Germany to Ramp Up Borrowing With 2021 Debt of $286 Billion

Germany aims to borrow 240.2 billion euros ($286 billion) this year, taking on just over 60 billion euros more debt than initially planned to help mitigate the impact of the coronavirus crisis.

Heavy government spending is set to continue as the country grapples with a fresh wave of the pandemic. Finance Minister Olaf Scholz will propose suspending constitutional borrowing limits for a third straight year when he presents a draft 2022 spending plan alongside his supplementary 2021 budget on Wednesday, according to two senior government officials, who asked not to be identified in line with briefing rules.

Scholz, who is running as the chancellor candidate for the Social Democrats in September’s national election, is targeting net borrowing of 81.5 billion euros in 2022, the officials said. That would take the total for this year and next to more than 320 billion euros.

Germany’s so-called debt brake is designed to prevent net borrowing exceeding 0.35% of economic output, except in emergencies, and the total for this year of 240.2 billion euros amounts to about 7% of gross domestic product.

Scholz has consistently argued that Germany can afford hundreds of billions of euros in support for the pandemic-ravaged economy thanks to years of budget discipline. He points out that debt as a percentage of output will still be the lowest among the Group of Seven nations.

Germany to Ramp Up Borrowing With 2021 Debt of $286 Billion

According to the two officials, German debt will swell to about 75% of GDP this year. The mid-term financing plan through 2025 foresees a restoration of the debt brake from 2023, they added.

The government will need to fill a budget gap of just over 20 billion euros for 2024 and 2025 combined, the officials said, suggesting that tax increases may be needed to help make up the shortfall.

The final decision on next year’s budget will be taken by the government that takes charge of Europe’s biggest economy after Chancellor Angela Merkel steps aside following the election.

Merkel’s conservative CDU/CSU bloc is on track to lead the next administration and favors a return to frugality once the coronavirus recedes, while Scholz’s struggling SPD and the surging Greens have pledged to invest billions in technology and tackling climate change.

As things stand, Merkel’s bloc could form a coalition with the Greens, though the outcome is far from certain with discontent increasing among citizens weary of virus restrictions and unhappy with the slow pace of Germany’s Covid-19 vaccine rollout.

With the contagion rate on the rise again, Merkel is holding talks with cabinet ministers and regional leaders later on Monday to decide the next steps in the government’s pandemic strategy.

The German leader has proposed keeping lockdown restrictions in place for another four weeks after the contagion rate rose beyond a level that risks overloading the health system. Merkel’s plan would extend and slightly tighten existing curbs through April 18, according to a chancellery draft seen by Bloomberg.

Authorities had begun to relax restrictions in late February, and had also set out a plan to gradually unwind the remaining measures -- including the partial closing of non-essential stores and the shuttering of hotels, restaurants, gyms, and cultural venues.

The restrictions on the economy were stricter in the middle of the current quarter than in the previous quarter, and output will probably “decline sharply” in the first three months of 2021, the Bundesbank said Monday in its latest monthly report.

“Activity in contact-intensive service sectors in particular is likely to decline again,” the central bank said. “In contrast, industry, which is not affected by the measures as directly as the construction sector, should have supported economic activity” as it benefits from dynamic foreign demand, it added.

Merkel’s cabinet is due to sign off on the 2021 and 2022 financing plans, as well as a mid-term budget outlook, on Wednesday before the legislation goes to parliament for approval by the end of the year. Germany’s Federal Finance Agency is scheduled to publish details of planned debt issuance for the second quarter on March 30.

©2021 Bloomberg L.P.

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