December 1, 2023
German budget crisis deepens with freeze on finances this year

(Bloomberg) — Germany’s budget crisis deepened after the Finance Ministry imposed a freeze on emergency spending in response to last week’s ruling by the country’s top court.

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Chancellor Olaf Scholz’s governing coalition is struggling to process the implications of the Constitutional Court ruling, which calls into question the financing of hundreds of billions of euros in special funds that are not part of the regular federal budget.

The Finance Ministry in Berlin on Monday froze almost all new spending authorizations for this year as it tries to identify the broader and long-term impacts, according to government officials, who asked not to be identified in line with briefing rules.

He said existing liabilities would be honored but new commitments could be unblocked only in exceptional cases. The decision applies to all federal ministries, with only both houses of parliament and constitutional bodies such as the Constitutional Court being exempted.

Judges ruled on Wednesday that unused loan authorities earmarked to combat the pandemic cannot be transferred to a fund for initiatives such as green manufacturing and the expansion of solar power.

Read more: German economy chief warns of major shock from budget decision

According to Economy Minister Robert Habach, the decision is also likely to affect other special funds, including one that pays for measures to ease the burden of high energy prices on households and companies.

If officials conclude that the decision applies more broadly, as expected, Finance Minister Christian Lindner will have to retroactively account for at least €30 billion of new debt in the revised 2023 federal budget, people familiar with the discussions said. told Bloomberg on Monday.

As a result, he will be forced to abandon his plan to reinstate constitutional rules limiting new borrowing known as the debt brake, a key policy of his pro-business Free Democratic Party.

Germany has 29 such off-budget funds worth about €870 billion, although the €100 billion pot for military spending is not expected to be affected because it is written into the constitution.

Budget lawmakers are due to finalize next year’s federal budget this week and are meeting with experts in Berlin on Tuesday to discuss the court’s ruling.

–With assistance from Michael Nienaber.

(Updated with additional information starting in first paragraph)

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