German borrowing set to soar as 2021 budget passed

Germany on Friday, December 11, passed a 2021 budget that once again smashes its “debt brake” rule, promising to shield businesses and workers from the economic hit of the pandemic as cases continue to rise.

Chancellor Angela Merkel’s government plans to borrow 300 billion euros ($364 billion) across 2020 and 2021 combined after Berlin pledged more than a trillion euros in aid, including through short-time work schemes and business support.

“The budget is the basis for everyone to be confident that we can provide the necessary economic and social support to get us through this crisis together,” Finance Minister Olaf Scholz told lawmakers. 

The budget for 2021, which passed with 361 votes in favor to 258 against, provides for a total of 179.8 billion euros in new loans and nearly 500 billion euros in public spending.

It means for both 2020 and 2021, Germany will abandon its cherished “debt brake,” a constitutionally enshrined rule that forbids the government from borrowing more than 0.35% of gross domestic product (GDP), before planning to return to no new debt in 2022.

Restrictions to curb the second wave of COVID-19 – including shutting the food-and-drink, leisure, and cultural sectors – continue to burden the economy, which previously pushed Berlin to amplify its aid to businesses.

Yet case rates continue to climb. On Friday, Germany reported a record nearly 30,000 new infections and almost 600 deaths in a 24-hour period.

Now, Merkel is facing calls to tighten restrictions again.

‘Aid can’t be endless’

Despite the “ray of hope” of a vaccine rollout, Scholz said, “we know that…we’re going to be struggling well into next year with the health, economic, and social challenges that are going to follow from this pandemic.”

Businesses hit by the current closures are entitled to claim aid amounting to up to 75% of their revenues for November and December 2019, expected to cost the government some 30 billion euros.

However Economy Minister Peter Altmaier said last week that support for pandemic-hit firms implemented through November and December could not go on “endlessly.”

Nevertheless Altmaier on Friday said he aimed to increase the ceiling for aid from January in the case of a harder lockdown.

Germany’s debt-to-GDP ratio will climb to 70% this year, Germany’s central bank said in a report published on Friday.

But public finances will likely improve as coronavirus measures come to an end, it said.

The government expects the economy to shrink by 5.5% this year, before rebounding by 4.4% next year. – Rappler.com