Budget stand-off pushes German coalition to brink

German ministers are hurtling towards a showdown over how to plug a massive financing gap in next year’s budget, in one of the toughest tests of coalition unity since Olaf Scholz became chancellor.

The deadline for adopting a draft budget for next year in the Eurozone’s largest economy is July 3 — a task not helped by increasing frictions between the three coalition parties in the wake of the European elections.

Finance minister Christian Lindner has demanded big savings across the board to cope with a smaller tax take in Germany’s sluggish economy, which is only expected to grow by 0.3 per cent this year. But he is facing strong resistance from many of the key ministries affected.

“The parties’ positions are essentially irreconcilable and I don’t see yet how we get to an agreement,” said one MP with knowledge of the talks.

The conflict is a huge dilemma for Scholz, who is already reeling from a European election that saw his Social Democratic party (SPD) slump to just 14 per cent — the worst result in a nationwide vote in its 134-year history.

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The chancellor is being squeezed between Lindner, a fiscal hawk from the liberal Free Democratic party (FDP) whom he has so far backed in the dispute, and the SPD and Green ministers in his cabinet who reject the proposed cuts.

“It’s still unclear whether Scholz can push through a deal,” said one senior official. “Will he be able to prevail over his own party?”

The budget row highlights the widening conflict at the heart of Scholz’s government, a marriage of convenience between tax-and-spend Social Democrats and Greens on the one hand and fiscally conservative, free-market liberals on the other.

Thorsten Faas, a political scientist at the Free University in Berlin, said the tensions over the spending plan were virtually unprecedented for postwar Germany. “All three parties seem to be pulling in opposite directions,” he said. “Everyone’s nerves are really frayed.”

The fronts in the conflict have only hardened since European elections that saw the combined share of the vote for the three government parties fall to just 31 per cent, down from 52 per cent in the federal elections of 2021 that brought them to power.

The opposition Christian Democrats won the election with 30 per cent, while the far-right Alternative for Germany came second with 15.9 per cent — its best ever result in a nationwide vote.

Since then, all three government parties have appeared even less willing to compromise over spending than they were before polling day.

Lindner and his FDP are insisting the budget must comply with the “debt brake” — the cap on public sector borrowing enshrined in the German constitution which has become a trademark of the party.

In recent days he has gone even further, calling for changes to “Bürgergeld”, the Scholz government’s system of welfare payments that critics say resembles universal basic income, a bugbear of the right. 

But the FDP’s determination to stay fiscally prudent has set it on a collision course with the SPD, whose tone has become much more combative since the European election.

Lars Klingbeil, SPD leader, has said the party should give its traditional voters more of what they expect from it — affordable rents, higher pay, good social care. “Our people want to see us fight,” he told ARD TV.

And Kevin Kühnert, SPD general secretary, warned Lindner against any cuts to welfare spending, saying savings “can’t come at the expense of social cohesion”. Left-of-centre parties are convinced that the surge in AfD support can be explained in part by popular anxiety about threats to Germany’s welfare state.

The SPD has proposed loosening the rules of the debt brake or putting up taxes. The Greens, who fear cuts to climate programmes and investments in clean tech, have made similar demands.

“What’s clear to everyone is you can’t plug a €40bn fiscal gap primarily through budget cuts,” said Sven-Christian Kindler, budget policy spokesman for the Greens.

But Lindner’s FDP is hanging tough. “What’s clear is that we Free Democrats will not cross the lines set out in the coalition agreement,” said Wolfgang Kubicki, the FDP’s deputy leader. “That means: there will be no tax increases with us and no unconstitutional violation of the debt brake.” 

The budget conflict dates back to earlier this year, when Lindner issued each ministry with a spending target for 2025 that was in many cases lower than their expenditures for the current year. Ten cabinet members complied, while five insisted on a higher budget.

For example, the international development ministry wants to spend €12.2bn next year, while Lindner is prepared to allocate just €9.9bn. Meanwhile, the foreign ministry has presented a budget of €7.4bn for next year — about €2bn more than Lindner is prepared to give.

“That’s basically going back to the spending levels of 2017 — before the war in Ukraine, the war in the Middle East,” said one foreign ministry official. “What’s on offer isn’t even enough to cover our ongoing operational costs, let alone humanitarian aid and help for Ukraine.”

Insiders dismiss suggestions in German media that the budget crisis could trigger a break-up of Scholz’s coalition. “There will be a solution,” said the MP close to the negotiations, who said all sides would have to edge back from their maximum demands. “But it’s not going to be easy for anyone.”