Fall 2024 projection: What does this mean for budget planning?

Robert Habeck could use some good news now, after all, he wants to present himself as the new strong man in his party, as a winning factor for the Greens. And not as a hapless economic crisis minister who, despite all his confidence, simply cannot defy reality.

But when Habeck officially presents the autumn projection for 2024 on Wednesday afternoon, he will still have to provide evidence that there are reasons for his continued optimism. Because what was a slight plus for Germany’s groaning economy has turned into an inglorious minus.

Habeck’s ministry now assumes that the economy will shrink by 0.2 percent this year and that the gross domestic product (GDP) will not grow by 0.3 percent as previously expected. The “Süddeutsche Zeitung” initially reported on the poor values. Last year, economic output in Germany fell by 0.3 percent.

A persistent lull that neither Habeck nor the traffic light coalition can enjoy, even if the economics minister is at least positive for 2025 and 2026. The gloomy outlook for this year is also likely to have an impact on budget planning, which is based on many assumptions – for example economic growth.

SPD politicians insist on reforming the debt brake

Andreas Schwarz, budget politician for the Chancellor’s party, points this out, among others. He sees the forecast as having concrete effects on the budget for 2025 and international competitiveness. “As the third largest industrial nation in the world, we cannot afford a recession,” warns the SPD politician star. “Economy and finance ministers are called upon here with their ideas.”

Can the current budget planning even be maintained? At least the economic forecast could cause even more uncertainty in the complicated preparation of the budget, which has a financing gap of twelve billion euros. For example, a spokesman for the FDP-led Finance Ministry told the Reuters news agency that the assumptions could also affect the tax estimate at the end of the month. He didn’t give any details. However, if growth expectations have fallen, the expected total tax revenue is likely to be lower than previously thought.

Leading research institutes have also already lowered their forecast for the German economy this year. In their recently published autumn report for the government, economists assume that GDP will fall by 0.1 percent in 2024, marking the second time in a row that it will shrink. This is not all Habeck’s fault; many of the decisions were made incorrectly even before he was in office. But the numbers are also a problem for him personally – and for his dreams of becoming chancellor. The economic situation is closely linked to him as a minister. There will likely be many questions about his record during the election campaign.

“Our economy now needs powerful growth impulses,” warns SPD householder Schwarz. That would also solve some of the investment brakes in companies. “The current debt brake is not only a brake on growth, but also a brake on the future. That’s why it urgently needs to be modernized.”

SPD board member Sebastian Roloff argues similarly. The economic politician calls for investments and secure energy prices in order to create a “clear and predictable basis” for the industry. Roloff recently brought a “scrappage bonus 2.0” into play to stimulate the market for electric cars, while SPD leader Lars Klingbeil called for “massive investments” in network expansion and a reduced industrial electricity price.

Roloff is now primarily holding the liberal coalition partner responsible. “We’re happy to repeat it, but the question is whether ‘Repetitio est mater studiorum’ [“Wiederholung ist die Mutter des Studierens”] also applies to the FDP; I don’t have that feeling – some people seem to feel most comfortable deep in the trenches of their own complacency, even when all the numbers show that action needs to be taken.” What is meant is the FDP’s persistent adherence to the current debt rules.

Hoping for the “growth initiative”

Finance Minister Christian Lindner is also dissatisfied with the current economy. “The German economy is treading water,” said the FDP leader on Monday. But a reform of the debt brake is unlikely to be possible with him. Instead, Lindner insists on the federal government’s so-called growth initiative. This is a first step to enable an upswing, said Lindner, but it must be built upon. For once he agrees with Vice Chancellor Habeck.

The Economics Minister expects GDP to increase by 1.1 percent in 2025 and even 1.6 percent in 2026, as the “Süddeutsche Zeitung” reports. However, on the condition that the federal and state governments – including those with the CDU and CSU in government – quickly implement the growth initiative in question with bureaucratic relief or work incentives for older people.

Although Habeck did not want to comment on the upcoming economic forecast, he basically told the newspaper that there was still a great need for action. “A first necessary step is this federal government’s growth initiative,” he explained. “The German economy can grow significantly faster in the next two years if the measures are fully implemented and can have their effect.” But the truth is that more will be needed.

As expected, the opposition sees it that way and is sharply criticizing the federal government. “The traffic light policy is further shrinking the economy in Germany – it unsettles citizens and also creates completely wrong incentives,” said CDU finance politician Matthias Hauer star. The “slump” in the growth forecast is also the result of federal policy. According to Hauer, the shrinking economy will now tear further holes in the state coffers, especially since the draft budget is already “largely questionable”. Hauer complained that in addition to a dubiously high global underspending of twelve billion euros and understated citizens’ money costs, “the economy is now also being stalled.”

Habeck said in Berlin that an impulse for investment would help in the short term. This is exactly what the federal government is planning with its growth initiative. However, not all measures have been initiated by the cabinet yet; there could still be changes in the Bundestag. For example, the plans for tax incentives for skilled workers from abroad are controversial. Some things could be prevented in the Federal Council because it would also lead to reduced tax revenue for the states. And last but not least: it is not clear whether the growth initiative will actually have the desired effect.

The most important thing would be to release the brakes now, warned Habeck. Data is constantly being corrected – “unfortunately now downwards”.