Ongoing fiscal consolidation confirms our expectations that domestic activity and demand through 2024 will remain soft, and MNCs will continue to see challenges in ensuring top-line growth amid acute price sensitivity. B2G MNCs and firms that work directly with ministries and government departments will likely see easing demand on the back of the announced cuts and should expect pricing pressures to persist in the long term.
Overview
- The government in Germany has finalized the approval of the federal budget, which will see expenditures reduced by 6.4% YOY in 2024 to EUR 445.7 billion.
- Long-term budget planning envisions gradual increases in expenditures through 2027 at an average pace of 1.6% YOY.
- Fiscal consolidation comes on the back of the reinstatement of the debt brake in January 2024, which stipulates a limit on the debt-to-GDP ratio of 60%.
- Finance Minister Christian Lindner has justified the cuts to expenditures by pointing out that Germany is expected to spend EUR 37.0 billion on debt interest in 2024.
Our View
Discussion over the budget during the summer has confirmed our previous expectation that the government will need to introduce substantial fiscal revisions to comply with the debt brake and address rising concerns over the sustainability of public finances. While the scaling down of fiscal support for the economy through energy support measures should help in easing some of these existing budgetary pressures, the government has had to introduce substantial reductions across a variety of spending categories and ministries, with the Ministry of Health’s budget seeing a reduction of 33.7% YOY and the Ministry of the Interior seeing a reduction in expenditures of 1.4% YOY. Defense spending is set to remain a top priority in the long term, and the government will rely on the EUR 100.0 billion special fund to sustain expenditures, which will be utilized through 2027 to modernize and rearm the military.
Despite gradual increases in 2025–2027, the long-term fiscal outlook remains conservative, given the fact that Germany will likely see additional fiscal burdens beyond 2027, when it will have to repay some COVID-related debt and European funds debt. The rise in policy rates is also complicating the outlook and may require additional adjustments to the spending outlook beyond 2024. More encouragingly, the budget in Germany does not include substantial tax revisions and should not put a significant burden on consumers. Some issues, however, persist, such as the proposed energy support funding for energy-intensive industries, which have seen a significant deterioration in their competitive position. Initial proposals by the Greens were rejected by the ruling coalition; instead, the government agreed to a EUR 7.0 billion corporate tax relief package that will likely do little to abate the structural pressures experienced by Germany industries.
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