NewsGermany mulls suspending debt brake amid economic downturn

Germany mulls suspending debt brake amid economic downturn

Germany wants changes in the budget
Germany wants changes in the budget
Images source: © Getty Images | Michele Tantussi
Robert Kędzierski

27 June 2024 18:11

Economic slowdown and a decline in tax revenues are prompting part of the German government to discuss suspending the controversial budget brake. Negotiations on the 2025 budget are dragging on, according to the latest edition of the weekly report by the Polish Economic Institute.

Germany is considering easing its restrictive budget policy due to increasingly poor economic data. As the Polish Economic Institute reported, the economic downturn in Germany is leading to lower-than-expected budget revenues. Estimates published in May 2024 indicate that federal revenues will be £3.13 billion lower this year than projected and an average of £6,7 billion lower in subsequent years. The necessity to abide by strict debt limits is forcing Berlin to seek savings, which is met with opposition from parts of the government, according to Sebastian Sajnóg's article.

Germany has had enough of restrictions

The prevailing budget brake in Germany, intended to guarantee the stability of public finances, limits the ability to incur new debts. According to this rule, the structural deficit at the federal level cannot exceed 0.35 percent of GDP. Since 2020, the states must maintain balanced fiscal policies, which precludes increasing debt except in extraordinary situations.

Weak economic performance further narrows the room for manoeuvre. 2023 German GDP shrank by 0.3 per cent, and the European Commission forecasts only symbolic growth of 0.1 per cent this year. This necessitates even tighter deficit constraints compared to last year. Estimates project that 2025 expenditures will be about £21 billion lower than in 2024.

The new budget project forces the search for savings. Adherence to constitutional fiscal policy principles has led to cuts in almost all ministries and establishing upper spending limits. These measures, however, face criticism from some ministers, mainly associated with the SPD and the Greens. According to the PIE report, scepticism about austerity is expressed by, among others, the Ministries of the Interior, Labour, Defence, and Development Cooperation.

As noted by the author, Foreign Minister Annalena Baerbock from the Green Party demands a budget of around £6 billion, arguing that otherwise, humanitarian aid for conflict regions such as the Middle East or Ukraine would have to be cut by about half.

Defence Minister Boris Pistorius is also against the cuts, asserting that the country's defence capabilities are just as important as reducing debt. The Interior Ministry takes a similar stance.

Germany fears a downturn

Discrepancies in the approach to savings are dragging on budget negotiations. The original deadline for adopting the 2025 budget project expires on 3 July, but it is already known that it will not be met. Final decisions are expected later, although politicians declare that an agreement should be reached in July.

In light of the economic slowdown, the discussion on the justification of the stringent budget brake is returning. While it aims to maintain the stability of public finances, it is often criticised for limiting the possibility of conducting counter-cyclical fiscal policy. According to opponents, rigid debt limits can deepen and prolong periods of weaker economic conditions, preventing an adequate response to changing economic conditions, according to the PIE report.

According to Bloomberg, one of the options being considered is to create an additional budget for the coming year, assuming an increase in loans of £9 billion. This solution would compensate for the loss of tax revenues and support the economy through increased public spending.

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