Scholz Warns of German Budget ‘Challenge’ While Eschewing Cuts

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German Finance Minister Olaf Scholz warned next year’s federal budget will be a “challenge,” while pledging not to cut investment or welfare spending.

Scholz, who is running as the Social Democrats’ candidate for chancellor in September’s election, is due to present a draft 2022 budget next month. His comments highlight the fiscal conundrum facing the next government, which polls suggest will again be led by Chancellor Angela Merkel’s conservative bloc after she steps down.

A decision will have to be made whether to request parliamentary approval to suspend constitutional borrowing limits for a third straight year to fund outlays to offset the impact of the coronavirus crisis.

“I am not prepared to cut investment spending and put the future of our country on the line,” Scholz said Saturday in a tweet. “The welfare state, which is carrying us effectively through this crisis, will also not be pared back.”

Germany’s so-called debt brake -- designed to prevent new borrowing exceeding 0.35% of economic output except in emergencies -- has been a source of tension in the ruling coalition in recent weeks. Scholz’s latest remarks could signal the start of a period of bitter wrangling over next year’s spending plan as it makes its way through parliament.

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Merkel’s CDU/CSU bloc is fiercely committed to financial discipline and wants to restore the debt brake as soon as possible, while Scholz this month presented a fiscally expansive platform to finance a sweeping shift to cleaner energy and better digital infrastructure should he succeed Merkel after September’s vote.

The debt mechanism was already suspended for 2020 and 2021, with Merkel’s government making tens of billions of euros available to help businesses hurt by the pandemic.

The government is authorized to take on nearly 180 billion euros ($218 billion) in new debt this year, about 160 billion euros more than the constitutional rules would normally allow.

Scholz has repeatedly emphasized that even with the surge in borrowing, Germany’s debt remains the lowest as a percentage of output among the Group of Seven rich economies.

©2021 Bloomberg L.P.

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