Germany freezes new spending commitments after ‘debt brake’ court ruling

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Germany has imposed an across-the-board freeze on new spending commitments, in a move that has exposed the depth of the budgetary crisis triggered by last week’s bombshell ruling by the country’s constitutional court.

Officials said the €8bn in military aid that Germany had pledged to Ukraine in 2024 would be affected by the freeze.

The court blocked a government move to transfer €60bn of funds originally earmarked for tackling the Covid-19 pandemic to projects designed to modernise the German economy and fight climate change.

Ever since, government ministers have been scrambling to find ways of plugging the €60bn hole that the ruling has opened up in Germany’s public finances, with the three parties in Chancellor Olaf Scholz’s unruly coalition deeply divided over how to solve the crisis.

The finance ministry has now responded by ordering a freeze on most new spending, in a sign of how seriously Scholz’s team is taking the judgment and its implications for government policy.

The freeze was ordered by Werner Gatzer, state secretary at Germany’s finance ministry, in a letter to 17 ministries seen by the Financial Times. In it, he said the constitutional court verdict meant the “whole situation with the budget must be reassessed”.

Gatzer said that all “commitment appropriations” for the remainder of the 2023 budget “are to be blocked, with immediate effect”. The German parliament and the top court are exempted from the freeze.

A government official stressed that “existing spending obligations would be honoured — but we just won’t be taking on any new ones”. She said it wasn’t a “spending freeze” and in exceptional cases, “appropriations can be unblocked”.

A source with knowledge of Germany’s military budget said the freeze could affect several of the defence ministry’s multiyear projects, including €8bn it had planned for Ukraine in 2024. “We are currently checking to see whether these funds can be released,” the person said.

On Tuesday, defence minister Boris Pistorius visited Kyiv and said that immediate funding totalling €1.3bn would be disbursed. Ukrainian officials recently expressed concerns that uncertainty about continued assistance from European and US allies had put their country’s “macro-financial stability” at risk.

The German constitutional court targeted the government’s “climate and transformation fund” (KTF), an off-budget vehicle used to channel everything from subsidies for semiconductor and battery factories to investments in Germany’s creaking railway network.

Shortly after coming to power in 2021, Scholz’s government decided to allocate €60bn of unspent coronavirus funds to the KTF to help finance Germany’s transition to a carbon-neutral economy.

It is one of 29 funds held off the government’s balance sheet, totalling about €870bn. One of the largest among these is the €200bn Economic Stabilisation Fund or WSF. Originally set up during the pandemic, it was repurposed after Russia’s invasion of Ukraine to protect consumers from higher energy costs.

Yet the WSF, too, could end up being struck down. The opposition Christian Democrats, who were behind the legal challenge to the KTF, are considering referring the WSF to the constitutional court as well. If successful, that could create an even bigger problem for the government.

Asked about Gatzer’s letter to the ministries, Kevin Kühnert, general secretary of Scholz’s Social Democratic party (SPD), said it didn’t mean the state had stopped spending money.

“It means we’ve determined that new commitment appropriations — that is, new spending commitments related to the future — are not possible for the moment,” Kühnert told public broadcaster ARD.

“As long as the government hasn’t figured out how [the €60bn in lost revenue] can be offset, this is normal procedure under the federal budget code,” he added.

Ministers are split over how to respond to the constitutional court’s ruling. Some in the government want to extend a suspension of Germany’s “debt brake”, which tightly restricts new government borrowing. But the fiscally hawkish Free Democratic party (FDP), which controls the finance ministry, opposes a further relaxation of that rule, which had already been paused since the pandemic.

Some in the FDP want the government to slash spending to plug the gap — an approach that their coalition partners, the SPD and Greens, have rejected.

Kühnert told ARD that the SPD had not been elected to “make €60bn of budget cuts with the lawnmower, slash welfare spending, give up on transforming our society and stop supporting companies that are competing internationally and so lose jobs in Germany”.

Source: Financial Times

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