German gov't to tackle budget crisis with savings

The German government announced on Wednesday that the 17 billion euro gap in the 2024 budget due to the failed reallocation of COVID-19 relief funds for climate protection measures is to be closed through savings.

Although it has to "make do with significantly less money," the government is sticking to its green transformation plans, said Chancellor Olaf Scholz in a press conference. Savings are to be generated in particular by abolishing climate-damaging subsidies.

Four weeks ago, the Federal Constitutional Court ruled that the shifting of COVID-19 relief funds to the Climate and Transformation Fund (CTF) violated the law prohibiting new borrowing, known as debt brake. Exceptions to the debt brake can only be made in crisis situations.

While the government has retroactively suspended the debt brake for 2023, citing the emergency caused by the energy crisis, the rule is to apply again next year. However, should the Ukraine crisis intensify, the government is leaving open the possibility of a further exception.

With a total volume of 160 billion euros by 2027, the CTF remains the "central instrument" for the country's climate-neutral transformation, although cuts of 12 billion euros would have to be made in the coming year alone, said Scholz.

To maintain the pillars of the CTF, including the development of a hydrogen economy and the decarbonization of industry, there would be cuts in sectors such as transport, construction and the solar industry, said Minister for Economic Affairs and Climate Action Robert Habeck.

In addition, some expenses such as investments in rail infrastructure are to be removed from the CTF, but financed from other sources.

Before the ruling, Germany had planned to invest approximately 58 billion euros from the fund in green projects next year.

German industry fears that the government's budget program will further hamper the economic recovery. "It is a tough austerity package that will weigh heavily on the economy and consumers," said Siegfried Russwurm, president of the Federation of German Industries.

As Germany is also struggling with a construction crisis and low export demand, the IW predicted on Wednesday that the country will slide deeper into recession in 2024 and its gross domestic product is expected to fall by 0.5 percent in 2023 and 2024.