German energy subsidy savings spark battle over how to use cash

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Germany is expected to spend less than half the €83bn it earmarked for subsidising energy prices this year, according to a top economic think-tank, leading to a bitter battle within the country’s coalition government over how to use the extra cash.

Economy minister Robert Habeck, one of the leaders of the Green Party, is pushing to use the savings for a subsidy on industrial electricity prices. But he is facing opposition from fiscally conservative finance minister Christian Lindner, head of the liberal FDP, who would rather use the money to reduce Germany’s budget deficit.

The Munich-based Ifo Institute on Wednesday estimated the “gas price brake” that German chancellor Olaf Scholz unveiled last year, as part of a €200bn plan to cushion the impact of the country’s energy crisis on households and small businesses, would cost about €13.1bn due to lower gas prices — only a third of the €40bn set aside for it this year.

The government is also on track to make similar savings on the €43bn it had budgeted to subsidise electricity bills, with the policy set to now cost around half that amount based on energy futures prices, according to Max Lay, an Ifo specialist who conducted its latest study.

“Some politicians say ‘we have this funding, so let’s use it’, for instance on the industrial electricity price subsidy, but I’m not sure this will go through,” said Lay.

A spokesperson for Lindner’s finance ministry said Berlin had already spent €18.9bn on the gas price brake. About half of this figure was used to pay most households’ gas bills in December, which was not part of the Ifo’s estimates. Berlin has so far spent a further €11.3bn on the electricity price brake.

The overall cost of the energy aid measures has been lowered as prices have fallen. The European gas benchmark TTF has dropped almost 90 per cent from its peak last August, while German wholesale electricity prices are down about 80 per cent from their peak.

The Ifo recently forecast that the savings on Germany’s energy subsidies would help to lower the government’s budget deficit this year from just over €100bn, or 2.6 per cent of gross domestic product, to slightly less than €70bn, or 1.7 per cent of GDP.

The country’s constitutional debt brake, which limits the amount of new borrowing, has been suspended since the pandemic hit. But it is due to come back into force next year and the finance ministry is pushing most government departments to rein in their spending.

One way to fund some of the extra projects planned by Berlin would be to use a special purpose fund set up before the pandemic to meet the country’s target of reducing carbon emissions.

The government announced on Wednesday that this fund, which does not directly count towards the debt brake, would provide €212bn from 2024 to 2027 for upgrading the railways, improving the energy efficiency of buildings and subsidising heat pumps. It will be partly financed by income from the carbon pricing and emissions trading schemes.

Berlin remains deadlocked over Habeck’s separate proposal earlier this year to subsidise 80 per cent of the electricity costs for energy-intensive companies until 2030. That plan, estimated to cost between €25bn and €30bn, is designed to support the sectors of Germany’s economy hit hardest by last year’s energy crisis unleashed by Russia’s full-scale invasion of Ukraine.

The proposal has attracted criticism from other European countries that cannot afford such measures.