Wednesday, November 29, 2023

Oliver Hartwich: Stark warning in creative misuse of covid funds

Writing about European affairs for a New Zealand audience may seem, at first glance, a bit of a strange pastime. What happens in European domestic politics rarely seems to matter down here.

Yet part of my motivation for this column is to elaborate parallels between Europe and New Zealand. The challenges we face are often similar, but our responses to them are usually not. That means there is much to compare.

This is especially true of my topic today: the fiscal response to the Covid crisis.

In many countries, the pandemic triggered the creation of enormous emergency funds. And wherever there are such large pots of money, there will always be a temptation for governments to use them, well, creatively. Funds initially approved for handling the pandemic might then find themselves dedicated to other causes.

In New Zealand, that is precisely what happened. The Covid Response and Recovery Fund was established in Budget 2020. That was at the peak of the first wave of the crisis, and it appeared eminently sensible to have such a tool in place.

However, few people would have foreseen the variety of seemingly unrelated purposes to which this fund was put: Cultural projects, cameras on fishing boats, school lunches, and the Government’s Three Waters reforms all received cash from the Covid fund.

Of course, this had its critics. The Auditor General and a few journalists highlighted questionable uses of the emergency funds. The opposition did so, too. My colleague Dr Eric Crampton kept reminding the Government that it often failed in funding health measures even though there was money for all sorts of other things.

But none of these critics could stop the Government from misusing the Covid fund. The Government continued regardless. Perhaps that was one of the reasons why it was kicked out in October’s election.

Well, this was New Zealand. But in a parallel universe, some 17,000 kilometres away, a similar approach to Covid emergency funds has just ended up with a very different outcome.

In Germany, too, the federal Government granted itself a special financial vehicle to deal with Covid. At the beginning of the pandemic, the Merkel Government received parliamentary authorisation to borrow hundreds of billions to spend on fighting the pandemic and stabilising the economy.

The initial authorisation proved too generous – but perhaps it was meant to err on the side of generosity. After all, you would not want to go back to Parliament every few months to ask for an extra allocation.

As a result, there were 60 billion Euros left when the new German coalition Government took over in late 2021.

That new coalition was a strange political beast. Made up of the Social Democrats (the German version of Labour), the FDP (the German version of ACT) and the Greens (the German version of, well, the Greens), these parties had little in common.

The Social Democrats did not want to cut spending. The FDP did not want tax increases or more debt. The Greens wanted plenty of projects against climate change and for the transformation of the economy.

Bringing these three parties together required a political squaring of a circle. And it would have been impossible had it not been for the unspent Covid funds.

Olaf Scholz, now Chancellor and previously Minister of Finance under Merkel, had a brilliant idea. He simply repurposed the unspent Covid billions by turning the Covid fund into a climate fund. And voila, now there were 60 billion Euros to spend on whatever.

The FDP was happy because this move did not involve tax increases and it circumvented the constitutional deficit rules. The Greens were happy because they got their pet projects funded. The Social Democrats were happy because they did not have to worry about warring coalition partners.

However, this seemingly clever financial manoeuvre did not go unchallenged. Unlike New Zealand, Germany has robust constitutional checks and balances, particularly concerning fiscal policy.

The German Constitution, or Basic Law, contains strict rules on budgetary discipline and debt limits. These rules are not mere guidelines but enforceable legal requirements overseen by the Federal Constitutional Court.

As the Scholz Government enjoyed its creative fiscal solution, trouble was brewing. The opposition Christian Democrats (the German equivalent of National) saw the repurposing of Covid funds as a breach of constitutional principles and lodged a complaint with the Constitutional Court.

Their argument was straightforward yet potent: the funds allocated for pandemic relief could not legally be repurposed.

The Court’s ruling was a bombshell. It declared the Government’s reallocation of 60 billion Euros from the pandemic fund to climate action unconstitutional. The budget was ruled illegal and nullified by the court.

This decision left the Government’s ambitious climate action budget in disarray and sent shockwaves through the political landscape. The ruling effectively stripped the coalition of the financial means to pursue its key projects, thereby challenging the very foundations of its governance model.

It was made even worse by the fact that the Court, in passing, raised doubts about the legality of further shadow budgets. So Berlin may now be out of pocket for a few hundred billion Euros.

The court ruling has thus plunged German politics into a deep crisis and left the political survival of the coalition Government and Chancellor Scholz in doubt.

This judicial intervention in Germany starkly contrasts with New Zealand’s experience. Here, despite criticism and public scrutiny, the Government faced no legal repercussions for its misuse of the Covid fund.

Would we have rather had a written constitution with a deficit limit and budget rules? Would we rather have a constitutional court with the power to declare the Government’s budget null and void?

Or do we prefer political flexibility without judicial recourse, knowing that we can always kick out the Government at the end of a term if we do not like it?

I am not sure which version I prefer. But you cannot go past the German solution if you like political drama.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.


DeeM said...

Not sure I like the idea of a tiny group of unelected judges deciding what parliament can do. After all, look at the shocking decisions the NZ Judiciary and Supreme Court has been reaching recently. Common Law kicked into touch in favour of Maori cultural practice.

Surely, there can be governmental checks and balances and the ability to call an early election, authorised by the Governor-General, if major breaches are made.
NZ sure as hell needs stronger, enforcable rules to prevent the runaway train we've had for the past 3 years, but judges don't do it for me.

Anonymous said...


History never lies but politicians do without fail. In a fake system based on false values, lying is considered to be an essential part of political survival.

The Swiss system of direct democracy and people power is totally unique and gives the people the right to have a referendum on almost any issue they choose.

This makes the people much more responsible in their choices as a winning vote on any issue becomes part of the constitution and cannot be changed by government or parliament. Only a new referendum can change such a decision.

Basil Walker said...

Part of the National, ACT, NZ First coalition excellent agreement is a new Ministry of Regulation with wide spread powers to investigate the Governments new and existing regulation and legislation.

Just hold your horses until the first report is tabled .and the CEO's squirm.
Basil Walker