German Slump Emboldens Finance Chief’s Drive for Budget Cuts

(Bloomberg) -- Germany’s unexpected winter recession prompted Finance Minister Christian Lindner to double down on his push for budget cuts as the three-party ruling coalition struggles to reach an agreement on a finance plan for next year.

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After the publication Thurs

day of data showing a 0.3% contraction in gross domestic product in the first quarter, Lindner reiterated that the “expansionary fiscal policy” Germany has pursued since 2020 must end.

“For a very long time, we lived very well on artificially low interest rates and there were regular upward revisions to government revenue forecasts,” Lindner said at a private equity conference in Berlin.

“Now, in a very different economic environment and in a very different interest-rate environment, we have the task of returning to sound public finances and their long-term sustainability,” he added.

Lindner, a self-styled fiscal hawk, has insisted on restoring a constitutional limit on borrowing known as the debt brake that was suspended to enable generous government spending during the pandemic and the energy crisis.

The chairman of the pro-business Free Democrats and Social Democrat Chancellor Olaf Scholz are working on a plan to close a €20 billion ($22 billion) shortfall in next year’s budget with expenditure cuts in all departments except defense, Bloomberg reported this week.

That risks angering the Greens, the third party in the alliance, who have called for tax increases for higher earners and are reluctant to scrimp on spending that will help Germany achieve its ambitious climate goals.

Robert Habeck, the Greens economy minister who is also the vice chancellor, on Thursday challenged the legitimacy of the borrowing rules, which were introduced in their current form after the financial crisis that began in 2008.

Speaking at the same event as Lindner, Habeck highlighted the dangers of holding back investment, warning that such a policy could damage Germany as a business location. “And then we will pay a high price for not having been courageous or generous,” he added.

Asked at a news conference later on Thursday in Berlin if he would try to talk Lindner out of his drive to cut as much as €20 billion in spending, Scholz sidestepped the question.

Instead, the chancellor said officials are working on legislation aimed at “unshackling the forces” of the German economy.

He voiced confidence that the coalition will quickly resolve a lingering dispute about cleaner heating in the housing sector.

“I have now asked everyone very urgently to resolve the specific issues with each other over the next few weeks — and it can be resolved,” Scholz said. “And my impression is that this is exactly what will happen.”

--With assistance from Michael Nienaber and Petra Sorge.

(Updates with Scholz, Habeck comments starting in eighth paragraph)

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