German Chancellor Olaf Scholz said Tuesday his government would work “as quickly as possible” to resolve the budget crisis, but he gave few details about how he would achieve his goal of promoting clean energy after a court ruling canceled billions of dollars in funding.
As its economy struggles, Germany is now seeking to fill the gap in spending by setting aside renewable energy projects and aid for companies and consumers facing high electricity bills due to Russia’s war in Ukraine.
This cutting policy could further slow down the economy of the world’s worst performing large economy.
German society “needs clarity in difficult times,” Scholz said in a speech to parliament, adding that the government would not abandon any of its goals, which also include promoting investment in factories for computer chips and batteries for electric cars to modernize the economy.
Details about what could be cut for next year are still unclear.
Moreover, a long-term solution could take years, perhaps until the next national elections scheduled for 2025.
This is because the strict legal limits on borrowing outlined in the November 15 court ruling are already enshrined in the German constitution, and a two-thirds majority in parliament is needed to soften them.
Economists say the budget cuts will only add to the challenges Europe’s largest economy faces after Russia cut off supplies of cheap natural gas used to fuel its factories. These Russian policies have put pressure on businesses and raised the cost of living for households that pay more for energy.
Germany’s Constitutional Court has canceled the budget of around 60 billion euros ($65 billion) for this year and next.
The MK said the government cannot divert unspent funds intended for COVID-19 relief to boost wind and solar power projects, help with energy bills and encourage investment in computer chip production.
The German constitution also limits the deficit to 0.35 percent of economic output, although the government can exceed that deficit absent an emergency, such as a pandemic. Some of the disallowed expenses have been used this year.
To comply with the decision, the government amended the 2023 budget by declaring a state of emergency, citing a halt in natural gas supplies in Russia and higher energy prices.
The question now is next year’s budget.
According to Holger Schmieding, chief economist at Berenberg bank, the German government will have to strive to cover a shortfall of around 30 billion to 40 billion euros, plus 20 billion to 30 billion euros for 2025, compared with previous plans. Some spending could be shifted to public-private partnerships or taken over by state development banks.
But efforts can only go so far. Ultimately, spending could be reduced by as much as 0.5% percent of annual economic output for the next two budget years, Schmieding said. (my/hour)