The demand for austerity in the new German budget threatens to divide the tripartite

Germany must tighten its belt. The boom years in which ministries could present budgets above the limits are over. The German Finance Minister, the liberal Christian Lindner, reported on Thursday in a letter sent to his partners that those times are behind us and that the country must face a high budget gap, which in government circles they estimate will be of about 25 billion euros for next year alone (around 0.6% of GDP).

This predicts a tough fight between the three parties of the coalition government – Greens, Social Democrats (SPD) and Liberals (FDP) – to agree before the summer holidays on the budget for 2025 and plan financing until 2028. Furthermore, they are already late. . Traditionally, March is the month to start negotiations, but this year they have been delayed due to the problems Germany had in closing the 2024 budget.

In the letter to which the German media have had access, the liberal politician explains to his colleagues in the Executive that “a joint effort by the federal government” will be necessary. This means that everyone will now have to submit savings proposals and see how they can manage their budgets, knowing that there is a hole in the accounts and that in the coming years even more money will be spent on defense. There is not much room for maneuver and that is something that the head of the Treasury wanted to make clear before starting to debate each item.

The way in which these negotiations will be carried out will differ from that of previous years, according to the minister. Normally, the finance minister and his secretary of state for the budget negotiate their spending requests with other departments. Once an agreement is reached, there are key figures for all ministries, which are approved by the Executive. In previous years, the new reference values ​​were usually higher than the previous year. However, now you have to save and things will be different.

“For the preparation of the 2025 federal budget, a reference value procedure as in previous years is not convenient, since there are no additional funds to distribute,” explains Lindner in his letter. This means that the ministries must adhere to the spending limits set in the financial plan for 2024. “If the requests do not correspond to the specific maximums for each department, they cannot be accepted. Any further need for action will have to be resolved jointly in the subsequent process,” Lindner continues. The ministries' plans should be available on April 19.

In this way, Lindner seeks to prevent ministries from presenting budget demands higher than the established limits and forcing endless meetings to be held that end up reducing that figure. Precisely, this gap led last year to a stalemate that ended up extending for months, because the departments not only did not take into account the minister's requests for savings, but also requested million-dollar additional expenses.

Lindner's words reaffirm what was advanced a month ago by the Secretary of State for Finance, Wolf Reuter (appointed in November). In a letter, issued to the different departments to talk about the budgets, Reuter already indicated that the accounts for 2025 would not only be delayed, but would be “fundamentally different” from previous years, also due to the ruling of the German Constitutional Court which canceled the reallocation of 60 billion euros of unused debt, coming from an extra-budgetary item related to the coronavirus, to a climate fund.

Social or defense spending

Reuter also noted that the macroeconomic environment is not expected to produce any relief for the federal budget. In fact, he spoke of “a clear and structural need for consolidation” and stated that, after years of an extraordinary emergency situation, structural problems in the federal budget and related to economic growth are coming to light. “A consolidation is necessary that strengthens Germany as a business location and, simultaneously, its growth potential.” His words have now been reaffirmed by Lindner.

The Ministry of Finance speaks of “billions of euros” of gap. This has prompted Lindner to make clear that there will be no more additional spending on social benefits. Instead, the minister wants to expand incentives for growth and investment.

However, the Secretary of State is not the only one with clear ideas of where savings can or cannot be made. In the Executive there is a broad consensus on the need to allocate more money to defense. At the same time, the German Chancellor, Olaf Scholz, and the Minister of Labor, Hubertus Heil (both from the SPD), refuse to cut social spending. Both Greens and Social Democrats reject that international security is opposed to social security in Germany. Thus, they oppose Lindner's plans to finance support for Ukraine at the expense of pensioners, people in need of care or beneficiaries of social benefits, something that they also consider would benefit the far-right party Alternative for Germany (AfD). ).

Given this situation, the possibility that Scholz may decide to declare another emergency situation – now due to the conflict in Ukraine – and suspend the debt ceiling again sounds louder, which would make it possible for the German Government to contract more loans. This debt limit is set in the Constitution, but it can be suspended in extraordinary cases, such as a catastrophe or emergency. This happened, for example, during the coronavirus pandemic. Lindner currently sees no basis for suspending that constitutional limit and at the same time warns that Germany is risking its good credit rating. He also warns that future generations will have to face high interest payments if the debt increases.

The big question that many experts are asking is whether the budget negotiations between the three government partners – who pursue very different objectives – will end up straining the coalition government to the extreme. At the moment, they have until early July to approve the federal budget for 2025, which must then go through the German Parliament for final processing. Normally, the accounts are usually finally approved in December.

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