Germany suspends borrowing limits for a fourth year following debt brake ruling

Germany will suspend its constitutional cap on new borrowings for the fourth consecutive year as it rushes in order to deal with fallout following a ruling from the country’s highest court, which has left the spending plans of the nation in chaos.

Christian Lindner, the finance minister, announced that the government will present a 2023 supplementary budget to parliament “that puts spending done this year on firm constitutional ground”.

In a social media post, he said that he would propose to the parliament that they retroactively declare that 2023 is an “exceptional situation” which would allow them to remove the “debt-brake”, Germany’s constitutional restriction on deficit spending.

Lindner has suffered a blow, as he had demanded that the debt brake was reinstated in this year. The leader of the fiscally conservative Free Democrats views himself as the guardian of fiscal prudence within the three-party coalition of Chancellor Olaf Scholz.

A ruling by the Constitutional Court last week, which struck down the government’s move to transfer unused borrow capacity from its pandemic fund to a “climate and Transformation Fund” known as the KTF, triggered the announcement. The judges said that the government’s actions were in violation of the rules for the debt brake. However, they left ministers wondering how to fill a €60bn gap in the public finances.

Introduced in 2009, this debt brake limits federal government structural deficits to 0.35 percent of GDP, adjusted for economic cycles, and effectively prevents Germany’s sixteen states from having any deficits.

It can be temporarily suspended when a country is faced with a natural disaster or national emergency. The program was suspended during the 2020 coronavirus outbreak and remained inactive after Russia’s full-scale invasion of Ukraine, as well as huge cuts to Russian gas exports.

Lindner stated that the ruling of the court had provided “legal clarity” on how to handle special funds, such as the KTF, which have been stocked up with emergency borrowing. The government is now “drawing conclusions” from the ruling.

He stated that he and Scholz, as well as Robert Habeck, the deputy chancellor of the economy and deputy minister for finance had agreed on a need for a 2023 supplementary budget. He said that the government would not take on new debt, but simply place money spent on Germany’s crises this year “on a solid legal basis”.

Lindner said, “We cannot start discussing 2024 or the years that follow until we are in a constitutionally sound and legal state.”

The Karlsruhe-based Court’s decision focused on the KTF, but raised concerns over the legal status other non-budget funds that the government recently used — in particular the €200bn Economic Stabilisation Fund (WSF).

The lockdowns were implemented at the beginning of the pandemic. It was repurposed after the Ukraine war to help companies and consumers who were struggling with high energy bills.

This year, the WSF has received EUR37bn in withdrawals. These funds were used to fund a cap on electricity and gas prices. The WSF may also face legal challenges due to the verdict of the Constitutional Court, which effectively bans the repurposing Covid funds.

Lindner stated that it was crucial to put the spending on energy price caps on a legal basis.

Officials from the Finance Ministry say that declaring 2023 a state of emergency is not controversial, given this year’s economic conditions — high energy and inflation costs as well as a sharp industrial slowdown.