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Debt brake: Are debts the solution?

2019-09-08T11:29:09.812Z

Many economists are suddenly calling for the debt brake to be abolished. The federal government has also lent money with it.


Sometimes debates turn radically. That's exactly what happens with the debt brake. Ten years ago, it was the nonplusultra for economists to slow down the spending power of politicians. Since 2011, it has been valid for just eight years. But now everything is different. The rule is under attack. And not from the politicians, but the economists. A whole lot of them suddenly wants to abolish them. Even once-strong advocates have changed sides.

You have three arguments. First, it's just as cheap as never to get into debt. Second, the economy is running so badly that a stimulus plan could become necessary, which would be easier without a debt brake, because then the state would not have to save elsewhere or raise taxes. Thirdly, Germany now needs so much investment that the money is only enough if you abolish the debt brake.

As far as the first argument goes, yes, Germany can actually borrow incredibly cheaply, interest rates are at a low. However, the federal budget has benefited from this for a long time. Because even under the debt brake, the state is constantly borrowing new loans to be able to pay off old ones that are phasing out. Limited by the brake only debts that increase the total debt of the federal government. That it is just cheap, anyway, is not a sufficient reason to continue to go into debt. It depends on whether you need the money at all. After all, no one covers - say - hundreds of dusters in the one-Euro shop, just because they are unbeatable there.

So it's the arguments two and three that are central: the economy and investment. The question arises: how much could the federal government spend in addition to this without abolishing the debt brake? Many voices in the debate sound like the Bund has nothing left for it. But that is not the case.

Constantly the rules for loans are confused with the black zero

The wrong impression sometimes arises because two terms are thrown together: the debt brake and the black zero. Even the CDU party leader Annegret Kramp-Karrenbauer has already confused her. There are differences. The black zero is more radical. In the federal budget, it means: There must be no additional loans beyond the existing level. This will not reduce the debt. But as the economy grows, the ratio of debt to economic performance decreases, measuring the soundness of finances. In Germany that was the last time.

The debt brake, as it is in the Basic Law, requires no black zero. It allows federal debt to rise by as much as 0.35 percent of gross domestic product. That would be just under twelve billion euros a year. This margin is slightly smaller in 2019, mainly for cyclical reasons (in periods of growth it is somewhat limited to have more in bad times). According to information from the Ministry of Finance, a good six billion euros could still be used for additional spending in 2019, compared to just under ten billion by 2020.

These sums are, however, lapsed if the economy collapses. Already in the Basic Law stands that there can be regulations for a "deviating from the normal situation economic development". In the downturn, therefore, a significantly higher debt is possible. Why argument two for the debt brake does not convince. If Germany plunges into recession, it can be loosened with the brake more money.

The third argument remains: the investments. Economists are quite unanimous that Germany could use more of it: perhaps state-owned, certainly private, which the state can facilitate, for example, with new depreciation rules. That costs revenue. Whether that goes without easing the debt brake depends on what you do exactly. The finance minister could also use the ten billion euros that he will be able to absorb in 2020. In addition, there are hidden pots after years of high tax revenues. Such as the reserve for refugee costs. Unofficially, it has long been considered a budget reserve for bad times. It covers 35 billion euros. So far she has not been touched. But Finance Minister Olaf Scholz has already budgeted for something from this pot for 2020. Maybe there would be more, if it is about time-limited issues. And of course you can always save elsewhere, such as subsidies, instead of taking on debt.

Source: zeit

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