Germany's 2025 Budget is a Lazy Compromise
Not everything that is heralded as a success is actually a success. At the end of last week, Chancellor Olaf Scholz's coalition agreed on a draft federal budget for 2025, which is not a political triumph but is one of the key tasks of the federal government.
However, the dispute between the three parties was so heated that the observing media placed bets on whether the coalition could fail over the issue of the budget. Then the French president dissolved the National Assembly and German pragmatism prevailed in Berlin: better a bad compromise than none at all. However, Germany's enormous budget problems are far from over.
First of all, the most important thing: this is a draft that is to be decided in the Council of Ministers on 17 July and adopted in the German Bundestag in September. A lot can happen between now and then. However, Chancellor Olaf Scholz was clearly keen to present something resembling a result before the summer recess.
This agreement stipulates that the debt brake will also be adhered to in the coming year. There will be no emergency situation that would allow more loans, it was said. Total expenditure in the 2025 budget is also expected to be 470 billion euros
Debt at a record level
However, government representatives are no longer able to hide the massive structural problems of Europe's largest economy:
Germany's total public budget at the end of the 1st quarter of 2024 was a staggering 2,461.4 billion euros in debt.[1] For months, the issue of new debt was therefore also at the centre of political disputes: while Scholz's SPD and the Greens would accept additional debt, Finance Minister Christian Lindner (FDP) is a strict opponent of it - as, incidentally, is the vast majority of the conservative opposition.
The debt brake enshrined in the German constitution should oblige the federal government to reduce its net new debt to 0.35 per cent of gross domestic product from 2016. The federal states would even have been prohibited from taking on new debt from 2020. However, debt exploded in the wake of the coronavirus pandemic, the war in Ukraine and the energy crisis.
The German Federal Audit Office already sounded the alarm last summer: in a report, it pointed out that net borrowing in 2023, including the so-called "special funds", had risen from 46 to 193 billion euros.[2] The newer and very expensive special funds include the special fund of 100 billion euros for the Bundeswehr and the economic stabilisation fund for the energy crisis of 200 billion euros. The financial volume of the currently existing larger special funds alone currently totals around 869 billion euros.
Social costs are exploding
In addition, costs are expected to explode, particularly in the social sector.
- Germany recently spent well over 400 billion euros on healthcare, which is more per capita than almost any other country in the world. Around half of this is borne by the statutory health insurance funds, which have been running ever-increasing deficits for years. In 2023, expenditure will again rise more than expected. Experts therefore expect contribution rates to rise by 2025 at the latest. The additional contribution, which currently averages 1.7%, could rise to 2.45% in extreme cases. Expressed in labour costs, between 120 and 200 euros of net wages are likely to be lost - the next federal government will probably have to deal with this unpleasant question.
- However, that's not all: the issue of pension funds is also burning under the nails. 127 billion euros will flow from the federal budget into the statutory pension fund in 2024, which is a third of all government spending. In 1950 it was 2.3 %. Under current circumstances, this sum is likely to almost double by 2050. For 70 years now, Germany's economists have had to calculate how the pension system can continue to be financed - with rising contributions, increasing taxes, benefit cuts or alternative financing models.
- According to a recent study [3], at least 42 billion euros will have to be invested in the education infrastructure over the next 10 years, a further 35 billion euros will be needed to renovate universities and 37 billion euros for social housing.
According to the experts' calculations, a total of 600 billion euros in public investment will be needed by 2034 to renovate the most necessary structures: around 180 billion euros for cities and municipalities, 200 billion euros for energy-efficient building renovation and network expansion, 127 billion euros for transport routes and local public transport, to name just the most important.
Structural problems
The ECB's loose monetary policy, which has persisted for many years, has also encouraged large economies such as Germany to take on huge debts. The dramatic situation was concealed with the help of special assets and other budgetary tricks. However, with the Federal Constitutional Court's budget ruling last autumn and the significant rise in interest rates, nothing can be swept under the carpet any more.
Germany is suffering from a completely misguided climate policy, which makes energy costs among the most expensive in the world, as well as from increasing neo-dirigism.[4] State institutions are increasingly intervening in the economy in order to achieve better results. For years, income has been redistributed through price regulations, social transfers and taxes, which has led to evasive reactions (e.g. by companies) and damage caused by social costs. There is already a noticeable loss of prosperity, which will worsen dramatically in the coming years.
The agreement on the 2025 budget provides the government under Olaf Scholz with nothing more than a short break. Whether it is the current cabinet or the next one: Germany will need many years to mitigate the fatal economic consequences of a completely misguided social, economic and energy policy. Many of the course-setting measures date back to the Merkel era, others even to the time of Gerhard Schröder.
As the leader of the SPD parliamentary group in the Bundestag, Rolf Münzenich, aptly put it, "a few opportunities for budgetary management have obviously been used, but it remains to be seen whether these tricks will be legally valid." [5] As already said, a lot can still happen between now and the autumn.
This article was first published in Courrier des Stratèges on July 8th, 2024.
---
[1 ] https://www.destatis.de/DE/Presse/Pressemitteilungen/2024/06/PD24_233_713.html
[2 ] https://www.bundesrechnungshof.de/SharedDocs/Kurzmeldungen/DE/2023/sondervermoegen.html
[5] https://www.daserste.de/information/politik-weltgeschehen/morgenmagazin/berichte-und-interviews/Rolf...