Germany’s ruling coalition is locked in near non-stop talks to try to resolve an unprecedented budget crisis triggered by last week’s shock ruling on off-budget funds by the country’s top court.
As Chancellor Olaf Scholz hosted a regular weekly meeting of his cabinet Wednesday morning, government lawyers and officials continued frantic efforts to address the Constitutional Court judgment, which blew a €60 billion ($65.4 billion) hole in a pot for funding initiatives to protect the climate and spur Germany’s industrial transformation.
The ruling also called into question other special funds loaded with billions of euros in debt authorizations, which will likely force Scholz’s governing alliance of his Social Democrats, the Greens and the Free Democrats to overhaul the federal government’s finance plans for this year and next.
Although the timings remain extremely fluid, coalition officials have set themselves an unofficial deadline to reach an agreement by Thursday noon at the latest, people familiar with the planning told Bloomberg on Tuesday. Budget lawmakers are due to gather immediately after to try to put the finishing touches to the 2024 finance plan and solve any outstanding issues for this year’s budget.
If lawmakers manage to sign off on next year’s plan — and it’s by no means certain they will — it will go to a vote in both houses of parliament, with the final ballot due in the upper house, where Germany’s 16 regions are represented, on Dec. 15.
Here are some of the options the government is considering, according to people familiar with the discussions:
SUSPENDING THE DEBT BRAKE
One proposal on the table is a retroactive overhaul of this year’s budget that would include another suspension of a constitutional limit on net new borrowing know as the debt brake.
The mechanism can be suspended in times of emergency, an option the government tapped for three straight years through 2022 to help deal with the fallout from the Covid-19 pandemic and the energy crisis.
Economy Minister Robert Habeck suggested that the court judgment broadly applies to most of Germany’s off-budget funds, including one that pays for measures to dampen energy prices for households and companies.
That means Finance Minister Christian Lindner would have to account for about €37 billion of new debt in a revised 2023 finance plan because those funds can no longer be booked outside the regular budget. Authorized net debt for 2023 was set at €46 billion and has already been exhausted.
Lindner would be forced to reverse the restoration of the debt brake he insisted on for this year, a painful climbdown for the FDP chairman, who sees himself as a guardian of fiscal stability.
Some senior figures in Scholz’s SPD party have called for a suspension of the debt brake next year as well to enable additional borrowing for measures to fight climate change and support companies in the green transformation.
The coalition can suspend the debt brake rule with its majority in the lower house of parliament, though it would also be potentially exposing itself to another legal challenge.
In what may have been the first hint of an imminent climbdown, one of Lindner’s economic advisers was quoted as saying Tuesday that a retroactive emergency suspension of the debt brake for 2023 would be justifiable.
ENSHRINING OFF-BUDGET FUNDS IN THE CONSTITUTION
The government could attempt to embed some of the special funds in Germany’s constitution, a feat Scholz pulled off last year with a debt-financed pot worth €100 billion to modernize the armed forces.
Altering the constitution requires a two-thirds parliamentary majority and Scholz would have to persuade the main opposition conservatives to support it, just as he did for the military fund following Russia’s invasion of Ukraine.
This time, cross-party cooperation looks far less likely — not least because it was the conservative bloc that filed the legal challenge against the off-budget funds at the Constitutional Court.
FURTHER OPTIONS
Subsidy cuts, postponing some expenditure and raising fees and levies could also help resolve the budget dilemma, even if they would only make up a small part of the potential shortfall.
To help plug the hole in the fund that was the subject of the court challenge, Germany could raise its carbon tax and bring forward an expansion, planned for 2027, of the European Union’s Emissions Trading System to additional sectors of the economy.