A Last-Minute Deal Reached Despite Economic Growth Worries
Germany’s government has reached a last-minute agreement on its 2024 budget, which will see Berlin adhere to its self-imposed limits on new debt. The deal comes amid concerns that these limits could hinder growth in Europe’s top economy and its green transition. Chancellor Olaf Scholz’s three-party coalition faced the choice of suspending the debt brake or finding savings and tax hikes of around 17 billion euros ($18.3 billion) following a recent constitutional court ruling. After weeks of tense negotiations, an agreement was reached, with the government opting for austerity – a win for the fiscally conservative Free Democrats (FDP).
Potential Suspension of Debt Limit and the Ukraine Crisis
While the debt brake to limit debt could be suspended again if Ukraine required additional funding to counter Russia’s invasion, Scholz emphasized the government’s commitment to its goals. However, he acknowledged that achieving these goals with fewer funds would necessitate cuts and savings. In response to the court ruling, 12 billion euros would be cut from the climate and transformation fund in 2024, with reductions up to 45 billion euros planned over the budget period until 2027. State railway firm Deutsche Bahn’s upgrade, for instance, would no longer receive funds from the climate fund but would instead be financed through the privatization of government stakes in redundant companies.
Changes in Subsidies and Levies
The budget compromise also includes the early termination of premiums for purchasing electric cars, cuts to subsidies for the solar industry, and the introduction of new levies. These levies include taxes on kerosene fuel for domestic flights, production of environmentally harmful plastic, and an increase in the CO2 surcharge on fuel, heating oil, and gas. Notably, the business-friendly FDP accepted the increase in the CO2 surcharge, despite its initial opposition to tax hikes. The recent court ruling has made it clear that the government must rely less on off-budget funds moving forward.
Concerns about the Debt Brake’s Suitability
Germany introduced the debt brake, which restricts the public deficit to 0.35% of the gross domestic product, into its constitution in 2009. However, there are increasing concerns about the brake’s suitability given the economic challenges the country faces. The debt brake had already been suspended for three years in response to the COVID-19 pandemic. The recent court ruling prompted another suspension for this year due to the energy crisis caused by the Ukraine conflict. Scholz and Economy Minister Robert Habeck sought a further suspension in 2024, but Finance Minister Christian Lindner insisted on adhering to the constraint, emphasizing its importance.
Implications for the Coalition and Government Stability
The political victory in reaching an agreement on the budget could help the FDP face internal calls to leave the coalition, as the party’s support has recently declined to record lows. The FDP, which is less ideologically aligned with the Greens and SPD, is currently polling around the 5% minimum threshold to enter parliament. A member survey on whether the FDP should remain in the coalition will be conducted shortly, although it will not be binding. Analysts believe that leaving the coalition at this point would be detrimental to the FDP’s reputation and perceived responsibility during times of crisis. Despite some uncertainties regarding budget details, the government’s effective crisis management and stability have been praised.