German govt imposes freeze on spending

Amid a deepening budget crisis, the German government has imposed a freeze on most new spending commitments, citing it as a necessary step in efforts to address the financial challenges faced by Chancellor Olaf Scholz's coalition.

A recent court ruling has thrown the government's spending plans into chaos by blocking the transfer of 60 billion euros ($65 billion) in unused funds from the pandemic toward green initiatives, potentially depriving certain German industries of crucial support and threatening their competitive edge, reported Reuters news agency.

The court's verdict has intensified tensions within the three-way coalition between Scholz's ruling Social Democrats Party, or SPD, the prospending Greens, and fiscally conservative Free Democrats, or FDP, as they try to decide whether to abolish the country's debt brake or curb spending from elsewhere.

The billions in funding had been kept aside to be used for renewable energy subsidies, energy-efficient housing, chip production, and support measures for high-energy companies.

Germany's debt brake policy, implemented in 2009, restricts the country's structural budget deficit to approximately 0.35 percent of its gross domestic product. Critics say it severely hinders Germany's borrowing capacity, prompting the introduction of off - budget funds as a workaround.

The debt brake was temporarily lifted in 2020 amid the COVID-19 pandemic, to provide critical support to companies and the economy, and it was removed again in 2022, due to rising interest rates, inflation, and high energy prices, but was reinstated in 2023 alongside the introduction of alternative funds designated for military and energy-price subsidy purposes.

In a sign of the finance ministry's concern about the potential impact on its finances, a letter from the budget state secretary revealed that future spending pledges across nearly the entire federal budget have been frozen.

State Secretary Werner Gatzer said the finance ministry is freezing spending "in order to avoid further upfront burdens on future financial years".

Kevin Kuhnert, the secretary general of Scholz's SPD, said in a television interview on Monday that the freeze does not affect financial commitments that have already been made.

The measure encompasses all ministries and a 200-billion-euro fund established to aid companies during the pandemic and the energy crisis following the outbreak of the Russia-Ukraine conflict in February 2022.

In an effort to fully understand the implications of the court ruling last week, lawmakers from the Bundestag's budgetary committee conducted a public hearing with legal experts on Tuesday, to evaluate its potential impact, reported Politico.

The effect of the ruling will be immediate, according to Thiess Buttner, a professor from the University of Erlangen-Nuremberg, in a statement delivered to Parliament ahead of Tuesday's hearing.

"There is a need for consolidation in the budget planning for the coming year of 52 billion euros," he said.