The current 2024 budget law of the traffic light coalition is the framework government policy for 2024, presented in numerical format on 3,232 pages – planned down to the euro in terms of income and expenditure. Accordingly, after 80 hours of deliberation, the Federal Cabinet presented a draft for the 2025 federal budget on July 17, 2024. Before the law is passed – it is scheduled to be passed on December 20 – numerous changes and clarifications will be made in three rounds of deliberations in the Bundestag and Bundesrat.
But the key figures are there: spending of 480.6 billion euros, which is three percent less in real terms than this year; the cuts affect the Foreign Office and the Development Ministry (900 million each); more is being paid to Labour and Social Affairs (3.6 billion), Digital and Transport (2.5 billion), Defence (1.3 billion) and Family (600 million); the debt rule is just formally being complied with with new debts of 43.8 billion euros.
One critical comment: The draft is a reflection of the coalition itself. Despite the declared “military turning point” and growth initiative, the governing parties cannot find the strength to redirect spending in this direction due to the diverging goals. Instead, there is the lowest common denominator, “petrification” and constitutional concerns.
Federal Audit Office criticizes wrong incentives in the federal budget
Example of defence: According to NATO calculations, the two percent target for defence will be met in 2025. However, as the recently published Federal Expenditure Monitor 2024 of the Kiel Institute for the World Economy (IfW; Kiel Subsidy Reports 47/24) for the current year shows, the calculated 2.12 percent of gross domestic product (GDP) shrinks to about 1.5 percent of GDP if one deducts interest payments from the Bundeswehr special fund (775 million euros), pension costs for soldiers (5.8 billion euros), pension payments and allowances for former members of the ministry (1.8 billion euros), the ministry’s personnel and material costs (303 million euros) and expenditure on the Bundeswehr universities amounting to an estimated 200 million euros. Potemkin villages in 2025 too? The statutory social spending and interest burdens continue to grow, the latter due to the interest rate turnaround.
In its required statement, the Federal Audit Office (BRH) criticizes the departure from the benchmark procedure that has been practiced for many years (2011 to 2022) when drawing up the budget. This ties the needs of individual departments to the forecast state revenues and has a corresponding disciplining effect. The financial plan approaches for 2024 that are now being used, on the other hand, “pose the risk of a disorganized budget preparation in which the self-interests of the departments dominate over the overall interest in stable federal finances.” Here, too, orientation towards the past, i.e. a “petrification”.
The 2025 budget draft, which is already being cut to the limit, also features several creative accounting approaches that knowingly accept the risk of a necessary supplementary budget or even increased pressure to subsequently suspend the debt brake, even to the point of constitutional objections. As a placeholder for the principle of hope, 17 billion euros were booked in “global underspending”. Experience has shown that there are unspent budget funds at the end of the year, but not in this double-digit amount.
Constitutionally questionable ideas
Then the debt brake (Article 115 paragraph 2 of the Basic Law) allows for additional debt in the event of economic problems in addition to structural new debt of 0.35 percent of GDP. According to previous calculations, this would be 7.9 billion euros. However, with the help of an adjustment in the calculation method for the economic component, the debt brake could be relaxed by a further 3.4 billion euros in additional credit – with new debt of 43.8 billion euros. The problem for future governments is the control account, which will force today’s excesses in better times to force a stricter application of the debt rule.
In order to reduce the “global spending cuts”, two ideas – which are constitutionally questionable – are being put into play. Firstly, the credit funds from the state development bank KfW that are not used for the gas price cap could be transferred to the new fiscal year for other purposes. In its so-called budget ruling (2 BvF 1/22), the Federal Constitutional Court already prohibited such a transfer from the Climate and Transformation Fund in November 2023. Secondly, additional loans could be taken out to replace subsidies for infrastructure investments by Deutsche Bahn and Autobahn GmbH, which are currently a burden on the budget.
Draft reflects mutual political blockade
With the same goal, one could increase their equity capital. In purely formal terms, the federal government would receive an asset (equivalent value), so that this would be considered a permitted financial transaction. The problem with this is that the investments are likely to be a loss-making business, which ultimately makes the loans non-repayable or consumes the equity capital. This would turn the loans into subsidies, just at a later date. The government is planning a further burden shift of two billion euros by cutting subsidies to the pension insurance system to the detriment of contributors for 2025 to 2027.
The policy of muddling through will become apparent to society and future governments as grossly negligent from 2028 onwards. Annual repayment obligations from the Corona emergency loans relevant to the debt brake and the gas and electricity price brakes (540 billion euros, annual repayment 17.4 billion euros), the Bundeswehr special fund (100 billion euros) and the EU joint debt (a share of around 22 percent of the 812 billion euros in “NextGenerationEU” loans) will burden the credit scope from 2028 into the 2060s.
What would be advisable? Firstly, a reduction in subsidies: create transparency, early announcement, “lawnmower method” – the same percentage cut, new subsidies only with an expiry date. Secondly, legal reforms that affect revenue and expenditure: increase the retirement age, facilitate genuine skilled immigration, strict refugee restrictions, reform of the citizen’s income. In contrast, every government will prefer the soft route: devaluation of debt through inflation. Even a four percent inflation halves the real value of loans every 17.5 years.
JF 33/24
