Misuse of Germany's infrastructure and climate fund dims growth prospects – advisors

Germany's 500-billion-euro special fund for infrastructure and climate neutrality set up to finance long-term investments in the country’s competitiveness and resilience is “in need of significant improvement” to meet these aims, the Council of Economic Advisors (Wirtschaftsweise) warned in its annual report on economic development. If the government does not ensure that investments made through the fund are “additional and productive,” this could jeopardise the short-term growth potential as well as the country’s long-term debt sustainability, the advisors said. Lower economic growth would make it more difficult to refinance the debt incurred to fill it, with the debt-to-GDP ratio potentially reaching 85 percent in 2035.

The fund was set up to finance new projects for transport infrastructure, energy supply, digitalization, and other projects until 2037. According to the council, it has significant potential to improve the country’s economic prospects. However, its current design and the planned implementation mean that the fund will likely fall short of what could be achieved with more targeted investments. The special fund “should not be used to make room in the core budget for funding questionable measures,” such as a special pension for mothers or increasing the commuting allowance, the advisors stressed with a view to two controversial schemes adopted by the government.

About half of the money from the special fund might not be used for additional investments, but instead to avoid budget cuts elsewhere, economic research institute IW said earlier this week. 

The advisors identified as a main problem that the current investment plans largely replace expenditures from the core budget rather than coming on top of them. Moreover, no mechanisms are in place to ensure that the part of the fund reserved for Germany’s state governments and for the Climate and Transformation Fund is invested in line with clear goals. The council urged the government to introduce better monitoring mechanisms, including a multi-annual financial plan, a central project registry, and an independent monitoring committee. To facilitate oversight, a clear formula for calculating additionality should be agreed and applied universally in the budget, they added.