Germany signals belt-tightening but no tax rises in budget compromise

By Holger Hansen and Christian Kraemer

BERLIN (Reuters) – German Finance Minister Christian Lindner signalled the government would need to make savings worth a double digit billion euros to help solve a budget crisis, though data on Friday showed growth shrinking in Europe’s largest economy.

Lindner plans to lift self-imposed limits on borrowing and present a supplementary budget next week after a constitutional court ruling wiped billions from the federal budget and forced the government to freeze most new spending commitments.

The court ruling, which blocked the government from transferring pandemic funds towards green projects and industry subsidies, has sparked warnings that German companies could be starved of support to keep them globally competitive.

In order to keep backing industry, the fiscally hawkish Lindner ruled out tax rises and said savings would have to be found elsewhere, backed up by reforming the welfare state.

“We are talking about a significant additional need for consolidation,” Lindner told the Handelsblatt newspaper in an interview. “We are talking about double-digit billions, for example to implement the ambitious plans to renew the infrastructure and invest in technology.”

“In a phase of low economic dynamism, the aim must be to relieve the burden on citizens and companies,” he added.

Chancellor Olaf Scholz’s government is set to propose lifting the debt brake, which limits Germany’s structural budget deficit to the equivalent of 0.35% of gross domestic product, by proposing to parliament an “emergency situation” for 2023.

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

Lindner had been reluctant to suspend the debt brake 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 IN A BOXING MATCH

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 keep 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. Is that how we want to win it? The others have horseshoes wrapped in their gloves and we don’t even have our arms free. It’s clear how that’s going to turn out.”

A poll by the broadcaster ZDF suggested only a minority of Germans, 35%, supported suspending the debt brake however, compared to 61% wanting it to stay in place.

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.

Germany has been among the weakest economies in Europe this year as high energy costs, weak global orders and higher interest rates have taken their toll. Its economy shrank in the third quarter, data showed on Friday.

German business morale however improved for a third straight month in November, the Ifo institute said, adding there had been no impact for the time being from the court ruling.

“The question that naturally arises is whether the rise in the Ifo business climate index is merely a flash in the pan or marks a turn for the better? We don’t really want to believe it,” said VP Bank Chief Economist Thomas Gitzel.

Potential austerity measures resulting from the court decision “are not exactly contributing to greater confidence in future economic development,” added Gitzel.