Germany will suspend a constitutional limit on net new borrowing for the fourth consecutive year after Chancellor Olaf Scholz’s government was forced into a radical budget review by a ruling last week from the country’s top court.
Under debt braking rules, structural net debt — adjusted to take into account cyclical factors — is limited to 0.35% of gross domestic product. An increase in net debt is permitted during an economic downturn, but there is less room for additional debt during an upturn.
The November 15 bombshell ruling by the Karlsruhe Constitutional Court called into question hundreds of billions of euros of funding in the government’s special funds – some of them decades old – that are not part of the regular federal budget.
The emergency measure to lift the so-called “debt brake” will be part of a revised budget for 2023 that the Finance Minister plans to make next week, a spokeswoman for his ministry said on Thursday. Due to the court ruling, Lindner must retroactively account for at least 37 billion euros ($40.3 billion) of new off-budget debt intended to ease the burden of high electricity and gas prices on households and the companies.
It is a humiliating descent for the president of the Free Democratic Party, who insisted on restoring the debt limit after it was suspended for three years due to the pandemic and energy crisis and sees himself as a guardian of Germany’s fiscal stability.
German debt extended declines after Bloomberg reported on Thursday that the government planned to raise the debt limit, raising 10-year yields by up to six basis points to 2.62%.
In addition to cushioning the impact of high energy costs, Scholz’s administration has set aside money from the various funds for initiatives including greening production, expanding renewable energy and charging infrastructure, as well as subsidies for battery installations and semiconductors.
Using the special funds initially allowed Lindner to fulfill a commitment to reinstate the debt brake for the regular budget this year, while directing money to support the renewal of Germany’s industrial base and help reduce harmful emissions.
Lifting the debt brake again is the second major step the government is taking after freezing virtually all new spending authorizations for 2023 as it assesses the broader, long-term impact of the court ruling.