Germany faces €31 billion budget cut, triggering coalition infighting

After a decade of spending increases, the German government on July 5 adopted plans to cut its budget for next year by €30.6 billion, affecting areas from health to childcare and public transport — sparking fierce political battles within the governing coalition and across the political divide.

Ballooning public debt from the coronavirus pandemic and the energy crisis triggered by Russia's war in Ukraine meant that drastic cuts were now unavoidable, Finance Minister Christian Lindner said. He insisted the country would return to stricter fiscal policies that respect the country's constitutionally enshrined debt brake that limits spending, Politico reports.

"We are only at the beginning of the fiscal turnaround," Lindner said. "We need to free the state from debt without burdening people and businesses with more taxes."

Declining tax income and data last month showing that Germany has fallen into recession have further reduced Lindner's room for manoeuvre. The cuts will affect all government ministries except those of defence and labour and welfare.

The plans have already led to fierce rows between politicians from the three-party ruling coalition of Chancellor Olaf Scholz's Social Democrats (SPD), the Greens and Lindner's Free Democratic Party (FDP).

Scholz came out fighting on July 5.

"The budget is of course challenged by the fact that many have become accustomed in recent years to the large spending," he told lawmakers in Berlin. But "we will now again draw up budgets that do not attempt to combat crises with these additional credit-financed funds, but that are geared very specifically to the future of our country.”

“Brake on the future”

Labour unions criticized the proposals. Lindner’s insistence on returning to the debt brake, which restricts borrowing to a fraction of GDP, is putting "a brake on the future," especially at a time of multiple challenges such as the green transition and social issues, Stefan Körzell of the German Federation of Trade Unions, said.

The cuts are much bigger than an initial figure of €18 to €22 billion that the Greens Economy Minister Robert Habeck mentioned last month.

Nevertheless, the government still plans €16.6 billion of new debt next year — the maximum amount that is allowed under the debt brake. Parliament will be asked to approve next year's budget in the fall.

The Greens are particularly upset about budget cuts imposed on Family Minister Lisa Paus, which they say are responsible for the government having to cut back on Germany's generous allowance that permits couples to take up to 14 months of parental leave.

The dispute escalated so much in recent days that lawmakers from the Greens and FDP shared confidential government letters on Twitter in an effort to show who should be blamed for the cuts. For his part, Lindner took to Twitter to tell Paus that she could also have made savings in other areas.

While only highly paid households with a yearly income over €150,000 would be affected by the cuts and will no longer have access to the childraising allowance, the Greens are critical because they fear this will reduce the number of men with high salaries taking a break from work, putting a larger burden of childcare back onto women.

The opposition also attacked the plan. Mario Czaja, secretary-general of the centre-right CDU, spoke of a "slap in the face of working parents that creates de facto a two-class society among hard-working families."

But Scholz stressed his government remains committed to implementing one of the Greens' key projects — a basic allowance for children from low-income households, slated to be introduced in 2025 but with financing still uncertain.

Another sector heavily affected is health. Karl Lauterbach, the health minister, announced his department would scrap a state subsidy for long-term care insurance.

Education, trains, defence

Other areas affected by severe spending cuts include education, which will reduce the government's ability to finance student funds, and transport, meaning that Berlin can provide less money for renovating the country's ailing railway network.

Germany's railway operator Deutsche Bahn has said that it needs €45 billion of fresh money by 2027 for upgrades and to prepare for increased passenger numbers — a government objective as Germany wants to encourage rail travel to cut back carbon emissions. However, Lindner's budget plans only foresee about €12 billion for the years 2024-2027.

Although the government plans to tap a special climate fund to pump more money into the rail sector, it's unclear whether that fund will have sufficient financial power to fulfil Deutsche Bahn's needs, given that it's also used to pay for other needs such as a €10 billion subsidy for a new Intel chip plant in eastern Germany.

Germany's defence budget will be spared from cuts next year and will increase slightly from €50 billion to nearly €52 billion. However, that increase is forecast to cover only the increased costs due to inflation and it won't be sufficient to pay for urgently needed investments to boost Germany's military capabilities amid Russia's war in Ukraine and Scholz's proclaimed shift in foreign and defence policy, the Zeitenwende.

For the moment, Scholz said that the government would tap a €100 billion special fund for military armament to pay for those investments and fulfil NATO's goal of spending at least 2 per cent of economic output for defence as of next year.

Yet, it's still unclear how Germany wants to permanently fulfil the NATO 2 per cent goal once that special fund begins to run dry as of 2026.

"Please ask [Defence Minister Boris] Pistorius, how he wants to keep NATO commitments" with these budget plans, said Christian Mölling from the German Council on Foreign Relations.

Scholz argued in Parliament that in the longer term, “we have to finance these [defence] expenditures from the [regular] budget.”