The government will stick to its controversial debt break
After months of negotiations, the ruling coalition managed to strike a deal on the 2025 budget that will respect the self-imposed debt break of 0.35% of GDP. The budget is set to be neutral and includes spending and revenues of EUR 480.6 billion. The government will, however, rely on financial transfer and extra-budgetary funds to sustain spending, but that will complicate budget execution, given that overall federal and extra-budgetary expenditures still face a funding gap of around EUR 17.0 bln. The government also adopted a supplementary budget for 2024, which increases borrowing by EUR 11.3 bln, intended to provide some additional measures to boost the economy and to plug the existing gaps in public finances.
Business Implications
While the 2025 budget does offer several positive surprises, it does not tackle the key issues of chronic underinvestment and low productivity, and government policy does not provide ambitious measures to increase the market’s external competitiveness. Executives should continue to expect relatively anemic growth in the long term, but the boost to public investments may provide some new opportunities. The de-prioritization of climate protections and plans to scrap the extra-budgetary fund signals that the government intends to focus on improving domestic infrastructure and increase spending on construction. With the 2025 elections already looming over the government, a new ruling coalition is unlikely to bring substantial changes to the fiscal outlook and support for the economy without a constitutional reform.
What are the government’s priorities?
The government has introduced a relatively ambitious spending program, but the adherence to the debt break and structural underinvestment is unlikely to significantly alter the long-term trajectory of the economy. While total spending is set to decline, the budget will hike public investments by EUR 8.0 bln to EUR 78.0 bln in 2025, with most new investments likely to go towards infrastructure and energy transition. Housing and urban development and education and research are also set to see substantial increases of 7.4% YOY and 3.9% YOY, respectively. On the other hand, climate protection spending, and economic cooperation funding is set to decline, and the government also intends to slash funding previously earmarked for Ukraine in half. While defense spending is also set to increase, the amount is lower than previously expected, and will rely on the EUR 100.0 bln extra-budgetary fund that will run through 2028. In a bid to support the economy, the government is also offering work incentives for people to remain in work after retirement, tax cuts for skilled foreign workers, and an increase to the income tax thresholds and the tax-free allowance through 2026. Individual ministries, however, are likely to see cuts to expenditures, which will affect certain sources of B2G demand.
The government also plans to amend the extra-budgetary climate fund, with one proposal suggesting scrapping the fund altogether by 2027 and subsidizing projects directly from the federal budget. In 2024 alone, the budget can rely on EUR 49.0 bln, which has been partially supported by carbon permits, but the 2023 Constitutional Court decision that blocked transfer to the budget has made its financing unsustainable.
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