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Germany’s 2022 Budget to Unleash Large Stimulus Package and Shift From Black Zero Fiscal Policy

By:
Eiko Sievert
Published: Mar 18, 2022, 15:37 UTC

Germany will run regular budget deficits in the years ahead to finance increased military, energy, infrastructure and welfare spending in an ongoing shift from ‘black zero’ policies begun in 2014 even if this year’s 6-7% financing gap proves exceptional.

Germany’s 2022 Budget to Unleash Large Stimulus Package and Shift From Black Zero Fiscal Policy

The latest budget announcement of the government reflects a momentous shift for Germany. Besides sharp increases of military expenditure, Russia’s war in Ukraine has brought into focus urgency of addressing previously identified investment needs to tackle the green energy transition.

Germany’s U-turn on military expenditure to belatedly meet NATO commitments of spending 2% of GDP per annum on defence is an important change as is the reassessment of the nation’s energy security given dependence on oil and gas imports from Russia. Both will require sustained increases of expenditure in addition to that needed to fill an investment gap and meet growing social burdens of an ageing population.

We project a budget deficit of circa 6-7% of GDP in 2022, including EUR 100bn allocated for defence spending and funds to support transition towards the carbon-neutral economy. A further budget amendment over the coming weeks will detail additional support for households and businesses to cushion the impact rooted in soaring energy prices.

With the debt brake suspended during 2022 due to the Covid-19 pandemic, the government plans to increase borrowing this year to a minimum of EUR 199.7bn (5% of GDP). A significant portion of such funding will be held in special funds (‘Sondervermögen’) to be spent over several years. Additional borrowing of 2022 increases Germany’s debt-to-GDP ratio by around 3pps, partially offset via higher nominal GDP growth.

German federal revenues and expenditure 2008-2025F
EUR bn

Source: Federal Ministry of Finance (Germany), Scope Ratings GmbH.

Over the medium run, public finances remain on a strong footing. From 69% in 2021, debt to GDP is seen rising to 70% in 2022 and thereafter falling to 62% by 2026. The government will try reaching a balanced budget during 2023 within the 0.35% of GDP structural deficit limit set by the debt brake rule instituted in 2011.

However, budget projections are inevitably subject to significant uncertainty surrounding degree of spill-over from the war in Ukraine, not least its impact on German economic growth.

We have revised our forecast of German real growth of 2022 to 3.5%, from 4.4% previously, while, under one stressed scenario of prolonged conflict and economic disruption, our projections reflect real growth assumptions of circa 1.5% in 2022 before 1% in 2023.

Germany is a net importer of oil, gas and coal – equivalent to EUR 93bn of imports during 2021 – so higher import prices weigh on the economy’s external balance, while an outright import shortfall, e.g., due to an embargo, would reduce GDP growth by circa 2.2pps in 2022, according to one recent study by Rüdiger Bachmann and collaborators.

Even if the current scale of conflict does not endure into 2023, structural deficits at or near 0.35% of GDP, equivalent to around EUR 15bn, would mark a significant change from pre-pandemic ‘black zero’ fiscal policies marked by average federal budget surpluses of EUR 16bn, or 0.5% of GDP, over 2014-19.

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Eiko Sievert is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Julian Zimmermann, Analyst at Scope Ratings, contributed to writing this commentary.

About the Author

Eiko Sievertcontributor

Eiko Sievert is a Director in Scope’s Sovereign & Public Sector ratings group, responsible for ratings and research on a number of sovereign and supranational borrowers.

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