Germany’s Scholz promises swift budget overhaul in debt brake fiasco

By Holger Hansen and Christian Kraemer

BERLIN (Reuters) -German Chancellor Olaf Scholz promised on Friday to finalise the 2024 budget by the end of this year, in a video message that sought to reassure spooked citizens and investors in Europe’s largest economy after a court ruling tore up its spending plans.

Scholz’s government was forced to freeze most of its new spending commitments after the constitutional court last week declared unconstitutional its plans to re-allocate pandemic funds to green projects and industry subsidies, wiping billions from the federal budget.

“We will carefully revise next year’s budget in light of the judgement – swiftly, but with the necessary care,” Scholz said in a video posted on social media platform X.

Scholz said his government would ask parliament to lift Germany’s debt brake, which limits its structural budget deficit to the equivalent of 0.35% of gross domestic product, in order to secure aid planned for this year.

The chancellor plans to give a statement to parliament on the issue next Tuesday.

The court ruling has called into question Germany’s traditionally strict fiscal policy and sparked warnings that German companies could be starved of support to keep them globally competitive.

Germany has by far the lowest debt in the G7 grouping of major economies, but memories of how frugality paved the way for postwar reconstruction and how costly it was to re-integrate indebted ex-communist East Germany have shaped a uniquely debt-averse political culture.

In order to keep backing industry, Finance Minister Christian Lindner, a fiscal hawk, has ruled out tax rises and said savings would have to be found elsewhere, backed up by reforming the welfare state.

He plans to lift self-imposed limits on borrowing and present a supplementary 2023 budget next week.

In an interview with the Handelsblatt newspaper, Lindner said consolidation needs were in the double-digit billions.

The debt brake, introduced after the global financial crisis of 2008/09, was first suspended in 2020 to help the government support firms and health systems during the COVID-19 pandemic.

Lindner had been reluctant to suspend the mechanism as his party strongly advocates fiscal discipline but relented as the budget turmoil put more strain on Scholz’s fractious three-way coalition.

HANDS TIED

The crisis has sparked calls for reforming the debt brake. Economy Minister Robert Habeck from the pro-spending Greens has criticised it as inflexible and as blocking vital support for industry to stop jobs and value creation from moving abroad.

To a standing ovation at a Greens party conference, Habeck questioned whether the debt brake was applicable in changed times from “when climate protection was not taken seriously, wars were a thing of the past, China was our cheap workbench”.

“With the debt brake as it is, we have voluntarily tied our hands behind our backs and are going into a boxing match,” he said.

However, government spokesperson Steffen Hebestreit said on Friday that reform, which would need a parliamentary supermajority, was not on the immediate agenda.

A poll by broadcaster ZDF suggested only a minority of Germans supported suspending the debt brake.

Some 57% wanted the budget shortfall from the court ruling to be covered by spending cuts, 11% favoured tax increases and 23% wanted the state to take on additional debt.

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