Germany’s three-party coalition government is struggling to agree on next year’s budget after a court ruling tossed the country into an economic crisis. The turmoil could hurt the economy and hinder Green agenda investments, but an audit court has warned that a recently approved supplementary budget could also be unconstitutional.
As the government seeks to fill the hole in the budget, Finance Minister Christian Lindner ruled out tax increases, and emphasised that his country’s debt brake “must be respected.”
As we previously reported, the constitutional court ruled on November 15th that a move to redirect €60 billion of unused loans meant to combat the effects of the pandemic to a climate fund was unconstitutional. In December 2021, the coalition of Social Democrats, Greens, and the liberal FDP agreed to transfer €60 billion of untapped credit to its so-called climate and transformation fund.
The manoeuvre was attempted with the suspension of the so-called Schuldenbremse, the debt brake. This vehicle restricts the German public deficit to 0.35% of GDP under normal circumstances, and to 1.5% of GDP in a recession, which Germany is currently experiencing. The debt brake was suspended because of the pandemic from 2020 to 2022—the government is allowed to do so in the event of “exceptional emergencies” to finance its response. The suspension remained at the start of the war in Ukraine last year with the drastic increase in Europe’s energy costs. This allowed the government to borrow billions of euros in emergency loans.
However, the constitutional court has made it clear that setting aside these loans for the future and spending them in ways not approved by the Bundestag is not permissible.
The government unveiled a supplementary budget last week that will see Germany suspend its debt brake for a fourth year in a row to borrow roughly an extra €45 billion. But the country’s audit court, which supervises state finances and issues non-binding recommendations, warned on Monday that the supplementary budget for 2023 is “extremely problematic under constitutional law,” because it retroactively invokes an emergency for a budget year that is almost over.
Christian Lindner, leader of the fiscally conservative FDP, is reluctant to agree to another suspension in 2024 and has ruled out tax increases to fill the gap.
In this case, the coalition would have to agree on budget cuts, which could partly affect the green transition of the German economy, projects from greening manufacturing to building out solar energy and expanding battery and semiconductor production. “We will do everything to realize these goals,” Social Democrat Chancellor Olaf Scholz promised a few days ago.
In contrast to the FDP and the opposition centre-right CDU/CSU, both the Social Democrats and the Greens are pushing for the debt brake to be abolished. Economy Minister Robert Habeck, from the Greens, has criticised the debt brake as inflexible and as blocking vital support for industry to stop jobs and value creation from moving abroad. “With the debt brake as it is, we have voluntarily tied our hands behind our backs and are going into a boxing match,” he said, adding that the brake “prevents investment and climate protection and weakens the German economy in times of need.”
However, the Green agenda has not been popular in Germany, with many people unhappy about a ban on new gas boilers, that has been watered down. The Greens had once enjoyed the support of 21% of the population early this year, but are now polling at 13%, with right-wing AfD reaping the rewards of both the unpopular green agenda and the migration crisis. Despite the budget crisis, the government has promised to provide up to €21,000 per household for the installation of heat pumps.
Though Scholz, Habeck and Lindner are expected to debate the issue in the coming days, the daily Süddeutsche Zeitung writes it is highly unlikely next year’s budget will be approved by parliament by the end of this year. It is unusual for an incumbent federal government to slip into such a situation. 2024 will begin with funding and investment uncertainties.
