By Maria Martinez and Andreas Rinke
BERLIN (Reuters) -A German court ruling that wiped billions from the federal budget could drag down growth by as much as half a percentage point next year in Europe's biggest economy, an economy ministry source told Reuters on Friday.
The coalition is scrambling to fix a large hole in its finances after a court ruling blocked the government from transferring 60 billion euros ($65 billion) in unused funds from the pandemic towards green initiatives and industry support.
The assessment of the ruling is an early indication of just how damaging some in Chancellor Olaf Scholz's coalition see it, though Finance Minister Christian Lindner on Thursday had said it was too early to assess the extent of the issue.
The economy and finance ministry declined immediate comment.
"According to initial rough estimates, a loss of investment funds could cause growth in 2024 to be about half a percentage point lower," the source, who is familiar with the economy ministry's forecasts, said.
"So the ruling could have a negative impact on economic growth," the source added.
Last month, the economy ministry predicted 1.3% growth for next year.
The court ruling has increased tensions in Chancellor Olaf Scholz's already fractious government, which has seen support slump as it tackles a series of crises and the economy teeters on the brink of recession.
Although the Greens want additional spending, the Free Democrats (FDP), which heads the finance ministry, reject additional debt and higher taxes.
"Some of the expenditure planned for the coming year will now have to be cut, which the governing parties are likely to find difficult to agree on," said Commerzbank (ETR:CBKG) chief economist Joerg Kraemer.
Economy Minister Robert Habeck from the Greens party doubled down on warnings that the ruling could damage industry, disrupt climate change goals and see jobs move abroad.
The Climate and Transformation Fund was designed to ensure value creation and jobs, Habeck said.
"It will be used to finance the production of green steel, green chemicals, the ramp-up of hydrogen, battery cell production, and also semiconductor production to strengthen economic security," he said.
"If this is at risk, jobs and value creation are at risk. The exodus of industry is damaging our country and society."
Germany stands by its commitment to Intel (NASDAQ:INTC) despite the court decision.
"There is a clear political decision in favour of Intel and nothing has changed yet," said an economy ministry spokesperson on Friday.
In June, Berlin agreed subsidies worth nearly 10 billion euros with the U.S. chipmaker, which will develop two chip-making plants.
As the upheaval continued on Friday, a parliamentary committee paused deliberations on the 2024 draft budget and saw some decisions postponed until after an extraordinary meeting next week.
Some measures were agreed however, and parliament passed a multibillion-dollar tax relief package for small and medium-sized companies, aimed at unleashing new investment at a time of weak foreign demand and high interest rates.
State gas and electricity price brakes, which were due to expire at the end of the year, have been extended until March 31, 2024, the news agency dpa reported.
However, the tax break for food at restaurants won't be extended. The VAT on food in restaurants will rise back to 19% from 7%, after it was cut during the COVID-19 pandemic.
Some specific expenditure allocations, however, will be discussed next Thursday after a special meeting on Tuesday to discuss the impact of the ruling.
MORE LEGAL CHALLENGES THREATENED
The ruling is a boost for the resurgent opposition Christian Democratic Union party which had brought the suit against the government.
Its leader Friedrich Merz said the CDU was considering further legal action against the 200 billion euro Economic Stabilisation Fund (ESF).
The ESF was created in 2020 to support companies amid the coronavirus pandemic but since last year it has focused on the energy crisis, and a successful court challenge could threaten fresh turmoil.
CDU lawmaker Christian Haase warned that budget proceedings should be delayed and said the 2024 budget could be deemed unconstitutional, comparing the coalition's troubles to the sinking of the Titanic.
"Now the band is playing and we are waiting for the last piece to be played next Thursday."
The chief budget officers of the coalition government accused the opposition of refusing to cooperate in budget deliberations.
There are 29 special funds at the federal level, with a total volume of 869 billion euros. It is not clear which of these funds are at risk.
"These fears seem overblown," Commerzbank's Kraemer said. "However, there are considerable risks associated with the Economic and Stabilization Fund."
For an EXPLAINER on the impact of the budget ruling, see Full Story