By Tarik Oran, Team Leader – Germany & Political Consultant
“We support Ukraine in its fight for freedom, for self-determination, for territorial integrity – politically, financially, humanitarianly as well as with weapons. We will continue our support for as long as it is necessary”, stated Chancellor Olaf Scholz in March 2023. When reports emerged in recent weeks that Germany would freeze new military aid to Ukraine in light of a tight budget for 2025, the public outcry was huge, especially in its partner countries. But the budget issue has been one of the main topics in domestic politics in the past months, tracing back to 2023 when the drama unfolded.
The 2023 budget fiasco, when a Constitutional Court ruling blew a 60 billion euro hole in the public finances and plunged the government’s financing framework into turmoil, put enormous pressure on the government to deliver a legally sound budget for the 2025 fiscal year. After countless meetings of the negotiating heads of the three-party coalition, the SPD, the Greens, and the liberal FDP, reached an initial agreement on the 2025 budget on July 5th. The lack of austerity measures in the budget caught fiscal experts by surprise. Federal Minister for Finance, Christian Lindner, who is known for his fiscally hawkish stance on budgeting, announced straight-away that some of the financing tools would need to be further examined. Among the options that were considered und scrutinised in July had included converting the grants of national rail operator Deutsche Bahn and the highway company into loans, as well as using extra funds from state bank KfW.
Two expert opinions unanimously assessed the proposal to reallocate the money left over from the “gas price brake”. Although this would have reduced the budget gap by almost five billion euros, the funds would come from loans taken out by the federal government on the grounds of a budget emergency, which the Federal Constitutional Court had declared unconstitutional in its judgement on the debt brake. The experts also expressed concerns about the granting of loans for the Deutsche Bahn and the national highway company. Lindner’s ministry followed up, assessing that they indeed could not envision a loan, but an increased equity injection for the Deutsch Bahn which would reduce the budget gap by up to 3.6 billion euros. Neither did they see a possibility of a potential loan to the highway company. Chancellor Scholz weighed in and told the press during his holiday, that he believes that strengthening the railway and motorway companies is legally feasible, even after the expert reports on the budget. ‘It made sense to have the federal government’s options for action reviewed by experts to see how Deutsche Bahn and the motorways could be financially strengthened in the budget. The clear result of the legal opinion is that this is possible,’ the Scholz told the newspaper Die Zeit.
After weeks of continued negotiations, the government finally reached a new deal on Friday, August 16th, reducing its 2025 budget deficit target from 17 billion euros down to 12 billion euros. Essentially, the agreement reallocates funds for the federally owned Deutsche Bahn, which will receive an equity injection of 4.5 billion euros, replacing planned subsidies and increasing the government’s permissible new debt by the same amount. Higher payments from the energy company Uniper to the federal budget will also be included and the provision for the loss of tax revenue from the EU energy crisis contribution will be reduced by 200 million euros. The government assumes that the 12 billion euro gap in the budget will further narrow due to favourable economic developments.
The budget by the numbers
The federal government’s draft envisions expenditure totalling 488.61 billion euros for 2025. In the current year 2024, 488.88 billion euros are available. 81.01 billion euros have been earmarked for investments (2024: 70.82 billion euros). As is now quite common, the largest of the 25 individual budgets is the budget of the Federal Ministry of Labour and Social Affairs, with an expenditure of 179.26 billion euros. The budget of the Federal Ministry for Digital and Transport sees the largest increase compared to 2024, rising by 5.22 billion euros to 49.67 billion euros, making it the largest investment budget at 35 billion euros. There is also a significant increase for defence spending. The Federal Ministry of Defence will receive 53.25 billion euros – 1.3 billion euros more than in 2024.
The draft also anticipates net borrowing of 51.3 billion euros. This figure is below the net borrowing permitted under Germany’s debt rule. The federal government expects revenue from taxes and tax-like levies to total 388.45 billion euros – an increase of 13.9 billion euros compared to 2024 (374.55 billion euros). The debt rule has been a highly contested issue in recent months, with both the SPD and Greens demanding a reform to allow for more spending. The FDP and the opposition CDU/CSU remain staunch defenders of the “Schuldenbremse”.
Outlook and Timeline
After the summer recess, the German Bundestag will commence again on Tuesday, September 10th , where the MPs will be debating the government’s draft budget for the first time. The debate in the Bundestag comprises three readings. In the first reading, the Federal Minister for Finance, Christian Lindner, will explain the overall budget in a standalone speech. After several days of debate, where each ministry’s budget will be discussed individually, the draft budget is then referred to the Budget Committee. This is where the actual work and crunching the numbers takes place. The committee’s respective rapporteurs go through each individual expenditure item, scrutinise them with ministry representatives and make their recommendations to the Budget Committee. These recommendations are then discussed in so-called individual budget consultations. Ultimately, the committee submits a modified draft budget to the Bundestag. This new version of the budget is subsequently subject to the second reading in the plenary where further debates between the government and the opposition take place and each individual budget is voted on. In the third reading, the entire bill with all amendments is put to a final vote. The second and third reading usually occur in November.