Germany to breach balanced budget rule in 2021

Germany will once again abandon its balanced-budget policy in 2021 to help pay for massive stimulus measures aimed at steering the economy through the coronavirus pandemic, its finance minister said Wednesday, September 23.

Europe’s biggest economy plans to borrow 96.2 billion euros ($112 billion), ditching the country’s constitutionally enshrined debt-brake rule, due to an “exceptional historical situation,” Olaf Scholz said after the Cabinet approved his budget.

“We are acting decisively, even if it costs a lot of money – doing nothing would be much more expensive for our country,” he said.

Scholz, who is also running to succeed Chancellor Angela Merkel in next year’s general election, added he expects to reinstate the no-new-debt rule in 2022.

Germany had come into the pandemic with a well-endowed war chest, following several years of strong surpluses amid record low unemployment.

But the government’s room for maneuver is shrinking, as tax intake will come in below expectations with the economy taking a hard knock during the crisis.

“We’re not going to save during the crisis,” said Scholz.

The budget agreed by the Cabinet today means that compared with previous plans, additional expenditure for next year is around 47 billion euros, and 91 billion euros in total by 2024.

‘Financing economy on credit’

The devastating impact of the pandemic has forced Merkel’s government to abandon its years-long aim of running a “black zero” balanced budget, a policy introduced at the height of the financial crisis in 2009.

Written into the constitution, a slightly less stringent so-called “debt brake” limits the federal budget deficit to 0.35% of gross domestic product (GDP).

The German reluctance to spend was in the past years a bugbear for its allies including France, which had repeatedly urged the European heavyweight to invest more and stimulate growth in the bloc.

Faced with the pandemic, Merkel’s government has finally relented.

Berlin will already borrow 218 billion euros in 2020, as Merkel’s right-left coalition has pledged more than a trillion euros in aid to shield German companies and workers from the virus fallout, including through loans, grants, and subsidized shorter-hours programs.

The budget will prioritize health protection, support for the economy, and securing employment, Scholz said.

Debt will this year rise to 75% of GDP, well above a European Union ceiling of 60%.

The extra spending has raised eyebrows in some quarters, with the pro-business FDP opposition party on Friday, September 18, criticizing Scholz’s spending plans, accusing him of electioneering ahead of next year’s polls.

“We can’t keep financing our economy on credit,” said the FDP’s Christian Duerr.

The German economy has done relatively well during the pandemic compared to its European neighbors, despite being predicted to contract by 5.8% in 2020, the deepest slump in its post-war history. The finance ministry expects it to rebound by 4.4% in 2021. – Rappler.com