Budget dispute exposes cracks in Germany's government

Beefing up the military, phasing out fossil fuels, modernizing infrastructure, reforming the social benefits system, the education sector, health and the pension system... The German government has a long list of urgent projects. And all of them come with a hefty price tag.

The various ministries' wishes add up to around €70 billion ($74,3 bio) but Finance Minister Christian Lindner is digging his heels in.

He was set to present the key points for his 2024 federal budget to the chancellor and his ministerial colleagues in mid-March. But with his coalition partners unwilling to accept austerity measures, that appointment was unceremoniously scrapped.

"We will have to talk about financial realities again in the Cabinet," the finance minister stressed. From his point of view, there is simply no money left for most of the projects the coalition had agreed upon when it came to power in December 2021. 

An estimated 30 bills are currently on hold because the three coalition partners — Chancellor Olaf Scholz's center-left Social Democrats (SPD), the Greens, and the neoliberal Free Democrats (FDP) — do not agree. Since the projects are not prioritized in the coalition agreement, each party believes that its respective political concerns should have priority.

The infamous 'debt brake'

"We have to learn to make do with the financial framework available," the finance minister warns. That means setting priorities, "because not everything can be financed at the same time."

Lindner is deliberately not naming a new deadline for the budget cornerstones and is thus aiming to build up pressure. Without a financial basis, the ministries cannot tackle any new legislative projects. 

The FDP chairman is keen to implement one of his most important election promises: To reinstate the so-called "Schuldenbremse" (debt brake) enshrined in the constitution — a ceiling limiting fresh debt in any annual budget to 1% of GDP.

Germany is sitting on a mountain of debt after billions went into alleviating the impact of the COVID-19 pandemic, before last year's spending spree: €60 billion for climate protection, €100 billion to upgrade the Bundeswehr, €200 billion to compensate households and businesses for high energy costs. 

And interest payments have increased significantly due to inflation and interest rate increases. The debts amount to around 2.5 trillion euros. This year, the finance minister will have to transfer around 40 billion euros in interest to creditors. That is ten times more than two years ago.

Budget disputes are not unusual. But this time the ideas are so far apart that a compromise is hard to imagine. 

Center-left vs. neoliberal

The Greens see taking on new debt mainly as investments into the future. Weeks ago, Economy Minister and Vice-Chancellor Robert Habeck wrote a letter to the finance minister on behalf of all Green ministers, telling him that his party was not prepared to sacrifice its political projects agreed upon by all three parties last year. The debt brake was by no means more important, he said. 

There is not much left of the former harmony that the SPD, the Greens, and the FDP made a show of when they took office in December 2021. 

The potential for conflict was there right from the start. The SPD and the Greens are left-leaning parties that care about social justice and ecology and advocate a strong state. If more money is needed, they see tax hikes as a good option.

In many respects, the neoliberal FDP propagates the opposite: As little regulation as possible, low taxes for companies and top earners, and as little social spending as possible.

The SPD and Greens are now calling for tax loopholes to be closed and subsidies to be eliminated in order to increase the state's revenues. 

Tax breaks worth billions

"Subsidies that are harmful to the climate are a burden on the state budget and delay the transformation to a climate-neutral economy," Economics Professor Monika Schnitzer the chairwoman of the German Council of Economic Experts told several newspapers this month. This would mean scrapping tax rebates for kerosene, diesel fuel, and privately used company cars and VAT exemption for international flights, which would mean an additional 30 billion euros a year into state coffers. 

Other economists suggest scrapping the tax breaks for the catering and hotel industry granted in the COVID-19 pandemic or they suggest raising retirement or reducing pensions.

The FDP does not want to cut subsidies that benefit its top-earning, car-loving voters. Following a beating in no less than five regional elections, the party is under a lot of pressure to please its voters.

But the FDP and the SPD also have every reason to avoid a break-up of the coalition government. Both parties have slumped in the polls, while the center-right opposition Christian Democrats (CDU) have seen their fortunes rise again. In several states, the CDU has teamed up with the Greens, who have seen solid support. New elections, pundits say, would likely cost the Social Democrats the chancellorship. 

By June, the government must present its 2024 budget proposal to the Bundestag, the federal parliament. The final vote will not be taken until December 1, and experience shows that no budget leaves parliament in the form in which it was submitted by the government.

This article was originally written in German.

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