Merkel keeps budget goal even if 2006 growth weak

Germany's new government will seek to bring the budget deficit under EU limits in 2007 even if growth fails to pick up next year, designated Chancellor Angela Merkel was quoted on Wednesday as telling the weekly Die Zeit.
Asked whether the consolidation target could be put back if growth fails to pick up as expected in 2006, Merkel said: "No".
"We can't keep saying for years in a row that we can't manage a budget that conforms with the constitution. That's not on," she said, referring to German constitutional rules that say new borrowing must not outweigh investment spending.
Merkel's new coalition of conservatives and the centre-left SPD has agreed a government programme that aims to bring the budget back in conformity with European Union rules limiting the deficit to three percent of gross domestic product in 2007.
It says it will need at least 35 billion euros ($40.8 billion) in savings or new revenue to reach the goal and is counting on an upswing in 2006, which would see economic growth reach 1.8 percent from an expected 0.8 percent this year.
However Merkel, who leads the conservative Christian Democrats (CDU), has already conceded that the growth assumption underpinning the target is an optimistic one.
Her comments may raise concern that proceeds from an increase in value-added tax (VAT) that have been earmarked to help cut social security contributions paid by workers and employers will have to be diverted to the budget.
The new government is planning to raise VAT by three percentage points to 19 percent in 2007 and use two-thirds of the extra revenue raised to plug budget holes, with the remainder going on cutting contributions.
For the budget, the new government has more or less written off 2006, admitting it will not be able to reach the EU target or conform with Germany's own constitutional rules that require investment spending to outweigh net new borrowing.
In the past, the government has pleaded extenuating circumstances, such as weak economic growth to get around the constitutional rules.