EUROPEAN FISCAL: DE 2025 Budget Gap Grows; Political Risk Is Rising

MNI (LONDON) - For the 2025 federal budget, the revised tax estimates mean that the prevailing funding gap grows to the high single-digit Ebln range according to the finance ministry (vs 'mid' single-digit Ebln range previously). To us, after some risks we've flagged on prior calculations have materialized, the gap estimate now appears plausible - but comes with rising tensions.

• We do think it is more likely than not that the gap will be plugged somehow. Expenditure cuts generally appear more likely than tax hikes but there are little suggestions on the table the traffic light coalition could easily find consensus on.
• Two alternatives remain but we see as less likely: suspending the debt brake for 2025 (coalition unlikely to find consensus on) or the government falling apart altogether (polling numbers suggest little to be gained from that).
• Political risk is nevertheless rising. Ministries / the chancellor's office led by different parties of the coalition have initiated a set of 'industry summits' and a 'modernisation agenda' in the last couple of days but without aligning these internally which has caused some tension. 

In detail, the funding gap calculates as:

• Draft budget planned revenue of E418.3bln included E14.2bln provisions for higher revenue vs the May tax projections on the back of a) stronger economic activity following the 'growth initiative' package (which is only partially implemented yet, and growth surprised to the downside) as well as b) lower EU-transfers (which are netted out from revenue). Of these E14.2bln, only E0.7bln materialized (mostly driven by lower EU-transfers) - E13.5bln less than planned.
• Almost in line with earlier reports ('Debt Brake 2025 Net Issuance Allowance To Raise by E5.2bln' - MNI, Oct 11), the cyclical component of the debt brake allows E5.4bln of higher 2025 net issuance on the back of weaker growth. E500mln of this was provisioned for in the draft budget - E4.9bln remain to be deducted from the funding gap.
• E7bln of subsidies becoming free 2025 following the "delay" of Intel investment plans appear now likely to be fully used to also reduce the funding gap (as we've speculated before: 'Delay of Intel Inv'ment Subsidized With E9.9b Shouldn't Impact Issuance' - MNI, Sep 17).
• With some unconventional accounting measures having to be pared by E2.4bln (we've seen the risk that these might turn out being too "optimistic": 'German 2025 Budget Seen As Market-Friendly But No Major Breakthrough' - MNI, Jul 8), and some individually smaller additional alterations, the gap in the mentioned high single-digit Ebln range remains.

The finance ministry will provide a more precise gap estimate "over the next couple of days". The 2025 budget is scheduled to be finalized by November 14 and passed in parliament on Nov 29.