05 Jul 2024, 15:07
Benjamin Wehrmann

Germany's coalition agrees 2025 budget with “record” climate and energy investments

Lindner, Habeck, and Scholz (left to right) presenting the agreement to the press. Source: ZDF (screenshot)
Lindner, Habeck, and Scholz (left to right) presenting the agreement to the press. Source: ZDF (screenshot)

Months of negotiations among the parties in Germany’s governing coalition about the country’s 2025 budget have ushered in “record investments” into renewable power, industrial decarbonisation, electric mobility and a faster transition in the heating sector, chancellor Olaf Scholz and his cabinet colleagues have said. Brokering a budget for 2025 had been made more difficult by the constitutional limit on new borrowing, which had blown up funding plans made by Scholz’s government after a seminal ruling last year. Yet, the chancellor and his ministers for the economy and for finance all said that they had managed to agree a budget that avoids painful cuts while putting the country on track to leave its current financial woes by embarking on a reinvigorated growth path backed by efforts to achieve greenhouse gas neutrality. Observers immediately voiced doubts whether this upbeat interpretation reflected the deal's true impact.

The parties in Germany’s governing coalition have reached an agreement on the country’s 2025 budget after months of intense negotiations that were complicated by a ruling of the country’s highest court late last year declaring billions of euros earmarked for climate and transformation projects unlawfully booked. At the same time, the three parties’ representatives also agreed on an amended 2024 budget. Chancellor Olaf Scholz of the Social Democrats (SPD), together with economy minister Robert Habeck of the Green Party and finance minister Christian Lindner of the pro-business Free Democrats (FDP), agreed to adhere to the so-called ‘debt brake’ that puts a limit on new government borrowing but also jointly decided on a “growth package” that is meant to provide stimulus to an economy pummeled by consecutive crises.

The package is designed to use the country’s decarbonisation efforts as a lever for industrial recovery. It will include a wide range of measures and investments in climate and energy policy, such as a renewed support mechanism for electric mobility, tax write-offs for decarbonisation investments for companies, support for public transport, heating and buildings as well as reduced bureaucracy, the government members said.

The budget agreement will “create security and stability at a time that is marked by instability and insecurity,” Scholz told journalists at a press conference. Russia’s war on Ukraine, climate change, and the economic transformation towards climate neutrality and the “full transition” of the energy system towards renewables and hydrogen are among the factors contributing the most to citizens who feel uncertain about their future, the chancellor argued. While populist forces seek to exploit these tendencies by proposing simple solutions, responsible government action would have to deliver more than that, Scholz said. “We don’t need a policy of either-or, but one based on ‘as-well-as’,” the chancellor argued. This meant, for example, that the country must aim for “modernisation of its industry as well as affordable energy prices,” or investments as well as solid budgeting, he added.

A ruling by Germany's highest court in November 2023 declared an integral part of the government's funding plan for climate and energy programmes unlawful, dealing a major blow to Scholz’s coalition. However, the agreement did not include legal backdoor arrangements to bypass the debt brake by declaring another emergency, an option that had been chosen to finance national response measures to the coronavirus pandemic with money outside of the official state budget, the government member said. Scholz’s government had initially sought to rededicate about 60 billion euros of unused funds from this emergency budget in the so-called Climate and Transformation Fund (CTF), spread out over several years -- an approach that the constitutional court said violated the terms of an emergency brake measure. The government instead would have to integrate long-running transformation projects into the regular budget planning, the judges ruled at the end of 2023, leaving it with difficult decisions on how to bridge the gap.

While Scholz after the ruling had said the government would continue to pursue its green transition plans despite the budget crisis, he has also recently defended planned austerity measures that research institutes, industry associations and environmental groups have warned would hit the country's energy transition. Before the turn of the year, his government cut the special climate fund by 45 billion euros until 2027 in order to make the budget comply with constitutionally enshrined limits on borrowing.

"This is not an austerity budget," treasurer says

Scholz said the agreement reached by the party leaders this week will now be further debated in parliament before the treasury can adopt the official budget, which is scheduled for 17 July. The chancellor said the agreement would entail “record investments” in key climate and energy areas, such as renewable power installations, the decarbonisation of industry or efficient building modernisation. New borrowing would be allowed especially for funding renewables through the Renewable Energy Act and for social security transfers – “within the debt brake’s limits,” he added. The chancellor stressed that the prolonged negotiations had allowed each party in the coalition to find its respective positions represented and would ultimately strengthen his coalition, also with a view to the 2025 general elections. “Germany has to be an anchor of stability in Europe at this time and we must not be busy only with ourselves,” Scholz argued.

Finance minister Lindner said solid budgeting remained a cornerstone of stability for the country and agreed with Scholz that the negotiations in which “every stone in the budget had been turned upside down” had helped to strengthen the coalition’s internal cohesion. According to him, the agreement signalled Germany’s entry into “an economic turnaround” and enabled the government to deliver on citizens’ expectations for the state to fulfill its duties, not least regarding urgently needed climate action and energy transition measures.

The FDP leader said the agreement on the amended 2024 budget included total expenditures of 489 billion euros and investments worth 52 billion euros, while borrowing would amount to 50 billion euros. For 2025, the total budget volume would be 481 billion euros, investments would amount to 57 billion euros and new borrowing to 44 billion euros. The finance minister explained that, in addition to money already earmarked for investments in the 2025 budget, the dedicated CTF funding would bring in another 34 billion euros, while other sources of funding outside the regular budget would raise the total amount available for investments to about 100 billion euros. The increase in expenditures booked as investments would make clear that “this is not an austerity budget,” Lindner said, even though the treasury had to cope with lower tax income, higher expenditures caused by low growth, such as social security transfers, and effects stemming from energy markets, for example due to lower energy prices piercing a hole into renewables funding. The government’s expectation would be that the measures contribute to stabilising state earnings again soon, Lindner added. “I’m confident that we will not have to amend the budget next year.”

Economy minister Habeck said the agreed investments are expected to lead to a 0.5 percentage point increase in growth in 2025, equaling roughly 26 billion euros. The spirit that had guided the negotiations for him had been “a trinity of economy-climate-children,” the minister said. Habeck said the agreement did not entail any substantial cuts to support the decarbonization of the heating sector, although the government would have to make sure that this would be covered by commensurate higher earnings.

"Financial patchwork quilt" no replacement for true reform, NGO says

At the press conference, Habeck also said the government agreed to consider a reduction in grid fees and to find a way to keep them more stable in the long run. This would include the possibility to spread the repayment of investments over several decades, which would better reflect the fact that investments into the grid would pay off over a period of 30 or 40 years. Habeck said the switch in renewables funding, from a system based on a surcharge on power customers towards one where operators receive guaranteed remuneration directly from the budget, had marked one of the single largest cost relief measures of the past years. It reduced the average bill by 6.5 cents per kilowatt hour and cut total costs for customers by 20 billion euros.

He added that a new write-off mechanism for companies would deliver a renewed “push” for the rollout of electric vehicles that the German automotive industry is eagerly waiting for. At the same time, a restrained national interpretation of the EU’s Supply Chain Law would give companies further leeway in overcoming the current difficulties.  Recalling the role the budget negotiations had played in German politics in the past months, Habeck stressed that “the budget is not the centre of the world,” pointing at multiple international crises and especially political developments in allied countries, such as France or the United States. “Europe will have to become more independent,” the minister stressed.

First reactions to the budget agreement painted a less upbeat picture regarding the funding deal’s impact on government spending in key areas. Moritz Schularick, president of the Institute for the World Economy (Ifw) said the budget agreement has turned out to be a compromise which "does not do justice to the most pressing challenges facing the country and Europe. Martin Kaiser, head of NGO Greenpeace Germany, said the deal offered no real answers on how to tackle the big issues of the future. "Instead of a financial patchwork quilt, we need the necessary room for manoeuvre, for example by reforming the debt brake, in order to create a secure ecological and stable economic future," Kaiser argued. 

However, energy industry association BDEW welcomed the budget deal. The lobby group's head Kerstin Andreae said that important elements included the focus on security and planning security for investments needed, also in the energy industry. "The energy industry is prepared to invest large sums of money, including in the expansion of renewable energies, the expansion and conversion of grid infrastructures, the expansion of the domestic hydrogen economy and the decarbonisation of heating and transport," she said. Renewable energy industry association BEE said that the budget agreement showed that the government is "expressing its clear intention to further strengthen the importance of renewables for energy and supply security and for meeting climate targets."

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