Germany's ruling center-left coalition has managed to strike a political deal on the federal budget for 2024, government sources said on Wednesday.  

The agreement comes after a court ruling threw government finances into disarray and exposed deep rifts between the three governing parties.

What caused the budget gap?

Germany's constitutional court ruled on November 15 that the coalition government's decision to reallocate €60 billion ($64.69 billion) of unused debt from the COVID-19 pandemic era to its climate and transformation fund was unconstitutional.

The ruling limited the government's ability to set up and draw money from off-budget special funds to circumvent the constitutional "debt brake," which restricts the annual public deficit to 0.35% of Germany's total economic output.

It blew a big hole in public finances. For the 2024 budget, the government has had to find an additional €17 billion ($18.3 billion) to fill the hole. 

How did the ruling affect Scholz's coalition?

The court ruling also raised tensions in Scholz's already fractious three-way coalition, which is made up of the Social Democrats (SPD), the environmentalist Greens and the business-focused Free Democrats (FDP).  

The three parties often have contradictory priorities and they have suggested different measures to resolve the budget crisis.

While the SPD and the Greens sound in favor of increasing taxes, the FDP has ruled out tax hikes and instead suggested welfare cuts.  

The SPD and the Greens are staunchly against any cuts to social benefits; they instead want to suspend the debt brake again for 2024 to allow for increased government borrowing. But the FDP opposes this move. 

What did the coalition agree on?

Chancellor Olaf Scholz, Economy Minister Robert Habeck and Finance Minister Christian Lindner presented the details of the deal on Wednesday. 

Scholz said the government will reinstate the debt brake in 2024. "We will keep to the debt rule... in budget 2024," said the chancellor.

"The government is sticking to its targets," he said, adding that there will be cuts and savings, as the government will have to make do with less money following the constitutional court ruling.

Scholz also stressed that the climate and transformation fund will remain a key instrument for the climate-friendly transformation of the German economy. But the fund will be cut by €12 billion for 2024, he said.

Addressing the Bundestag on Wednesday, Scholz said: "We have agreed to prioritize spending without putting the social security of our country or its transformation at risk. The Federal Ministry of Finance will now quickly implement these political compromises and provide the Bundestag with all appropriate formultions."

Scholz said of negotiations: "It was hard, but constructive. In the end, we got a good, truly democratic compromise."

Habeck said the ruling coalition agreed to end financial incentives to buy electric cars sooner than previously planned, without revealing the exact date for when they would expire.

He also said that subsidies for the expansion of solar power will be cut.

There will also be changes to how the renovation of the country’s rail network will be financed.

Lindner said the Deutsche Bahn, the state-owned national rail operator, should benefit from privatization proceeds. Deutsche Bahn wants to sell its subsidiary Schenker.

Lindner also noted that the government will slash climate-damaging subsidies to the tune of €3 billion.

What about German aid for Ukraine?

The three coalition parties vowed to continue German support for Ukraine.

Lindner said Berlin plans to provide direct bilateral assistance worth €8 billion to the war-ravaged country next year. "We will continue to shoulder this responsibility," said the finance minister.

Scholz stressed Germany would have to react should the Ukraine conflict worsen next year.

If the situation worsens, for instance, due to other supporters cutting back their aid to Ukraine or a further increase in threat levels faced by Germany and Europe, "we will have to react to this," he said.

The chancellor said he expects the Cabinet to give its approval to the budget agreement as early as possible.

Will the parliament pass it by year's end?

Despite the coalition's deal on a draft budget, it's not clear if there will be enough time for the lower house of the German parliament, the Bundestag, to approve it before the end of the year.

The failure to finalize a 2024 budget will result in the government starting next year with a provisional budget.

That means government expenditure will continue and essential services like social benefits, salaries and pensions will be paid out.  

But other spending like industrial subsidies will be frozen.  

Finance Minister Lindner will also get increased powers as he will have to authorize any new spending.

sri/lo (Reuters, AFP, dpa, AP)

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