Germany's budget issue became "hot" after the ruling from the constitutional court, as well as the tough statements of the opposition conservatives, that there was no tolerance in budget negotiations. Therefore, Minister Habeck immediately cancelled his trip to several Middle Eastern countries, including the United Arab Emirates (UAE), Oman, Israel and Saudi Arabia.
This ruling caused the German Parliament to postpone its meeting to consider passing the draft budget law for 2024 and forced the German government to reconsider priorities in budget spending, financial reallocation or saving. In case next year's budget is not approved in 2023, the German government will have to use the emergency budget in early 2024. After the court's decision, the German government suspended most projects funded through the Climate Change Fund and "froze” expenditures for the remainder of 2023.
The constitutional court ruled that the government's reallocation of 60 billion EUR of unused debt from the COVID-19 fund to climate fund was illegal. This ruling also affects other off-budget funds that Germany has applied for many years to finance the "debt brake" policy to limit the public budget deficit from exceeding 0.35% of GDP. Germany's "debt brake" policy has been applied since 2009 under former Chancellor Angela Merkel.
When the COVID-19 pandemic broke out, this policy was exempt from implementation for 2020-2022 to increase emergency public spending to cope with the crisis. In 2023, this policy was applied again and is the reason the German constitutional court does not accept changing the purpose of use for the above 60 billion EUR.
The court's ruling is expected to continue to impact the German government’s financial plans next year, even until 2027. After three years of "heavy" spending to deal with the pandemic and the impact of the conflict in Ukraine, the German government is applying measures to cut budget spending on a large scale. Finance Minister Christian Lindner declared his determination to reduce debt at any cost and stressed that by 2024, interest payments alone will cost the state 37 billion EUR.
Paying interest on loans puts the German government in a difficult situation because the 2024 draft budget law submitted to the parliament for approval is only 445 billion EUR, 30 billion EUR less than this year's budget. In that context, Minister Lindner proposed cutting social spending, international climate financing and some subsidies to fill the budget deficit.
Despite the crisis weighing on the budget, Chancellor Olaf Scholz affirmed that he will invest heavily in the modernisation and green transition of Europe's largest economy while applying a series of measures to restore growth, modernise the economy and support key industries, including subsidies to help steel plants transition to hydrogen energy, as well as investments in battery plants and microchips.
However, the problem is that the opposition is unlikely to agree with the new proposals, making it difficult for the ruling coalition to escape the budget crisis.
Friedrich Merz, the leader of the centre-right Christian Democratic Union (CDU), threatened to bring a legal challenge if Chancellor Scholz's government attempts to suspend the debt brake again in 2024 by declaring an emergency. The budget crisis is even more severe after the Organisation for Economic Cooperation and Development (OECD) forecasts that the German economy will decline in 2023 and recover slightly, with a modest growth rate of 0.6% next year.
