Germany facing €172bn budget black hole

Telegraph

a day ago

Germany's finance minister has unveiled a €172bn (£149bn) budget black hole in the country's accounts.
On Wednesday, Chancellor Friedrich Merz's government told Germans to brace for potentially painful spending cuts after a rise in pensioner payouts and business tax breaks dented public finances.
The country's deficit has also been driven by more spending to service the country's debt pile.
Lars Klingeil, the German finance minister, said: 'This will be one of the biggest domestic challenges that we will have to overcome in the next 12 months.
'Everyone at the cabinet table will have to make savings ... The finance minister's popularity in cabinet won't exactly go up.'
Germany's constitution strictly limits how much the government can borrow to fund its spending, which is known as the 'debt brake'.
Mr Merz has been granted permission from parliament to exempt big increases in defence and infrastructure spending, but the brake still applies to the rest of government spending – meaning painful cuts lie ahead.
Mr Klingeil said that by 2027 there will already be a €30bn hole to fill, because the government had increased tax breaks for businesses, boosted pension payments and was paying more interest on its borrowing.
Like his British counterpart Rachel Reeves, Mr Klingeil has vowed to close the gap by cutting spending and reforming welfare rather than raising taxes.
Also like Ms Reeves, he hopes economic growth will do some of the heavy lifting, delivering higher tax revenue and reduced spending in areas like unemployment benefits.
Figures released on Wednesday showed German GDP shrank 0.1pc in the second quarter, meaning the economy is still smaller than it was before the Covid pandemic.
Infrastructure boost
But many economists expect a growth revival next year when the government unleashes its €500bn infrastructure investment fund and doubles its spending on defence.
'The government will probably be fine this year and next, but in 2027 they're going to have to make a decision, basically, either to cut spending on other areas or to give themselves more leeway by modifying the debt rules again,' said Franziska Palmas, from Capital Economics.
She questioned how much resolve the government had to tackle the shortfall, but said Germany's low debt-to-GDP ratio of 62.5pc made the problem less acute than elsewhere in western Europe.
Observers said the government's big political challenge was that it had softened up voters by promising an infrastructure and defence splurge, making it harder to convince them of the need for austerity in areas like welfare and health.
'Germans do have this big aversion to debt,' Ms Palmas said. 'In surveys that ask, 'What do you think the government should do?' people say, 'Oh, they should cut spending.' But then when the government tries to do it, the electorate gets very angry.'
Mr Merz is from the conservative Christian Democratic Union and Mr Klingbeil is from the Left-wing Social Democrat Party. Ms Palmas said both would be wary of spending cuts playing into the hands of the far-Right AfD party, which poses an increasing electoral threat.