LocationsIn a rare display of unity, German Chancellor Olaf Scholz, Vice Chancellor Robert Habeck, and Finance Minister Christian Lind-ner unveiled their draft for the country’s 2025 federal budget last weekend. It's a political achievement that many would have con-sidered implausible, given the ongoing clashes within the squab-bling government coalition. This budget is a strong signal that Germany's politically diverse “traffic light”-coalition of the center-left SPD, the environmentalist Green Party, and the pro-busi-ness FDP intends to navigate its complex "ménage-à-trois" until the regular federal election in September 2025. A cabinet deci-sion on July 17th is expected to rubber-stamp the compromise.
On paper, the budget looks quite solid
According to the draft, the German federal government plans to spend 481 billion EUR in 2025, only about 1% more than this year. The constitutional debt brake will be maintained. A "state of emergency" that would allow for its suspension cannot be rea-sonably declared. Germany's public debt ratio is likely to de-crease further.
At the same time, the Finance Ministry proudly announced that investment expenditures will reach a record level of 57 billion EUR. This may be accurate in absolute numbers. Anything else would have been utterly shocking after the high inflation episode over the last two years. Yet, the record in nominal capex spend-ing barely makes a real dent in the backlog of investments (see last week’s To the point). Compared to what is necessary, it is nowhere near enough. What is needed to remove the investment backlog is a large excavator, not an espresso spoon.
“Record-level investments” are not enough
The German Economic Institute (IW) estimates that an additional 600 bil-lion EUR in public capital expenditures will be required over the coming decade, on top of what was already planned. With the debt brake and the simultaneous promise not to raise taxes, such volumes are not feasible. A special fund for clearly defined investments would be advisable instead. A two-thirds majority would be needed in implement this. The opposition is unlikely to agree to this, as pre-election campaigning is already in full swing.
Bookkeeping alchemy and gimmicks
Due to the economic downturn and resulting loss of revenue, the adherence to the debt brake can only be ensured through some accounting sleight of hand. For instance, the cyclical component of the debt brake rule will be reformulated. This should add a few billion euros in flexibility, without changing anything in the real world. The same applies to how gains and losses from the issu-ance of government bonds are accounted for. And finally, a sup-plementary budget in 2024 will result in higher reserves available in 2025. Those gimmicks buy a little time, but the fundamental challenges remain unaddressed. For example, it is unclear how defense spending will be financed once the special military fund set up after Russia’s invasion of Ukraine runs out in 2027.
Growth initiative: a good first step
Simultaneously, the leadership of Germany's government coali-tion presented a comprehensive package of 49 measures known as the "Growth Initiative", aimed at doubling the potential growth of the economy by 0.5 percentage points. Many of the measures are welcome – such as strengthening work incentives, stream-lining regulations, or easing tax rules for companies. However, to advance growth in the targeted manner, the initiative remains too piecemeal. But some credit is due: at least, it is a first step in the right direction. The journey is made by walking…
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