German state finances are in a critical condition

German state finances are in a critical condition and the future government must consolidate them. The Federal Audit Office pointed this out on Wednesday, parties that are negotiating the formation of a governing coalition and considering a new debt. At the same time, the government's economic advisers lowered their growth forecast for Europe's largest economy in 2021 on Wednesday. The center-left Social Democrats (SPD), the Green Greens and the Entrepreneur Free Democrats (FDP) face a huge spending problem. During exploratory talks, they agreed to return to strict debt limits from 2023 and avoid raising taxes. According to sources familiar with the parties' talks last week, they discussed new loans next year that would allow a one-billion injection of several billion euros into the government's climate investment fund. However, in a report for the lower house of the Bundestag parliament, the Federal Audit Office warned against fiscal generosity. "The situation is serious. In order for federal finances to be sustainable again, the new government must act now," he said, adding that federal finances were in a "critical state". "Waiting and hoping for better economic times will not be enough to restore financial sustainability," the office added. Berlin "faces a number of fiscal problems and challenges for which no solutions have yet been found," the office said, citing the fight against climate change, the aging of society and the risk of rising interest rates. The Office of the Office for Administrative Efficiency recommended a moratorium on expenditure to the future cabinet, on the basis of which each new measure would be "counterfunded" by repealing other measures. In addition, the government's economic advisers, who follow their forecasts in determining fiscal policy, cut their growth forecast for Europe's largest economy in 2021 on Wednesday to 2.7% from 3.1% in the March forecast. This is due to supply chain problems and inflationary pressures. This will complicate the trio of parties who would like to agree to form governments before Christmas. It makes it more difficult for them to fulfill their investment promises and restore the so-called debt brake from 2023 without raising taxes. However, the consultants also increased Germany's gross domestic product (GDP) growth forecast by six percentage points to 4.6% next year. Olaf Scholz's Social Democrats will lead the government if the negotiations are successful. The Greens are more relaxed on government spending, but for pro-entrepreneurial Free Democrats, fiscal discipline is a central element of their policies. In their report, the advisers expect the current high inflation to continue in 2022. They estimate that the average inflation rate driven by high input prices will reach 3.1% this year and fall to 2.6% in 2022. The government should respond to the advisers' report early next year 2022.