Germany Returns to Austerity with Budget Cuts

GERMANY is undergoing a significant shift in its fiscal policies as it returns to austerity measures. The finance minister, Christian Lindner, has made it clear that Germany must tighten its belts due to budget constraints, signalling an end to the era of increased spending to combat the impact of the COVID-19 pandemic and the energy crisis caused by the war in Ukraine.

The draft budget for 2024, recently approved by the Council of Ministers, slashes funds in all government departments except defence. This means that infrastructure, health, and parental allowance departments will have to give up funding for some of their programs, resulting in substantial budget cuts amounting to €30.6 billion.

These budgetary decisions have caused friction among the coalition partners, particularly the Social Democrats and the Greens, who accuse each other of slashing social benefits. The disagreements over the budget have raised questions about the unity of the coalition and may continue until the final approval in autumn.

Für alle Maßnahmen der #Kinder– und Familienpolitik zusammengenommen, sind im kommenden Jahr 9,5 Mrd. Euro eingeplant. Für 2025 sind als Merkposten 2 Mrd. Euro für die #Kindergrundsicherung vorgesehen, erklärte @c_lindner zum Entwurf für den #Bundeshaushalt 2024. pic.twitter.com/5eN302xav6

— Bundesministerium der Finanzen (@BMF_Bund) July 5, 2023

Germany had temporarily abandoned its strict spending rules in the past three years to address the challenges posed by the pandemic and the crisis in Ukraine. However, Lindner, known for his fiscal conservatism, insisted on restoring the debt brake, a constitutional limit on borrowing. After intense negotiations and intervention from the chancellor, fiscal discipline has been returned. Next year, Germany will only borrow €16.6 billion, adhering to the debt brake’s limit of 0.35% of GDP.

To achieve fiscal rectitude, public spending will be significantly reduced, causing concern among social democrat and green ministers. For instance, the health ministry will face a one-third cut in its budget. Lindner acknowledges the difficult circumstances surrounding the negotiations, comparing them to the challenges faced during the sovereign debt crisis in 2010.

Lindner aims to halt the expansionary fiscal policy of recent years without raising taxes. However, some economists and trade unions criticise the budget, arguing that it neglects necessary investments in infrastructure, climate protection, and new technologies.

Return to fiscal normality/ total expenditure in the federal budget in billions of euros

Wir beenden den Krisenmodus expansiver Staatsfinanzen. Das ist nicht nur Vorgabe der Verfassung, sondern ein Gebot ökonomischer Klugheit, so @c_lindner zum #Bundeshaushalt 2024. Auf die neue finanzpolitsche Realität kann es nur eine Antwort geben: Solide und tragfähige Finanzen. pic.twitter.com/hthxVbctUk

— Bundesministerium der Finanzen (@BMF_Bund) July 5, 2023

Disputes within the government have intensified due to the budget cuts. The Greens are particularly unhappy about reductions in the family ministry’s budget, which affect the parental leave benefit. The proposed cap on eligibility income has drawn criticism for potentially disadvantaging women and making them more financially dependent.

Education and transport sectors will also face budget cuts, despite the government’s goal of promoting train travel to combat the climate emergency. The state-owned railway company, Deutsche Bahn, has been underfunded for decades, and the allocated budget falls far short of the required funds to upgrade the network.

Germany to buy 60 Chinooks for up to 8 bln euros -lawmakers https://t.co/dlFVjXbOf3 pic.twitter.com/dvT8Mpvfx7

— Reuters (@Reuters) July 5, 2023

Overall, public spending in Germany is decreasing, although it remains higher than pre-pandemic levels. The only ministry to receive an increased budget is defence, aligning with NATO’s target of member states spending at least 2% of GDP on defence. However, this increase is largely due to a special fund established last year in response to Russia’s invasion of Ukraine, and regular defence spending may require further increases when the fund is depleted.