Germany agrees budget deal to plug €17bn hole after debt ruling

Stay informed with free updates

Simply sign up to the German economy myFT Digest — delivered directly to your inbox.

Germany’s government has clinched a last-minute budget deal, averting a financial shutdown in January and plugging a projected €17bn hole opened by a landmark court ruling. 

After weeks of tense negotiations, Olaf Scholz’s coalition agreed painful cuts to green energy and construction subsidies, transport spending and support measures for industry in order to comply with Berlin’s strict public finance rules.

Funding for Ukraine against Russia’s full-scale invasion and social security spending would be protected, the chancellor said. The government will also raise the carbon price more than planned next year.

Scholz acknowledged the tougher financial environment ahead for the EU’s largest economy, which is forecast to have only a small rebound in gross domestic product next year.

“The government is sticking to its goals. We are forging ahead with the climate-neutral transformation of our country,” Scholz said on Wednesday. “We are strengthening social cohesion and we are standing by Ukraine’s side in its defence against Russia . . . [but] it is clear that we must manage with significantly less money in order to achieve these goals.”

In a ruling last month, Germany’s top court declared that €60bn of funding allocated to its KTF special climate fund violated the country’s constitutionally enshrined debt brake, which tightly limits government borrowing, throwing financial planning for 2024 into disarray. 

Scholz said the government would not seek to repeal the debt brake next year, despite the long-term questions keeping it has raised in Germany. The brake prohibits Germany from running a fiscal deficit exceeding 0.35 per cent of GDP. It had been suspended for four years as a result of the coronavirus pandemic and the energy crisis fuelled by deep cuts in imports from Russia after its invasion of Ukraine last year.

The chancellor said that if the situation in Ukraine deteriorated, the government was prepared to seek emergency funding through a partial suspension of debt brake rules in the coming months.

Some painful cuts to environmental policies were necessary, said vice-chancellor Robert Habeck, of the Green party. “That’s the price we have to pay for retaining the central components . . . development of the hydrogen economy, decarbonisation of industry and citizens’ programmes.”

The KTF will have its spending plans cut by €12bn next year, the government said, while environmental subsidies for homeowners would also be scaled back.

Government funding for Germany’s railways will be reduced, though the shortfall will be plugged with a plan to sell off real estate around the rail network.

In a partial offset to curbs on green policies, €3bn of subsidies earmarked for polluting industries will also be cut.

Finance minister Christian Lindner, of the fiscally hawkish Free Democratic party, welcomed the agreement and said it showed Germany was committed to a “course of fiscal consolidation”.

A €15bn package of tax cuts for households would go ahead as planned, Lindner said, as well as a €3bn reduction in electricity taxes.

The budget deficit will shrink again next year, he said, to 1.5 per cent. It was 3.6 per cent in 2021.

“We have achieved a turnaround . . . the debt brake continues to be of great importance to us. I think this is a balanced, good package that will move our country forward.”