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September 24, 2020

Europe

GERMANY: Budget 2021 – A glimpse at the fault lines of post-Merkel politics

BY Carsten Nickel

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Chancellor Angela Merkel’s cabinet has signed off on the draft budget for 2021 as well as the medium-term fiscal plan until 2024. As national debt is expected to re-increase to around 80% of GDP, and the constitutional “debt brake” will be paused for another year, the fiscal debate is likely to feature prominently in next year’s Bundestag campaign.

Next year’s budget envisages new debt of some EUR 96bn. In its longer-term projection, the government plans to return to compliance with debt rules as of 2022, progressively lowering the amount of new borrowing. Central to this is the plan to utilize some EUR 48bn remaining in the migration emergency fund set up after the summer crisis of 2015. In line with the support and stimulus packages already agreed, EUR 55bn in investments are envisaged for next year, and EUR 48bn annually thereafter.

When the Bundestag examines next year’s budget, it will be Merkel’s final appearance in the general debate that is led annually over the chancellery’s accounts (although this item is only a tiny fraction of the overall budget). In charge of the budget is her Finance Minister Olaf Scholz. Following his nomination by the leaders of the Social Democrats (SPD), he is, for now, the only declared contender for Merkel’s succession in next September’s Bundestag election. Scholz attempts to step into Merkel’s footsteps at the pragmatic center, offering substantial spending and investment in times of crisis, combined with the promise of a return to sound public finances beyond 2021.

However, the level of new borrowing in 2021 is being held below the mark of EUR 100bn only thanks to an agreement between the finance and health ministries about funding the rising costs for the medical fight against the pandemic. To keep transfers from the federal budget to health insurance funds at a mere EUR 5bn – despite a hole in these funds of some EUR 16bn – contributions will be increased, and the funds’ reserves will be tapped. This incident has raised the question of whether past the 2021 elections larger-scale tax increases might be inevitable.

Commentators have pointed to structural, pre-pandemic holes in the budget. Over recent years, the grand coalition has spent on everything from infrastructure and housing to green initiatives, families with children, and defense. A new solidarity pension is intended to be financed with the proceeds of an EU-wide financial transaction tax which has, however, not yet seen the light of the day. Instead, the migration emergency fund was tapped already last year.

Behind all this lies the much bigger political question of the future role of the state in the provision of public services, as well as how to fund them going forward. This could be a central fault-line for post-Merkel politics, amid looming questions over Germany’s growth model in a world of trade tensions, reshoring initiatives, and ever-increasing pressures to tackle climate change.

Scholz’s budget reveals his intention to revive the center-left coalition of middle-class and lower-income voters, combining a more active role for the state with an overall promise of fiscal moderation. In contrast, the leadership question in Merkel’s Christian alliance (CDU/CSU), the Greens’ preferences and, therefore, the outlook for the party and personnel composition of the next government, are all still very much in flux.