Germany's cabinet agrees to lift debt brake again for 2023

The German government's three-way ruling coalition has temporarily extended the lifting of constitutionally enshrined restrictions on borrowing as part of a supplementary budget, the German Finance Ministry said on Monday.

The supplementary budget included a credit of around €45 billion ($49 billion) that is intended to cover funds that have already been spent in 2023, for example for an energy price cap and to support flood victims. The budget must still be approved by the German Bundestag.

Germany's Constitutional Court earlier this month ruled that unused pandemic funds could not be repurposed for climate and green industry projects. It said the move did not meet the constitutional requirements for emergency borrowing — blowing a hole in the government's budget.

"With this 2023 supplementary budget, we are dealing with the consequences of the judgment by the Constitutional Court," Finance Minister Christian Lindner said.

Why is the budget revision necessary?

The Karlsruhe-based Constitutional Court's ruling effectively vetoed government plans to funnel €60 billion that was borrowed for a pandemic fund into the Climate and Transformation Fund (KTF).

The gap in finances has posed one of the biggest challenges so far for the coalition of Chancellor Olaf Scholz's center-left Social Democrats, the environmentalist Green Party, and the business-focused Free Democrats.

It had already been expected that the 2023 supplementary budget would see Germany suspend the debt brake for a fourth year in succession.

The debt brake is part of the German constitution and limits the federal government's structural net borrowing to 0.35% of gross domestic product. It was first adopted in 2009 after the financial crash. 

The brake was suspended from 2020 to 2022 during the pandemic and energy crisis but was set to come back into force this year.

How is the government justifying its plan?

Finance Minister Christian Lindner last week said he would declare 2023 a year of emergency so as to put the existing spending plans on a "firm constitutional footing."

According to a government spokesperson, Berlin is convinced that its 2023 supplementary budget is legally sound, reasoning that high energy prices had made the extension necessary.

"We are very convinced that it is constitutionally compatible with the new requirements of the federal constitutional court," the spokesperson said, in response to a question about possible fresh legal challenges.

"Basically, we justify the emergency for 2023 by saying that this is the same thing that led to the emergency in 2022," he said.

The court's decision has also cast doubt over the government's 2024 budget, which Scholz on Friday promised would also be finalized by the end of this year.

"We will carefully revise next year's budget in light of the judgment — swiftly, but with the necessary care," Scholz said in a video posted on social media platform X.

ab, rc/wd (Reuters, AFP, dpa)

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