Germany Special April 2021

Germany

Germany: Parliament approves additional budget for this year to further support recovery

April 29, 2021

In late March, the German federal government agreed on an additional budget for this year, totaling EUR 60 billion, to provide further aid for lockdown-hit businesses and rekindle economic activity. The supplementary budget was approved by the Bundestag on 24 April, taking this year’s new borrowing to a new all-time high of EUR 240 billion. The first budget draft for next year was simultaneously presented, incorporating new borrowing of EUR 81.5 billion, as Finance Minister Olaf Scholz stated the country “will spend its way out of the crisis”. Our panelists expect the fiscal shortfall and public debt stockpile to rise this year as a consequence. Meanwhile, in late April, the government sent its post-pandemic recovery plan to the European Commission for approval, detailing its proposal for spending Germany’s allocated funds from the EU’s recovery pot. The supplementary budget includes support measures for firms that have seen their revenues halved for at least three months since November last year. Businesses that meet the criteria are eligible for cash injections on top of already existing measures. Firms that have lost more than 70% of their revenues are able to apply for a total reimbursement of their fixed costs for rent, electricity or heating. This reimbursement was previously capped at 90% of fixed costs. Furthermore, the supplementary budget includes measures for event and travel companies, and extends the option of special write-downs on seasonal goods to manufacturers and wholesalers.

The draft budget for next year, meanwhile, sees the constitutional debt brake—which limits new borrowing to 0.35% of GDP—suspended for the third year running. This could bring pandemic-related borrowing between 2020 and 2022 to above EUR 450 billion. Although the budget for 2022 will be finalized after September’s election, the impact of the pandemic and the necessary fiscal support will continue to be a key pillar. However, fighting climate change, digitalization of the economy and infrastructure investment will likely also feature heavily in the budget. Lastly, the government also presented its draft financial plan to 2025, with a return to the constitutional debt brake in 2023 as it plans to cut the shortfall to around EUR 10 billion from then onwards.

Meanwhile, in late April, the government sent its proposal on how to spend the funds from the EU’s Recovery and Resilience Facility, as part of the Next Generation EU budget. The German plans amount to roughly EUR 28.0 billion—above the EUR 25.6 billion to be allocated by the Commission, with the difference to be financed by the German government. The plans center around reforms and investment focused on climate change and energy transition, digitalization, infrastructure, education, the healthcare system, modernizing public administration and reducing barriers to invest, and increasing social participation.

Heavy government spending will remain a feature of the German economy this year as the country is struggling with a third wave of infections. That said, Germany is better positioned than most of its European peers to recover from the pandemic quickly, with our panelists expecting the economy to return to pre-pandemic levels by the end of this year. However, the government will need to plug a sizable budget gap of EUR 20 billion in 2024–25, which suggests that taxation is likely to increase after September’s election.

FocusEconomics Consensus Forecast panelists expect the fiscal shortfall to reach 4.9% of GDP in 2021, with public debt rising to 71.9% of GDP. For next year, panelists penciled in a fiscal deficit and public debt of 2.1% and 70.0% of GDP, respectively.


Author:, Economist

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