100 billion euros for the Bundeswehr, 200 billion euros for a relief package. The federal government is financing two of its most expensive projects in the coming year via special funds. How does that work and why does the Federal Court of Auditors criticize it as unconstitutional?
In principle, a state finances itself in the same way as a company or a private individual. He has income that consists mainly of taxes and duties, and expenses for a wide variety of items from maintenance of the administration to the construction of infrastructure to pensions and social security. The Basic Law stipulates that these revenues and expenditures must be listed and approved by the Bundestag every year. We know this as the so-called federal budget. This includes all expected income and expenses. If the financial situation changes drastically in a year, the Bundestag can decide on a supplementary budget.
If the expenses in the federal budget are greater than the income, Germany incurs new debts. We’ve been very good at that over the decades. To date, we have accumulated a mountain of debt of 2.3 trillion euros. Far too much, the federal government and federal states decided back in 2009. That’s why they issued the so-called debt brake at the time. Since then, public budgets can only borrow up to a maximum of 0.35 percent of their gross domestic product (GDP) per year. For the federal government, that would be a maximum of 12.6 billion euros this year.
The debt brake may only be exceeded in exceptional cases, namely natural disasters, economic crises and other exceptional emergency situations. This included the corona pandemic, for example, which is why new debt from 2020 to 2022 totaled around 440 billion euros. This was used to finance corona aid, economic stimulus packages and other aid measures.
From 2023, however, this emergency will officially no longer exist. Federal Finance Minister Christian Lindner (FDP) will then have to comply with the debt brake again and has repeatedly emphasized that he wants to do so. The budget for the coming year only provides for new debts of 17.2 billion euros, in the years after that it should be even less. This plan is to be approved by the Bundestag at the end of November.
Nevertheless, the federal government is planning large expenditures. The Bundeswehr is to be modernized at a cost of 100 billion euros in the coming years, and the next major relief package due to the energy crisis could cost around 200 billion euros. This expenditure of 300 billion euros is not in the budget. In view of all the other necessary expenses, they could not be financed with the expected tax revenues of almost 500 billion euros per year – at least not if the federal government wants to comply with the debt brake. Incidentally, this cannot be overridden at will. It is enshrined in the Basic Law. Willful breaching of the debt brake would therefore result in complaints to the Federal Constitutional Court.
So the federal government has to find other ways to finance major projects such as the Bundeswehr and the relief package. The solution is called “special assets”. This is a construct that German budgetary law allows. The funds in special funds are not subject to the general budget. They are a kind of secondary or shadow budget, but the federal government must also keep accounts of the exact inflows and outflows.
There are also strict rules for special funds that are laid down in the Basic Law. One is that they have to be decided by the Bundestag. A second is that special funds are funds set up for a specific purpose. The Bundestag cannot simply approve a general second budget with a special fund. Special funds are financed either from the tax revenue of the state or through a separate credit authorization, i.e. new debt.
With the debt brake, however, care was taken to ensure that the Bundestag cannot simply circumvent the rules of the brake with special funds. Special funds are also subject to the debt brake – at least so far. For the 100 billion euro special fund for the Bundeswehr, the Bundestag amended the Basic Law on June 3 to the effect that this sub-budget is exempt from the debt brake. That was the reason why the ruling traffic light coalition was also dependent on the votes of the opposition, especially the CDU/CSU parliamentary group. Changes to the Basic Law require a two-thirds majority in the Bundestag and Bundesrat, which the coalition alone could not provide.
The federal government wants to use a different trick for the twice as large special fund to combat inflation and the energy crisis. The funds are to be taken from the Economic Stabilization Fund WSF, which was set up during the Corona crisis. It actually expired in July, but is now being reactivated. The WSF is to borrow the money this year, but the payments will run until 2024. According to the Federal Court of Auditors, this violates constitutional regulations for special funds. These always have to take on their debts in the year in which the expenses are incurred, so that the federal government is prevented from creating a cushion for future times through special funds. The advantage for the federal government of reactivating the WSF is that it does not require an amendment to the Basic Law, as was the case with the Bundeswehr special fund. The votes of the traffic light coalition in the Bundestag are sufficient.
The Federal Court of Auditors, which routinely examines such projects, sees this critically. Theoretically, opposition parties could complain to the Federal Constitutional Court, but only if they represent at least 25 percent of the MPs. The only faction that achieves this are the CDU and CSU. While both criticize the project, they will not file a lawsuit for the time being. Firstly, the Union would like to finance even more relief, secondly, it has already sued against the conversion of corona debts for the federal government’s climate fund and only wants to wait for this decision by the Federal Constitutional Court.
By the way: Even if special funds play a role in reporting more often this year – mainly because of the high sums – they are historically not uncommon in the Federal Republic. Nine special funds are currently still active, including funds that manage health insurance and pensions for former employees of the federal railways and civil servants in general, a fund that protects securities investors from the bankruptcy of service providers and the climate fund decided in 2011, which is intended to help finance the energy transition. The oldest is the special fund from the European Recovery Program (“Marshall Plan”) from 1948. The fund’s original 6 billion Deutschmarks have meanwhile grown to 12 billion euros, which the Kreditanstalt für Wiederaufbau repeatedly issues as loans through support programs.
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