German government resolves 2024 budget dispute

After more than 200 hours of negotiations, including all-night talks, German Social Democratic (SPD) Chancellor Olaf Scholz, Green Vice-Chancellor and Economics Minister Robert Habeck and Free Democrat (FDP) Finance Minister Christian Lindner have announced a new state budget for 2024.

When Germany's governing three-party coalition took power in late 2021, it repurposed €60 billion ($64 billion) in unused COVID-era loans for climate protection efforts. Yet in November, Germany's constitutional court ruled this reallocation unlawful, sparking protracted negotiations to draw up a new budget. The government does not intend to reapply for these loans.

Instead, it wants to rein in public spending even more than previously planned, while still keeping an eye on fulfilling its major policy goals. Recently, Chancellor Scholz summarized these as such: "We are pushing forward the climate-neutral transformation of our country, strengthening social cohesion, and standing by Ukraine as it defends itself against Russia." Adding that "these three goals continue to guide us, but it is clear that we have to get by with significantly less money; this means cuts and making savings."

Germany's free-market FDP is focused on cutting public expenditure. It had entered the budget negotiations convinced that Germany should heed its constitutionally enshrined debt brake in 2024. It stipulates that, in principle, the German state should only spend as much as it earns. It only allows the government to take out loans to a limited extent, unless it faces an emergency, in which case the debt brake may be suspended.  

Emergency money

The coalition wants to keep this option on the table, for example for financing reconstruction efforts in the Ahr Valley, which was devastated by floods in 2021.

"The constitution expressly stipulates that credit ceilings can be raised to deal with natural disasters and extraordinary emergencies," said Chancellor Olaf Scholz. Next year, €2.7 billion in flood aid will be financed through loans.

Authorities expect uncertainties and potential emergencies in connection with Ukraine. So far, €8 billion has been earmarked for direct aid in 2024, to be paid though the regular budget. But what would happen if the US — Ukraine's biggest financier — were to cease supporting the embattled country?

Speaking at a SPD party conference, Chancellor Scholz said a "major" financial challenge would arise "when others struggle." He said Germany would have to reach decisions to be able to handle such a situation. By this, he was referring to suspending the debt brake — a move the liberal FDP opposes.

FDP Finance Minister Christian Lindner appears, however, to have relented over Ukraine, saying that "if the situation changes and the international community reaches joint decisions, we are fully capable of acting, including when options provided by the federal budget are exceeded."

Cuts looming

Flood reconstruction efforts and Ukraine assistance aside, next year's budget will entail cuts in many different areas. The climate and transformation fund now lacks €12.7 billion, funds which had already been earmarked for various projects, including overhauling Deutsche Bahn's rail network. This will now be paid for through the sale of German state-held shares. Deutsche Bahn itself wants to sell its freight forwarding subsidiary Schenker.

Subsidies for the solar industry, for installing climate-neutral heating systems and purchasing electric cars will be cut too, even though they were supposed to remain in place until the end of 2024. "That pains me, but it's the price for keeping the central components, the pillars of the climate and transformation fund intact," said Economic Minister Robert Habeck of the Greens.

Fuel and plastic to get more expensive

"We are reducing climate-damaging subsidies to the tune of €3 billion," said Finance Minister Lindner. So far, the German state paid €1.4 billion due to the EU's so-called plastic levy, yet going forward, companies that put plastic into circulation will be forced to foot the bill.

In addition, the CO2 levy for burning fuel, heating oil or gas will be raised sooner than planned. The price currently stands at €30 per ton but is set to rise to €45 in 2024, instead of €40 as previously planned. Petrol will become about 4.5 cents more expensive per liter. This is expected to grow government revenue by about €1 billion.

According to Finance Minister Lindner, an extra €1.5 billion will be saved by reducing social welfare spending. Efforts will be made, for example, to quickly integrate Ukrainian refugees into the German labor market. 

Opposition lambasts budget plans

Friedrich Merz, chairman of the opposition CDU/CSU parliamentary group in the Bundestag, sharply criticized the government's budget announcement, calling it "financial policy trickery, that's all it is." He said it had squared the circle attempting to satisfy all coalition parties' wants. Merz thinks the government will run out of money with the planned budget.

Merz said in light of the "dramatic" developments in Ukraine, an emergency ought be declared by the middle of next year at the latest. Adding that political stability was declining as the military threat increases.

The government's 2024 budget has also been criticized by the business community. There are fears a higher CO2 tax will drive up prices.

This article was translated from German

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