Germany moves to suspend debt brake for 2023 to fix budget turmoil

By Holger Hansen and Kirsti Knolle

BERLIN (Reuters) -German Finance Minister Christian Lindner will propose a supplementary budget for this year which includes the suspension of limits on new borrowing, as he tries to ease a budgetary crisis caused by a court ruling last week.

The German government has in the last week scrambled to find a way to accommodate a constitutional court ruling which blocked the transfer of unused funds from the pandemic to green investment, blowing a 60 billion euro hole in its finances.

The ruling has prompted warnings about growth in Europe’s biggest economy and strained the uneasy three-way coalition between Social Democrat Chancellor Scholz, Lindner of the pro-business Free Democrats (FDP) and the Greens.

“In consultation with the chancellor and the vice chancellor, I will present a supplementary budget for this year next week,” Lindner told reporters on Thursday.

“We will now put spending, especially for the power and gas price brakes, on a constitutionally secure footing,” he said, adding this required a supplementary budget.

A finance ministry spokesperson said the government would propose a lifting of 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.

A majority of lawmakers must agree.

The constitutionally-enshrined debt 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 pandemic economic fallout.

Hawkish Lindner had been reluctant to suspend the debt brake mechanism as his party strongly advocates fiscal discipline.

Lindner said the priority was to get this year’s budget on a legal footing before looking to the financial planning for next year. Talks for the 2024 budget have been delayed, meaning the government may not be able to pass it by the end of the year.

Compounding the uncertainty, the government has imposed a freeze on future spending plans across ministries.

If new spending commitments are not possible, this raises the risk of fiscal drag in the near-term, the scale of which is hard to gauge, according to a JP Morgan research note.

“We can only talk about the year 2024 and subsequent years again, once we have a legally and constitutionally secure basis,” said Lindner.

DEFENCE FUND RINGFENCED

Earlier, the defence ministry said a special 100 billion-euro fund for modernising the armed forces was safe.

“In principle, the Bundeswehr special fund is exempt from the budget freeze,” the ministry said in a statement, making clear that also applied to projects partially financed from regular defence spending in future.

A manager for a major German defence company, speaking on condition of anonymity, said there was nevertheless a lack of clarity about next year’s general defence budget, including long-running projects needing financing authorisation.

Some 20 billion euros-worth of those authorisations could be at risk, he said, although the sector did not expect cuts given the government’s commitment to defence.

The constitutional court ruling has raised fears over the future competitiveness of German firms and the loss of jobs abroad.

The crisis could hobble the wider European economy, said the Paris-based Organisation for Economic Cooperation and Development (OECD).

“If there is less investment and spending in Germany over the next few years because there is less money available, this will inevitably have an impact on the EU economy,” the head of the OECD’s Germany desk Robert Grundke told Reuters.

Germany’s steel sector added its voice to the growing jitters, warning that the court ruling had put a question mark over more than 40 billion euros in planned investments.

These comments highlight major uncertainty among Germany’s industrial firms, which are already struggling with higher inflation and interest rates and are increasingly looking to more favourable markets such as the United States.