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Germany balances budget for first time since 1969

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Angela Merkel, Germany's chancellor Photographer: Krisztian Bocsi/Bloomberg

Angela Merkel, Germany's chancellor Photographer: Krisztian Bocsi/Bloomberg

Bloomberg

Angela Merkel, Germany's chancellor Photographer: Krisztian Bocsi/Bloomberg

Germany has balanced the federal budget for the first time in almost half a century, helped by strong tax revenues and rock-bottom interest rates, but the extra leeway is unlikely to translate into spending that could boost weak euro zone growth.

Berlin had been aiming to achieve the so-called "schwarze Null" in 2015 - but the finance ministry announced on Tuesday it had got there in 2014, a year ahead of schedule.

It was the first time since 1969 that Germany had achieved the feat and is both a domestic and European political fillip for Chancellor Angela Merkel's government, which wrote the goal into a coalition agreement in late 2013 and has preached budget discipline to the likes of Greece.

Peter Tauber, general secretary of Merkel's Christian Democratic Union (CDU), said the budget was a "historic success" and sent a clear signal to the rest of Europe that Berlin was leading by example and now only spending money in its coffers.

"This marks a turning point in financial policy: We've finally put an end to living beyond our means on credit," he said.

But while Europe's biggest economy is under pressure from European partners to spend more, some Germans have harboured deep-seated fears of inflation since the hyperinflation of the 1920s that wiped out an entire generation's savings and many have an aversion to debt.

Christian Schulz, economist at Berenberg Bank, said the government had staked a lot of credibility on balancing the budget and would reap a political dividend from voters "who are very keen on the German government not borrowing more".

But although more spending could boost domestic demand in Germany and imports from the rest of Europe, Schulz said it was unlikely to be at levels that could significantly affect euro zone growth.

The underlying lack of confidence in the euro zone remained "and that really doesn't depend very much on whether Germany digs a few more holes and fills them in afterwards again", he said.

"So I would expect a very marginal effect on the rest of the euro zone," he added.

GERMANS "HARD AT WORK"

The government had originally planned to take out 6.5 billion euros ($7.7 billion) in net new debt last year but ended up not needing to take any, and even managed to pay off old debts worth 2.5 billion euros.

This was due to income tax revenues being bolstered by record employment and Berlin spending significantly less on debt interest payments as the European Central Bank's main interest rate languishes at historic lows.

Tax revenues climbed to 270.8 billion euros last year - about 2.6 billion euros higher than forecast, according to preliminary 2014 budget figures provided by the ministry.

"Germans are more hard-working than forecast. That's not an unpleasant development - if you look at the income, you'll see the positive developments particularly relate to the high level of employment in Germany," a senior government official said.

The number of people in work in Germany hit a record high of 43.1 million in November and the unemployment rate has fallen to a historic low of 6.5 percent.

The government received another 24.7 billion euros from other revenue including dividends and coin sales.

Spending was 1 billion euros less than planned at 295.5 billion euros, its lowest level since 2009. A second senior government official said the government had spent 1.7 billion euros less on interest payments than forecast.

Reuters