MNI INTERVIEW2:Germany Must Trim Spending Vows In Budget Drive

Germany’s new ‘traffic-light’ government will need to sacrifice some of the spending promised in its coalition agreement as it drives to return to a balanced budget from 2023, a senior Finance Ministry official told MNI.

“There are many ideas, but limited financial means,” Florian Toncar, parliamentary state secretary in the FDP-led department said in an interview, citing the need to reduce government borrowing from more than EUR100 billion in 2022 in order to comply with the constitutional debt brake from 2023. “We need to manage the different interests to come to good agreements and solutions. Not everything will be possible. However, the opportunities and burdens should be shared in a fair manner, and I'm optimistic that we will do so.”

Party leaders announced measures in December to modernise German infrastructure, upgrading digitalisation, climate protection and housing, in an agreement supported by Social Democrat (SPD), Free Democrat (FDP) and Green voters. But the degree to which that agenda can be completed will depend on whether money can be found from a much-reduced Federal budget, Toncar said, though he called for income tax cuts for middle earners and said households needed support to cope with higher energy costs.

Government priorities are defined in the coalition agreement and will be subject to negotiations as the ministry looks to present a mid-term finance plan and detailed budget to cabinet on March 9.

DEBT BRAKE

“For the Ministry of Finance, the most important thing is that we will adhere to our clear financial schedule: not more than EUR100 billion of new debt in 2022, which is the figure the former government has already presented,” Toncar said. “From 2023 onwards, the constitutional debt brake will apply again. This is ambitious, but we are ambitious.”

Still, even as the government seeks to save money, it is also exploring ways to lighten the burden of soaring energy costs for consumers and businesses, with budgetary leeway to end the renewable energy levy - the EEG-Umlage, he said. He also called for lower taxes for middle-income families.

“We must speak about the progression of the income tax tariff, which is hitting middle income families quite hard this year,” he said. “We don't have full agreement on that in the coalition so far, but the point of view of the ministry is that we need a fair compensation of the middle income families for this effect.”

Growth, which has recovered more slowly than anticipated a year ago, should pick up in 2022 - albeit to lower levels than previously foreseen - and will stage a major recovery in 2023, but will still require a fresh impulse from the private sector in addition to public investment, Toncar said.

Inflation, which is forecast to run at 3.3% for 2022, off a January high of 4.9%, could also dent growth prospects if left unchecked.

“When it comes to price increases, experts are unsure whether we will see a certain normalisation in the course of 2022 and 2023. However, the underlying factors such as demography, wages, shortfall in the workforce, bottlenecks in delivery chains and transitional investments will persist. Politics and central banks should prepare for that.”

INFLATION

Recent expressions of greater concern about inflation by the European Central Bank are “highly appreciated,” and demonstrate that the issue is being judged more seriously than before, Toncar said.

“Monetary policy cannot address all of the factors driving inflation. But it must remain in the position to react to price increases in a proper way, and this must be an even stronger argument to say governments will work on the stability of the areas they can directly influence.”

While an advocate of emissions trading as a key tool in climate policy, Toncar said heavy industries should receive targeted support for an intermediate period to help them move to carbon-neutral production. But the state should not be expected to pay for every aspect of the transition, he warned, and should instead create a fair environment for markets to develop the right products rather than try to pick future green champions and back them with subsidies.