The parties of the German government coalition, led by Olaf Scholz, have reached a political agreement to resolve the financial and political crisis triggered by the decision of German Constitutional Court which had prohibited the use of special funds to meet budgetary needs for 2024. The ruling had created a 17 billion euro hole in the 2024 budget estimated at around 450 billion euros.
After hectic days an agreement between the parties of the yellow-red-green government was found last night. Today German Chancellor Olaf Scholz announced that for next year's budget the constitutional rule of a balanced budget, the so-called "debt brake", will be substantially respected, even if an exception of 2,7 billion for areas is being considered affected by a 2021 flood.
The new agreement was illustrated in a press conference by Chancellor Olaf Scholz, Finance Minister Christian Lindner of the FDP and Economy Minister Robert Habeck of the Greens.
The ruling of the Constitutional Court and the 17 billion hole
Germany's highest court had reversed the decision to reuse 60 billion euros originally intended to cushion the fallout of the COVID-19 pandemic for measures to help fight the climate and to change and modernize the country. This had caused a shortfall in next year's budget of around 17 billion out of a total estimated at 450 billion.
Scholz, Habeck and Lindner have met several times in recent days to try to resolve the impasse before the end of the year. During the negotiations, Lindner insisted on the reintroduction of the debt brake for 2024, which limits the German government deficit to 0,35% of gross domestic product (GDP). But Scholz and Habeck had asked for another suspension in 2024, for the fifth consecutive year, to avoid spending cuts. But in the end a halfway compromise was reached.
The details of the agreement: spending cuts and new revenues
The agreement reached by the yellow-red-green government parties provides for a combination of spending cuts and new revenues. An agreement that observers say could keep the economy in a slight recession next year. “We need to prioritize which means figuring out what we can afford and what we can't, together. It's also about cuts and savings. We don't like doing them, of course, but they are necessary,” Scholz said during the press conference, as reported by the German media.
In particular, the government plans to reduce subsidies that harm the climate, to end subsidies for electric vehicles and the solar panel industry earlier than expected, to reduce some expense of individual ministries and to try to make social spending "more efficient".
There will also be a price increase of CO2 emissions and the introduction of a new tax on plastic packaging. The government wants to avoid the fifth consecutive year of official deviation from the constitutional debt brake, but still wants to verify the possibility of a deviation of 2,7 billion euros to continue financing the damage of floods of 2021. Finally, the climate and transition fund will be reduced by a total of €45 billion for the period 2024-2027.
Scholz: we maintain the objectives, but with less money
The government, the chancellor added, is sticking to its goals, including supporting Ukraine, continuing Germany's green transformation and strengthening social cohesion. "These three goals they guide us unchanged. But it is clear that we have to be able to reach them with significantly less money,” Scholz said, adding that the government will also maintain its debt brake, first launched in 2009. This decision, he added, will not only have an impact on the current and future budgets, but also on how other budgets will be created and set up.
The breakthrough should help ease tensions within the three-party alliance of Scholz's Social Democrats (SPD), Greens and pro-business Free Democrats (FDP), whose support has fallen to record lows in polls. The Chancellor will also make a scheduled statement to Parliament this afternoon.
