Germany pledges return to ‘fiscal normality’ as of next year

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Germany has declared a return to “fiscal normality” with a 2024 budget that draws a line under the massive spending of the past three years, slashes new borrowing and imposes belt-tightening measures across all ministries.

“Our expansive fiscal policy must end now,” said Christian Lindner, finance minister. “The state can’t solve everything with money.”

Germany tore up its fiscal rule book to deal with, first, the Covid-19 pandemic and then the energy crisis triggered by Russia’s invasion of Ukraine. By the end of this year it will have taken out €507bn in new debt, pushing the country’s overall burden from 59.6 per cent of gross domestic product in 2019 to 67.75 per cent this year, above the EU’s limit of 60 per cent.

But as of next year the “debt brake” will apply, Germany’s constitutional cap on new borrowing that was suspended at the start of the coronavirus crisis. The country will take on just €16.6bn of debt in 2024.

Germany still faced “structural challenges”, Lindner said, but was “no longer in an exceptional emergency” that would justify a continued suspension of the brake.

Lindner’s plan envisages €445.7bn in spending next year, compared with €476bn this year. Most ministries will get less money, with the exception of defence, which will see its budget increase from €50bn to €51.8bn.

The budget, which was adopted by the cabinet but must still be passed by parliament, became a huge bone of contention between the three parties in Chancellor Olaf Scholz’s fragile coalition. Lindner acknowledged that talks on the plan had been “very intense — because the circumstances are particularly challenging”.

Some ministries saw big declines in their budgets. The health ministry, for example, will be able to spend €16bn next year, compared with €24bn in 2023 — a decline of 33 per cent.

But the biggest casualty was Lisa Paus, family minister and a leading Green. She had wanted €12bn next year for a new programme, “basic income for children”, that was to be a key plank of the government’s efforts to combat child poverty. In the end she got just €2bn. She will also have to swallow a big cut in the provision of Elterngeld, a child-rearing allowances for parents, which will now be more strictly means-tested.

It’s not the only defeat for the Greens. One of their flagship policies — a ban on new gas boilers — was significantly watered down after a public backlash.

Lindner said the budget showed Germany wanted to “remain the gold standard of public finance”. It was also a “signal to our partners and friends in Europe” that Germany would continue to be an “anchor of stability in the EU”.

The budget comes with the clouds darkening over the German economy. The country is in recession, inflation remains high, business sentiment is souring and unemployment is on the rise. Some economists are describing Germany as the sick man of Europe — a sobriquet last applied to it in the early 2000s.

Lindner acknowledged that the economic outlook remained uncertain. But despite that, it was time to switch from expansionary public spending to more supply-side policies, such as solving the skills shortage, reducing red tape and speeding up planning procedures.

Scholz himself echoed Lindner’s message in the Bundestag on Wednesday, saying many had got used to higher public spending during the pandemic and the war in Ukraine.

“But it is now clear that we have to start drafting budgets that don’t try to overcome crises using additional credit-financed funds,” he said. He added that budgetary resources must be focused on certain key priorities such as decarbonising the German economy, defence and social cohesion.