SHARE
COPY LINK

POLITICS

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.

READ ALSO: 

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

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.
For members

GERMAN CITIZENSHIP

German conservatives vow to overturn dual citizenship if re-elected

Foreigners in Germany are waiting on tenterhooks for the introduction of the new dual nationality law on Thursday - but the centre-right CDU and CSU say they would overturn the reform if re-elected next year.

German conservatives vow to overturn dual citizenship if re-elected

“The CDU and CSU will reverse this unsuccessful reform,” Alexander Throm (CDU), spokesperson on domestic policy for the CDU/CSU parliamentary group, told DPA on Tuesday.

“Dual citizenship must remain the exception and be limited to countries that share our values.”

Throm also criticised the new citizenship law for reducing the amount of time foreigners need to live in the country before naturalising as Germans, describing the new residence requirements as “far too short”.

“After five or even three years, it is not yet possible to determine with certainty whether integration has been successful in the long term,” he stated.

“The recent caliphate demonstrations and the rampant Islamist extremism, often by people with German passports, must be a wake-up call for us all.”

READ ALSO: Which foreign residents are likely to become German after citizenship law change?

Despite vociferous opposition, the alliance between the Christian Democrats (CDU) and their Bavarian sister party (CSU) was powerless to stop the traffic-light coalition’s citizenship reform passing in both the Bundestag and Bundesrat earlier this year. 

The reform, which permits the holding of multiple passports, lowers residence requirements and removes language hurdles for certain groups, is set to come into force on June 27th. 

But with the CDU and CSU emerging as clear winners in the recent EU parliamentary elections and regularly landing on 30 percent or above in the polls, it’s possible that the party could be on course to re-enter government next year. 

In this situation, the centre-right parties have pledged to try and undo what senior CDU politicians have described as a “dangerous” reform.

“It is not unusual for successive governments to reverse decisions made by the previous government,” Andrea Lindholz, the head of the CDU/CSU parliamentary group said in a recent response to a question

“We will maintain our position on this and will continue to strive for a corresponding change.”

READ ALSO: What are citizenship offices around Germany doing to prepare for the new law?

Whether the CDU and CSU can secure enough votes at both state and federal elections to change the law in the future remains to be seen.

The parties may also have to compromise on their plans with any future coalition partner, such as the Greens, Social Democrats (SPD) or Free Democrats (FDP), all of whom support liberal immigration laws and the holding of multiple nationalities. 

‘Citizenship devaluation law’

The CDU and CSU parties, which form a centre-right alliance nicknamed the Union, have long been opposed to dual nationality in Germany.

During their years of governing in a so-called grand coalition with the centre-right Social Democrats (SPD), the parties had regularly made reforms of citizenship one of their red lines, citing the danger of hostile nations influencing Germany from within. 

In a recent parliamentary speech back in January, Throm had slammed the bill as a “citizenship devaluation law” and accused the government of trying to generate a new electorate to win votes.

CDU politician Alexander Throm speaks in a debate in the German Bundestag

CDU politician Alexander Throm speaks in a debate in the German Bundestag. Photo: picture alliance/dpa | Christoph Soeder

In comments aimed primarily at Germany’s large Turkish diaspora, the CDU politician claimed that people who had lived in Germany for decades but not taken German citizenship had already chosen their old country over Germany.

The majority of Turks in Germany are also supporters of the authoritarian president Recep Erdogan, he argued.

Responding to the claims, FDP migration expert Ann-Veruschka Jurisch said the opposition was fuelling resentments against migrants by claiming the government was “squandering German citizenship”.

In fact, she argued, the reform has tightened up requirements by ensuring that people who claim benefits and cannot support themselves are unable to become German citizens.

READ ALSO: What you need to know about Germany’s citizenship law reform

In addition, the B1 language requirements have only been softened in a few exceptional cases, for example to honour the lifetime achievements of the guest worker generation who had few opportunities when they arrived, Jurisch said. 

If foreigners have committed crimes, the authorities will be able to investigate whether these involved racist or anti-Semitic motives before citizenship is granted, she added. 

With reporting by DPA

SHOW COMMENTS