The Constitutional Court has strengthened the debt brake. But it is unclear whether politicians want to live in a tighter corset. The political reaction to the ruling could lead to its weakening.
Strengthening the debt brake
The latest ruling by the Federal Constitutional Court on the debt brake appears at first glance to be a clear victory for supporters of a sustainable financial policy. The creative use of special assets is now clearly unconstitutional. Specifically: The established and now set in stone budget principles of annuality and annuality prohibit parking reserves in the form of credit authorizations in special funds in an emergency year, which then expand the scope for spending in years when the debt brake is normally applied.
This should first be viewed as positive. Because now the debt brake works the way it should actually work according to its wording. There are no longer any simple and unproblematic ways out. Perhaps the federal government had hoped before the ruling that the budget principles would be interpreted more generously by the court. Perhaps she hoped that she would only have to provide a more valid justification that linked the expenditure from special funds more closely to the original emergency situation. Such a judgment could have been dealt with.
Things turned out differently, but surprisingly so far this has not primarily led to the coalition humbly dealing with its own mistakes. Instead, Green and Social Democratic politicians in particular are accusing the Union of populism. Successful constitutional lawsuits in Karlsruhe, enforcement of basic rules of political action as populism? Such accusations are astonishing.
Suspension of the debt brake in 2023 and 2024?
Financial policy creativity is also already being mobilized, but not so much in the attempt to find savings potential with which the coming budgets can be designed in accordance with the constitution. The focus of interest is the question of how to bend the debt brake to provide new budgetary flexibility without breaking it again. Some of these proposals are nevertheless exposed to the risk of being canceled in Karlsruhe. But they could give the coalition time until a new verdict.
One such proposal is to simply declare a new emergency for 2023 and at least 2024. Of course, a ruling by the Constitutional Court cannot be a reason for a new emergency in 2023. However, according to supporters of this proposal, one could argue that an emergency situation has existed all year, but that this has not yet been used for political reasons.
But what should this consist of? Security policy risks as a result of the Russian attack on Ukraine have already been addressed with the Bundeswehr’s special funds, which are otherwise not threatened because they were secured with a two-thirds majority. And the energy crisis normalized relatively early in the year with falling energy prices. However, Karlsruhe often grants a federal government a lot of leeway when it comes to such substantive considerations, which it can use for argumentative purposes.
Not every problem constitutes an emergency
So you could actually try again for 2023. Whether this would also be politically wise is another question. Especially for the FDP, which relies heavily on its role as guardian of the debt brake, such a step could mean massive alienation from its electorate. It will be even more difficult in 2024. An emergency situation can hardly be justified here. Also and certainly not with economic risks, because these are already taken into account in the debt brake through the normal economic adjustment procedures.
Suggestions to justify an emergency with the “climate crisis” are also unfounded. Because this is not a surprising emergency that is beyond the control of the state and for which extraordinary budget flexibility would have to be created quickly. Rather, it is a political marathon that can and must be run sustainably and according to plan. And efficient instruments such as the CO2 price are available, which even generate new income.
Reformed economic stimulus?
Another way out could be to change the calculation of the allowable structural deficit. This would have to be decided with a simple majority. There have been discussions for a long time as to whether the current approach to economic adjustment makes sense, as incorrect assessments always occur ex ante and corrections ex post. This is more of a debate for gourmands, and an adjustment could be made here without provoking an agitated political discussion.
However, the question of whether there really are sensible, balanced alternatives to the current procedure is highly academically controversial. In any case, there would be a risk that a new procedure would be chosen in such a way that a systematic distortion would be introduced towards a permanent justification of high deficits. Nevertheless, this step would certainly only alleviate the federal government’s current distress somewhat, but not eliminate it.
And the economic stabilization fund?
How sensitively the spending plans are affected becomes clear when you see that not only the postponed emergency funds amounting to 60 billion euros in the climate and transformation fund are unconstitutional. The Economic Stabilization Fund (WSF) is also likely to be affected, from which the gas and electricity price brake should be financed until mid-2024. This should be manageable given the sharp fall in energy prices. But further reallocation of funds is no longer possible.
In any case, it would be wrong to see the WSF’s 200 billion euros as a budget gap. Here it was always a case of a raised lid. In the first WSF of the Corona crisis, only a small fraction of the volume at that time was actually spent. From the current second WSF, the federal government has already spent over 30 billion euros on gas and electricity price caps, emergency natural gas aid and network fees. When looking ahead, however, lower market prices help.
The political dramatization of the situation
As difficult as the situation is, parts of the federal government are obviously deliberately and deliberately dramatizing it in the public discussion. If, for example, the Federal Minister of Economics warns of major burdens caused by rising electricity prices, or if subsidies may no longer be financed, de-industrialization or a loss of future technologies are invoked for the country, this can probably be seen as a major exaggeration. The location is much more threatened by a shortage of skilled workers, high tax burdens and bureaucratic shackles than by the alleged lack of state aid.
But the dramatizations serve a political purpose. They should build up pressure towards easing the debt brake or circumventing it again. The Union’s cooperation would be needed for both. There are many suggestions on this. With a two-thirds majority, the debt brake could be changed so that, for example, investment expenditure is not covered by it. However, this would be problematic, if only because of the need to delineate investment expenditure. A policy that also labels pure redistribution such as basic child welfare as an investment in the future can be trusted here.
There is also discussion about setting up a special fund with the Union (similar to the Bundeswehr special fund) secured by a two-thirds majority, but otherwise leaving the debt brake untouched. That would be constitutional. When it comes to volume, sums are mentioned that can make you dizzy, for example when investment requirements in the context of climate policy are estimated at 500 to 1,000 billion euros. However, there is actually a risk that, once you decide to take such a step, you will be taking a big step out of the bottle, which will eliminate the need for spending discipline, at least for the current generation of politicians.
It must also be clear that this would mean an outsourcing of government investment activities beyond the core budgets. There would be scope for even more redistribution and even more public consumption, with potentially significantly negative growth effects. But this path could be attractive for the Union. Formally, it could position itself as a supporter of the debt brake, but at the same time create scope for future participation in government.
Will the fiscal policy rules be maintained?
The lesson of the past few years is that politics doesn’t like to be bound by rules. Ways out are sought and found with great creativity. If we are unlucky, in a few years the ruling from Karlsruhe will be seen as an impulse that has triggered a very large coalition to weaken the debt brake. Then, from a stability-oriented perspective, it would actually have been just a Pyrrhic victory.
Brandenburg Technical University of Cottbus