Discussions on reforming the debt brake for individual states are gaining traction within the Union, despite skepticism from some economists and politicians. Chancellor candidate Friedrich Merz is now open to allowing states to incur debt for investments, which could generate significant funds. However, internal opposition persists, with calls for adherence to constitutional regulations. The uneven debt distribution across Germany raises concerns, and any changes would require a two-thirds majority in parliament, with the SPD, Greens, and Left Party showing potential support for reform.
Potential Reform of the Debt Brake: A Closer Look
The prospect of relaxing the debt brake for individual states might lead to significant reform within the Union. Yet, skepticism lingers among economists and certain state politicians regarding this proposal.
Recently, discussions around this topic have gained momentum. The Union, historically a staunch supporter of the debt brake, is showing signs of change. Chancellor candidate Friedrich Merz, who previously opposed any reform, is now considering the idea. A suggestion emerging from Union circles, backed by CSU leader Markus Söder, proposes that states be permitted to incur debt amounting to 0.15 percent of their gross domestic product, enabling crucial investments. Presently, states are restricted from accumulating debt except in emergencies, such as the COVID-19 pandemic, while the federal government has a limit of 0.35 percent. This reform could potentially generate approximately 6.5 billion euros annually, although not all members of the CDU are on board.
Concerns and Alternatives from Within and Beyond the CDU
Union faction vice Middelberg has described the relaxation of the debt brake for states as “debatable.” Internal opposition continues, as seen with Saxony’s Finance Minister Hartmut Vorjohann, who expressed his disapproval of the reform, emphasizing that increased debt would impose further financial burdens on future generations.
Conversely, Saxony-Anhalt’s Prime Minister Reiner Haseloff advocates for investing in infrastructure, science, and technology for the country’s future. He insists that any solutions must comply with constitutional regulations, suggesting that existing provisions of the debt brake be fully utilized before seeking reform. This could involve declaring an emergency to facilitate new loans. Others, like Berlin’s mayor Kai Wegner, are more vocal in their support for reform.
While CDU leader Merz had previously dismissed the idea of modifying the debt brake, the economic community’s responses have been mixed. Economist Jens Südekum acknowledges the necessity for reform but cautions that the proposed amounts fall drastically short of the actual investment needs, which far exceed the suggested 6.5 billion euros. Meanwhile, the ifo Institute remains critical of the reform, with economist Joachim Ragnitz pointing out that the investment shortfall at the state level is not as significant as often portrayed, suggesting that municipalities contribute more substantially to public investments.
The uneven distribution of debt across Germany highlights the disparities among states. For instance, residents of Bavaria face debts of around 2,600 euros per head, whereas Bremen’s figure is approximately 33,000 euros. Cities like Bremen and Saarland already receive federal restructuring aid, and others, including Berlin and Schleswig-Holstein, have also benefitted in the past.
If a relaxation of the debt brake occurs, Ragnitz proposes implementing minimum investment requirements, while the federal government could fund additional transformation and defense costs through special assets. However, he warns that any excess would necessitate budgetary prioritization, implying potential cuts elsewhere.
Despite the calls for reform, states still possess various options. Since the debt brake is embedded in the Basic Law, any changes would necessitate a two-thirds majority in both the Bundestag and the Bundesrat. Parties like the SPD, Greens, and Left Party either support relaxing or abolishing the brake entirely, making it feasible for them to collaborate with the Union for a potential change.
In late November, the SPD-led Mecklenburg-Vorpommern proposed adjustments in the Bundesrat, advocating for a federal “special fund for infrastructure” to finance collaborative projects. However, not all states have maximized their current leeway. Both federal and state governments can take on additional debt during economic downturns, with repayment possible during economic upswings. Nevertheless, Saxony has chosen not to pursue this option, and previous attempts to reform Saxony’s stringent financial policies have faced resistance from the ruling CDU.
In the face of ongoing financial challenges, the new minority coalition of CDU and SPD in Saxony has not moved towards modifying the debt brake. During the announcement of their coalition agreement, Michael Kretschmer remarked on the financial emergency, suggesting that loan repayments should be extended and reserves for future civil servant pensions reduced. He had previously proposed two special funds of 100 billion euros each at the federal level for infrastructure and municipal development, yet consensus remains elusive on this issue.
The situation mirrors developments in Thuringia, where the CDU, Alliance Sahra Wagenknecht (BSW), and SPD are seeking to enhance financial opportunities within existing legal frameworks. They propose extending repayment periods for emergency loans and adjusting economic measures accordingly.
In Brandenburg, the coalition agreement between SPD and BSW stands out by claiming that “the debt brake has not passed the reality check in the current economic environment.” This coalition intends to advocate for its abolition in future governance.
As Germany gears up for new federal elections, the dialogue surrounding the debt brake may intensify, potentially linking it to alterations in state financial equalization, which currently benefits many recipient states disproportionately compared to what they could gain from relaxing the debt brake.