Scholz backs Germany’s return to tight government spending

BERLIN – Chancellor Olaf Scholz backed plans to revive Germany’s tradition of tight government spending, despite mounting demands to modernise Europe’s largest economy.

Mr Scholz’s ruling coalition approved a 2024 finance plan earlier this month that slashes net new borrowing to the lowest levels since before the pandemic. The fiscal consolidation is aimed at returning to a constitutional debt limit after suspending it for three years.

“We are back on track on the budget,” Mr Scholz said on Friday in Berlin during his summer press conference.

Germany faces a series of challenges.

Its energy system is ill-suited to support manufacturers with sufficient affordable clean energy, while an ageing workforce creates demands for social spending even as companies face a growing labour shortage.

There are also demands to invest in physical and digital infrastructure to keep pace with other developed economies. 

Mr Scholz has been under pressure to deliver on pledges to tackle a new era in terms of foreign policy in light of Russia’s war against Ukraine, while domestic issues like a controversial home-heating reform have triggered public feuds in his coalition and frustrated voters. 

Next year’s budget squeezes spending across all government departments except for defence. 

During the wide-ranging press conference that touched on topics including the rise of far-right Alternative for Germany and the country’s support for Ukraine, the chancellor vowed to continue to meet Nato targets for spending 2 per cent of gross domestic product on defence.

However, he didn’t say how that would be financed once the €100 billion (S$148 billion) special defence budget will be used up in 2027. BLOOMBERG