(Bloomberg) -- German Chancellor Olaf Scholz and Finance Minister Christian Lindner are thrashing out a plan to close a €20 billion ($22 billion) shortfall in the 2024 budget with expenditure cuts in all departments except defense — a move which risks angering their coalition partners, the Greens.
Scholz and Lindner have agreed to spending reductions of 2% to 3% for almost all ministries, people familiar with the plans said, speaking on condition of anonymity. That’s enough to deliver about half of the savings required, but they are still to decide on how to find the rest of the money.
Lindner, leader of the pro-business Free Democrats, is calling for reductions in politically sensitive areas such as social spending, arguing that it’s the only way to achieve a solid budget, the people said. Scholz’s Social Democrats want to avoid such a step and, in particular, to exempt benefits for children threatened by poverty.
A finance ministry spokesman declined to comment on the plan and said that budget discussions are ongoing.
Whatever they decide on, it’s likely to cause problems with the Greens, the third party in the governing coalition. Economy Minister Robert Habeck, one of two senior Greens in the cabinet, has been calling for higher taxes instead to close the gap, particularly on higher earners.
Asked to comment on the planned cuts to close the budget gap of €20 billion, Habeck told reporters in Berlin on Tuesday that he can “confirm that this has been thrown at us, that is what is being talked about.”
He added the reported figure was a rough order of magnitude and that the actual budget gap was probably somewhere between €18-22 billion euros.
“Of course, you can make cuts everywhere, but there are also great needs (for investments) everywhere, especially in the areas of decarbonization and digitalization,” Habeck added.
Sven-Christian Kindler, chief budget lawmaker from the Greens, said there are alternatives to “unilateral austerity policy” that would jeopardize economic recovery and endanger social and and democratic cohesion. “We expect the Finance Minister to present a draft that can be agreed in the Cabinet,” Kindler added.
Any hints at tax increases are unlikely to win support from Lindner though and Habeck has lost leverage in recent weeks after a heavy-handed law to reduce CO2 emissions from home heating and seeing a senior aide forced to resign. An Insa Institute poll published Tuesday by Bild showed that 50% of voters want Habeck to quit with just 28% in favor of him remaining in his post.
The three parties have until the first week of July to publish their proposals to give Parliament sufficient time to examine the details before approving the final legislation in the fall.
One potential compromise would be to cut spending that runs counter to the government’s climate goals, such as subsidies for certain types of diesel fuel, one of the people said. That’s an idea that the Greens have been pitching for a long time, but Lindner’s FDP is blocking that proposal so far.
Cutting fossil fuel subsidies might save a few billion euros, but still not enough to spare the coalition from difficult decisions.
Lindner and Scholz both agreed that defense is one area that will be exempt from the cuts because Germany has pledged to increase military spending and keep up support for Ukraine’s fight against the Russian invasion, according to the people.
Social Democratic Defense Minister Boris Pistorius has called for a €10 billion increase to the €50 billion defense budget, but may have to make do with around €2 billion to €3 billion in 2024, according to government officials.
To achieve NATO’s target of spending 2% of GDP on defense, Germany would need an extra €20 billion once a special fund of €100 billion has been used up. Scholz created that program shortly after Russia launched its attack on Ukraine.
Germany is facing a tighter budget outlook for next year in part because a far larger share of spending will be taken up by interest payments. The government is set to spend more than €40 billion on servicing its debt next year, compared with €4 billion in 2021.
But all three coalition members have also agreed that in 2024 the federal government must restore a constitutional borrowing limit, which was suspended for three years to boost public spending during the pandemic and then cope with energy shortages triggered by the Russian invasion.
The mechanism, known as the debt brake, restricts the federal government deficit to 0.35% of gross domestic product except in times of emergency.
“States in Europe — this also applies to our country — cannot simply continue with all the additional money that we have mobilized to fight two crises in immediate succession,” Scholz told a conference in Berlin on Monday. “So we will continue from here in the way that is possible on the basis of this rule — namely without massive new debt.”
--With assistance from Petra Sorge.
(Updates with comment from Habeck starting in sixth paragraph)
©2023 Bloomberg L.P.
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