German Government Contemplates Debt Brake Suspension Amid Court Challenges

28 Nov, 2023

Germany's ruling coalition is set to approve a supplementary budget, temporarily lifting self-imposed borrowing limits following a constitutional court ruling disrupting government spending plans. Chancellor Olaf Scholz's government grapples with a crisis prompting concerns about economic growth and an industry exodus. The supplementary budget aims to suspend Germany's constitutionally enshrined debt brake for the fourth consecutive year. The constitutional court had halted plans to redirect unused pandemic funds towards green projects and industry subsidies, prompting the need for adjustments. The 2023 budget will suspend the debt brake to align with the court's ruling, while the 2024 budget faces potential cuts in some ministries to maintain spending commitments elsewhere. The government justifies this move by citing the spillover effects of the 2022 energy crisis triggered by Russia's invasion of Ukraine. Parliament's approval for a 2024 budget this year is time-sensitive, possibly delaying until January's end. Some coalition members advocate extending the debt brake suspension in 2024, while the Free Democrats resist, asserting the need to maintain fiscal discipline. The court ruling challenges Germany's traditionally stringent fiscal policy, raising concerns that German companies might lack support for global competitiveness. Finance Minister Christian Lindner rules out tax increases, proposing savings in welfare state reform to back industry. The debt brake, introduced post-2008 global financial crisis, was first suspended in 2020 during the Covid-19 pandemic. Economy Minister Robert Habeck criticizes its inflexibility, advocating for vital industry support. The government seeks to provide clarity amid concerns, addressing the economic impact and potential measures, including the extension of energy price caps supporting industry.

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