(Updated with statements from Scholz and his ministers)
by Andreas Rinke
BERLIN, Dec 13 (Reuters) – Germany’s three-party ruling coalition has agreed to plug the 17 billion euro hole in the 2024 federal budget through subsidy cuts and cuts to ministries’ operating budgets, but without immediately extending the suspension of the state debt brake, Chancellor Olaf Scholz announced on Wednesday.
Flanked by his ministers of the Economy, the ecologist Robert Habeck, and of Finance, the liberal Christian Lindner, the social democratic chancellor congratulated himself during a press conference on having reached this agreement after several weeks crisis within his coalition.
If the debt brake, a measure enshrined in the Constitution limiting the annual budget deficit to 0.35% of gross domestic product (GDP), will be reestablished, the government reserves the possibility, under the terms of this agreement, to invoke an exceptional emergency situation to lift it again if the war in Ukraine worsens and requires increased financial support for Kyiv, Olaf Scholz said.
“The government will respect its objectives (…) but we must achieve it with less money, which implies reductions in spending and savings,” he declared. “Such difficult budget discussions usually take months, but we completed them in a matter of weeks.”
The crisis was triggered by the judgment rendered on November 15 by the Constitutional Court of Karlsruhe prohibiting the government from reallocating in the 2024 budget a remainder of 60 billion euros originally intended for the fight against the COVID-19 pandemic. towards a fund to support the modernization of industry and the fight against climate change.
This decision led to a hole of 17 billion euros in the 2024 draft budget.
On the political level, this agreement should calm relations between the three components of the coalition, whose popularity is at its lowest. Economically, it should reassure businesses by dissipating the uncertainties arising from the decision of the Karlsruhe Court.
This crisis and the need to lower the ambitions of the federal budget have nevertheless led the two main German economic institutes to revise their growth forecasts for Europe’s largest economy next year.
The IW institute now expects German GDP to contract by 0.5% in 2024 while the IfW forecasts growth of 0.9% but with a negative impact of 0.3 percentage points from the decision to the Constitutional Court.
The “debt brake” was lifted in 2020 due to the COVID-19 pandemic and Christian Lindner categorically refused to allow it to be suspended for a fifth consecutive year, even though Germany has a debt ratio significantly lower than those of many other European countries, at 65% of its GDP compared to 117% for France, 148% for Italy or 116% for Spain, according to OECD data. (Reporting Andreas Rinke, writing by Kirsti Knolle, Sarah Marsh and Maria Martinez; French version by Zhifan Liu, Kate Entringer and Bertrand Boucey)
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