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The debt brake in the grip It’s best to do nothing at all

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The debt brake in the grip It’s best to do nothing at all

The proposals from politics and science for easing the debt brake are becoming more and more numerous. But none of them are convincing.

The desire for additional spending flexibility

At this point in November, I had already suspected that the Federal Constitutional Court’s ruling on the debt brake would ultimately lead to an unexpected result: a weakening of the debt brake by politicians. At the time, however, I would not have expected that the discussion would gain momentum as quickly as it is at the moment. The surprising narrowing of their spending scope appears to have hit two of the three traffic light parties and state governments from all political camps to the core.

Economists have also come up with one or two reform proposals. Some of these are not surprising. The usual suspects from the left spectrum want to scrap the debt brake completely. Such demands are more likely to be aimed at your own fan base. Because a two-thirds majority for a complete abolition of the debt brake is not in sight.

If something is going to happen, it will probably be smaller, gradual changes. A change in the procedure for economic adjustment would be an option that can also be implemented with a simple majority. The Federal Ministry of Finance had already put a review of the current procedure and a possible update on the agenda before the BVerfG’s ruling.

Changes with a simple majority

Depending on the outcome of this discussion, there could be some additional scope for debt if the economy is poor. However, these would then have to disappear again more or less symmetrically in times of good economic activity. But despite its neutrality across the business cycle, this approach could be politically attractive in the short term. After all, you want to now allow higher deficits, and a completely different government might have to deal with the reduced spending scope in the next upswing.

A further declaration of emergency would also be possible, but the actors here have to be deprived of illusions that many in Berlin probably still have. According to the BVerfG ruling, a declaration of emergency is no longer a general key to greater scope for spending. For example, if an emergency is declared because Ukraine is to receive greater support, then the additional debt may only be used for this purpose. Individual state governments are still trying to work with generously defined justifications for emergencies, but the risk of later legal conflict should not be underestimated.

Other changes and workarounds to the debt brake would require a two-thirds majority. Since the Union (apart from individual deserting state fathers) and the FDP have so far been firmly committed to compliance with the debt brake, at best small changes could be implemented.

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The fat special fortune Bertha

The variant of the two-thirds special fund is brought into play in many comments, also in a joint FAZ article by Clemens Fuest, Michael Hüther and Jens Südekum. The authors argue that given the threat of gaps in the financing of future budgets, government investments and the support of private investments will most likely be cut. In order not to endanger Germany’s growth prospects, it is therefore necessary to look for ways out. A new special fund is one such solution.

Maybe that would even be acceptable for the Union. It could claim to the outside world that it would leave the logic of the debt brake untouched and would only agree to a special fund once because of an urgent special situation. What special situation would that be? The Federal Minister of Economics has the major, state-led transformation on offer, perhaps we can also say something again about resilience and strategic autonomy.

It doesn’t matter anyway: If you get a two-thirds majority, the justification only has to sound good politically, but not necessarily be economically sound. And since it is foreseeable that the SPD will no longer have a chancellor any time soon, the Union naturally also has a certain interest in creating leeway for the next term of government.

The scope of such a special fund would be flexible. Everything from 400 billion euros to 1,000 billion euros is on offer, and who knows whether that would really be the end of the line in an emergency. Once there is an agreement on this path in principle, then we will not limit ourselves to absolutely necessary additional expenditure, but rather create a nutritious reptile fund from which many special requests can be financed over two or three legislative periods that are not even foreseeable today .

If this were to happen, the Federal Minister of Finance or his successor would immediately have to shoulder at least 10 to 30 billion euros in additional interest payments every year. This isn’t so bad as long as you can still make sufficient use of the special assets. After that, there will be a painful reduction in the scope for spending, and so the special fund will already have the desire for the next relaxation or circumvention of the debt brake. Which is probably entirely intentional.

The suggestions of the Council of Experts

Last week, the Council of Experts also took the stage with a potpourri of small suggestions for changes. This includes the already mentioned reform of the economic adjustment. A two-thirds majority, however, is required for the second proposal, namely for a new transition period between emergency and normal situations. The SVR would like to see a slow adjustment to the normal enforcement of the debt brake after an emergency situation has ended. Expenditures should not have to be adjusted abruptly.

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This is not really convincing. Assuming the emergency is a natural disaster, let’s say for simplicity: a surprise volcanic eruption in the Eifel. As long as the removal of lava and the rebuilding of infrastructure cause considerable costs that place an extraordinary burden on the federal budget, the emergency can be repeated every year. When these loads are no longer present, we have the normal case. But why should the federal government spend even more than is normally planned?

The point is: there is no need for a fiscal shift from emergency to normal situation today, but you can declare emergencies to decrease every year until you are back in the normal regime. This also makes the Council of Experts’ argument that a new, gentle transition to macroeconomic expectations stabilization is necessary obsolete. And if you read the Council’s argument carefully, you can see what it’s actually about: new fiscal leeway, even if this no longer has anything materially to do with the emergency.

A third reform proposal from the SVR is annual debt leeway, which varies depending on the current debt ratio. Today, a structural 0.35% of GDP is always permitted in normal phases. According to the SVR proposal, 1% of GDP would be allowed if the debt-to-GDP ratio is below 60%, 0.5% if it is above it and 0.35% if it is even above 90% of GDP. This is not a symmetrical reform, but a clear and significant relaxation compared to the current situation.

60% debt ratio: From the cap to the point target?

But now it is actually the case that the 60% is seen as an upper limit, not as a goal that could also be achieved from below. This discussion is reminiscent of the ECB’s inflation target. That was once at 2% or below, but at some point it was interpreted as meaning that 2% was the target and that lower inflation rates were almost deflation. It will soon be said that a country with debt of less than 60% of GDP is simply not investing enough for the future. But of course that is certainly not true, as European countries with much lower debt ratios and much better infrastructure show.

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Undesirable political-economic incentives also arise near the threshold values. Of course, I have an incentive to leave my successor government, in which I will no longer be represented, less scope for debt and, if possible, to push the debt ratio above the threshold before the election. There is an additional institutional incentive to cause political business cycles.

The broader context of the expert’s proposal is also not convincing. It seems very far-fetched that the compliant application of the current debt brake would lead to financial policy uncertainty, which in turn would drive private investments abroad. It is also incomprehensible why it should be a problem if the German debt brake is somewhat more restrictive than the European fiscal rules. These represent a minimum standard and of course each Member State can choose stricter rules for itself. If you see the problems we face in the form of implicit national debt (and less so for some other EU states), then it is not unwise to do this.

Conclusion: there is no need for reform

In the 2024 federal budget, the investment rate will rise to 12.3%, a good two percentage points higher than the pre-crisis year of 2019. There is also still a lack of evidence to support the recurring claim that the debt brake is leading to a particular weakness in investment in Germany. So why are there debates about the debt brake, as if the state urgently needs new scope for debt?

The medicine that is currently needed in Germany is completely different. Not more and more subsidies financed with public debt, but rather an improvement in general location conditions. What is needed is not more and more interventionist industrial policy and the purchase of political approval through rampant funding programs, but rather more freedom for entrepreneurial activity.

This requires measures that often do not involve large expenditures, but on the contrary make the state leaner. We all know what it’s about: reducing bureaucracy, less regulation, less discretionary interventionism in the markets. We won’t get the political pressure to pay attention to this if we weaken the debt brake.

If you really want to reform the debt brake, I would have a suggestion to avoid overly opportunistic and short-sighted solutions and to promote a neutral view: We are discussing reforms, but agree that they will not come into force until the next legislative period at the earliest.

Brandenburg Technical University of Cottbus

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