Germany faces a budget shortfall of €25 billion ($28.6 billion) up to 2023 due to an expected slowing of tax revenues after the government slashed its 2019 GDP forecast to 1.0 percent from 1.8 percent last week.
That comes us a shock after years of easy surpluses as Europe’s largest economy kept delivering growth. As recently as December, the government was squabbling over how to spend the 2018 excess tax proceeds. Now, however, the expected shortfalls are destined to heighten tensions in Chancellor Angela Merkel’s shaky coalition.
Ministries controlled variously by her conservatives and the Social Democrats have been pledging costly spending programs, and the ready availability of cash helped to keep the peace because they didn’t have to argue over money.
That’s about to change. In their coalition deal reached a year ago, the parties agreed not to run up any net new government debt through 2021 and Scholz, a Social Democrat, is determined to stick to that plan, not least to disprove the common prejudice that his party can’t handle money.
“We expect tax revenue shortfalls of around €5 billion per year for the current financial plan,” the finance ministry said in a 22-page document prepared for Finance Minister Olaf Scholz to present to his cabinet colleagues.
Over the next five years, that will create a shortfall of €25 billion compared to previous forecasts. It may not immediately result in a budget deficit, because Scholz could either use existing reserves to cover the hole or reign in spending.
The lower-than-expected revenue will come on top of planned spending increases, for example the billions of euros to help mining regions adapt to the phaseout of coal-fired power generation over the next 19 years. Some €500 million a year have already been set aside for the exit from coal. But a further €1.5 billion will now be needed to cover the €40 billion bill for regional redevelopment agreed last week.
Berlin unprepared for tougher times
The finance ministry paper warns that all spending plans will come under scrutiny to ensure that Germany avoids a budget deficit. To be sure, it’s standard practice for finance ministers to claim empty coffers to strengthen their negotiating positions ahead of budget talks with cash-hungry ministries.
The finance ministry claimed empty pockets a year ago, but the federal government ended up posting a budget surplus of €11.2 billion for 2018, its fifth since 2014 thanks to nine years of consecutive economic growth.
But balancing the budget may really get more difficult from now on, said budget experts. The squabbling is already starting. If you ask the SPD, tax cuts pledged by the conservatives are out of the question now. Conservatives, meanwhile, say the SPD can forget about its plans for automatic pension hikes for low-wage earners.
The budget gap would be even bigger if Scholz were planning to stick to Germany’s international commitments on development aid and military spending. But he isn’t. If he did, he would have to spend an additional €9 billion for each those ministries in 2023 alone.
He’s going to have to dip into the €35 billion in reserves the government has set aside after the 2015 refugee crisis to integrate asylum seekers. Neither he nor his predecessor Wolfgang Schäuble needed to use that money for its intended purpose. Without drawing funds from it now, Scholz would have to save even more.
The opposition said the government had failed to prepare its finance for tougher times. “It’s been clear for years that the surpluses couldn’t go on like this for ever,” said lawmaker Sven-Christian Kindler, a budget expert for the opposition Greens. “But neither Schäuble nor Scholz worked properly on the budget to make it fit for the future.”
Merely preventing further spending
It remains unclear how Scholz plans to close the gap. The ministry paper is vague on this, stating: “New measures can only be tackled via a re-prioritization within the individual plans.” That means that if ministers plan a new program, they will have to cut outlays elsewhere in their department to come up with the money themselves.
The paper mentioned the government’s plans to fund the development of artificial intelligence technologies with outlays of €3 billion through 2025. That money will have to be cut elsewhere. Equally, there won’t be any fresh tax money available for the government’s plan to spend billions on providing schools with broadband and digital equipment in the coming years.
Scholz also plans to freeze spending on civil service staff, curbing the recent wave of new hiring by federal authorities and ensuring that pay rises are financed by existing funds. The problem is that these measures merely prevent further spending — they won’t close the existing holes.
Martin Greive is a Handelsblatt correspondent in Berlin, while Jan Hildebrand leads the publication's financial policy coverage and is deputy managing editor of Handelsblatt's Berlin office. David Crossland adapted this article into English for Handelsblatt Today. To contact the authors: [email protected], [email protected]