Explainer-What next for Germany's contentious 2025 budget?

By Maria Martinez

BERLIN (Reuters) - Germany's three-way coalition has been battling for months to resolve differences over next year's budget. Chancellor Olaf Scholz of the Social Democrats (SPD), Economy Minister Robert Habeck of the Greens and Finance Minister Christian Lindner of the Free Democrats (FDP) aim to agree at least an outline next week.

The following sets out the background to negotiations and what is at stake:

WHAT HAVE BEEN THE MAIN STICKING POINTS?

Total spending plans for 2025 submitted by individual ministries exceeded the limit by around 20 billion euros ($21 billion).

Lindner said a handful of ministries had excessive wishes, without naming them. Government sources said they included the Greens-led foreign ministry and SPD-led ministries for development, defence, interior and labour.

WHY ARE NEGOTIATIONS SO CHALLENGING THIS TIME?

Drafting of both the 2025 budget and a medium-term financial roadmap through to 2028 are hard because Lindner has demanded a period of fiscal consolidation after higher spending during the COVID-19 pandemic and the more recent energy crisis.

The year 2028, included for the first time in the mid-term financial plan, is considered particularly difficult. This is because a special fund for the armed forces is due to run out and an extra 20-25 billion euros will likely be needed in the regular defence budget to meet minimum NATO spending goals.

WHEN WILL THE DRAFT BUDGET BE READY?

The deadline for an accord was July 3.

Although the government no longer expects the cabinet to meet it, Scholz, Habeck and Lindner could still present a rough political agreement next week on key points.

A new date of July 17 is being considered, as the finance ministry needs around two weeks to turn a political agreement into a detailed draft budget.

The new date would still allow all deadlines for submitting the draft to the Bundestag, the lower house of parliament, to be met.

WHAT HAPPENS NEXT?

After the summer break, the Bundestag begins deliberating in the second week of September.

The Budget Committee carries out a final review on Nov. 14, and the budget should pass both houses of parliament before the end of the year.

DOES GERMANY HAVE EXTRA FISCAL ROOM?

The structural component of the debt brake, a fiscal rule embedded in the constitution, allows deficit spending of only 0.35% of gross domestic product.

Furthermore, new European Union rules further restrict Germany's fiscal headroom, requiring stricter adjustments than under national regulations and leaving no rule for additional borrowing, according to the finance ministry.

When they submitted their spending requests, some ministries had hopes of getting additional funds if tax revenue forecasts were increased.

However, the federal government is now expected to have 11 billion euros less in tax revenues next year than forecast in October of 2023.

On the bright side, the cyclical component of the debt brake allows additional borrowing in economic downturns. Because the government's latest economic forecast projects more modest growth next year than was estimated in 2023, Lindner can increase borrowing by 8 billion euros.

WHAT ARE THE POLITICAL IMPLICATIONS?

In June's EU election, the ruling parties in Germany's coalition government fared poorly, with the far-right Alternative for Germany taking second place behind the conservative CDU.

One year before the federal election, with difficult regional elections coming up, an agreement on the budget and on a long-awaited package to stimulate an anaemic German economy is a test of a coalition often accused of being hobbled by internal disagreements. ($1 = 0.9353 euros)

(Reporting by Maria Martinez; editing by Mark John and Kevin Liffey)