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Germany's budget increase: Who foots the bill?

March 15, 2022

Germany is about to rack up billions in new debt according to budget plans for 2021 and 2022. But it won't stop there. The war in Ukraine is further driving up costs.

Christian Lindner
Finance Minister Lindner has had to shelve his plans to reduce state spendingImage: Florian Gaertner/photothek/picture alliance

The German parliament is about to receive the government's draft for the 2022 budget, central points of which have already been made outdated by war in Ukraine. The draft currently includes €99.7 billion ($108.8 billion) in new debt. That is probably an unrealistically low assumption, as the Finance Ministry is well-aware.

What is missing are the costs that the Russian invasion of Ukraine will entail for Germany. The budget does not yet take into account either the financial impact of rising energy prices or the follow-up costs of the sanctions against Russia. Costs for humanitarian aid in Ukraine can be found in the figures, but not for helping those people fleeing from Ukraine to Germany.

The ministry says that, at present, it is simply not possible to reliably estimate whether further debt will be necessary and, if so, how much. The ministry has drafted a "core budget," which the federal cabinet wants to approve on Wednesday before it makes its way to parliament. It provides for total spending of €457.6 billion ($502,64 bn).

German Chancellor commits €100bn to defense spending

While the Bundestag deals with this core budget, something that is expected to take until the end of June, the Finance Ministry will use the time to calculate further costs and to draw up and submit a so-called supplementary budget. The conservative opposition parties, the Christian Democratic Union (CDU) and the Christian Social Union (CSU) reckon that extra borrowing could ultimately amount to as much as €150 billion.

The budget also does not include the €100 billion announced by Chancellor Olaf Scholz to upgrade the German armed forces over the next few years. The German government has decided to set up a special fund for this purpose, which means that the money will be raised through loans, but the special fund is not part of the annual budget and does not burden the debt ratio.

Fiscal unknowns

A major uncertainty in the so-called core budget concerns the calculation of revenues, which is based primarily on how the economy is doing. But for the current budget, the Finance Ministry used economic forecasts from January for its calculations, i.e. from before the war. The tax estimate is even older, dating back to November 2021. Unfortunately, the ministry added tersely, more recent figures are not yet available.

The cost of the pandemic

But why has Finance Minister Christian Lindner presented a budget that fails to reflect the actual costs?

The minister is under some pressure. Last year's change of government meant that no budget had been decided for the current year. Since January 1, ministries, agencies, and all the other institutions that depend on the federal budget have been working with provisional budgets. In other words, they do not know what they are allowed to spend.

When Lindner took over in early December, he found himself working with a draft budget for 2022 written by his predecessor (now Chancellor Olaf Scholz) before the outbreak of the omicron wave of the coronavirus pandemic. That draft included around €100 billion in new debt.

Lindner, who is also the leader of the neoliberal Free Democratic Party (FDP), was determined to stick to that debt limit. When the FDP were still in opposition, they never tired of pushing for the state to take on less debt. But that is unlikely to happen in 2022. Energy supplies will become more expensive, for one thing. Prices for gas and heating oil continue to rise, and at gas stations, a liter of gasoline and diesel now costs well over two euros.

EU countries back Ukraine — but how much?

The draft budget includes a heating allowance for the needy, and €1.5 billion has been earmarked for gas reserves. But if prices continue to rise, that will not be enough.

Lindner also wants to ease the burden on motorists and proposes a temporary crisis rebate for gasoline consumers. A certain amount would be deducted per liter at the cash register. But even a ten-cent per liter rebate would cost the German treasury €550 million a month. "It will have to be more than ten cents and more than one month if I have my way," Lindner said after a meeting with the FDP presidium.

That proposal has met with little favor in other parts of the government. Economy Minister Robert Habeck of the Green Party, for instance, has urged "efficiency measures" and "incentives" to reduce consumption overall and has proposed a speed limit on the highway to reduce gasoline consumption.

Robert Habeck at a press conference
Economy Minister Habeck from the Green Party is skeptical of plans by the neoliberal FDPImage: Michael Kappeler/dpa/picture alliance

The so-called debt brake could also be a bone of contention. If Lindner and his FDP get their way, the state will spend only as much it takes in, from as early as 2023. This is not a "political demand or wish" on his part, Lindner stressed. "That is the reality. The debt brake is in the constitution and I don't see that there would be a constitution-amending majority in the Bundestag and Bundesrat for softening it."

The constitution only allows an exception to the debt brake in emergency situations. "We all want to hope that we will be spared such an emergency as was the case during the coronavirus pandemic," says Lindner, who is planning for only €7.5 billion in debt in 2023: exactly the amount allowed by the constitution. To get by with that, all spending would have to be put to the test and priorities strictly set, the ministry says.

And there are other question marks. In the preliminary financial planning for the coming years, some projects that were agreed in the coalition agreement, such as the introduction of a parental allowance, a basic child allowance, and a care allowance, do not actually appear. The Finance Ministry insists it is not feasible to simply take on new debt for all the kinds of projects that have been promised. But will the coalition partners from the other parties see things the same way?

There has already been some grumbling among the Social Democrats, whose left wing is calling for the debt brake to be suspended in 2023 and for higher taxes for the wealthy. But the FDP rejects this outright. The finance minister's only concession concerns repayment of the debt accumulated during the pandemic: Instead of 2026, the repayments need only start in 2028, and then be stretched out over 30 years.

This article was originally published in German.

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