What is Germany's budget crisis and how might it affect you?
Germany’s budget crisis and debt brake have been dominating the headlines in recent weeks. We explain why Olaf Scholz's government are in a sticky situation and what it means for you.
German politicians scramble to solve budget crisis
Politicians of Germany’s governing traffic-light coalition led by Olaf Scholz are currently scrambling to fill a 17-billion-euro hole in its budget for 2024.
Conversations between Scholz (SPD), Finance Minister Christian Lindner (FDP) and Federal Minister for Economic Affairs and Climate Action Robert Habeck (Greens) continued into the night on December 3, as the government continues to look for a solution.
Problems first arose in mid-November when the German constitutional court in Baden-Württemberg ruled that funding for the 2024 budget, which was already announced in July, had not been sourced legally. To fund the budget, the German government planned to redistribute 60 billion euros leftover from emergency policies to tackle coronavirus and use it to fund the “climate transformation fund” (KTF).
Because the holidays are fast approaching, and a second draft budget would also need days of deliberation before it can be officially approved, the pressure is on for the government to come up with a plan within the next week. If this isn’t achieved, optimistic commentators say a draft could also be approved in early 2024, while the most damning forecasters suggest it could mean an end for the coalition, which has been falling out of favour among the population for months.
What is the German debt break (Schuldenbremse)?
A central factor at play in the grand pickle that Scholz and co find themselves in is Germany’s debt brake (Schuldenbremse). Thanks to the brake, the government are bound by the country’s constitution, the Basic Law (Grundgesetz), to borrow no more than 0,35 percent of GDP.
The debt brake was introduced by Merkel’s government in 2009 in an attempt to bring stability to the German economy after the 2008 global financial crisis. Only in emergency scenarios, such as was the case during the spread of coronavirus, can the government borrow beyond 0,35 percent of GDP.
Finance Minister Lindner has now said he will declare 2023 an “emergency year” so that this limit can be overstepped. But Lindner and his party are wont to tighten the purse strings and he has already said that he will not declare 2024 an emergency year, leaving many to worry that austerity measures are just around the corner.
Lindner is so dedicated to the debt brake that he has earned himself the nickname of Sparfuchs (saving fox or scrimper) and according to a recent poll by SPIEGEL, two-thirds of the German population broadly agree with his approach.
But many critics are arguing that the debt brake should be reformed or scrapped altogether, saying the constitutional clause is out of date for the early 2020s, which has been marred with crisis after crisis. This includes criticism from former finance minister Peer Steinbrück (SPD), who was partly responsible for the introduction of the brake in the first place. “We have an acute need for investment in diverse fields,” Steinbrück told DIE ZEIT newspaper. “We live in a different time from 2009.”
Speaking to VAP, President of the German Institute for Economic Research Marcel Fratzscher, said that cutting Germany’s plans to fund ecological and digital transformation “would be a huge mistake for the future.”
Which policies are affected by the German budget crisis?
So which are the policies where the future of funding hangs in the balance? While the Greens have proposed cutting fossil fuel subsidies, Lindner and the FDP are pushing to take from the 45 percent of the budget which has been set aside for funding social security. Lindner's 2024 budget from July already saw significant and controversial cuts planned for parental allowance (Elterngeld).
A definite plan is still in the works, but if the traffic light coalition doesn’t plug the funding gap, these are some of the policies from the planned “climate transformation fund” (KTF) which could be reduced or scrapped:
Gas price cap (Gaspreisbremse)
This one has actually already been confirmed. Last week, Lindner announced that the price cap on gas and electricity, introduced to keep home utilities affordable after Russia invaded Ukraine, will be scrapped from December 31, 2023.
The policy caps energy prices at a maximum of 12 cents per kilowatt hour of gas and 40 cents per kilowatt hour of electricity for 80 percent of a household’s average annual usage. The difference is then paid out by the German government.
The decision means that consumers can expect the cost of home utilities to go up just as the January weather bites.
Renovating Deutsche Bahn railway tracks
Germany’s deteriorating track network is one of the main reasons why the company has seen worsening punctuality in recent years, with every third passenger delayed in 2022.
Plans that Deutsche Bahn made with the Federal Ministry of Transport to renovate major routes and every third train station across Germany by 2030, will be less feasible if the government can’t plug the budget hole for trains. Transport Minister Volker Wissing (FDP) has said that renovation plans for 40 track sections are already at risk.
Subsidies to buy electric cars will be cut
In 2023, people who wanted to buy an electric car in Germany could apply to have their purchase subsidised, a policy designed to encourage greener transport. However, since these subsidies came from the climate package, people who applied for the money might not get it in the end.
According to the Ministry for Economy, whether your car is registered yet will likely be the deciding factor as to whether you can still hope to see the subsidy money in your bank account. This is particularly bad news for people who may already have gone through the process of buying a car but have not registered the vehicle.
Climate crisis will cost Germany 900 billion by 2050
The fact that Germany's budget could now see more climate policies scrapped or granted reduced funding, leaves even more of the bill to be picked up at a later date.
A study by Germany’s Institute for Ecological Economic Research recently revealed that at the current rate of policy development, extreme weather caused by climate change could cost the federal republic as much as 900 billion euros in cumulative economic damage by 2050.
According to the study, this figure could be reduced to 280 billion euros if the policy is put in place in time to avoid climate tipping points. However, critics of the climate transformation fund - or at least the version of it that existed before the government was thrown into budgetary crisis - have pointed out that achieving German climate neutrality by 2045 won’t be fast enough to avoid these tipping points.