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Germany to suspend borrowing limits for fourth year after debt brake ruling

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Germany is to suspend its constitutional limit on new borrowing for the fourth year running, as it rushes to deal with the fallout from a ruling by the country’s top court that has left its spending plans in disarray.

Christian Lindner, finance minister, said the government would present parliament with a supplementary budget for 2023 “that will put spending made this year on a firm constitutional footing”.

He said in a post on social media site X that it would propose that parliament retroactively declare 2023 an “exceptional emergency” that would allow it to set aside the “debt brake”, Germany’s constitutional curb on deficit spending.

The move is a setback for Lindner, who had insisted the debt brake be reinstated this year. The leader of the fiscally hawkish Free Democrats sees himself as the custodian of fiscal prudence in Chancellor Olaf Scholz’s three-party coalition.

The trigger for the announcement was a ruling from the constitutional court last week that struck down a government move to transfer unused borrowing capacity from its pandemic budget to a “climate and transformation fund”, known as the KTF. The judges said the government’s actions violated the rules of the debt brake, but left ministers scratching their heads over how to plug a €60bn hole in the public finances.

First introduced in 2009, the debt brake limits the federal government’s structural deficit to 0.35 per cent of gross domestic product, adjusted for the economic cycle, and effectively prohibits Germany’s 16 states from running any deficits at all.

But it can be temporarily set aside when the country faces a national emergency or natural disaster. It was suspended in 2020 during the coronavirus pandemic, and remained inactive when Russia’s full-scale invasion of Ukraine and huge cuts in Russian gas exports led to an explosion in Europe’s energy costs.

In a statement Lindner said the court’s ruling had created “legal clarity” about how to deal with special funds such as the KTF that have been stocked with emergency borrowing, and the government was now “drawing the conclusions”.

He said he had reached agreement with Scholz and deputy chancellor and economy minister Robert Habeck on the need for a supplementary budget for 2023. The government would not be taking on any new debt but would simply put the money spent this year on responding to Germany’s many crises “on a sound legal basis”, he added.

“We can only start talking about 2024 and the subsequent years if we have a legally watertight, constitutional state of affairs,” said Lindner.

The Karlsruhe-based court’s ruling was focused on the KTF but triggered concerns about the legal status of other off-budget funds the government has recently deployed — chief among them the €200bn economic stabilisation fund, or WSF.

This was set up at the start of the pandemic to help companies affected by lockdowns. After the war in Ukraine broke out it was repurposed to aid companies and consumers struggling with higher energy bills.

Some €37bn has been drawn down from the WSF this year, in part to finance a cap on gas and electricity prices. But the constitutional court’s verdict effectively banning the repurposing of Covid-era funds means the WSF could also be subject to legal challenge.

In his statement, Lindner said it was important that spending on the energy price caps was put on a firm legal footing.

Finance ministry officials say declaring 2023 an emergency is uncontroversial considering the economic conditions that have prevailed this year — high inflation and energy costs and a steep industrial slowdown.

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