Wrangling Follows Constitutional Court Ruling
German Chancellor Olaf Scholz’s three-way coalition has reached an agreement on the budget for next year after a month of negotiations that ensued following a constitutional court ruling that disrupted the government’s financial plans.
In an effort to address a 17 billion euro ($18.33 billion) funding gap, the government intends to implement spending cuts in certain areas. It also plans to reintroduce a limit on new net borrowing in 2024, at least initially.
Below are some key reactions to the draft budget for 2024:
Monika Schnitzer, Chairperson of Germany’s Council of Economic Experts
According to Monika Schnitzer, it is sensible to keep the option of justifying emergency situations open for specific spending needs, such as aid for the flood disaster in the Ahr valley and assistance to Ukraine. It is not surprising that the coalition partners could not reach an agreement to declare another emergency situation for 2024. It raises concerns if the budget for 2024 can only be balanced by depleting the remaining reserves.
Joerg Kraemer, Chief Economist at Commerzbank
Joerg Kraemer welcomes the German government’s attempt to avoid suspending the debt brake in the upcoming year. He views the resolutions as typical compromises, with each party involved making concessions to close the budget gap. However, the significant interest rate hikes by central banks worldwide in combatting high inflation will have a greater impact on the economy. Commerzbank continues to anticipate a 0.3% contraction in Germany’s gross domestic product next year.
Carsten Brzeski, Global Head of Macro at ING
Carsten Brzeski believes that overall, the announced measures appear to be manageable for the economy. Nonetheless, the ongoing debate surrounding the combination of large-scale investments and balanced budgets will persist even after this announcement. With fiscal policy turning restrictive and a high level of policy uncertainty, there is a considerable risk that the German economy will experience a slight recession next year.
Clemens Fuest, President of the IFO Institute
Clemens Fuest regards the budget agreement as a step in the right direction, though some questions remain unanswered. It is commendable that the federal government did not opt for the easy route of declaring a budget emergency. Instead, it reduced spending, particularly subsidies, and slightly increased environmental taxes, such as the CO2 price.