Status: 05/31/2022 03:37 am
Expenditure of almost 500 billion and new debt of almost 139 billion euros: This week the Bundestag will vote on the budget – but nobody knows what the figures are worth.
From the point of view of FDP Finance Minister Christian Lindner, the war in Ukraine and its consequences also mean a turning point for budgetary policy: special federal spending, a return to inflation, economic uncertainty. Nevertheless, Lindner continues to swear to the goal: “You have to find an exit from the crisis mode. Depending on the situation, this may be possible in the coming year.”
Because in the coming year, Lindner wants to comply with the debt brake stipulated in the Basic Law. This only allows the federal government to borrow to a very limited extent and has been suspended since 2020 due to the pandemic. However, the federal budget has a number of problem areas that complicate the goal. Some have grown structurally, others have been added recently. An overview:
Social security costs
The number one problem area has long been the subsidies from the federal budget for pension insurance. In 2021, they accounted for around a fifth of the total budget at 106 billion euros. And the long-term care and health insurance companies must also be increasingly supported. The contributions of employees and employers to social security are not enough. Florian Neumeier, financial expert at the Munich Ifo Institute, is convinced that the federal government must act to reduce subsidies as much as possible. “There’s an awful lot of tax revenue tied up that could otherwise be spent on other things.” However, no one dares to undertake fundamental reforms, especially because an obvious increase in the retirement age would be quite unpopular.
defense spending
The governments of the past few years have studiously ignored the financial obligations for the defense of the alliance. Instead of spending two percent of gross domestic product (GDP) on defense, as planned in NATO, the so-called peace dividend was used for other purposes. Now a quick turnaround is planned: 100 billion euros are to be mobilized via a loan-financed special fund for the Bundeswehr in order to quickly retrofit and also to meet the two percent target. However, it is unclear what will happen when the assets are expected to be depleted in 2026. Finance Minister Lindner assumes that defense spending will be permanently higher in order to be able to meet the then valid NATO goals. In 2021, the defense budget was 47 billion euros. It takes more than 70 billion euros to reach two percent of GDP.
Global Uncertainty
Most economists had actually expected a strong recovery in the global economy after the corona pandemic for this year. Instead, the global economy is sputtering, with record energy prices and more than seven percent inflation in this country. This will also affect the federal budget, says ifo expert Neumeier. In the short term, this will bring advantages, for example through higher income from VAT. In the medium term, however, if inflation persists, government spending would also increase – for example for wages or infrastructure spending. “The state also benefits from inflation because the real debt service for existing loans decreases,” explains Neumeier. However, it is to be expected that inflation will lead to higher interest rates for government bonds in the future. “That can increase debt service for new loans.” Gone are the days when Germany could get into debt practically free of charge. In the 2021 budget, interest costs accounted for around ten billion euros, just under two percent of total expenditure.
potential savings
In the first few months, the traffic light coalition has again really drawn on the full or wants to spend a lot of money. 60 billion euros for the energy and climate fund, 100 billion euros for the Bundeswehr, 40 billion euros for the supplementary budget as a result of the Ukraine war, including the relief packages because of the high energy prices. All of these funds are funded almost exclusively through debt. On the other hand, the coalition has so far been reluctant to come up with ideas about where money should be saved permanently. If there are no comprehensive proposals, the coalition must either increase revenues or prepare for a permanently high level of new debt.
compliance with the debt brake
Finance Minister Lindner is also insisting on compliance with the debt brake in the coming year because he wants to increase financial discipline in the cabinet. After all, Lindner has managed to ensure that the special programs, which are worth billions, are one-off investments that tend not to lead to new, annually recurring obligations. So Lindner uses the suspended debt brake to really get back to it – in the hope that he can massively reduce the new debt in the coming year. From 140 billion euros this year plus the 100 billion euros for the Bundeswehr to less than 10 billion euros in 2023.
However, from the point of view of ifo expert Neumeier, this presupposes that the overall economic environment improves. And since he is rather pessimistic. “I would see the chance at less than 50 percent. I fear that the war in Ukraine and the consequences of Corona will unfortunately continue until next year.”