The German government have no money and they can't stop spending it

How the myopic, no trade-offs "both-and" politics of the present are preparing the "neither-nor" reality of the future.

Finance Minister Christian Lindner, Economics Minister Robert Habeck and Chancellor Olaf Scholz present their plans to spend money they don’t have at a 5 July press conference.

Budgets are boring, but in their tiresome details lurk the story of our politics.

I’ve often written of the three great political ideologies of the twentieth century. Illiberal nationalism, or fascism, met a spectacularly violent end in 1945. Communism persisted longer before finally succumbing to its own collapse in 1989. Liberal democracy is all that is left, and the big questions are whether it is also doomed to fail and what its collapse might look like. Pondering discussions surrounding the German budget for 2025 has given me a dark suspicion of what the answers to these questions might be. I suspect that liberal democracy will not so much collapse, as it will become mired in its own myopic imprudence, more and more bound by its unrelenting tendency to mortgage the future for small gains in the present, until all accounts are empty and there are only debts to pay and nothing left to borrow.

You may recall that the Federal Republic has run out of money. This happened last November, when our government’s doubtful efforts to reappropriate Covid emergency funds were declared unconstitutional. The Scholz coalition can’t borrow more, because of our strict debt ceiling rules, and they can’t just raise taxes, because these are already among the highest in Europe and it would spell political suicide for the liberal FDP, who are junior partners in the coalition. Their senior partners, however, are the social democrats and the Greens – leftist parties whose entire political strategy depends on promising entitlements to political clients. Some doubted whether it would be possible for the coalition to square the circle and develop a viable budget for 2025. A few even predicted the FDP would leave the government and we would have new elections.

That has not happened. On 4 July, Chancellor Olaf Scholz announced in triumph that the leaders of the coalition had come up with a budget after all, in fact two of them – a supplementary budget for 2024 and a full budget for 2025. These contained “a lot of very clever measures,” among them a “stimulus turbo” for the faltering German economy. The next day, as when the draft was released, Scholz tweeted that “we do not need an either-or politics, but rather a both-and politics. Sound finances and economic growth. Support for Ukraine and stable pensions. A strong Bundeswehr, good roads and functional rail. This is what the draft budget stands for.”

No trade-offs, candy for everybody, and all of it accomplished not by producing more or saving more but by accounting legerdemain and shifting the financial burden towards future governments after all serving politicians have been voted out – that is what liberal democracy amounts to in the year of our Lord 2024.

According to media reports, the budget contains a range of techniques to evade the debt ceiling and spend more on credit than our government would be advised to. Our Finance Minister, for example, proposes to borrow money not by issuing new government bonds at present (higher) interest rates, but by re-issuing old bonds which bear the lower fixed interest rates from prior years. Because these bonds are a bad deal, investors will only buy them for less than their nominal value. The German government will therefore commit to repaying the holders of these bonds more than they borrowed, providing investors effectively the same interest rate as they would’ve gotten had they bought new bonds. The trick is that this repayment will not happen until the Scholz clown car are out of office, so it’s not their problem.

It is a similar story with the Bundeswehr. To meet NATO demands that Germany increase defence spending to 2% of our gross domestic product, the government will buy new frigates, new Eurofighters, new F-35 bombers, new Leopard tanks, new Patriot air defence systems, new satellite communications systems and god knows what other new shiny things. Of course there is no money for any of this, and so the plan is to conclude immediate contracts with manufacturers that will allow the government to delay payment until 2028 – with interest, of course. We will build an army at a premium that some future politicians can worry about funding.

One thing that might raise tax revenue, would be if more people sought work and stopped living off of government entitlements. Those who live on the dole cost the taxpayer, while those who work actually, you know, pay taxes. Alas, the coalition have raised entitlements, disincentivising a great many people from finding a job. The supplementary budget for 2024 thus includes 11 billion Euros in new debt, a substantial part of it to fund entitlement spending. This is money our government will spend so that it can collect even less money in tax revenue. To compensate, we hope to attract foreign workers who will pay taxes instead. The new budget thus also includes a substantial tax incentive for skilled foreign workers; 30%, 20% and finally 10% of their gross salary will be exempt from taxation in the first three years after they arrive. If you think this will have any meaningful impact – or accomplish anything but pissing off native German workers by imposing lighter taxes on their foreign counterparts – you are insane.

In all of these areas, the story is the same: The government are buying goodies in the moment at the expense of the future. This trainwreck of a budget strongly suggests that our rulers are fighting only to survive until the federal elections in 2025; they fully expect to be voted out of office and to leave their successors to deal with all the financial timebombs they’ve sown. And why shouldn’t they? They are the themselves the victims of the identical malfeasance of prior governments.

Since the 1990s, our leaders have thought it prudent to spend as little as possible on Deutsche Bahn. At first nothing much happened, but over the past decade our rail system has become increasingly unreliable. It is now a national embarrassment that is punctual only 64% of the time. If your journey involves a single connection, in other words, you will be late more often than not. Also since the 1990s, we have spent less and less on our military. The Bundeswehr have become a laughingstock as a result; in 2022, it was reported that they have munitions sufficient for only two days of warfare. These are just two of many catastrophic problems that would take many years to solve even with the most honest and earnest of efforts. Instead, we’re proposing to fix them via the same means that they arose in the first place.

What is afflicting Germany are not contingent or incidental defects in planning and prudence. Our problems arise directly from the liberal democratic system of the Federal Republic. Politicians win elections by promising to give voters fun things. They are focused entirely on their careers and their term of office. Accepting pain in the moment for a better future is unthinkable and the equivalent of political suicide, because voters will always prefer parties that promise Scholz’s “both-and politics.” I guess that will continue until we end up in a dismal neither-nor reality.