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Economics Grimm, Malmedier, Schnitzer, Truger and Werding with Chancellor Scholz (2nd from left, in November 2022)
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Clemens Bilan / EPO
Economists consider the debt brake to be unnecessarily strict and are calling for 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, Monika Schnitzer. In doing so, it unnecessarily restricts the fiscal scope for future-oriented spending. The federal government's important economic policy advisors are suggesting a concrete reform that could bring several billion euros in lending leeway every 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.”
In a first step, the government advisors 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. 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. Schnitzer believes that the debt rule is unnecessarily restrictive. "We don't have to be so restrictive to ensure our debt sustainability."
Specifically, the economists suggest three areas of reform:
Transitional rule after an emergency
To date, there is no transitional rule for the period after an emergency with high borrowing. However, economic crises could still have significant effects on an economy in the following years, write the economists. If you have to save heavily immediately after an emergency, this could lead to unnecessarily strong negative impulses for the weakening economy.
A transitional regulation should therefore stipulate that new debt is gradually reduced to the standard limit after an emergency. This would create additional leeway "and at the same time prevent constant discussions about declaring emergencies," said economist Ulrike Malmendier. For example, the structural deficit could be reduced by 0.5 percentage points annually or reduced linearly over three years.
More flexible and higher debt limit
The second reform approach concerns the debt limit, which is currently 0.35 percent of economic output. Instead of this rigid requirement, the deficit limit should be staggered according to the level of total debt: If this is below 60 percent of GDP, the deficit limit should be one percent of GDP. If the debt level is between 60 and 90 percent, it would be 0.5 percent; if the debt level is over 90 percent, it would be the current 0.35 percent. This “moderately expands the fiscal scope without endangering sustainability,” said economist Veronika Grimm.
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.
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 economic developments are unknown at the beginning of the year. This means that in some years there is too much room for debt and in others too little, explained Schnitzer. “That is not economically efficient.” Therefore, the method should be reformed so that the scope is not expanded structurally, but the economic needs are better reflected, said council member Martin Werding.
fdi/dpa