German government reaches deal to reduce deficit target after 2025 budget debacle

By Maria Martinez

BERLIN (Reuters) -Germany's coalition government reached a deal on Friday to narrow its 2025 budget deficit target from 17 billion euros ($19 billion) down to 12 billion euros, in a compromise aimed at salvaging the spending plan after the original proposals fell apart.

The cabinet approved its 2025 budget in July after months of wrangling but left open how to reduce the gap between projected spending and revenue. Finance Minister Christian Lindner said then that the government's intention was to reduce the shortfall to 9 billion euros.

"It would be better if it was in single-digit figures," Lindner said on Friday about the newly agreed target of 12 billion euros.

"This is somewhat higher than I would wish for as finance minister."

The government agreement paves the way for a draft budget plan to be submitted to parliament on Friday, keeping the legislation on track for approval by the end of the year.

Under the deal, the infrastructure division of Deutsche Bahn will be given 4.5 billion euros in equity, which will replace subsidies that were included in the previous version of the draft budget.

In addition, Deutsche Bahn will receive a loan of 3 billion euros from the government, which can be used to redeem infrastructure bonds previously issued on the market.

"Compared to the July decision, we have decided to invest in transport infrastructure with additional capital and loans for Deutsche Bahn and have made further general savings," German Chancellor Olaf Scholz said on Friday about the agreement.

The draft budget for 2025 includes a total of 15.1 billion euros in investments for rail infrastructure.

The equity injection and the loan do not count towards the debt brake, which limits public borrowing to 0.35% of gross domestic product.

"The debt brake is therefore respected and all the measures that we have now introduced, for example giving loans and equity to the railway, are designed in such a way that they are absolutely in line with the constitution," Lindner said.

The constitutionality of the different options to narrow the gap was carefully studied, as the government was trying to avoid the chaos of November 2023, when a court ruling blew a 60 billion-euro hole in the public finances and threw the government's financing framework into turmoil.

Options under scrutiny in July had included converting the grants of national rail operator Deutsche Bahn and the highway company into loans, as well as using extra funds from state bank KfW. The advisory board to the Finance Ministry had said those options were problematic and new options had to be found.

The government will also get 300 million euros extra from energy utility Uniper, as the company will pay 2.9 billion euros instead of 2.6 billion as it has set aside more funds for the payment obligation to the federal government for aid received in 2022.

Other measures include a 200-million-euro reduction in the provision for the loss of tax revenue from the European Union energy crisis fund.

"The budget legislators can now begin their deliberations on next year's budget right on time after the parliamentary summer break," Scholz said.

The Bundestag will begin debating the budget plan in the second week of September. The Budget Committee then carries out a final review on Nov. 14, and the budget should pass both houses of parliament before the end of the year.

Lindner said on Friday that he expected the projected budget gap could be further reduced by November.

($1 = 0.9080 euros)

(Reporting by Maria Martinez, Christian Kraemer and Holger Hansen; Editing by Rachel More, David Holmes, Emelia Sithole-Matarise and Hugh Lawson)