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German cabinet adopts emergency 2023 budget, eyeing ‘debt brake’

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Germany’s three-party governing coalition adopted on Monday (27 November) a supplementary budget for 2023 which includes the proposal to declare an emergency situation suspending the ‘debt brake’ set in the constitution.

This follows a ruling by the constitutional court that said additional debt justified with an emergency in one year cannot be transferred to funds to be spent in subsequent years.

The ruling declared as unconstitutional the plan to transfer €60 billion of unused COVID-related debt from 2021 into a climate fund and has also put into question some €45 billion justified with the energy crisis in 2022, which were spent in 2023 to stabilise energy prices.

“With the supplementary budget 2023, we are drawing the consequences of the judgement of the Federal Constitutional Court,” Finance Minister Christian Lindner (FDP/Renew) wrote on X.

“To this end, we are also implementing the resolution of an emergency situation, which was established in view of the energy crisis last winter, in the 2023 budget,” he added.

Both the supplementary budget and the declaration of emergency still have to be formally adopted by parliament.

On Tuesday, Chancellor Olaf Scholz (SPD/S&D) will explain in parliament how his government will proceed, as the ruling leaves €60 billion missing from the climate fund, which the government meant to spend, among other things, to support renovations of buildings, hydrogen production and electric mobility.

Germany’s ‘debt brake’ rule, written into the constitution in 2009, strictly limits the deficits that federal and state governments can go into, restricting net borrowing to 0.35% of GDP per year, plus some additional borrowing allowed in economic slumps.

It can be suspended in times of natural disasters and emergencies that are “beyond the control of the state”.

While the rule was suspended from 2020 to 2022 due to the COVID pandemic and the energy crisis following the Russian invasion in Ukraine, the government announced last week to extend the suspension to this year to secure the legality of this year’s budget.

Reform of the debt brake

Meanwhile, a discussion has emerged about changing the rule more fundamentally, which would require changing the constitution with a two-thirds majority in the German parliament.

“With the debt brake as it is, we have voluntarily tied our hands behind our backs and are going into a boxing match,” Economy Minister Robert Habeck (Greens) said on Thursday (23 November).

“The others put horseshoes in their gloves, and we don’t even have our arms free. It will be clear how this ends,” he said with regard to massive industrial subsidies spent in global rivals like the US and China.

Similar comments were made by representatives of Scholz’ SPD, with party co-leader Saskia Esken calling a reform of the debt brake “unavoidable” due to the necessary investments into the digital and green transformation in the next few years.

For the liberal FDP (Renew) of Finance Minister Christian Lindner, however, the rule should not be touched.

“We are the only ones who still stand by the debt brake enshrined in the Constitution without compromise, and we will continue to defend it,” Christoph Meyer, deputy head of the FDP’s parliamentary group, wrote in an op-ed in WELT on Monday (27 November).

“The debt brake guarantees international confidence in German public finances,” he wrote, adding that “our AAA top rating is on the brink if the state continues to take on unbridled debt”.

Within the EU, Germany is one of only six countries with the ‘AAA’ rating of its credit worthiness by rating agency S&P. With a government debt ratio of 65% of GDP, Germany is in the middle range of EU countries.

Conservative opposition divided

For a two-thirds majority in the Bundestag to change the constitution, the votes of the three-party government coalition would not suffice. Instead, the government would need to strike a deal with the conservative opposition parties CDU/CSU (EPP).

While CDU and its Bavarian pendant CSU have been strong defendants of the debt brake, some of their own senior politicians have also started questioning the rule.

Kai Wegner (CDU/EPP), the mayor of Berlin, one of Germany’s 16 federal states, warned in Stern that “the debt brake will increasingly become a brake on the future.”

Wegner called to introduce a so-called “golden rule”, which would see investments exempted from the debt limit. Similar comments were made by the CDU state premiers of the East German states of Saxony and Saxony-Anhalt.

CDU leader Friedrich Merz, however, quickly rebuffed the statements, defending the rule as it is now.

“The furore against the debt brake tends to disregard the reasons that led to this amendment to the constitution 15 years ago, namely the reinterpretation of all possible government spending as ‘investment’, which under the old regulation always had to be higher than the debt incurred,” Merz wrote in an email to supporters.

“As debt rose to ever new highs, especially under SPD-led governments, the concept of investment had to be extended further and further, just as it is again today,” he added.

CSU leader and Bavarian state Prime Minister Markus Söder, meanwhile, called on the government to trigger snap elections alongside the European Parliament elections on 9 June 2024.

The current three-party coalition of the Social Democrats, Greens and the liberal FDP would not “have the strength to overcome the current problems,” Söder said on Monday.

[Edited by János Allenbach-Ammann/Zoran Radosavljevic]

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