German towns fail to tap into government's investment funds

October 14, 2016 12:02 PM EDT

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By Michael Nienaber

BERLIN (Reuters) - Germany has earmarked billions of euros in investments for schools, nurseries, hospitals and housing, but local authorities have so far spent only a fraction of that windfall due to planning bottlenecks, data shows.

Facing international pressure to increase public investment and spend a record budget surplus on infrastructure and education, Finance Minister Wolfgang Schaeuble has made fresh money available through different funding pools.

But government figures collated by Reuters on Friday show heavily indebted municipalities and states, which historically manage a large chunk of public spending in Europe's biggest economy, have yet to tap in.

Of 3.5 billion euros ($3.9 billion) earmarked in a Municipal Infrastructure Fund for investment in schools and hospitals, local authorities have used only about 1 percent, data from the Finance Ministry shows.

The fund was created in June 2015 and initially meant to last until 2018. In light of the slow take-up it has been extended to 2020.

"A lot of towns don't have sufficient planning capacities," said Marcel Fratzscher, head of the DIW economic institute. "Also, tendering procedures often take long on a local level."

Municipalities say local officials are struggling to cope with the sudden but welcome funding line after years of austerity.

"The delay in tapping the federal funds is also due to the fact that local authorities were overwhelmed by last year's record influx of migrants, which left them fully occupied with ensuring accommodation and integration," said Helmut Dedy, head of the Association of German Cities.

Dedy said towns were likely to tap the funds faster in coming months, given that the influx of new arrivals had slowed and officials could now focus on other tasks.

Separately on Friday, the federal government and 16 states agreed a tax revenue-sharing deal from 2020 when the solidarity pact for states in the former communist East and a broader agreement on the redistribution of tax revenues expires.

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The organizational bottleneck is also reflected in the slow tapping of money from a fund to expand day care for children. So far, less than half of this year's 230 million euros has been paid out to municipalities, the Finance Ministry figures show.

In another program, the government promised to transfer 5 billion euros to the regional governments by 2019 if they spend the money on new social housing projects.

But a Finance Ministry report seen by Reuters shows fewer than 15,000 public housing units were built in 2015, with three states investing nothing at all.

"Especially in urban areas, more new residential construction and more affordable housing is needed urgently, also to accommodate the refugees who are allowed to stay," the authors of the report say.

The authors suggest weighting distribution of the funds more towards more densely populated areas, making more money available for urban areas like Hamburg and Berlin whose need is greatest.

"It's now up to the states to act quickly and create affordable housing with their construction subsidy programs," the report concluded.

An International Monetary Fund (IMF) economist repeated calls by the Fund for Schaeuble to further increase public investment.

"The government would be ill-advised to spend the budget surpluses only on tax cuts," Maurice Obstfeld told Der Spiegel magazine, referring to an agreed package of 6.3 billion euros of income tax cuts in 2017 and 2018.

In a pre-release of a report due for publication on Saturday, Obstfeld also said additional stimulus in Germany's construction sector would push up wages, helping the European Central Bank reach its 2 percent inflation target.

German harmonized consumer prices rose 0.5 percent year on year in September.

($1 = 0.8928 euros)

(editing by Larry King and John Stonestreet)



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