The federal cabinet today adopted the government draft for the 2022 federal budget and the fiscal plan to 2025. The German government is continuing to pursue a decisive fiscal policy that includes large-scale assistance measures and record investment levels. In addition, the numbers show that the federal government is in good fiscal shape. Germany’s debt ratio is far lower than projected and remains low by international standards.

“We have every reason to be optimistic! The recovery is underway. During the pandemic, the fiscal policy action we took was right on target: We protected the health of many of our citizens, supported businesses, saved millions of jobs and prevented Germany from entering a downward spiral. After weathering the crisis comparatively well, we now want to emerge from the crisis in good shape. That’s why we are continuing to pursue resolute, decisive fiscal policy measures in our 2022 budget. Our investments are targeted in particular towards social cohesion, strong communities and a strong, climate-friendly economy that is fit for the future.” Finance Minister Olaf Scholz

Emerging from the coronavirus crisis with success – and record investment levels

The draft federal budget for 2022 shows that the German government is continuing to pursue decisive fiscal policy action. A broad-based investment initiative remains in place to counter the effects of the coronavirus crisis. The draft 2022 budget provides for €51.8bn in investment spending.

This is €1.8bn more than the already ambitious target set out in the government’s earlier benchmark figures decision. In all of the years covered by the new fiscal plan, government investment levels will remain high at about €51bn per year.

By maintaining significantly higher investment levels compared with pre-crisis years (€38.1bn in 2019), the government is also demonstrating a firm commitment to reinforcing Germany’s position as an attractive place to do business.

Key priorities include investments in education and research, digital infrastructure, forward-looking transport infrastructure and the climate-friendly transformation of the economy. Additional investment spending will come from various special funds run by the federal government. These include special funds for energy and climate, digital infrastructure, childcare expansion, and expanded all-day care for primary-age children.

Draft 2022 federal budget and fiscal plan to 2025: an overview

Target
2021

Draft budget
2022

Fiscal plan benchmarks

2023

2024

2025

in €bn

Expenditure

547.7

443.0

403.4

407.6

408.3

Includes: investment59.351.850.950.850.8

Revenue

547.7

443.0

403.4

407.6

408.3

Includes: tax revenue

284.0

315.2

332.9

346.4

359.2

Net borrowing

240.2

99.7

5.4

12.0

11.8

A leader in climate action thanks to ambitious policy measures

Climate action is one of the German government’s key priorities. In the past two years, Germany has earmarked over €80bn for climate policy measures. A new immediate action programme for 2022 will add roughly another €8bn to this amount. The government aims to make Germany a climate action trailblazer.

Emerging from the crisis with full strength

Overcoming the pandemic and stabilising the economy also remain a top priority. For this reason, the draft 2022 budget sets aside €10bn in precautionary funding to cover unanticipated extra pandemic-induced costs.

Another €7bn will be made available in 2022 to ensure full financing for business assistance programmes and the special fund for cultural events. Funding for the special loan programme managed by KfW will be increased to about €4bn. Roughly €1.9bn will be allocated towards the procurement of Covid-19 vaccines. Extensive tax-related assistance (€1.6bn) will also be provided, for example on the basis of the Third Coronavirus Tax Assistance Act (Drittes Corona-Steuerhilfegesetz).

Strengthening social cohesion

In addition to stabilising and strengthening the economy, the German government also places a high priority on enhancing social cohesion.

For this reason, the government has again agreed to cap the rate of social security contributions at 40% in both 2021 and 2022. The aim here is to ensure that insured persons and their employers are not faced with excessive cost burdens. To this end, the government will provide the national health fund with an additional grant in the amount of €7bn.

Taking international responsibility seriously

At the same time, the German government is stepping up to take its share of international responsibility for development cooperation, humanitarian aid and international climate action.

To this end, the draft 2022 budget includes roughly €2.4bn in additional funding for these purposes. This amount will be distributed amongst the departmental budgets for the Federal Foreign Office, the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, and the Federal Ministry for Economic Cooperation and Development. An additional €2.0bn will be set aside in 2022 for international measures to fight the coronavirus crisis and for international climate measures.

Finances under control, despite major challenges posed by the pandemic

Due to the budgetary impact of the pandemic and the costs arising from the government’s supportive fiscal policies, Germany will once again have to make use of the exception from the debt rule in the 2022 fiscal year.

Germany remains in an unusual emergency situation that is beyond governmental control and has a major adverse impact on public finances. As a result, it will continue to see marked tax revenue shortfalls compared with the levels anticipated before the crisis. At the same time, the government needs to persevere with its successful crisis response. It will continue to deploy significant funds to fight the pandemic itself and boost the economy.

Nonetheless, the German government will borrow significantly less in 2022 than in 2021. Overall, the government plans to take on €99.7bn in new debt in 2022 to finance revenue shortfalls and additional spending. The projected debt ratio for 2021 is 74½%. The general government debt ratio is thus significantly lower than it was following the economic and financial crisis, when government debt climbed to 82.3% of GDP in 2010. Germany’s debt ratio also remains low by international standards – the lowest among the G7.

The German government’s fiscal policy approach is in line with the European Commission’s recommendations. The European Commission suspended the deficit and borrowing limits set out in the Stability and Growth Pact for the third year in a row in 2022 to give euro area member states the necessary leeway to finance growth and assistance measures. It intends to resume regular application of the deficit and borrowing limits from 2023 onwards.

In good shape for the coming years

Starting in 2023, the German government plans to comply with the debt rule again without resorting to the emergency exception clause. In the years after 2023 that are covered by the fiscal plan, new borrowing will be reduced significantly. Assuming that the revenue in the reserve is used in full, new borrowing will fall to €5.4bn in 2023, €12bn in 2024 and €11.8bn in 2025.

After 2025, it will not be necessary to document the need for fiscal adjustments in order to comply with the constitutional budget rule. Under the new fiscal plan, the necessary fiscal adjustment will total approximately €6.2bn in 2025, meaning that it has already been brought down significantly below the €20.1bn total set out in the benchmark figures. The German government deployed the same budgetary instrument during the last financial and economic crisis. Fiscal adjustments in the 2011–2013 fiscal years totalled €34.5bn, significantly more than the figure presented today in the fiscal plan to 2025.

Successful fiscal policy track record

The German government can present a successful fiscal policy track record at the end of the current legislative term.

The government supported low- and middle-income earners in particular. The near-complete abolition of the solidarity surcharge, the child benefit increase and the increase in tax allowances represent the largest tax relief in more than 10 years.

Federal investments rose to a record total of €186bn between 2018 and 2021, more than 50% above the level achieved in the previous legislative term. The draft budget and the fiscal plan continue this approach, with plans for record investments of more than €200bn by 2025. This government has invested more in climate action, digital technology and research than any government before it.

The government also took targeted and decisive fiscal policy action during the pandemic. The figures show that the government’s supportive policies are effective. The German economy is getting through the Covid-19 crisis comparatively well. Overall, the economy can be expected to recover quickly in 2021, not least thanks to the government’s interventions to support companies and save jobs. The government has once again substantially raised its growth forecast for 2022 to 3.6%.