Austerity budget good for Bonn coalition but not so good for US ties

West Germany's marriage between the Social Democrats and the Free Democrats (liberals) in being preserved as a result of budget trims amounting to 18 billion deutsche marks ($7.4 billion). At the same time, the trims are irritating Washington.

Under the circumstances of a slowed economy, that's about the best Chancellor Helmut Schmidt could have hoped for.

The 1982 austerity program approved by the Cabinet July 30 calls for cuts in government spending adding up to 12 billion DM; a 1 billion DM tax cut; and a 1. 4 billion DM increase in tobacco taxes -- leaving 3.6 billion DM in revenues (possibly involving supplemental taxes for job creation), to be decided on by September.

Thus, the overall budget will rise no more than 4.2 percent (a slight real decrease, given the projected 4.5 percent inflation), to a ceiling of 241 billion DM.

The aim of the package is to curtail net borrowing. The cuts will reduce 1981's estimated 1981 net borrowing of 35 billion DM down to 26.5 billion DM next year.

In announcing the changes, Mr. Schmidt said he expected they would aid economic recovery, eventually reduce interest rates, ease the money market, improve the balance of payments, and strengthen the weak deutsche mark.

In the intensive coalition negotiations that preceded the budget compromise, care was takento gore everyone's ox evenly -- from the liberals' subsidized industrial constituents to the Social Democrats' welfare recipients.

Politically, this means the Social Democratic-liberal coalition will not break apart over the belt tightening. For the government this is a relief, especially given its shaky standing in current opinion polls. If elections were held today, polls show the Social Democrats getting only 34 percent of the votes; the liberals, 9.8 percent; and the opposition conservatives, 50.7 percent.

Economically, the budget compromise means that the federal labor office will lose 3 billion DM, family allowances will lose 1.5 billion DM, and veterans will lose 300 million DM. Through attrition, there will be a 1 percent reduction in the number of civil servants.

Similarly, 2 billion DM will be cut from the 1982 defense plans, for a nominal rise of 4.2 percent (equal to the overall budget rise). This means a slight real decrease in defense spending, unless there is a supplementary budget in 1982.

It is this cut in military spending -- along with blaming high American interest rates for West Germany's unpleasant domestic policies -- that has raised American hackles. Reagan administration officials, including Defense Secretary Caspar Weinberger, immediately expressed "regret" over the gap.

Under the Carter administration, Bonn's failure to meet the standing NATO members' pledge of a 3 percent annual increase in military spending became a major bone of contention between Bonn and Washington. With this history, Schmidt's willingness to court new American ire now by reducing his defense budget illustrates the seriousness of West German financial straits -- and perhaps also the end of Bonn's kid-glove treatment of Mr. Reagan.

From the time of Reagan's election up to the Ottawa summit, Schmidt showed him conspicuous deference -- alienating many younger members of his Social Democratic Party. In that period, it would have been inconceivable for him to take such a hefty chunk out of military spending.

Now, however, working relations have already been established with the Reagan administration. And if domestic necessity must prevail over foreign impact on the issue of America's high interest rates, then domestic necessity must also prevail over foreign impact in West Germany's military budget.

In discussing the issue at his press confernce, Schmidt stressed that Bonn has come close to meeting the NATO target in recent years, with 2.9 percent annual increases. He suggested that the 1982 defense cuts will probably require fewer training flights as well as a slowdown in delivery of the new Tornado fighter and Leopard II tank.

So far currency rates have not responded to the austerity measures. The deutsche mark remains at a five-year low against the dollar, now over 2.46.

June export figures just in show an improvement in the economy, however. There was a trade surplus of 1.7 billion DM (6.4 billion six-month figure), well up from last year's 275 million DM surplus. The current accounts deficit for June was 3.8 billion DM, for a six-month deficit of 14.4 billion DM, compared to 12.4 billion DM last year.

The last conservative chancellor candidate, Christian Social Union head Franz Josef Strauss, called the government budget program a "plan to exploit citizens." The civil service union is objecting to the 1 percnet personnel cuts in public employment. Veterans also object to the ir cuts in benefits.

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