The German government can’t manage without deficits if it wants to fulfill its investment and climate ambitions, according to Ifo President Clemens Fuest.
The ruling coalition could review subsidy plans and increase a levy on carbon emissions to mitigate the impact of last week’s court judgment, but “it’s impossible in my view to come up with all the necessary funding just through cuts and tax increases,” he said on Bloomberg TV on Friday.
“We do need a deficit financing to finance the investment needs and infrastructure in the energy transition,” Fuest said. “The question is, how can that be achieved? One way is to use public companies to incur debt,” he said, adding that “the better approach would be to try and set up a new fund and anchor it in the constitution.”
That would require Chancellor Olaf Scholz’s coalition to find support from opposition lawmakers — as it did when setting up a fund for the country’s military after Russia’s invasion of Ukraine. Fuest said that may not be possible in the short term, “but maybe after negotiations.”
The government will suspend the constitutional borrowing limit for this year after the court ruling forced Finance Minister Christian Lindner to retroactively account for at least €37 billion ($40.4 billion) of debt earmarked to ease the burden of high electricity and gas prices on households and companies.
The Nov. 15 judgment in Karlsruhe against a climate transition facility has called into question hundreds of billions of euros of financing in the government’s special funds — some of them decades old — that are not part of the regular federal budget.
Bloomberg Economics estimates that the situation could reduce economic growth by 0.5% next year as it casts doubt over several large investment projects.
For Fuest, the worst-case scenario would materialize if the budget hole is “filled by spending cuts and tax increases,” he said. “That would have a very negative impact on growth. It could put Germany back into recession in the coming year.”
“My main scenario would be that the government manages to find other solutions so that yes, there is uncertainty which will dampen growth a little bit,” according to Fuest. “I think we will see growth, albeit rather weak growth — something between maybe a half percent and 1%.”
