No debt, no tax hikes: German government faces public spending paradox

Germany's new government has pledged to spend big on the economy, climate change and social security -- but without raising taxes or taking on more debt, leaving many asking where the money is going to come from.

Piggy banks
Ornamental piggy banks adorn the shelves at a house in Cologne. Photo: picture alliance/dpa | Henning Kaiser

“We have decided that this will be a decade of investments,” future chancellor Olaf Scholz said on Wednesday as his Social Democrats (SPD) presented their coalition deal with the Greens and the liberal FDP.

But Scholz, who is finance minister in Angela Merkel’s outgoing coalition between the SPD and the conservatives, also admitted that “the modernisation of our country will not come for free”.

The new government faces some tough challenges as it prepares to take office in December, from meeting the Paris climate agreement to safeguarding the economy as the country is engulfed by a fourth coronavirus wave.

Economists predict that to meet these challenges, the country will have to spend around 50 billion euros a year, as well as pouring extra cash into pensions and health insurance to cater for an ageing population.

The centre-left SPD and the Greens had initially pushed for more flexibility on fiscal policy. But the pro-business FDP, which takes a tough stance on public finances, did not budge.

And it will be the FDP’s hawkish leader, Christian Lindner, in charge of the finance ministry in the new government.

Debt brake

Lindner is unlikely to be welcomed with open arms in Europe as the EU 27 embark on reform of the Stability and Growth Pact (SGP), which dictates the bloc’s rules on debt and public deficits.

The coalition contract states that the SGP must be made “simpler” and must guarantee “a sustainable level of debt” – hardly a sign of any “readiness to soften the pact”, according to Holger Schmieding, an analyst for Berenberg Bank.

The agreement also pledges a return to the so-called debt brake – a rule enshrined in the constitution that limits Germany’s public deficit to 0.35 percent of GDP that was lifted to help fight the coronavirus pandemic – as soon as 2023.

“We know what we want and we know exactly how to pay for it,” insisted Robert Habeck, co-leader of the Greens, expected to head a new “super ministry” in charge of climate and the economy.


Annalena Baerbock Robert Habeck Olaf Scholz Christian Lindner
Annalena Baerbock, Robert Habeck, Olaf Scholz and Christian Lindner pose for a press photograph before revealing the details of their coalition pact in Berlin. Photo: picture alliance/dpa | Michael Kappeler

Germany has taken on 370 billion euros of new debt during the pandemic, and public debt has risen from 59.7 percent of GDP to a predicted 75 percent this year.

Tax revenues in the coming year could yet be crimped by further shutdowns over a raging fourth wave of the pandemic. Germany’s Bundesbank is now expecting output to be flat in the fourth quarter.

For the full year, the government forecasts that GDP will come in at 2.6 percent rather than the 3.5 percent previously predicted.

Analysts believe that the coalition could take advantage of the eased debt rule in the coming year to make their investments.

If the debt brake is reapplied in 2023, the government still has one year to take a “a big sip from the bottle”, said Jens Boysen-Hogrefe, an economist at the IfW Institute in Kiel.

‘Squaring a circle’

This will be enabled partly by “new accounting rules for energy and climate funding”, whose deficits will no longer count towards the debt brake, Boysen-Hogrefe added.

The coalition also plans to allocate additional resources to energy and climate spending “from previously budgeted and unused funds”.

Other tricks will include increasing the repayment period for loans taken out during the pandemic from 20 to 30 years, and tweaking the methods used to calculate debt to allow more borrowing.

But Jens-Oliver Niklasch, an economist at the LBBW bank, said the parties would eventually have to “square a circle” to make the numbers add up.

Ahead of September’s election, economist Marcel Fratzscher, president of the Berlin-based DIW economic research institute, told AFP he believed it would be “impossible to return to the debt brake without massive tax increases”.

READ ALSO: E-cars and sleeper trains: How Germany’s new government will reform transport

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‘Russia must not win this war,’ says Germany’s Scholz

German Chancellor Olaf Scholz pledged once again to stand with Ukraine against Russia - but said Ukraine's bid to join the EU cannot be sped up.

'Russia must not win this war,' says Germany's Scholz

Scholz said the war in Ukraine was the greatest crisis facing the EU in its history, but that solidarity was strong. 

“We are all united by one goal: Russia must not win this war, Ukraine must prevail,” Scholz said in the speech to the Bundestag on Thursday.

Putin thinks he can use bombs to dictate the terms for peace, the SPD politician said. 

“He’s wrong. He was wrong in judging the unity of Ukrainians, and the determination of our alliances. Russia will not dictate peace because the Ukrainians won’t accept it and we won’t accept it.”

Scholz said it was only when Putin understands that he cannot break Ukraine’s defence capability that he would “be prepared to seriously negotiate peace”.

For this, he said, it is important to strengthen Ukraine’s defences. 

Scholz also pledged to help cut Europe free from its reliance on Russian energy. 

The Chancellor welcomed the accession of Finland and Sweden to Nato. “With you at our side, Nato, Europe will become stronger and safer,” he said.

However, Scholz dampened expectations for Ukraine’s quick accession to the EU.

“There are no shortcuts on the way to the EU,” Scholz said, adding that an exception for Ukraine would be unfair to the Western Balkan countries also seeking membership.

“The accession process is not a matter of a few months or years,” he said.

Scholz had in April called for Western Balkan countries’ efforts to join the EU to be accelerated amid a “new era” in the wake of Russia’s invasion of Ukraine.

Last October, EU leaders at a summit in Slovenia only reiterated their “commitment to the enlargement process” in a statement that disappointed the six candidates for EU membership — Albania, Bosnia, Serbia, Montenegro, North Macedonia and Kosovo – who had hoped for a concrete timetable.

“For years, they have been undertaking intensive reforms and preparing for accession,” Scholz said on Thursday.

“It is not only a question of our credibility that we keep our promises to them. Today more than ever, their integration is also in our strategic interest,” he said.

The chancellor said he would be attending the EU summit at the end of May “with the clear message that the Western Balkans belong in the European Union”.

Scholz also called for other ways to help Ukraine in the short term, saying the priority was to “concentrate on supporting Ukraine quickly and pragmatically”.

France’s President Emmanuel Macron has also said it will take “decades” for a candidate like Ukraine to join the EU, and suggested building a broader political club beyond the bloc that could also include Britain.