The FDP insists on it, the Greens and the SPD would like to reform it. The debt brake is one of the big bone of contention in the coalition.
The “economists” consider the debt brake to be unnecessarily strict and advocate comprehensive easing. Otherwise, the German debt ratio will fall much more than necessary in the next few decades, said the chairwoman of the Advisory Council for the Assessment of Overall Economic Development, Monika Schnitzer, of the German Press Agency. The important economic policy advisors are suggesting a reform that could give the federal government several billion euros in credit flexibility each year.
“The debt brake as it is now is too rigid,” said Schnitzer. “We want to increase flexibility and create scope so that future-oriented public spending can be made without undermining the sustainability of public finances.” How do the scientists come up with this – and what exactly are they suggesting?
Simulation: How is the debt ratio developing?
The debt rule in Section 115 of the Basic Law states that the state is generally not allowed to spend much more money than it takes in. Depending on the economic situation, only a small amount of new debt is permitted. This is intended to ensure that the state budget remains sustainable and also that no excessive burdens are passed on to future generations.
The “economists” have simulated how the debt ratio will develop over the next few decades if the regulation is not changed. The result: Even if the federal government always makes full use of its borrowing options and there are also regular emergencies with larger loans, the rate falls. So much so that by 2070 it will be well below the Maastricht criterion of 60 percent of gross domestic product.
Germany might then have saved money, although the money could have been put to good use. Schnitzer believes that the debt rule is unnecessarily restrictive. “We don’t have to be so restrictive to ensure our debt sustainability.”
According to Finance Minister Christian Lindner, the debt ratio is also currently falling. After a Corona high of 69 percent of GDP in 2021, the FDP politician expects around 64 percent for this year.
Starting point 1: Transitional rule after an emergency
The chairwoman of the “Economists” sees three structural weaknesses in the debt rule. So far, there is no transitional rule for the period after an emergency with high borrowing. “Of course you can declare an emergency situation again for the following year, but that becomes more difficult to argue with every year,” she said. Such uncertainty is sensitive for the economy because it cannot rely on promised support.
The “Economists” therefore suggest that borrowing be gradually reduced after an emergency situation: “You could reduce the structural deficit by 0.5 percentage points annually, as is envisaged in the EU. Or you could reduce it linearly over three years. “
Starting point 2: More flexible and higher debt limit
The second reform approach concerns the debt limit, which is currently 0.35 percent of economic output. “It’s unnecessarily low,” said Schnitzer. The scope could be increased depending on the debt ratio: to 1.0 percent with a debt ratio below the Maastricht limit, to 0.5 percent with a debt ratio of over 60 percent – and to 0.35 percent with a debt ratio of 90 percent or more.
“A transitional rule and higher deficit limits would ensure that the debt ratio no longer decreases as much, but continues to decrease steadily. This is still very compatible with debt sustainability and does expand the scope somewhat,” said Schnitzer. According to the experts, this would give the federal government a credit leeway of 36 billion euros per year – at least with a debt ratio below 60 percent. If Germany breaks the Maastricht criteria, it would still be around 18 billion.
Starting point 3: The economic component
How much debt the federal government is allowed to incur is also influenced by an economic component. To put it simply: the worse the economic situation, the higher the loans are allowed. The problem is that this is based on forecasts – because at the beginning of the year economic developments are unknown.
This means that in some years there is too much room for debt and in others too little, explained Schnitzer. “It’s not economically efficient.” The economic component must be made less susceptible to revision.
How realistic is implementation?
Reforming the debt brake requires a two-thirds majority in the Bundestag, which the coalition alone does not have. But even within the traffic lights of the SPD, Greens and FDP, the attitude is very different.
Schnitzer still urges you to act quickly. “We are addressing adjustments that are actually obvious. We recently experienced the fact that there is a really painful lack of a transitional rule – and also that the border is too rigid,” she said. “Our hope is that the coalition partners in the traffic lights and the opposition can come to an agreement on this.”
She can only “strongly recommend tackling the problem during this legislative period.” “Depending on how things develop, it may not be so easy to find a two-thirds majority from democratic parties in the next legislature.”