Ukraine war: Federal government heading for high debt

The Ukraine war whirls the financial planning of the federal government. Now a so-called supplementary budget is planned. That should mean one thing above all: more debt.

2022 is a special fiscal year. Not only because the budget, as always, is decided with a little delay after the federal elections, after all, the government has to be formed first. In addition, as in 2020 and 2021, a special emergency has been identified due to the corona pandemic, which allows an exception to the debt rule of the Basic Law. This states that the budgets of the federal and state governments should in principle be balanced without income from loans. Articles 109 and 115 of the Basic Law allow a certain amount of leeway.

But not only that: the Ukraine war also has consequences for the finances of the federal government. On the one hand, as Chancellor Olaf Scholz (SPD) announced in his government statement after Russia’s attack on Ukraine, a “special fund” is planned for the Bundeswehr. 100 billion euros will have to be taken out in debt this year. And that in addition to the almost 100 billion euros in debt provided for in the regular budget. On the other hand, according to Federal Finance Minister Christian Lindner (FDP), the federal government is planning a supplementary budget to cushion the consequences of the Ukraine war.

Further relief planned

Supplementary budget means that changes to the draft budget for this year are being worked on while the parliamentary process is still ongoing. The focus should be on relief for citizens and the economy. Finance Minister Lindner, for example, brought up a tank discount at the weekend. Admittedly, new debts will have to be incurred for this as well. According to initial calculations by the Ministry of Finance, a tank discount of ten cents would cost around 550 million euros – per month.

Record debts threaten again in 2022

In total, the federal government would incur debts of more than 200 billion euros this year. Depending on what else is planned, a record figure could even be reached – after net new debt of around 130 billion euros in 2020 and 215 billion euros in 2021.

From 2023 emergency braking for borrowing

When Finance Minister Lindner presents the key figures for this year’s budget in the cabinet on Wednesday, he will also present the medium-term financial plan. The decisive difference to the current budget: From 2023, the debt limit of the Basic Law should be complied with again. The new debt is to fall drastically to initially only 7.5 billion euros. In order for this to succeed, a reserve set up by former finance minister Wolfgang Schäuble (CDU) during the refugee crisis will be released in full. The federal government still has around 48 billion euros in reserve here, funds that are intended to facilitate the financing of regular expenditure from 2023.

No funds for numerous projects of the traffic light coalition

However, many projects of the red-green-yellow federal government have not yet been financed: Apparently no funds are available in the medium-term financial planning for the planned reorganization of basic child security or citizen benefit (instead of Hartz IV) and the introduction of a share pension. Despite steadily growing tax revenues. At the same time, the federal subsidy for pension insurance is steadily increasing.

But that’s not all of the future burdens: the high corona debts have to be repaid. According to sources in the Ministry of Finance, the new federal government wants to start later than previously planned and also extend the repayment over a longer period of time.

Repayment over 30 years

If the grand coalition had planned a repayment over 20 years from 2025, there is now talk of a repayment from 2028 – over 30 years. Nevertheless, that would cost the federal budget eleven billion euros per year. A task that only the next federal government will have to think about after the new planning.

And another current project has consequences far into the future. Because the 100 billion euros from the “special fund” Bundeswehr will be used up in a few years. But even after that, the promise made to NATO that Germany should spend two percent of its economic output on defense each year should apply. After the end of the special fund, 20 to 25 billion euros would have to be financed from the regular budget. Not to forget the repayment of the debt for the special fund.

For politicians, all of this means either discussing tax increases and relaxing the debt brake, or venturing into reforms that cut government spending.