Coalition agreement 2021-2025: Additional financial leeway for future investments?

The coalition agreement is here. Do the targeted fiscal policy instruments allow sufficient leeway for the necessary climate and other investments in the future? Tom Krebs and Janek Steitz with an assessment.




26. NOVEMBER 2021


6 MIN.

Text and analysis by Tom Krebs (University of Mannheim, Forum New Economy) and Janek Steitz (Agora Energiewende)

The coalition agreement of the traffic light parties essentially contains three financial policy instruments for public financing of climate and other future investments. First, the financing of public investments by strengthening the equity base of public companies and the credit financing of investments by these companies. Second, the promotion of private investments in the future by expanding existing KfW programs and reducing climate-damaging subsidies. Thirdly, the use of the exemption from the debt brake in 2021 and 2022 to finance the crisis-related additional spending in the coming years by building up reserves. In addition, the coalition agreement calls for an adjustment or further development of the cyclical adjustment procedure on the basis of scientific findings. In this way, the traffic light parties have taken up the main proposals of Krebs, Graichen and Steitz (2021) and thus created the fiscal policy prerequisite for a modernization decade.

Rough estimate of additional scope due to KoaV 2022-2025 measures

Measure coalition agreement
Additional leeway
a. Further development of KfW into an innovation and investment agency n/a Expanding the Future Fund and KfW’s tried-and-tested promotional instruments (e.g. low-interest loans with subsidies) can make a significant contribution to leveraging private investment. Strengthening KfW’s equity base is neutral in terms of the debt brake.


b. Strengthening of public companies (e.g. DB or BlmA) through financial transactions Around EUR 25 billion Financial transactions by the federal and state governments (e.g., strengthening of equity capital) and borrowing by public-sector companies can cover part of the investment needs in the climate sector in the period 2022-2025. If 1/4 of the needs identified in Krebs and Steitz (2021) (federal and local governments) are financed in this way, there is additional scope of around EUR 25 billion for 2022-2025.


c. Adjustment of the overall repayment schedule of pandemic related public debt in accordance with NGEU Around EUR 6 billion If the Corona related repayment obligations from 2020 do not start from 2023 as previously planned, but instead start from 2026 (or later), this can create additional leeway.


d. Adjustment of the accounting of special assets within the debt rule n/a Does not create leeway per se, but is a prerequisite for establishing a reserve in the new Climate and Transformation Fund under the debt brake exception clause (see d. and e.), which can then be used in a debt brake-neutral manner over the course of the legislative session.


e. Earmarked filling of the new Climate and Transformation Fund with unused credit from 2021. Up to EUR 65 billion  

In its 2021/2022 annual report, the German Council of Economic Experts expects a budget deficit of just under EUR 175 billion. According to the supplementary budget 2021, the authorization for permissible net borrowing is EUR 240 billion for 2021. The unused borrowing authorization is to be transferred to the Climate and Transformation Fund in accordance with the coalition agreement, taking into account that there must be a connection to the Corona pandemic (see comments below).


f. Consideration of increasing the Climate and Transformation Fund under the 2022 emergency rule n/a As long as links to the Corona pandemic can be established, further increases should be possible.
g. Evaluation and, if necessary, adjustment of the cyclical component of the debt brake Around EUR 30 billion (if new regulation takes effect from 2023) See Krebs/Steitz/Graichen (2021); assuming that the federal government commits to a sustainable growth-friendly economic policy and takes structural measures (e.g. investment in infrastructure or raising the minimum wage).
h. Implementation of suitable projects within the framework of Public-private-Partnerships n/a Difficult to estimate; possibly in hydrogen infrastructure.
i. Reduction of superfluous, ineffective and climate damaging subsidies and expenditures Up to 30 billion euros It is unclear how ambitious the reduction of climate-damaging investments will be; only the abolition of the diesel privilege is explicitly addressed. Potential for reducing “superfluous” expenditures uncertain. Cautious estimate total: EUR 30 billion.


j. One-time contribution to reduce legacy debts of municipalities Up to 20 billion euros Financing instrument unclear; possible one-time allocation to a legacy debt fund in 2022.


TOTAL 176 bn. euros + X Around 45 billion / year; including funds already made available, it should be possible to launch the necessary investments within the LP20 – subject, however, to the proviso that the formation of reserves (e. and f.) is legally feasible.


Federal public investment

Financing of the necessary federal investments is secured by the instruments we have proposed and mentioned in the coalition agreement (strengthening the equity base of public enterprises and the borrowing capacity of public enterprises). In this area, structural measures will be particularly important for successful implementation: Focus on the core business (offering public infrastructure and public services domestically), effective management organization and direct control by the owner (the public sector).

In addition, it should be noted that the Federal Employment Agency needs additional funding and a certain financial reserve in order to adequately fulfill the additional tasks mentioned in the coalition agreement (investing in people). This means, among other things, that – as proposed in our study — the federal government should partially compensate for the losses suffered by the BA in the Corona crisis (additional crisis-related expenditures) of almost 30 billion euros through a one-time allocation. Important: This does not require the accumulation of reserves – this is therefore innocuous under constitutional law.

Promoting private investment

The EKFs should be transformed into a climate and transformation fund. It makes economic sense to use reserves not used in 2021 and possibly additional reserves from 2022 to finance the fund. From a constitutional point of view, it is important to establish a direct or final causation link between the Corona crisis and the expenditures financed with the reserves – see the expert opinion of the Scientific Service “Emergency Debt of the Federal Government and the Länder” of November 22, 2021. However, such a link is given for the financing of the reduction of the EEG levy and part of the future climate investments, as we argue in our study.

The dismantling of climate-damaging subsidies should take place independently of the financing issue. This is because the promotion of climate-friendly investments has a particularly strong steering effect if climate-damaging subsidies are reduced at the same time.

It is important to note that the EEG levy is to be financed from 01.01.2023 via the climate and transformation fund using budget funds (revenues BEHG and ETS and, if necessary, further federal funds). In total, this is a requirement of around EUR 60 billion. It must also be taken into account that the introduction of “super depreciation” will lead to reduced tax revenues in the period 2022-2025.

Adjustment of the cyclical adjustment procedure

The coalition agreement mentions the further development of the estimation of the cyclical component or potential output based on scientific findings. The current estimation method has weaknesses especially after crises or structural reform. Our study develops ideas for the further development of the estimation method based on the relevant scientific literature. In implementing these and other proposals, it should be noted that methodological further developments are integrated into the European process (as also required by the federal law on Art 115 GG).



During the high point of market orthodoxy, economists argued that the most 'efficient' way to combat climate change was to simply let markets determine the price of carbon emissions. Today, there is a growing consensus that prices need to be regulated and that a carbon price on its own might not be enough.