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Germany notched a record budget surplus in 2016, aided by growing tax revenues and employment and low debt expenses. In turn, this created conditions for robust economic growth this year supported by higher state and household spending.

Budget surplus

According to the Federal Statistics Office data published Thursday, the German state has been running a budget surplus for three years, with gap climbing to €23.7 billion or $25 billion last year. This is the highest level since the country reunification in 1990.

With the surplus, it has generated a massive fiscal buffer at a period when authorities are working to house and integrate thousands of immigrants. A separate Statistics data report revealed higher state spending was a key player in bolstering economic growth to 1.9% in 2016.

Under the country's budget law, the federal government's surplus of €7.7 billion will go into a fund for refugee-related expenses.

Germany is hailed as Europe’s largest economy, which ranks fourth globally in nominal gross domestic product (GDP) figures, and fifth in purchasing power parity (PPP) GDP. Britain comes next in the European economic rankings, followed by France and Italy.

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Economic growth in Germany

For 2016, the economic growth rate in Germany reached its strongest in half a decade. The Finance Ministry claimed it estimated spending by households and public authorities to fuel gross domestic product growth once more this year— consolidating a shift away from the export activity that, by tradition, drove Germany’s economy.

The arrival of more than a million migrants in Germany has not only boosted economic growth, but also polarized the country’s political landscape ahead of its September federal elections. Most of the migrants are fleeing war and poverty in Africa and the Middle East.

Today’s Statistics Office data, which established preliminary GDP readings, also pegged fourth-quarter growth at 0.4%, presenting foreign trade as a net negative. The German government projects growth to slow to a still firm 1.4% this year.

“The German economy is on a solid growth path,” said the finance ministry in its monthly report released Thursday, adding that indicators implied a continuation of the economic improvement in 2017.

The ministry also mentioned the consumption may remain a crucial driver for the country’s economic growth, gesturing to job creation, salary increases, low interest rates and moderate, although growing energy prices.

The Finance Ministry's report buoyed readings in Wednesday's LFO index, which indicated German business morale improved in February, fuelling hopes for a strong start to 2017 despite fears about US trade policies and the conclusion of the French elections due in April and May.

Tax income

The country’s economic upswing is bringing tax income higher as well.

The Finance Ministry stated that revenues of the federal government and 16 German states jumped 4.0% on the year last month. That is consistently above the projected 2.9% increase for the whole year.

Higher tax revenue has allowed Chancellor Angela Merkel's government to increase state spending on roads, faster internet and refugees all without taking on new debt. It also means Finance Minister Wolfgang Schaeuble can keep his globally criticized aim of running a balanced budget as the government prepares for a potentially tightly contested election.

However, maintaining Germany's consumption-led upturn is by no means guaranteed. A survey published by GfK on Thursday revealed that the mood among German consumers worsened more than expected as March approaches, hitting its lowest in four months and suggesting that consumption may weaken.

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The survey by the Nuremberg-based institute quoted escalating inflation and economic risks associated to the trade policies of US President Donald Trump as the key factors for the decline.

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