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COST OF LIVING

Kindergeld and tax relief: How Germany’s planned 2025 budget could affect you

After tough and drawn-out negotiations, the German coalition reached a draft agreement on spending for next year. Here's what we know so far.

Published: 5 July 2024 16:48 CEST
Updated: 8 July 2024 09:22 CEST
File photo shows a child at a Kita in Dresden.
File photo shows a child at a Kita in Dresden. The German government is focusing on families in 2025 budget. Photo: picture alliance/dpa/dpa-Zentralbild | Sebastian Kahnert

Speaking to reporters on Friday June 5th, Chancellor Olaf Scholz, of the SPD, looked buoyant even with no sleep. 

The Social Democrat had pulled an all-nighter along with his coalition colleagues. Luckily it resulted in a solid outcome. 

The SPD, Greens and Free Democrats (FDP) have finally struck a deal on the 2025 budget – a topic that has been haunting the government for weeks, even months. 

In a press conference held alongside Economy and Climate Protection Minister Robert Habeck and Finance Minister Christian Lindner, Scholz said: “We have not always made it easy for ourselves. We are fighting hard for the cause and we are looking for compromises.

“Sometimes half the night. Sometimes all night.”

He said that ministers pushed through on negotiations in order to “present a draft budget today punctually at the end of this week of meetings”.

By doing so, the coalition has avoided a major breakdown that may have toppled the government. 

So what does this initial agreement mean and what’s actually in it? Many of the details are still to be finalised, but here’s a look at key points so far with some more details below:

READ ALSO: German coalition strikes breakthrough budget deal after crisis

The debt brake stays

The infamous debt-brake (Schuldenbremse) – a self-imposed cap on annual borrowing – will be adhered to. A decision that shows Finance Minister Lindner got his way.

The government plans to take on €44 billion in new debt next year, in compliance with debt brake limits, which would bring Germany’s total budget volume to about €480 billion. The debt brake means there are likely tough decisions and cuts in the coming years. 

The debt brake was a key sticking point in the talks. Germany suspended the mechanism for several years during the Covid-19 pandemic and the inflation shock which followed Russia’s full-scale invasion of Ukraine.

The centre-left Social Democrats in particular – who are the largest party in the coalition – pushed for the debt brake to be suspended in order to push for more investment into society and fewer cuts, but Lindner was keen to see it reinstated.

Clashes over the debt brake intensified after the constitutional court threw Germany’s spending plans into disarray last November in a ruling over spending. 

German Finance Minister Christian Lindner, German Chancellor Olaf Scholz and German Minister of Economics and Climate Protection Robert Habeck arrive to deliver a press conference on July 5, 2024 in Berlin, after the three parties in Germany's ruling coalition struck an agreement on the 2025 budget.

German Finance Minister Christian Lindner, German Chancellor Olaf Scholz and German Minister of Economics and Climate Protection Robert Habeck arrive to deliver a press conference on July 5, 2024 in Berlin, after the three parties in Germany’s ruling coalition struck an agreement on the 2025 budget. Photo by RALF HIRSCHBERGER/AFP

Focus on children and families

A family package is a big part of the draft budget. 

Kindergeld – Germany’s child benefit – is to be increased by five euros next year, as is the emergency child allowance for families who need it, according to German media reports. 

The payments will be phased out with the introduction of basic child security or Kindergrundsicherung, and parents in Germany will then receive €255 per month per child. 

The Kinderfreibetrag – or tax-deductible sum for children – is also to rise by €228 to €9,540 in 2025 and will go up a further €60 the following year.

The government said the law would continue to ensure that child support keeps increasing in future. 

A further €2 billion will be invested from 2025 to 2026 to improve the quality of childcare facilities. 

Tax relief and pensions

People in Germany are to receive around €23 billion in tax relief in 2025 and 2026, in a bid to make sure inflation doesn’t eat up wage increases. 

As part of a so-called ‘growth initiative’ there are to be further tax improvements for companies and the self-employed as well as employees. A tax exemption on overtime hours is one idea being discussed. 

It’s also planned that skilled workers coming from abroad will receive tax relief to make Germany a more attractive option. 

READ ALSO: 8 unlikely tax breaks in Germany that international residents need to know

More support for private investments and support for small firms is also planned in a bid to encourage more people to do business in Germany. 

Meanwhile, the coalition pledged to agree on a “clear timetable” for the planned pension reform. 

Boost for the economy

Under the plans, the government is vowing to invest more in the economy in a bid to modernise the country. Investment spending is set to reach a new record level of €57 billion, with money to be set aside for various things including railways, roads, local transport and digital infrastructure.

The initiative agreed during the budget consultations is expected to increase economic growth by 0.5 percentage points in the coming year.

ICE trains

An ICE train at Berlin’s main train station. Photo: picture alliance/dpa | Hannes P. Albert

Labour market bonus 

People receiving long-term unemployment benefits (Bürgergeld) are to receive additional bonus when they enter the labour market.

The coalition has summarised this as a “bonus model” to combat unemployment.

In order to make Germany more attractive as a business location, foreign skilled workers are to receive a tax rebate for the first three years. 

Billions for the Bundeswehr and social housing 

In terms of security policy, the traffic light coalition wants to fulfil NATO’s two percent target of investment every year. According to Scholz, the defence budget should reach €80 billion in 2028. The police, technical relief organisation and civil protection are also to be strengthened.

In addition, over €20 billion is to be invested into social housing across Germany by 2028.

The planned funding for climate and transformation has been secured for 2024 and 2025.

“This budget contains record investments,” said Scholz.

“In times characterised by unrest due to Russia’s barbaric war on Ukraine, unrest due to the climate crisis and unrest due to irregular migration,” said Scholz.

Less bureaucracy 

Another key point of the draft budget is reducing paperwork. 

“Companies and citizens alike are suffering from ever more bureaucracy, with official procedures taking far too long,” the coalition partners wrote in the draft budget. They are pledging to introduce measures to ensure things move more quickly in Germany in future. 

What happens now?

The next step following this initial agreement is for the party leaders to inform their parliamentary groups. This will be followed by budget discussions in the respective departments – and this could lead to yet more heated debates and adjustments.

According to the current schedule, the government wants to approve the draft budget in the cabinet on July 17th. It will then be discussed in the Bundestag after the summer break and, if all goes to plan,  adopted at the end of November.

With reporting by AFP 

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OPINION AND ANALYSIS

OPINION: After UK and French elections, Germany’s headaches this summer lie at home

With the British and French election results being kind on Germany, the main problems for Berlin this summer will be homegrown, explains Brian Melican.

Published: 8 July 2024 17:01 CEST
OPINION: After UK and French elections, Germany's headaches this summer lie at home

It’s a good job that – in contrast to many in Britain’s outgoing Conservative government – I’m not one for political bets.

If I were, I’d have lost a considerable amount of money over the last seven days. That’s because, for the last 10 years or so, I’ve predicated my predictions on Murphy’s maxim of “If it can go wrong, it will go wrong.” Brexit, Trump, rise of the far right: unlike many others, I never kidded myself that it would somehow all turn out alright in the end.

So last week, my money would have been on an electoral upset in the UK (whose voters can be coy about telling the truth to pollsters) and not on an electoral upset in France (where RN looked odds-on to win big). Also, I would definitely have placed a wager on Germany’s tripartite coalition failing to reach an agreement on next year’s budget – and might have had money riding on the government collapsing as a result.

Yet last Thursday saw Britain’s electorate – and, not unimportantly, its electoral system – hand a thumping majority to a sensible government while keeping the hard-right nutjobs at bay. And on Friday morning, it wasn’t just Britain’s leading centrist politicians standing in front of the cameras with satisfied, if somewhat sleep-deprived smiles. Here in Germany, the heads of the SPD, FDP, and Greens had just pulled an all-nighter, too, to reach a compromise on 2025 spending in time for the breakfast news – and ahead of that evening’s football match between Germany and Spain, as Olaf Scholz underlined with his trademark Cheshire cat grin.

READ ALSO: How Germany’s planned 2025 budget could affect you

“Schlaf wird überschätzt” – ‘Who needs sleep anyway?’ – beamed the Chancellor. And I would imagine he didn’t get much on Sunday night, either. Even after the first exit polls suggested that, contrary to expectations, the far-right Front – pardon – Rassemblement National wasn’t going to emerge victorious from the second round of the French parliamentary elections, I shouldn’t imagine anyone in the Chancellery felt truly comfortable nodding off until it became clear early this morning that the RN had come third.

Catastrophe averted for Berlin

An RN win would have been a major headache for Scholz et al.: President Macron being forced to charge Jordan Bardella with forming a government would have presented Berlin with a challenge of the same order as dealing with President Trump in Washington or Theresa May/Boris Johnson/Liz Truss in London. In fact, it would have potentially been much worse. It is stated RN policy to take France out of the European electricity market, for instance, and this is something it might have attempted early to show doubters that it meant business.

The result would have been a new energy crisis, potentially spiralling into a run on the Euro, with our government and several others left scrambling to Brussels for a gruelling summer of economic firefighting.

As it turns out, though, Olaf Scholz, Christian Lindner, Robert Habeck and Annalena Baerbock might actually get something approaching a – much needed – summer holiday. At the very least, they’ll be able to focus their energies on preparing for what looks to be a difficult autumn while at least the political weather is warm and sunny.

German Chancellor Olaf Scholz smiles as he attends a question time on July 3, 2024 at the Bundestag (lower house of parliament) in Berlin.

German Chancellor Olaf Scholz smiles as he attends a question time on July 3, 2024 at the Bundestag (lower house of parliament) in Berlin. Photo by RALF HIRSCHBERGER / AFP

London Calling back

Britain, for a start, is back. Even after Brexit, the UK remains, alongside France and Poland, Germany’s most important European ally – especially as Russia’s relentlessness recalibrates long-term foreign-policy priorities away from economic and towards military matters.

The fact that the UK’s new Foreign Secretary David Lammy was here within 48 hours of taking office underscores that Keir Starmer’s new administration understands this – and that there is now potential to rebuild some bridges torn down by Tory intransigence.

Annalena Baerbock will certainly have been relieved that, after dealing first with Liz Truss in her pre-lettuce incarnation, then James (Not-So) Cleverly, and, most recently, David Cameron (“Honey, I blew up the EU!”), she is once again speaking to a British representative with more than half a brain and something resembling a backbone.

READ ALSO: Inside Germany – Budget drama and what Germans think about UK election

Paris ‘en pause’

In France, meanwhile, Berlin will now be waiting for the dust to settle. This dust being French, it will take its time – after all, it will want to join the rest of the country by going on an extended break between 14th July and 15th August (all the more so given that the Olympics are fast approaching).

And for all the breathless commentary on Monday about political pandemonium in Paris after the shock victory of the Nouveau Front Populaire left-wing alliance, Emmanuel Macron is under no immediate constitutional pressure to task anyone with forming an administration. This leaves Matignon in the capable care-taker hands of Gabriel Attal – and anti-German, anti-capitalist, anti-everything lefty loon Jean-Luc Mélenchon is, for all his bombast, not going to be the replacement.

Forming a government will be complex, but by no means impossible given that two third of French MPs are not extremists: parliamentary mathematics will dictate a confidence and supply agreement of some kind. As ever in Paris, after some performative posturing, the most sensible option will prevail. And first, there will be les Grandes Vacances. Whatever government is then installed à la rentrée in September, it will be one Berlin can do business with.

French President Emmanuel Macron

French President Emmanuel Macron. (Photo by Ludovic MARIN / POOL / AFP)

Berlin on a budget

In fact, the only real remaining headache for our government prior to Trump’s inevitable return at the end of the year is, in my estimation, itself.

Yes, the three parties have defied my expectations and the political odds to present a budget compromise, but the agreement is a can of fudge. Yes, I know fudge doesn’t come in cans, so let me explain: that sound you can hear while you read through the coalition’s proposed package is a can being kicked down the road, and that odour is the saccharine smell of sticky political fudge.

Essentially, to get the numbers to work without anyone having to lose face, Scholz, Lindner, and Habeck have used every single accounting trick in the book, from labelling outlay as investment and assuming lower interest with higher growth to repurposing past spending and pushing current outgoings into the fiduciary future.

All of the methods employed are, taken by themselves, perfectly legitimate in the political cut-and-thrust, but there’s a strong chance someone will cry foul.

All the more so since we now have an unexpectedly quiet summer ahead of us and, in politics, the devil makes work for idle hands. Defence Minister Boris Pistorius, forced to accept a €1 billion increase in military spending rather than the €6 billion he’d petitioned for, is grumbling, but seems just about on board. It’s not unlikely, though, that one of the SPD ministers who’s come out with a net decrease in resources will, over the next couple of weeks, find themselves – and a willing journalist – with too much time on their hands. And there’s Rolf Mützenich, head of the parliamentary party, who is audibly angry after being kept out of the loop by Olaf Scholz during negotiations.

Then there are FPD loose cannons like Frank Schäffler and Wolfang Kubicki, always happy to make the headlines with uncharitable comments about coalition partners and with never-ending axes to grind about fiscal stability. And while the Greens, chastened by their recent electoral plunge, will probably keep their head below the parapets, their ministries have suffered some of the worst of the cuts: one of them could potentially surprise me – and everyone else – by going maverick.

Yes, after being caught unprepared by good news over the last few days, I’m expecting to be surprised again at some point this summer – probably by something altogether less positive as Murphy’s Law re-asserts itself and our tripartite coalition gets back into its intolerable habit of agreeing on something only to then disagree about it for months afterwards.

While I think that’s the likely outcome, I hope it’s not what happens. After all, I’m not a betting man.

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