Explained | What is happening with Germany's 2024 budget?

Berlin: German Chancellor Olaf Scholz, Economy Minister Robert Habeck and Finance Minister Christian Lindner resumed talks on Tuesday to find an agreement on the 2024 draft budget after a constitutional court ruling threw their financial plans into disarray. Here are some of the questions raised in the four weeks of negotiations:

How big is the funding gap?

Finance Minister Lindner of the fiscally hawkish Free Democrats (FDP) estimated Germany faced a funding gap of around 17 billion euros ($18.27 billion) in a budget of around 450 billion for 2024.

What are options for filling the hole?

Two clear options are increasing taxes and cutting spending. Lindner has ruled out tax hikes and suggested welfare cuts, while Chancellor Scholz has said there would be no cuts to social benefits.

Another option would be suspending the debt brake, which restricts the public deficit to 0.35 per cent of GDP, for the fifth consecutive year.

Lindner is reluctant to agree to another suspension in 2024, while Scholz's centre-left Social Democrats (SPD) and the Greens have called for suspending the debt brake to allow more spending.

Support is also growing for reform of the brake, even among conservatives, whose legal complaint prompted the court ruling.

What caused the budget gap?

Germany's constitutional court ruled on November 15 that the coalition government's decision to re-allocate 60 billion euros of unused pandemic emergency funds to its climate and transformation fund was unconstitutional.

The three coalition partners agreed on the transfer in December 2021 to make the most of a temporary, pandemic-related suspension of borrowing limits in the Constitution.

In addition, the government also decided that the funds should count in deficit calculation in the year the money was borrowed, giving it more budget leeway in 2023 and 2024 when most of the spending was expected. That would allow it to conform with the debt limit in 2023, but the court rejected such accounting and argued that spending the funds at a later date would still break the constitutional debt limit.

What will happen from January?

It is already clear that the lower house of parliament, the Bundestag, will not manage to finalise the 2024 budget this year.

From January 1, there will be a provisional management of the budget. Lindner will have a greater role in this because he will have to authorise certain expenditures.

Such provisional budget management means that in contrast to the situation in the United States, a lack of an agreed budget would not lead to a spending freeze in the coming year. Government expenditure would continue and the government has reiterated that salaries, pensions and support programs would be paid.

Has this happened before?

This is not the first time that the budget has been passed later in the year. In 2018, the budget for the year was passed on July 5 after extended negotiations among the new coalition partners following the elections in September 2017.

What are the political implications?

The ruling has heightened tensions in Scholz's already fractious three-way coalition, which has seen support slump since it took over the government nearly two years ago as it tackles a series of crises, in part due to public infighting.