By Maria Martinez, Andreas Rinke and Sarah Marsh
BERLIN (Reuters) -Germany's government clinched a last-minute deal on its 2024 budget on Wednesday that will see Berlin return to its self-imposed limits on new debt despite warnings this could hamper growth in Europe's top economy and its green transition.
Chancellor Olaf Scholz's three-party coalition was faced with either suspending what is known as the debt brake or finding some 17 billion euros ($18.3 billion) in savings and tax hikes after a Nov. 15 constitutional court ruling threw its plans into disarray.
Weeks of tense talks that had raised doubts the coalition could survive ended at around 5 a.m. (0400 GMT) on Wednesday with an agreement to go down the path of austerity - a win for fiscally hawkish junior partner, the Free Democrats (FDP).
Scholz of the centre-left Social Democrats (SPD) nevertheless said the brake to limit debt could be suspended again if Ukraine needed more funding to fight off Russia's invasion. He was speaking hours before flying to Brussels to an EU summit at which support for Kyiv will be top of the agenda.
"The government will stick to its goals ... but we must do so with less money which means cuts and savings," Scholz told a press conference flanked by Finance Minister Christian Lindner of the FDP and Economy Minister Robert Habeck of the Greens.
He told broadcaster ARD that the agreement would be turned into specific laws that could then be voted on by Germany's lower house of parliament, adding the goal was to conclude the process as soon as possible, ideally by end-January or early February.
After the court ruled that 60 billion euros of unused pandemic debt could not be moved to a climate and transformation fund, Scholz said that fund would be reduced by 12 billion euros in 2024 and by 45 billion euros in budget planning up to 2027.
For example, it will no longer be used to upgrade state railway firm Deutsche Bahn. Instead that will be partly financed through the privatisation of stakes in companies the government does not need, Lindner said.
Premiums for the purchase of electric cars will be ended earlier than previously planned and subsidies for the solar industry cut.
The budget compromise also foresees new levies on kerosene fuel for domestic flights and on the production of environmentally harmful plastic, as well as an increase in the CO2 surcharge on fuel, heating oil and gas - in a concession by the business-friendly FDP, which had ruled out tax hikes.
"A ROTTEN COMPROMISE"
Commerzbank (ETR:CBKG) chief economist Joerg Kraemer said the budget consolidation measures could dampen growth by up to half a percentage point next year.
Others said the deal simply delayed a necessary decision on how to fund investments in an economy that has already suffered years of chronic underinvestment. Last month's court ruling has made clear the government will not be able to resort as easily to off-budget funds going forwards.
Wednesday's agreement is "a rotten compromise with which the federal government is just pushing the problems into the future," Marcel Fratzscher, president of the German economic institute DIW, said.
"Citizens are among the losers of this agreement."
Germany has by far the lowest debt in the G7 grouping of major economies, but memories of how frugality paved the way for postwar reconstruction and how costly it was to reintegrate indebted ex-communist East Germany have shaped a uniquely debt-averse political culture.
The country enshrined a debt brake, which restricts the public deficit to 0.35% of gross domestic product, into its constitution in 2009.
But questions are mounting over the brake's suitability given the challenges Germany faces.
Berlin already had suspended it for three years to respond to the COVID-19 pandemic. The court ruling last month prompted it to suspend it again for this year because of the energy crisis sparked by the Ukraine war, and Scholz and Habeck had sought a further suspension in 2024.
But Lindner stood firm on the need to stick to the constraint, saying on Wednesday "orientation towards the debt brake remained of major importance".
STABILISING THE COALITION
The political victory could help FDP leaders face down calls from within its ranks for the party to leave Scholz's fractious coalition, whose support has slumped recently to record lows.
The party, which is less ideologically aligned than the Greens and SPD, is polling around the 5% minimum threshold to enter parliament.
The FDP executive said on Tuesday that it would shortly hold a member survey on whether the party should stay within the coalition after a petition by members gathered the necessary signatures.
The survey would be non-binding and political analysts say it would be tantamount to suicide for the FDP to leave now and be seen as abnegating responsibility in times of crisis.
Still, a negative answer could make life even harder for FDP leaders and the coalition at large.
"It appears that Lindner's coalition partners wanted to spare the FDP a loss of face," Jan Techau, analyst at Eurasia Group said.
"Overall, after suffering a severe setback from the court’s ruling, and despite some lingering uncertainty about budget details, the government has been able to pull off effective and unusually discrete crisis management, an achievement that will further increase government stability."
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