Germany freezes new budget spending after top court ruling

Germany freezes new budget spending after top court ruling

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Germany has imposed an across-the-board freeze on new spending commitments, in a move that has exposed the depth of the budgetary crisis triggered by last week’s bombshell ruling by the country’s constitutional court.

Officials said the €8bn in military aid that Germany had pledged to Ukraine in 2024 would be affected by the freeze.

The court blocked a government move to transfer €60bn of funds originally earmarked for tackling the Covid-19 pandemic to projects designed to modernise the German economy and fight climate change.

Ever since, government ministers have been scrambling to find ways of plugging the €60bn hole that the ruling has opened up in Germany’s public finances, with the three parties in Chancellor Olaf Scholz’s unruly coalition deeply divided over how to solve the crisis.

The finance ministry has now responded to the court’s ruling by ordering a freeze on most new spending, in a sign of how seriously Scholz’s team is taking the judgment and its implications for government policy.

The freeze was ordered by Werner Gatzer, state secretary at Germany’s finance ministry, in a letter to 17 ministries seen by the Financial Times. In it, he said the constitutional court verdict meant the “whole situation with the budget must be reassessed”.

Gatzer said that all “commitment appropriations” for the remainder of the 2023 budget “are to be blocked, with immediate effect”. The German parliament and the top court are exempted from the freeze.

A government official stressed that “existing spending obligations would be honoured — but we just won’t be taking on any new ones”. She said it wasn’t a “spending freeze” and in exceptional cases, “appropriations can be unblocked”.

A source with knowledge of Germany’s military budget said the freeze could affect several of the defence ministry’s multiyear projects, including the €8bn it had planned for Ukraine in 2024. “We are currently checking to see whether these funds can be released,” the person said.

On Tuesday, defence minister Boris Pistorius visited Kyiv and said that immediate funding totalling €1.3bn would be disbursed. Ukrainian officials recently expressed concerns that uncertainty about continued assistance from European and US allies had put their country’s “macro-financial stability” at risk.

The focus of the constitutional court’s ruling was the Scholz government’s “climate and transformation fund” (KTF), an off-budget vehicle used to channel everything from subsidies for semiconductor and battery factories to investments in Germany’s creaking railway network.

Shortly after coming to power in 2021, Scholz’s government decided to allocate €60bn of unspent coronavirus funds to the KTF, which is one of 29 such vehicles held off the government’s balance sheet, totalling about €870bn.

One of the largest of these is the €200bn Economic Stabilisation Fund or WSF. Originally set up during the pandemic, it was repurposed after Russia’s invasion of Ukraine to protect consumers from higher energy costs. It has been used to finance a cap on electricity and gas prices.

Yet the WSF has also fallen victim to the constitutional court’s judgment. In a further letter from Gatzer to the 17 ministries seen by the FT, he said the borrowing authorisations for the WSF “can, according to the current legal situation, no longer be used”.

He said all spending set out in the WSF’s 2023 budget that had not yet been utilised was to be blocked “with immediate effect”. A finance ministry official said payments for the gas and electricity cap would not be affected.

Asked about Gatzer’s spending freeze letter, Kevin Kühnert, general secretary of Scholz’s Social Democratic party (SPD), said it didn’t mean the state had stopped spending money.

“It means we’ve determined that new commitment appropriations — that is, new spending commitments related to the future — are not possible for the moment,” Kühnert told public broadcaster ARD.

“As long as the government hasn’t figured out how [the €60bn in lost revenue] can be offset, this is normal procedure under the federal budget code,” he added.

Ministers are split over how to respond to the constitutional court’s ruling. Some in the government want to extend a suspension of Germany’s “debt brake”, which tightly restricts new government borrowing.

But the fiscally hawkish Free Democratic party (FDP), which controls the finance ministry, opposes a further relaxation of that rule, which was paused during the pandemic and the 2022 energy crisis but came back into force this year.

Some in the FDP want the government to slash spending to plug the gap — an approach that its coalition partners, the SPD and Greens, have rejected.

Kühnert told ARD that the SPD had not been elected to “make €60bn of budget cuts with the lawnmower, slash welfare spending, give up on transforming our society and stop supporting companies that are competing internationally and so lose jobs in Germany”.

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