An Assessment of the Impact of Government debt and Deficits on the Economic Growth of GERMANY - Essay Example

Govt Debt% ? 1998 849.393 1,996 2.14 -2.99 1999 876.963 1,997 1.74 3.25 2000 841.974 1,997 3.30 -3.99 2001 890.106 1,999 1.64 5.72 2002 955.4 2,002 0.03 7.34 2003 1,042.85 2,003 -0.39 19.10 2004 1,115.94 2,003 0.70 7.01 2005 1,189.51 2,004 0.84 6.59 2006 1,227.10 2,002 3.89 3.16 2007 1,227.05 2,004 3.39 0.00 2008 1,242.06 2,007 0.80 41.85 2009 1,352.31 2,014 -5.07 8.88 2010 1,402.61 2,006 4.02 3.72 2011 1,434.37 2,008 3.10 2.26 2012 1,553.78 2,011 0.94 8.32 Source: IMF Economic outlook 2012     In the 1990s, when Germany took strong political measures such us reunification, the government had to face several economic constraints as government had to incur huge expenditure on the infrastructural development of the country.

Most of the government expenditure was tilted towards the eastern side of Germany, which led to the problem of unemployment. Government adopted tight monetary policy in the 1990s, but it was not able to put a control on inflation as the labor costs and taxes were very high. The economic problems faced by the country were eventually reflected through the growth number of the country as the growth rate stayed around 2% on average for the decade (Barassi, Caporale, Hall, 2000, pp. 45-55). The labor cost in the last 1990s was very low amid low demand of goods and services, which further worsened the situation for the country.

Government took various initiatives to spur domestic demand, but it failed as consumers were not willing to spend excessively as economic problems ruled the country and unemployment was at its peak. As a result, Germany witnessed sluggish growth till 2006, when it showed signs of recovery (Doornik, & Hendry, D.F. (2001). Government debt and fiscal deficit also had a profound impact on the growth rate of Germany especially before 2005. Government had to rely on heavy borrowing to finance its public expenditures or fiscal deficit.

The borrowed money was mostly used to cover administrative and infrastructural expenses. Hence, apart from low demand, lower expenditure on other sectors had a severe impact. After, 2005 government borrowing continued at a steady pace, but the impact of government borrowing on growth was not as pronounced as it was before 2005 (Krugman & Wells, 2009). Real GDP surged to 3.89% in 2006 due to a series of reform steps taken by the government. Although, government debt increased by 3.16% in 2006, but focus on job creation and price competitiveness helped economy recover from the problems.

Germany took special initiatives that drastically supported the labor increasing their productivity and motivation. It set a wage rate for all employees irrespective of company’s profitability and supply/demand condition (Brunner, 1986, pp. 709-731). Debt and Deficit When government expenditures are greater than its revenues, the excess expenditure is termed as deficit. The expenditure includes development expenditure, administrative expenditure, employee salaries and wages etc. On the other hand, sources of government revenue include taxes, interests, sale of property/financial instruments etc.

In order to finance the deficit if any, government usually borrows money from scheduled banks or from external sources to finance the de