German court to make key ruling on budget manoeuvre By Reuters

By Maria Martinez

BERLIN (Reuters) – Germany’s Constitutional Court is due to rule on Wednesday on the legality of the 2021 coalition government’s decision to reallocate 60 billion euros ($64 billion) of unused pandemic-era debt to its climate and transformation funds.

It will be a key decision as it could set a precedent for Germany’s fiscal responses in future crises, while also potentially triggering tensions within the coalition during a key week for negotiations budgetary.

The budgetary maneuver agreed in December 2021 by the center-left Social Democrats (SPD), the pro-spending Greens and the fiscally cautious Free Democrats (FDP) in their coalition agreement, allowed the parties to make the most of part of a temporary suspension linked to the pandemic. borrowing limits in the constitution.

In addition, the government changed the accounting principle whereby borrowing was charged against the budget deficit of the year in which the borrowing was actually made. Therefore, the transfer of 60 billion euros was only counted as a deficit in 2021, but not in the years 2023 and 2024, where most of the spending was supposed to take place.

This allowed German Finance Minister Christian Lindner to return to the debt brake rule this year. The rule limits the German public deficit to 0.35% of GDP but was suspended due to the pandemic from 2020 to 2022.

In response to the coalition government’s decision, the opposition filed suit in the Constitutional Court, claiming the law circumvented the debt brake.

“If the coalition were allowed to continue this practice, each finance minister could in the future accumulate unlimited debts during a crisis year, but then use this money for completely different purposes and for an unlimited period than the others years,” said Mathias Middelberg, of the CDU/CSU parliamentary group.

“The German Constitutional Court could issue a historic ruling affecting the government’s fiscal space immediately and in future crises,” said Christian Schulz, an economist at Citi.

A decision against the government would mean it would have to find money for the climate fund elsewhere, which would be a challenge in the current tight budget environment and amid discord within the coalition.

Germany’s 2024 budget and financial plans through 2027 are due to be finalized on Friday, as Europe’s biggest economic power cuts spending that has increased in response to COVID-19 and the war in Ukraine.

The Constitutional Court’s ruling could put additional pressure on budget deliberations.

“The government may have to reduce its deficit spending plans by 40 billion euros for 2024, the equivalent of 1% of annual GDP, and by a lower amount for subsequent years,” said the Berenberg economist , Salomon Fiedler.

However, even if the court ruled against the government, it is likely that the required budgetary adjustments would be much smaller than that, he noted.

“The court could give the government some time to bring its deficit down to the debt brake level,” Fiedler said.

($1 = 0.9357 euros)