long
they have lived here, whether they have completed their training here
in Germany and if their German is excellent, the wage gap never fully
closes. Immigrants' risk of becoming unemployed is also greater than
for Germans. "The finding is surprising and also alarming,"
Bayer says, adding that "even after they have been in Germany
for long periods of time, companies are generally employing them at
levels beneath their actual qualification."
This
presents a challenge for Germany -- not only for ethical reasons, but
also because it also represents an economic loss in the sense that
these people aren't working as productively as they could be.
"Employers have no excuses for this gap," says Beyer. If
Germany wants the positive economic effects of this new wave of
immigrants to outweigh the negative effects in the medium and long
term, the economist warns, then the state will need to begin
investing in refugees as soon as possible.
The
question remains as to how the government can best address the
current financial burdens created by the refugee crisis in order to
at least create the possibility of a net benefit to the country in
the future.
Doubts
over Schäuble Plan
There
are in fact legitimate doubts about the economic sense of Schäuble's
plan and its potential consequences, given that the budget surpluses
Germany is seeing have been paid in their entirety by current
taxpayers. If it's true that the integration of millions of refugees
will remain the task for at least an entire generation, there's an
argument to be made that it would also be unfair to place this burden
entirely on the shoulders of today's taxpayers and let future
taxpayers off the hook completely.
Indeed,
it would not be difficult to arrange for future generations to cover
part of the costs. Rather than financing the integration of the
refugees through budget surpluses, Schäuble would simply have to
cover the costs through new borrowing. While this would cause
Germany's deficit to grow again, it would also mean that future
taxpayers would be required to make their own contribution. They
would have to cover the interest and pay down the principle.
This,
of course, would mean bidding farewell to a balanced budget, which
Schäuble has made his chief policy priority as finance minister.
After two years of balanced budgets, the idea of new borrowing seems
almost outmoded. Many fear that if the finance minister were to
borrow fresh money, it would mark the end of Germany's newfound era
of budget discipline.
It's
not an unjustified concern, but it is still one that can be easily
addressed. For example, it would be possible to move the refugee
costs into a special budget separate from the normal federal one. All
borrowing related to the admission, care and integration of the new
arrivals could be pooled there. A special fund like that would have
the additional benefit of providing greater transparency that would
in turn make it harder for the government to succumb to the
temptation of secretly borrowing money for other purposes.
Prominent
German Economist Thomas Straubhaar, of the University of Hamburg,
also cites another reason. "A fund would allow money to be
mobilized immediately," he says, even if he personally would
prefer to see the money raised through savings and reallocations
within the existing budget. He argues it would make more sense to
spend money in the right ways now than to have to pay even more later
on to repair mistakes.
Favorable
Borrowing Conditions
The
debt in the special fund would be serviced through yearly allocations
from the federal budget. Depending on the interest rate and
amortization, the fund could be paid off in 10, 20 or 30 years' time.
And, with interest rates currently at their lowest since World War
II, conditions for fresh borrowing are extremely favorable at the
moment.
But
what happens to the €12 billion that Schäuble has already
earmarked for managing the refugee crisis if a special fund is
created instead? The money could be used by the federal government to
finance an investment program or lower taxes. Both moves would also
drive further economic growth.
Besides,
there's a political advantage to that approach: It would prevent
prejudice against and resentment toward refugees, because it would
mean that no one could make the argument that money is available for
the asylum-seekers, but not for the normal population. The creation
of the special fund would also enable the government to say that
migrants, too, will later be helping to pay back some of the debts
that were created as a result of their arrival.
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