German government to keep debt brake in 2024 budget
GERMANY’S government has agreed at least initially not to declare an emergency situation allowing it to suspend rules on net new borrowing next year, two government sources told Reuters on Wednesday after coalition parties reached a budget deal.
A spokesperson confirmed on Wednesday (Dec 13) that Chancellor Olaf Scholz’s three-party government had agreed a 2024 budget, concluding a month of fractious negotiations after a court ruling threw its plans into disarray.
The breakthrough could help ease tensions within the alliance of Scholz’s Social Democrats (SPD), the Greens and business-friendly Free Democrats (FDP), support for which has slumped to record lows in opinion polls.
It should also provide some reassurance for businesses in Europe’s largest economy after the budget crisis forced the government to freeze major spending pledges focused on green initiatives and helping industries through the transition.
The government spokesperson did not give details of the budget deal. Scholz, Finance Minister Christian Lindner of the FDP and Economy Minister Robert Habeck of the Greens will deliver statements at noon (1100 GMT).
The Chancellor will also give a pre-planned statement to parliament at 1200 GMT before he is scheduled to fly to an EU summit.
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Germany’s constitutional court ruled on Nov 15 that a government decision to reallocate 60 billion euros (S$87 billion) of unused debt from the pandemic era to its climate and transformation fund was unconstitutional.
The funds had been earmarked for initiatives such as making buildings more energy-efficient and subsidising renewable electricity and chips production, as well as supporting energy-intensive companies.
The main projects in the climate and transformation fund will be financed, according to sources close to the budget negotiations.
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The court ruling forced the coalition to suspend a constitutionally enshrined “debt brake” for the 2023 budget and to rethink its 2024 plans given an estimated funding gap of around 17 billion euros in next year’s budget of around 450 billion euros.
Uncertainty about the 2024 budget and expected consolidation measures prompted two leading economic institutes to cut their forecasts on Wednesday, with the IW predicting that the crisis would cause the German economy to contract by 0.5 per cent next year.
The Kiel-based IfW saw a hit to growth of 0.3 percentage points. “There is just as much uncertainty about the exact form of the savings as there is about their economic impact,” its researchers said.
During weeks of negotiations, Lindner had insisted the debt brake, which restricts Germany’s public deficit to 0.35 per cent of gross domestic product, should be reimposed for 2024.
Scholz and Habeck meanwhile sought another suspension in 2024 – for the fifth year in a row – to avoid spending cuts that could affect welfare benefits and investment in the transition to the green economy.
Germany’s debt-to-GDP ratio is low compared to its European neighbours, at 65 per cent in 2022 compared with 117 per cent for France, 148 per cent for Italy and 116 per cent for Spain, according to OECD data.
But memories of how frugality paved the way for postwar reconstruction and how costly it was to reintegrate ex-communist East Germany have shaped a debt-averse political culture.
Regardless of Wednesday’s agreement, it is already clear that the lower house of parliament, the Bundestag, will not manage to finalise the 2024 budget this year.
From Jan 1, there will be a provisional management of the budget. Lindner will have a greater role in this because he will have to authorise certain expenditures.
Such provisional budget management means that in contrast to the situation in the US, the lack of an agreed budget does not lead to a spending freeze in the coming year. REUTERS
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