German coalition strikes deal to fill €17bn budget hole

Germany’s ruling coalition has announced tax increases and cuts in green investment to bridge a €17 billion hole left in the 2024 budget by a constitutional court ruling last month.

After weeks of political disagreement, the draft budget has cut the so-called climate and transformation fund (KTF) spend by 80 per cent to €12 billion in the coming year.

Another €45 billion will be slashed in the subsequent two years from the fund, intended to help companies move towards climate-neutral production.

To boost government income, the cost of CO² emissions will rise by nearly 30 per cent to €45 per metric tonne, meaning higher gas, petrol and heating oil prices. Other new taxes will be imposed on plastic packaging and on previously tax-free airline fuel for domestic flights.

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“What’s clear is that we will have to spend less money to reach our goals,” said German chancellor Olaf Scholz. He insisted that green goals and welfare spending would still be maintained, and that plans were still in place to double aid for Ukraine to €8 billion.

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Since taking office two years ago, Berlin’s ruling “traffic light” coalition of the Social Democratic Party (SPD), Greens and liberal Free Democratic Party (FDP) has struggled to reconcile competing political goals of fiscal frugality with generous welfare and climate spending.

After a final round of all-night talks, coalition leaders agreed to reactivate next year the so-called debt brake, which limits new borrowing to 0.35 per cent of gross domestic product (GDP).

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To sidestep this rule and finance major investment projects, the coalition had previously repurposed residual funds raised for emergency pandemic measures, but this practice was struck down in last month’s court ruling.

New forecasts on Wednesday will see Germany end the year in technical recession, meaning Berlin will not be able to borrow to help finance its transformation of Europe’s largest economy.

Green economics and climate minister Robert Habeck said it “really hurt” to announce cutbacks in subsidy programmes for e-mobility, housing insulation and solar panels.

“But this is the price for keeping key pillars of the climate transformation fund,” he said, in particular multibillion investment in green hydrogen development.

While the FDP secured a major win in forcing the return of the debt brake, set aside in the pandemic, and a return to balanced budgets, it has had to break another voter promise of no new taxes.

It remains to be seen whether Wednesday’s plan will be enough to hold together Berlin’s embattled coalition. Earlier this week the FDP started a non-binding online poll of members, asking them whether they wished their party to remain in the coalition.

The opposition Christian Democratic Union (CDU), which triggered last month’s constitutional court ruling, accused the coalition of deliberately vague book-keeping “trickery”.

Leading economists were similarly negative, with many saying the plan remained vague, with no defined route to clear a growing backlog in German infrastructure investment.

“Our problem is competitiveness,” said Prof Michael Hüther, head of Cologne’s IW economic think tank. “We are working on the wrong issue by trying to stick to the debt brake.”