News | Economic / Social Policy - Western Europe - Distribution Crisis Back to Austerity

The new German federal budget contains a raft of drastic spending cuts to education and welfare



Eva Völpel,

German Federal Minister of Finance Christian Lindner at a press conference in Berlin, 5 July 2023.
German Federal Minister of Finance Christian Lindner at a press conference in Berlin, 5 July 2023. Photo: IMAGO / Future Image

For those who did not know, “the era of wishes is over” in Germany — despite low unemployment benefits, child poverty, underfunded municipalities, deteriorating railways, staff shortages in nurseries and schools, impoverished students, and the overall slow societal response to climate change. At least that is how Federal Minister of Finance Christian Lindner of the Free Democratic Party (FDP) sees it.

Eva Völpel works on economic and social policy at the Rosa Luxemburg Foundation’s Institute for Critical Social Analysis in Berlin.

In a recent guest column for the Frankfurter Allgemeine Zeitung, Lindner not only articulated some economic nonsense (stating, for example, that “you cannot generate sustainable growth with borrowed money anyway”), he also outlined Germany’s anticipated economic course for the upcoming years: “The 2024 budget is a crucial part of the country’s ongoing financial and economic transformation, which is only just beginning.”

Indeed, we are facing an intensified austerity policy (which Lindner frames as a “return to financial normality”), as indicated by the outlook of the Federal Ministry of Finance for the years following the current legislative period. But let us take one thing at a time.

Everyone Agrees: Austerity Was a Failure

In the coming year, Germany’s so-called “traffic light coalition” want to spend around 30 billion euro less than in 2023, with total expenditure shrinking from around 476 billion euro to around 446 billion. Somewhat larger budgets are planned for the years 2025 to 2027, but they will not reach the level seen in 2023.

It could be argued that in 2023, in view of the price crisis and inflation, there were many unforeseen expenses (the keywords here being “financial relief measures”) that will resolve themselves in the future. According to forecasts, the inflation rate in 2024 will be slightly above two percent again. However, the socio-political consequences of the price crisis have yet to be adequately addressed, and considering the climate crisis and other challenges, the coalition is not investing enough in urgently needed infrastructure projects, let alone the necessary expansion of the welfare state.

Even voices that are not typically critical, such as that of Michael Hüther, the director of the German Economic Institute, find fault in Lindner’s austerity measures in relation to investment. Hüther argues that the Climate and Transformation Fund, which foresees expenditures of around 177 billion euro by 2026, should be significantly increased to 400–500 billion euro — as a legally independent, temporary, and earmarked special fund for investments in climate transformation and digitalization. This would mean that the money, like the additional 100 billion euro being given to the armed forces, would not be bound by the constraints of the debt brake (a fiscal rule in Germany that forbids the federal government from taking on additional debts and restricts structural budget deficits).

Prioritizing the Debt Brake

That brings us to Lindner’s favourite project, one that effectively unites the entire traffic light coalition: the renewed adherence to the debt brake, which was temporarily suspended in 2022 due to a constitutionally justifiable emergency, starting in 2023.

At the end of 2022, even the Council of Economic Experts confirmed that this exemption could have been applied once more in 2023. Fiscal rules are still suspended at the EU level as well in 2023. However, Lindner made it clear early on that he intends to reinstate the debt brake and that circumvention schemes like new or increased special funds are not an option with him. He has categorically ruled out tax increases for higher earners, a position he largely succeeded in solidifying in the coalition agreement.

Due to these politically mandated constraints, the issuance of new loans will now be significantly reduced: from 45.6 billion euro in 2023 to 16.6 billion in 2024. In the following years, the amount is set to decrease further, reaching 15 billion by 2027.

Critics have long argued that the calculation of the debt ceiling does not adequately account for economic crises and upswings, resulting in insufficient leeway for new loans during stagnation or recession.

All of this is taking place despite a significant backlog in investments. Lindner argues investments in 2024, totalling 54.2 billion euro, will be significantly higher than in 2019 (when they were 38.1 billion euro). However, even back then, the rate of investment was insufficient. Compared to 2019, there is an increase in demand of approximately 100 billion euros for 2024 alone. Meanwhile, the United States is allocating billions for industrial policy support and climate protection measures through the Inflation Reduction Act, and the Chinese economy is rapidly gaining market share at the expense of German motor vehicle manufacturers.

Furthermore, the German economy is struggling and has yet to return to the growth levels seen before the pandemic. While the German federal government still predicts slight growth of 0.4 percent for 2023, several economic research institutes are in fact forecasting negative growth. Moreover, the full effects of the high interest rate policy espoused by the European Central Bank (ECB) — that could include a slowing down of the economy and increased unemployment — have not fully materialized yet, as they may take some time to be fully evident.

Since the coalition prefers to initiate a turn to austerity (instead of stimulating the economy with sufficient investments), it is also questionable whether Lindner’s optimistic tax forecasts for the coming years will hold true. If revenues are lower than expected, austerity measures will likely be intensified.

Budgetary Challenges

The ideological motivation behind Lindner’s austerity measures become especially clear when we look at the financial alternatives that would have been available.

Achim Truger points out that the return to the debt brake in 2023 will necessitate exhausting reserves amounting to 40.5 billion euro, which will no longer be available in the subsequent years. Furthermore, the Inflation Compensation Act passed in 2022, which includes the reduction of fiscal drag and disproportionately benefits higher earners, is leading to significant reductions in tax revenue. If this relief measure had been only targeted towards people with lower and middle incomes in light of inflation, an additional 6 billion euro, totalling 46.5 billion, would have been available for the budget in 2024 or the subsequent years, according to Truger.

There are other possible adjustments that the coalition is either neglecting or that the minister of finance is strategically exploiting for his propaganda in the budget debate.

For example, Lindner has been claiming for some time now that the federal government’s interest burden has increased tenfold within a short period of time due to the ECB’s interest rate turnaround, from 4 billion euro in 2021 to 40 billion in 2023 (the budget proposal for 2024 now includes 37 billion euro due to interest). This may sound rather dramatic, but it stems from archaic accounting rules, which is even criticized by the advisory council to the Ministry of Finance and the German Federal Bank.

In short, the Ministry of Finance currently records surcharges or deductions on government bonds in the year of issue instead of over the entire, multi-year term of the bond. According to Truger, the federal budget for 2024 would be relieved by 10 billion euro if the accounting rules were adjusted.

Similarly, the commitment outlined in the coalition agreement to reform the so-called cyclical adjustment method of the debt brake remains unfulfilled. Critics have long argued that the calculation of the debt ceiling does not adequately account for economic crises and upswings, resulting in insufficient leeway for new loans during stagnation or recession. Truger adds that a reform would result in around 5 billion euro more for the 2024 budget. If you add up all these items, this comes to 61.5 billion that could be made available for the 2024 budget or for the subsequent years.

Working Together against Progress

There is also considerable potential in the question of reducing environmentally harmful subsidies. The traffic light coalition had agreed to this in the coalition agreement, and in the course of the budget dispute the Greens once again called for the reduction or elimination of the commuter tax allowance, the company car tax break, and subsidies for air travel.

The Council of Economic Experts takes a similar view. According to Monika Schnitzer, the Council’s chairperson, scrapping tax incentives for kerosene and international flights, diesel, and tax privileges for privately used company cars could save 30 billion euro annually. But even on this issue, no progress is being made due to resistance from the FDP and Social Democrats (SPD).

This is not the only challenge. Lindner also opposes using unused funds from Germany’s Economic Stabilization Fund for other expenditures. In addition, the possibility outlined in the coalition agreement to provide the state-owned Deutsche Bahn AG with credit authorizations that would not count against the debt brake has not yet been used by the government to date. Instead, an increasing number of financing tasks are being allocated to the Climate and Transformation Fund (KTF), which falls under the purview of Robert Habeck.

Even from an economic perspective, Lindner’s policies are also detrimental to Germany’s business interests.

According to the budget proposal, for example, it is now being considered whether 15 billion euro for the railway should come from the fund. The financing of the approximately 10 billion mega-subsidies for Intel has already been shifted to the KTF, and further settlement support for additional chip factories could follow suit. The KTF is the fund primarily responsible for financing the climate transformation. It is intended to support initiatives, including the recently enacted but botched heating energy transition, among many other important initiatives.

The FDP’s refusal to use the specified financial leeways indicates that Lindner is hell-bent on using the disciplinary rhetoric of the supposedly alarming increase in public debt to push through core liberal economic projects: keeping public investments low and reducing social spending. Once again, it is the poorest and most vulnerable in society who will suffer.

That said, even from an economic perspective, Lindner’s policies are also detrimental to Germany’s business interests — something that the liberals supposedly advocate for (this is also evident in the FDP’s and Chancellor Olaf Scholz’s opposition to subsidized industrial electricity prices).

Savings on the Backs of the Poor

To illustrate how meagrely the traffic light coalition is setting the budget for crucial items, here are a few examples.

Instead of the 12 billion euro demanded by the Federal Minister for Family Affairs, the basic child allowance will only receive 2 billion in 2025. And this nominal figure is subject to change, as Lindner emphasizes. As an issue supposedly near and dear to the Greens — not only improving the integration of social benefits for financially disadvantaged children but also providing significantly more funding for them — this matter would have been met with bitter disappointment. Moreover, let us not forget that poverty has increased at a record pace as a result of the pandemic, rising from 15.9 percent in 2019 to 16.9 percent in 2021. Since then, an additional 840,000 people have fallen below the poverty line, and 21.3 percent or roughly 3 million children are living in poverty.

One of the ways that Lindner counters criticism of this is with the familiar argument favoured by liberals regarding projects for greater educational equity, specifically the Startchancen programme, a government programme aimed in particular at providing socially disadvantaged school students with a better educational start in life. Within the scope of this programme, the federal government wants to allocate funds to 4,000 schools to improve infrastructure, establish an “opportunity budget”, and hire more social workers in 2024.

Yet, the traffic light coalition has cut funding for this as well. Originally, 1 billion euro per year were earmarked, but now only 500 million are set to be allocated in 2024. Only 2,400 out of over 15,000 primary schools are expected to receive funds from the programme. This amount is not only insufficient, but such projects are also in no way a substitute for adequate social policies for families and children living in poverty.

Moreover, it once again shows how dysfunctional the coalition is in terms of economic policy. It allows for a portion of our future generation to be systematically neglected in terms of social policy, thereby undermining the strong qualifications and motivation of the urgently needed workforce and professionals of tomorrow, despite demographic changes.

The same applies to the financial subsistence level for those in a slightly older age group, where cuts are also being made. In 2024, there are plans to reduce financial assistance for education and training (which goes by the German acronym “BAföG”) by approximately 440 million euro for university students and around 210 million euro for school students. Although the existing BAföG rates themselves are not set to change, there are no provisions for the urgently needed increase in support in the face of inflation, the rental crisis, and the presence of around 1 million students living in precarious conditions.

In the meantime, the Federal Administrative Court has deemed the current BAföG rates to be unconstitutional. The amount is not compatible with the right to equal access to state education. The case is now pending before the Federal Constitutional Court.

Shifting the consequences of a restrictive budget onto the social security funds primarily burdens those with lower and middle incomes.

Cuts will also affect the budgets for the integration of the unemployed. The budget for integration assistance in the citizen’s allowance already fell by 300 million euro from 2022 to 2023, and now there will be another 400 million less in the coming year. In addition, the budget for the administrative costs of the job centres is barely growing, but inflation and wage settlements are driving up expenses. As a result, job centres are already shifting funds from integration assistance to a significant extent into administrative costs, with about half-a-billion euros in the current year.

Savings are being made in the areas of health and nursing care, too. The nursing care insurance fund is expected to receive 1 billion euro less and the federal subsidy to the statutory health insurance fund is being frozen instead of being adjusted for inflation — and all this despite an estimated deficit of around 7 billion euro in the health insurance funds in 2024.

What is more, the federal subsidy to the pension fund is set to decrease by 600 million euro annually starting in 2024. With a growing number of pensioners and in view of the declining pension level, more tax funding for the pension fund is needed, in addition to other pension policy adjustments.

(Un-)Sustainable Mobility

The budget for 2024 also clearly demonstrates steps away from the transition to sustainable mobility. In the coalition committee at the end of March, the traffic light coalition pledged to make an additional 45 billion euro available to the railways by the end of 2027 for renovation and expansion. However, the federal government linked this item to the corresponding budget situation.

The result? So far, only about half of the amount, partly to be generated through road toll revenues, has been secured. This is also why the coalition, as previously mentioned, is now focusing on the KTF to mobilize some of the money outside the purview of the regular budget.

As if that were not enough, drastic cuts are looming for bicycle-based transport. Only around 400 million euro in investments are planned, which is almost half compared to 2022 (750 million), with the 2023 figure still at 560 million. In particular, financial assistance for the federal states and municipalities will drop significantly to around 260 million.

In the spring of 2022, the conference of transport ministers called on the federal government to allocate 1 billion euro annually for the expansion of cycle path networks by 2030 to achieve climate goals. Instead, a substantial amount of money has been allocated to fossil fuels in the new budget.

For example, the budget for liquefied natural gas (LNG) terminals has been increased by nearly 900 million euro, while experts warn that the planned LNG capacities exceed climate-compatible demand and call for regulatory restrictions on reserve capacities during non-crisis periods. If these restrictions are not put in place, we will entrench the fossil energy system for years to come. In fact, it appears we are already well on our way to doing so.

More Money for Weapons, but No New Taxes

The balance sheet for international crisis aid is also sobering. Despite growing poverty and refugee crises, the Federal Foreign Office’s funds for humanitarian aid measures abroad will be cut by about 1 billion euro in 2024. The crisis fund of the Federal Ministry for Economic Cooperation and Development will also receive around 277 million euro less in 2024.

The fight against the debt brake and the push for wealth redistribution from the top to the bottom must be given higher priority on the agenda.

This makes it abundantly clear that money is being cut for social and education policies, for environmentally sensible transportation policies, and for humanitarian aid (further examples could be found). At the same time, funds are pouring in to the military and defence. For example, the Federal Ministry of Defence will receive an additional 1.7 billion euro in 2024, and the regular budget will grow to 7.3 billion by 2027. In addition, around 19 billion euro from the 100-billion-euro special fund for the armed forces will be available in 2024.

Let’s Take Back the Wealth

Christian Lindner likes to pat himself on the back about not increasing taxes. What he fails to mention, however, is that it will still become more expensive — but not for the higher earners or the wealthy. Since the traffic light coalition is exerting pressure on the social security funds through their budget, increasing contributions will be the result. This will affect both the nursing care insurance fund (for which contributions were raised as recently as 1 July), and the statutory health insurance fund (where many funds already increased supplementary contributions at the beginning of this year).

Shifting the consequences of a restrictive budget onto the social security funds primarily burdens those with lower and middle incomes. This is because contributions for higher earners and the wealthy are capped due to the contribution assessment ceilings, which Lindner refuses to raise despite timid demands from the SPD and the Greens.

It is also likely to become more expensive because the coalition wants to increase the CO2 levy on fossil heating and fuels. This regularly planned increase had been suspended following the outbreak of war and the energy price crisis. Now the surcharge is likely to increase from 30 euro per tonne to 45 euro on 1 January 2024.

Although the price increases for fuel or heating will not be dramatic, they will still pose a problem for low-income households. In addition, network charges may increase at the turn of the year, as network operators are set to be granted a higher return for network expansion, as demanded by the Federal Network Agency.

Looking at these developments, it becomes clear how grossly negligent it is that the coalition is not taking action on the climate funds outlined in the coalition agreement. There is an urgent need for a social compensation mechanism, both in terms of distribution policy and for garnering support for additional climate policy measures, especially in the face of growing propaganda against climate protection measures from the right and conservatives.

Moreover, the fight against the debt brake and the push for wealth redistribution from the top to the bottom must be given higher priority on the agenda. In July, the Die Linke launched a campaign called “Changing Course — Let’s Take Back the Wealth”. Working together is essential for making this campaign a success, strengthening the party’s public image regarding distribution policy, and exerting pressure for a different kind of politics. This is particularly important since the minister of finance has already clearly indicated in the current budget proposal where things are headed.

Lindner’s so-called “initiated budgetary and financial policy prioritization process” is an on-going task. He also points out the repayments that are due in the coming years: starting in 2028, the repayments of the loans that the federal government took on during the suspension of the debt brake from 2020 to 2022 (amounting to around 12 billion euro annually), and starting in 2031, the repayments of loans from the Economic Stabilisation Fund for Energy and the special fund for the armed forces. If the Left fails to exert strong grassroots pressure against these budgetary and fiscal policies, we risk further exacerbating inequality — with corresponding consequences for social cohesion and trust in democracy.

Translated by Alice Rodgers and Bradley Schmidt for Gegensatz Translation Collective.