German government fights over money

Money isn't everything, but without money it's impossible to implement political projects. The frustration that comes with that, is exactly what the governing German coalition of center-left Social Democrats (SPD), environmentalist Greens, and business-oriented Free Democrats (FDP) is now feeling.

In mid-March, Finance Minister Christian Lindner is expected to present the key points of the 2024 federal budget. With this document, Lindner, who is also FDP leader, wants to implement one of his most important election promises: To reinstate the so-called debt brake enshrined in the constitution, which limits spending to the amount of money the state earns. Since the beginning of the coronavirus pandemic, the debt brake has been suspended several times, which is allowed if the state is in a financial emergency.

Everyone should save

Lindner has been conducting tough budget negotiations with his government colleagues for months. That's because the debt brake can only be complied with if the government makes massive savings. When Russia invaded Ukraine, Lindner had to take out additional loans on top of the already agreed special debt of €60 billion ($64.1 bio.) for climate protection. Then there was another loan of €100 billion to upgrade the German armed forces and €200 billion in financial aid for German businesses and people to offset high energy costs.

These loans came on top of the record debts incurred in the COVID-19 pandemic — and the old debts which were already taken on beforehand. Add it all up, and Germany is sitting on a mountain of debt of more than €2.5 trillion. And the finance ministry must find interest payments, which have increased significantly due to inflation and interest rate increases. While they still amounted to only €4 billion in 2021, they are currently already at around €40 billion. "This is money that is missing elsewhere," Lindner said recently.

Meanwhile, the tax revenues forecast for 2024 is not enough to cover the German government's current needs. After the COVID years, health insurers need billions to make up their deficits, and long-term care insurance is under so much pressure due to the aging of society that it needs to be reformed.

In addition,more than a million refugees came to Germany last year, and the influx is continuing. Accommodation and care cost billions, and for months, state and local governments have been criticizing the fact that they will not be able to make ends meet with the money they have been allocated.

What is more important: Global security or social welfare?

Then there is the German military. Defense Minister Boris Pistorius (SPD) wants another €10 billion for the armed forces, above the special fund which is controversial even within his own party whose parliamentary group leader Rolf Mützenich said that €100 billion should be "quite sufficient for the coming years."

There are other issues that need to be considered in the budget, he said, arguing that humanitarian aid and development policy should not be neglected in international policy. "We need to be in sync there," he said, backing his party colleague, Development Minister Svenja Schulze. The latter warned that there was great concern among developing countries that Germany could forget about aid to the southern hemisphere over the Ukraine war.

The SPD is not alone in fearing that the war and its consequences will massively restrict the coalition's room for maneuver. What will become of the coalition agreement and the many cost-intensive political projects the new government had planned?

The list ranges from a basic child allowance to combat child poverty to 100,000 publicly subsidized apartments a year and investments in climate protection, digital infrastructure, and transport routes. Some €10 billion are to be transferred to the federal pension insurance fund, which is to be invested in the capital market to finance pensions. If the FDP has its way, it could be considerably more than ten billion.

Habeck against Lindner

Since the projects are not prioritized in the coalition agreement, each party believes that its respective political concerns should have priority. In the face of tight budgets, the conflicts that were predicted when the parties took office are now coming to the fore.

The SPD and the Greens are two left-wing parties that care about social justice and ecology and advocate a strong state. In many respects, the neoliberal FDP propagates the opposite: As little regulation as possible, low taxes, and as little social spending as possible.

But who should give way, who must suspend or maybe even abandon their goals? In February, a letter became public that Green Economy Minister Robert Habeck had sent to the Lindner ministry on behalf of all Green-led ministries. In it, Habeck made it clear that while the Greens would not question compliance with the debt brake, they were not prepared to sacrifice their projects for it either.

Habeck rejected Lindner's austerity plans, proposing instead to increase the state's revenues. But that was not going down well with Lindner.

Taxes up, taxes down

Tax increases or the reduction of tax benefits for company car owners, for example, are out of the question for the FDP. Instead, even in the current situation, they would like to lower taxes for companies and introduce tax breaks for top earners. The first thing the FDP wants to do is abolish the solidarity tax, originally intended to help former East Germany following reunification, which only the richest now still pay. But that alone would cost around €11 billion.

Meanwhile, the chancellor is said to have put his foot down in the dispute between Habeck and Lindner. Der Spiegel magazine reported on a meeting of the three politicians in the chancellor's office, at which Olaf Scholz is said to have sided with Lindner. There are to be no higher taxes. The FDP has lost votes at the last five state elections, and the party leader is battered as a result. Scholz does not want to put Lindner under additional pressure.

On March 5 and 6, the cabinet plans to meet and deliberate at the federal government's guest house in Meseberg castle. If no agreement is reached there, Lindner will have to leave a blank space among his key points. This is called "global budget cuts" and means that as yet unnamed savings will be made across the government. They will have to do this by June when the draft budget must be ready in all its details because that is when it has to be submitted to parliament.

This article was originally written in German.

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