The leaders of Germany's three-party coalition on Friday achieved a breakthrough in negotiations on the national budget for 2025, dpa has learnt from government sources.
The coalition leaders have also reached a preliminary deal on a financial plan to secure additional economic growth of more than 0.5% - worth an estimated €26 million ($28 million) - in the coming year.
Sources told dpa that the coalition plans to stick with strict rules against budget deficits, known as the debt brake, banking on a significant increase in economic output and a supplementary budget to overcome shortfalls in government spending.
The breakthrough comes after weeks of negotiations between German Chancellor Olaf Scholz of the Social Democratic Party (SPD), Vice Chancellor and Economy Minister Robert Habeck of the Greens and Finance Minister Christian Lindner of the pro-business Free Democratic Party (FDP).
The key sticking point has been a multibillion-euro deficit in government expenditure, with Lindner's FDP refusing to sideline the debt brake to allow for additional borrowing and investments, and the SPD ruling out any cuts to welfare spending.
Sources told dpa that the new deal includes a supplementary budget totalling €11 billion to bridge the gap, compensating for lower-than-expected tax revenues and higher government spending.
After a final round of consultations carried on throughout the night on Thursday, Scholz and Habeck met their parliamentary groups on Friday morning to discuss the details of the deal.
The leaders had originally planned to reach an agreement by Wednesday, but are now aiming to present a budget at a Cabinet meeting on July 17.
In order to meet the deadline, a preliminary deal was essential, as the drafting of the budget law typically takes around 10 days.
The Bundestag, the lower house of the German parliament, is due to begin deliberating the draft budget from mid-September, and it could be approved in November or December.
Growth plan for Germany
The coalition's new financial plan aims to kick-start a German economy that has struggled since the coronavirus pandemic, with companies withholding investment and private consumption failing to re-emerge.
Business associations have long complained about hurdles to growth, including a high tax burden, a shortage of skilled labour and excessive bureaucracy.
Left-wing critics, meanwhile, blame the debt brake - enshrined in the German constitution in 2009 in the wake of the financial crisis - for preventing key investments in infrastructure and education.
While the debt brake is set to remain active, the new deal aims to address several issues to encourage further growth.
Employer contributions to pension and unemployment insurance for employees already drawing a pension will be directly paid out as wages in the future to provide incentives for increased employment under the plans.
Welfare spending is set to be improved with "start-up funding," to encourage long-term unemployed people to keep more of their earnings in their first year in a new job without losing benefits.
In addition, tax-free allowances are to be increased and the income tax rate adjusted to inflation, according to government sources. Tax exemption for overtime is also to be introduced.
The coalition government also plans to reduce bureaucracy across government ministries. In addition, data protection is to be "streamlined" in order to reduce the administrative burden on small companies.
The new European Union supply chain directive is also to be transposed into national law quickly, while special depreciation allowances are also to be introduced for commercially used electric vehicles.
More spending on child welfare
The preliminary deal on the 2025 national budget also includes significant increases in spending on children's welfare, government sources told dpa.
The emergency child allowance for families in need will rise by €5 ($5.40) in 2025, while the government plans to invest €2 billion in improving the quality of daycare centres over the next two years and maintain support for voluntary childcare services.
Government sources said Family Minister Lisa Paus was satisfied with the outcome, which protects spending on child welfare despite Lindner's saving targets.
Opposition: Knockout only 'postponed'
Leading opposition figure Markus Söder of the Bavarian-based Christian Social Union (CSU) said the deal would not be sufficient for a fundamental turnaround in the German economy, nor to reverse the fortunes of the crisis-hit coalition.
"I don't think that will be enough. The knockout has only been postponed," he said.
Söder said the opposition would examine the details of the deal in the Bundestag, but criticized the coalition partners for their lack of a governing philosophy.
"It's not enough for a fundamental change," he concluded.
