Germany solves budget spat by cutting climate fund and increasing energy taxes

The German government has resolved its internal disagreements on how to deal with a €60 billion hole left in the government’s finances after a ruling by the country’s constitutional court, announcing a mix of expenditure cuts and additional sources of income.

The constitutional court in November strengthened the ‘debt brake’ set in the German constitution, by limiting the additional debt that can be justified with an “emergency situation” for spending in that year that is directly linked to the emergency.

As a result, it cut €60 billion off a “climate and transformation fund”, which is meant to finance investments into climate protection as well as industrial subsidies, such as for chip production.

“In light of the ruling, we have reprioritised the budget within the Federal Government in recent weeks,” Chancellor Olaf Scholz (SPD/S&D) told journalists on Wednesday (13 December). 

“My most important message at the outset: The government is sticking to its goals,” Scholz said, referring to the transition towards climate neutrality and social spending as well as support for Ukraine. “But one thing is clear: we have to make do with significantly less money in order to achieve these goals,” he added.

“Prioritising therefore means clarifying together what we can and cannot afford. It is also about cuts and savings,” Scholz said.

In total, a hole of €17 billion was closed in the regular 2024 budget, using a mix of spending cuts by several ministries and additional sources of income.

In the “climate and transformation fund” (KTF), which is not part of the regular budget, €12 billion of spending will be cut in 2024, and a total of €45 in the years up to 2027. The remaining volume of the fund would be €160 billion for the years from 2024 to 2027, and thus still “very high”, Scholz said.

Among other things, this will be reached by reducing planned subsidies for the solar industry, as well as phasing out a bonus for consumers who buy an electric car earlier than planned, Economy Robert Habeck (Greens) said.

“That pains me,” Habeck said, “but that is the price for maintaining the central components, the pillars of the KTF, the development of the hydrogen economy, the decarbonisation of industry, but also the citizens’ [support] programmes.”

The cuts will also affect a €5.5 billion support planned to relieve consumers from grid fees for electricity, which will no longer be paid in 2024. As a result, electricity prices for consumers will increase by an average 3 cent per kilowatt-hour (kWh), grid operators said.

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New sources of revenue

Alongside the cuts, the government also wants to generate more revenue, by increasing carbon prices on heating and transport fuels higher than initially agreed between government partners. In 2024, the price will rise to €45 per tonne of CO2, from currently €30.

The package also includes a new levy on plastics, which goes back to a deal in Brussels which foresees a payment by member states to the EU based on the amount of not-recycled plastics.

“This is an EU own resource, €1.4 billion, which we are currently paying to Brussels from general tax revenues,” Finance Minister Christian Lindner (FDP/Renew) said.

“We now want to re-finance this and, as provided for in the coalition agreement, we want to use the distributors of plastic to finance this own resource,” he added.

‘Debt brake’: No broad suspension

As regards the ‘debt brake’, which had been suspended from 2020 to 2023 due to the COVID pandemic and the energy crisis, the government decided against declaring another “emergency” for 2024 related to the ongoing war in Ukraine, as previously promoted by leading government party SPD.

The option for “emergency”-related spending will only be used for the reconstruction support for the West German regions affected by the flood in 2021, which adds up to €2.7 billion in 2024.

Aid for Ukraine will, however, be paid out of the regular budget, Scholz said, adding that the support will be maintained “for as long as necessary”.

“If the situation worsens in Russia’s war against Ukraine, for example because the situation on the front worsens, because other supporters reduce their aid to Ukraine or because the threat to Germany and Europe increases further, we will have to react,” Scholz said.

In this case, the government parties would be ready to use the exemption from the ‘debt brake’ by declaring another emergency.

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[Edited by János Allenbach-Ammann/Nathalie Weatherald]

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