There is no optimal debt rule. But effective institutional self-commitment by governments protects citizens against the consequences of excessive national debt. The debt brake should therefore be handled carefully.
Fiscal rules are intended to guarantee that public budgets are sustainable in the long term and that the state has sufficient scope for debt, especially in crisis situations. In Germany, the constitutionally enshrined debt brake for the federal and state governments generally provides for structurally balanced budgets. The Federal Constitutional Court’s ruling of November 15, 2023 has further fueled the discussion about reforming the debt brake. In addition, the reform of the European fiscal rules raises questions for national implementation with the help of the debt brake. Whether and to what extent a reform of the debt brake is necessary given the high financial requirements for defense, green and digital transformation and the resolution of the investment backlog should be carefully considered. The new EU fiscal regulations must also be taken into account. In general, government spending should be given greater priority and funds should be used more efficiently.
National debt can make sense to stabilize economic development, to cope with exceptionally high, short-term financial needs and to distribute financing burdens between generations. In economic crisis situations, the state can support demand and thus the overall economic balance through credit-financed spending in order to prevent long-term damage to the national economy. It can also make sense to finance extraordinary, one-off expenses through debt instead of through tax increases. Constant tax rates are important for citizens because they give them planning security for private investments. And finally, it may make sense to finance public investments, from which future generations in particular benefit, through government debt in order to ensure that future users share in the costs.
Even if an optimal or maximum level of debt cannot be clearly determined theoretically, there is extensive empirical evidence that a high level of debt increases the risk of debt crises and limits the scope for investment. In addition, governments have incentives to finance government spending through debt and to shift the burden into the future in order to secure votes. Fiscal rules serve to limit national debt and force a transparent prioritization of government spending. For example, in the Maastricht Treaty in 1992, the members of the EU agreed on fiscal rules at the European level that are intended to ensure sound budgets. In a monetary union like the Eurozone, limiting government debt not only serves to ensure the sustainability of public finances, but also to prevent free-rider behavior. With a common currency, there is an incentive to expand national debt and pass on the costs to the community in the form of inflationary developments.
In Germany, as a result of the global financial crisis and in view of the political consensus that a constantly rising debt ratio is unsustainable, the debt brake was anchored in the Basic Law in 2009. It also serves to secure European fiscal rules at national level. During the Corona pandemic, the federal and state governments used the emergency clause of the debt brake to finance extensive loan-financed support measures for the population and the economy. At the beginning of 2022, the federal government approved a second supplementary budget for 2021 and planned to transfer 60 billion euros of unused credit authorizations as part of the emergency clause to the Energy and Climate Fund (EKF) in order to finance transformation tasks. In November 2023, the Federal Constitutional Court made a far-reaching ruling on a constitutional lawsuit brought by the CDU/CSU faction of the German Bundestag against the transfer of emergency loans to the EKF. Accordingly, emergency loans can no longer be saved and deficits in special funds must be properly recorded. The federal government had to adjust the budgets for 2023 and 2024 accordingly.
In view of the high financial requirements for defense, green and digital transformation and the resolution of the long-standing investment backlog, possible adjustments to the debt brake are being discussed. The proposals range from minor technical changes to a general increase in credit flexibility to the introduction of a so-called “golden rule” that would allow debt financing of net capital expenditure. The reform options should be carefully weighed up in terms of their advantages and disadvantages. It is also important to make the German regulations compatible with the new regulations agreed at European level. The new EU system plans to focus primarily on the growth of government spending in the future and no longer on the government deficit. Institutionally implementing a national spending rule in a federal state like Germany raises many questions. The safeguards for government deficits agreed at European level are also likely to be politically interpreted as target values rather than maximum values and will fuel the discussion about expanding the debt scope of the German debt brake.
There is no optimal debt rule. But effective institutional self-commitment by governments protects citizens against the consequences of excessive national debt. The debt brake should therefore be handled carefully.
Notice: This policy brief was created on the basis of the ECONWATCH meeting “After the Karlsruhe verdict: What happens next with the debt brake?” with Prof. Dr. Thiess Büttner (Friedrich Alexander University Erlangen-Nuremberg, Advisory Board of the Stability Council, Scientific Advisory Board at the BMF)
BMWK
Market Economy Foundation
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