Second Supplementary Budget Act 2021 is void

Press Release No. 101/2023 of 15 November 2023

Judgment of 15 November 2023 - 2 BvF 1/22

In a judgment pronounced today, the Second Senate of the Federal Constitutional Court held that the Second Supplementary Budget Act 2021 (Zweites Nachtragshaushaltsgesetz 2021) is incompatible with Art. 109(3), Art. 110(2) and Art. 115(2) of the Basic Law (Grundgesetz – GG) and is void.

The applicants – 197 members of the Bundestag’s CDU/CSU parliamentary group – challenge the Second Supplementary Budget Act 2021, which retroactively amended the Budget Act (Haushaltsgesetz) and the 2021 federal budget. The Act provided for the transfer of an authorisation to borrow EUR 60 billion, granted in response to the COVID-19 pandemic but not needed in the 2021 fiscal year, to the Energy and Climate Fund (a legally dependent special-purpose fund of the Federation) to be used in subsequent fiscal years. The transfer was carried out retroactively in February 2022 for the then concluded 2021 fiscal year. The Energy and Climate Fund has since been renamed the Climate and Transformation Fund.

The Second Supplementary Budget Act 2021 does not satisfy the constitutional requirements for emergency borrowing. The Senate’s decision is based on three reasons; each of which individually is sufficient to declare the Act void. First, the legislator failed to sufficiently demonstrate the necessary factual connection between the emergency and the crisis management measures taken in response. Second, decoupling the declaration of an emergency pursuant to Art. 115(2) sixth sentence of the Basic Law from the actual use of the borrowing authorisations is incompatible with the constitutional principles of yearly budgeting (Jährlichkeit) and annuality (Jährigkeit). The de facto unlimited use of emergency borrowing authorisations in subsequent fiscal years without counting them towards the ‘debt brake’ rule (Schuldenbremse) for those years, and instead counting them as ‘debt’ for the 2021 fiscal year is therefore impermissible. Third, the adoption of the Second Supplementary Budget Act 2021 after the end of the 2021 fiscal year violates the principle set out in Art. 110(2) first sentence of the Basic Law that the budget must be determined in advance (Vorherigkeitsgebot).

The Court’s decision means that the volume of the Climate and Transformation Fund is reduced by EUR 60 billion. Insofar as the state has entered into obligations that it can no longer service as a result of this reduction, the legislator must compensate for this through other means.

Facts of the case:

The 2021 federal budget originally authorised total borrowing of approximately EUR 180 billion. In April 2021, the (first) Supplementary Budget Act 2021 increased that amount by a further EUR 60 billion to a total of approximately EUR 240 billion for the 2021 fiscal year. This authorisation was made possible by a Bundestag decision of 23 April 2021, which declared an extraordinary emergency within the meaning of Art. 115(2) sixth and seventh sentence of the Basic Law – an exception from the constitutional debt brake rule.

Over the course of the 2021 fiscal year, it became apparent that the additional borrowing authorisations would not be needed. Against this backdrop, a proposal was put forward to transfer the entire EUR 60 billion of additional borrowing authorised by the Supplementary Budget Act 2021 to the Energy and Climate Fund, thereby making it possible to use the funds in subsequent fiscal years.

Art. 1 of the Second Supplementary Budget Act 2021 amended the 2021 federal budget by increasing the total volume of the budget from EUR 547.7 billion to EUR 572.7 billion, and increasing the volume of the Energy and Climate Fund from EUR 42.6 billion to EUR 102.6 billion. Art. 2 of the Act provided for the amendment to enter into force with retroactive effect from 1 January 2021. The Act was promulgated in the Federal Law Gazette on 25 February 2022.

With their application for abstract judicial review, the applicants seek a declaration that the Second Supplementary Budget Act 2021, in providing for the transfer of the borrowing authorisations to the Energy and Climate Fund with retroactive effect, is incompatible with the Basic Law and void.

In addition, the applicants requested a preliminary injunction ordering that, until a decision is reached in the principal proceedings, the borrowing authorisations in question may only be used to the extent that the Bundestag approves a corresponding expenditure in the 2022 federal budget. The Senate rejected this application for preliminary injunction by order of 22 November 2022 (cf. Press Release No. 104/2022 of 8 December 2022).

Key considerations of the Senate:

The Second Supplementary Budget Act 2021 does not satisfy the constitutional requirements for emergency borrowing arising from Art. 109(3) first and second sentence and Art. 115(2) first and sixth sentence of the Basic Law. With regard to the timing of its adoption, the Act violates the principle that the budget must be determined in advance, which follows from Art. 110(2) first sentence of the Basic Law. It therefore need not be decided here whether the Act also violates the principles of budgetary clarity and reliability (Haushaltsklarheit und -wahrheit) under Art. 110(1) first sentence of the Basic Law.

I. 1. a) Art. 115(2) first sentence of the Basic Law gives specific shape to the general prohibition on incurring structural new debt imposed on the Federation and the Länder in Art. 109(3) first sentence of the Basic Law (‘debt brake’ rule). It provides that revenues and expenditures in principle be balanced without revenue from credits. Pursuant to Art. 109(3) fourth sentence and Art. 115(2) second sentence of the Basic Law, this requirement is satisfied when revenue from credits does not exceed 0.35 per cent in relation to the nominal gross domestic product. Art. 109(3) second sentence in conjunction with Art. 115(2) third sentence of the Basic Law additionally provides that when economic developments deviate from normal conditions, the resulting effects on the budget in periods of upswing and downswing must be taken into account symmetrically, through a so-called ‘cyclical component’.

b) Art. 109(3) second sentence in conjunction with Art. 115(2) sixth sentence of the Basic Law authorises the Bundestag to issue decisions allowing the credit limits set by the debt brake rule and the cyclical component to be exceeded in the event of natural catastrophes or unusual emergency situations that are beyond governmental control and are substantially harmful to the state’s financial capacity. In addition to the constituent elements explicitly mentioned in Art. 115(2) sixth to eighth sentence of the Basic Law, a factual connection is necessary between the natural catastrophe or unusual emergency situation on the one hand, and the exceeding of credit limits on the other. In assessing whether such a connection exists, the legislator has a wide margin of assessment. The Federal Constitutional Court does not conduct a review of the proportionality of the emergency borrowing. Nevertheless, the legislator has a burden of substantiation to make it possible for the Federal Constitutional Court to review whether the legislator’s decisions on borrowing are plausible and tenable.

c) Moreover, the systematic concept of the constitutional requirements applicable to the Federation’s borrowing under Art. 109(3) and Art. 115 of the Basic Law gives rise to the principles of yearly budgeting and annuality, which are supplemented by the current-year principle (Grundsatz der Fälligkeit).

aa) The principle of yearly budgeting requires that the budget be determined before the beginning of the fiscal year by the Budget Act (Haushaltsgesetz). Under the annuality principle, authorisations may only be exercised until the end of the fiscal year. Once the fiscal year has ended, they are in principle forfeited. The current-year principle provides that only revenue and expenditure may be budgeted that, in all likelihood, will be effected in the same fiscal year.

bb) The aforementioned budgetary principles must also be observed when an exception from the debt brake rule is invoked on the grounds that a natural catastrophe or unusual emergency situation pursuant to Art. 109(3) second sentence and Art. 115(2) sixth sentence of the Basic Law has occurred. These principles cannot be circumvented through the use of special-purpose funds. Adherence to these principles is subject to strict constitutional review.

2. a) The Second Supplementary Budget Act 2021 must be measured against Art. 109(3) second sentence and Art. 115(2) sixth sentence of the Basic Law. Their explicit constituent elements have been satisfied. However, the legislator has failed to sufficiently demonstrate a factual connection between the declared emergency and the crisis management measures to be financed by the emergency borrowing.

aa) In this regard, the Federal Government makes particular reference to its intent to combine the promotion of economic activity, which was weakened as a result of the pandemic, with another political objective: the promotion of climate protection, transformation and digitalisation. According to the Federal Government, the special circumstances of the pandemic require reliable funding and the promotion of private investment for significant transformation tasks and future challenges in the areas of climate protection and digitalisation and these are important prerequisites for quickly overcoming the effects of the crisis, safeguarding the economy’s competitiveness and thus stimulating and sustainably strengthening economic growth.

bb) This reasoning is not sufficient. At the time of the deliberations on the Act, the COVID-19 pandemic had already been in existence for almost two years. The longer ago the event triggering a crisis occurred – thus allowing the legislator more time for decision-making – and the more indirect the effects of a crisis are, the narrower the legislator’s margin of assessment becomes. This also entails stricter requirements regarding the legislator’s burden of substantiation, all the more so when the legislator – as in the present case – makes use of the possibility of emergency borrowing repeatedly within a fiscal year or in consecutive fiscal years.

cc) The longer a crisis goes on and the more extensively the legislator has made use of emergency borrowing, the more detailed reasons the legislator must give as to why the crisis continues and why its planned crisis management measures continue to be suitable. In particular, the legislator must demonstrate whether the measures taken by the legislator in the past were effective and whether it has drawn conclusions for the suitability of future measures.

The explanatory memorandum to the Act includes no more than the most basic aspects of such an evaluation and categorisation of the crisis management measures taken up to that point. In particular, the explanatory memorandum states that the funds in question supplemented the funds transferred to the Energy and Climate Fund for the purpose of addressing the pandemic in 2020, and thus continued to serve this purpose. According to the explanatory memorandum, developments had shown that the state measures taken so far to overcome the extraordinary emergency were effective. They were considered suitable, necessary and appropriate to mitigate the acute economic effects of the pandemic.

Yet there is no discussion of what specific measures were taken by the Energy and Climate Fund as a result of the first allocation to the fund or what (measurable) effects they had. It is therefore not even clear if the Second Supplementary Budget Act 2021 is to fund the same measures as the original emergency borrowing authorisations in 2020.

The legislator does not provide reasons why the borrowing authorisations deemed necessary in the (first) Supplementary Budget Act 2021 in the amount of EUR 60 billion were, contrary to the original plan, not used by the end of the 2021 fiscal year. Such reasons were all the more necessary here because almost a year had passed between the declaration of an emergency for the 2021 fiscal year and the adoption of the Second Supplementary Budget Act 2021.

An in-depth discussion of such reasons was also needed given that the Energy and Climate Fund had been established much earlier, the programmes it financed were determined at that time and such programmes would not have prevented or limited the effects of the crisis. The programmes financed by the special-purpose fund therefore cannot be deemed suitable for crisis management purposes.

Finally, the explanatory memorandum also fails to clearly distinguish emergency borrowing within the meaning of Art. 115(2) sixth sentence of the Basic Law from the scope of the expanded borrowing possibilities arising from Art. 115(2) third sentence of the Basic Law in cases where economic developments deviate from normal economic cycles.

b) The transfer of borrowing authorisations to the Climate and Transformation Fund provided for by the Second Supplementary Budget Act 2021 runs counter to the constitutional principles of yearly budgeting and annuality following from Art. 109(3) and Art. 115(2) of the Basic Law.

aa) Under the Second Supplementary Budget Act 2021, the transferred borrowing authorisations are to be held as de facto reserves over several fiscal periods; this violates the year-based allocation imposed by Art. 109(3) and Art. 115(2) of the Basic Law. The decision to be taken by the Bundestag pursuant to Art. 115(2) sixth sentence of the Basic Law regarding the declaration of an emergency is tied to a specific fiscal year and must therefore be taken separately for each fiscal year. Decoupling the emergency borrowing authorisations from the actual use of the borrowed funds is incompatible with the constitutional requirements laid down in Art. 109(3) second sentence and Art. 115(2) sixth sentence of the Basic Law. Under these requirements, borrowing authorisations for a specific fiscal year must be limited to covering the expenditures for emergency measures incurred in the same fiscal year.

bb) The Second Supplementary Budget Act 2021 transfers borrowed funds in the amount of EUR 60 billion to the Climate and Transformation Fund – a legally dependent special-purpose vehicle. While these funds affect the calculations of permissible borrowing for the year 2021, the crisis management measures envisaged by the legislator that are to be financed through the borrowing authorisations are planned to be taken in subsequent fiscal years. Under this conception, the Federation incurs actual debt primarily in subsequent years and it can be expected that such debt will exceed the constitutional debt limit applicable to the respective subsequent fiscal year. The borrowing authorisations created through the present Act are to be used without being counted towards the debt limit of the subsequent fiscal years, as the borrowing is included in the budget for the exceptional year of 2021 rather than when the funds are actually borrowed. This is incompatible with the principle of annuality in conjunction with the current-year principle.

cc) Neither the particular situation of the COVID-19 pandemic nor the fact that the Federal Government needs the financial resources to assume currently necessary obligations vis-à-vis third parties that require future payments are capable of justifying the violation of Art. 109(3) second sentence and Art. 115(2) sixth sentence of the Basic Law. If and to the extent that the constituent elements of emergency borrowing were (again) met in subsequent years, such borrowing would be permissible in the amount necessary at the relevant time. There is therefore no plausible reason for making use of borrowing authorisations from the year 2021.

II. The adoption of the Second Supplementary Budget Act 2021 after the end of the 2021 fiscal year violates the principle that the budget must be determined in advance under Art. 110(2) first sentence of the Basic Law.

1. Art. 110(2) first sentence of the Basic Law states that the budget must in principle be set forth in a law enacted before the beginning of the fiscal year.

a) The principle that the budget must be determined in advance serves to give effect to Parliament’s budgetary powers. It is aimed at safeguarding the temporal dimension of Parliament’s budgetary sovereignty and, in particular, serves to guarantee the budget’s guiding function for the entire fiscal year. All constitutional organs involved in the legislative process are required to cooperate to satisfy this principle. This includes the Federal Government, which has the sole right to introduce a (supplementary) budget act.

b) The principle that the budget must be determined in advance generally also applies to supplementary budgets. The purpose of this principle is to safeguard the Budget Act’s effectiveness in steering and managing public finances. It is therefore directed at protecting the budgetary sovereignty of Parliament. Thus, this principle must be applied accordingly to the introduction of supplementary budgets. The principle that the budget must be determined in advance then becomes a constitutional requirement to promptly, and without arbitrary delay, correct or adjust budget proposals that appear, or subsequently prove to be, unrealistic.

c) In the present case, a supplementary budget act for 2021 was only adopted after the end of the 2021 fiscal year.

aa) § 33 second sentence of the Federal Budget Code (Bundeshaushaltsordnung) provides that the government must introduce any supplementary budget bill by the end of the respective fiscal year. The consensus in the legal scholarship is that this provision must be interpreted in conformity with the Constitution to the effect that Parliament must adopt any supplementary budget bill by the end of the year, because it would otherwise be void.

bb) This view is supported by the fact that a supplementary budget is intended to adjust the original planning to new or changed needs and, for this reason, the supplementary budget itself must serve planning purposes for the rest of the current fiscal year. If a supplementary budget is only adopted once the fiscal year has ended, it cannot serve such planning purposes. The implementation of the budget has already been concluded and can no longer be influenced. The adoption by Parliament of a supplementary budget bill after the conclusion of a fiscal year thus runs counter to the budget’s function as a planning tool.

cc) Given the systematic concept of Art. 111 of the Basic Law, violations of the principle that the budget must be determined in advance that occur in relation to the primary budget do not result in sanctions; however, this does not apply to a late supplementary budget. When no budget has yet been adopted for a given period, Art. 111 of the Basic Law grants the Federal Government certain emergency budgetary powers to enable it to provisionally manage financial and economic affairs. However, there is no provision corresponding to Art. 111 of the Basic Law that would apply to a late supplementary budget.

2. Measured against these standards, the Second Supplementary Budget Act 2021 is incompatible with Art. 110(2) first sentence of the Basic Law.

a) The adoption of the Second Supplementary Budget Act 2021 after the end of the 2021 fiscal year violates the principle that the budget must be determined in advance.

It follows from the explanatory memorandum to the Act that the Second Supplementary Budget, in effecting retroactive changes to the 2021 Budget Act, fails to serve as a planning tool – a function that must be served by budget laws. In the explanatory memorandum, the Federal Government points out that state measures to combat the pandemic can no longer be implemented for the 2021 fiscal year.

b) Notwithstanding the question of whether such a violation could be justified under any circumstances, reasons for such justification have not been given, nor are they otherwise ascertainable. The draft act does not contain any statements to this effect.

III. Given that Art. 1 and Art. 2 of the Second Supplementary Budget Act 2021 are incompatible with the Basic Law, the Act is declared void.