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Germany Plans Return to Debt Brake, But Takes Key Spending Off-Budget

The German government yesterday approved benchmark figures for fiscal year 2023 and the financial plan 2022-2026. The budgetary figures envisage a marked narrowing of the central government budget deficit over the next two years and a return to the debt brake by 2023. This presentation of rapid budgetary tightening, however, does not reflect the overall future fiscal stance as the projected narrowing in the budget deficit is partly offset by a planned increase in off-budget spending on climate transition and defense. Furthermore, a situation of prolonged adverse economic implications from the war in Ukraine, including high energy prices, is likely to raise budgetary pressures in 2022 and beyond. While the increased reliance on off-budget spending limits the meaningfulness of the budgetary figures by themselves, DBRS Morningstar regards Germany's fiscal space as sufficient to accommodate higher public spending.

Key Highlights:
-- The German government released its financial plan yesterday which targets a return to the debt brake from 2023 onwards.
-- These budgetary plans, however, disguise a substantial increase in off-budget spending over the next years (climate transition, defense spending).
-- The economic fallout from the war in Ukraine and accompanying energy security risks are also likely to raise short-term budgetary pressures.
-- Germany commands over sufficient fiscal space to accommodate higher public spending.

“The proposed return to the debt brake in 2023 disguises the government’s increasing reliance on off-budget spending,” said Yesenn El-Radhi, Vice President of the Sovereign Group at DBRS Morningstar. “Moreover, the budgetary figures assume the impact of the war in Ukraine and accompanying energy security risks to be contained to the ongoing fiscal year,” Mr El-Radhi continues.