Circumvention of debt brake puts sound public finances at risk
The German Bundestag is currently discussing amendments to the Constitution that are intended to enable the Federal Government and the federal states to take on massive new debt. There is no doubt that considerable efforts are needed to finance defence spending and public infrastructure. However, our advisory report raises concerns about the long-term risks of government debt dynamics and calls for the preparation of a consolidation plan.
We hold that the Government's core tasks, such as defence capability and an efficient infrastructure, should be funded from current revenues and not from debt. The various draft laws proposed by the parliamentary groups do not take this into account: Some of them permanently allow for significantly higher possibilities for new borrowing that are not subject to the debt brake. Consequently, the pressure for consolidation is reduced and debt dynamics increases.
The only way to maintain the government's leeway for effective policymaking is to comply with the debt rule, not to circumvent it. A future on credit is not the answer.
In our opinion, sound public finances will only be possible if the Federal Government prioritises the most urgent core tasks and presents a comprehensive consolidation plan.
Permanent borrowing for defence
Two draft laws that have been submitted propose to use a sectoral exemption to ensure that some of the defence spending can be financed by borrowing on a permanent basis. The amount of this borrowing is unlimited. Hence, if such expenditure exceeds 1 or 1.5 per cent of nominal gross domestic product (GDP), it will no longer be subject to the debt brake and can therefore be financed by borrowing. If the debt brake reform is passed, new borrowing of more than €1 trillion could be required by 2035 – in addition to the Federal Government's current debt of €1.7 trillion. This fact alone could cause the debt brake to lose its protective effect for future generations.
Germany must swiftly strengthen its defence capabilities. However, this does not justify a permanent flat-rate borrowing.
If the Bundestag allows such an exception to the debt brake, we recommend that it only apply to defence spending in excess of 2 per cent of GDP. Such limit would correspond to the current financial commitments to NATO. Implementing our recommendation would enable substantial improvements in defence capabilities.
Special fund for infrastructure
One of the draft laws proposes the creation of a debt-financed €500 billion special fund for infrastructure investments. €100 billion of the special fund would be allocated to the federal states.
We note with concern that the Federal Government would once again assume responsibility for the federal states' tasks and incur high long-term interest costs.
If such a special fund is established, it should be subject to clear conditions: only if the funds are made available in accordance with the principle of additionality will it be possible to increase the currently inadequate level of spending on investment.
New scope for debt at federal state level
A further draft which will be submitted to the Bundestag aims at granting additional leeway to the federal states for structural debt in the amount of 0.35 per cent of nominal GDP.
Additional scope for debt for the federal states would in any case be a further argument against the Federal Government financing federal state tasks, as envisaged in the proposed special fund for infrastructure.
Need for a consolidation plan
New borrowing may seem like an easy solution in the short term, but in the long term, it could jeopardise the Government's ability to act. As early as 2035, annual interest expenditure could rise by €37 billion. By comparison, total interest expenditure is €34 billion in 2024.
External strength must go hand in hand with internal strength, and this includes sustainable federal finances. The submitted draft laws do not contribute to sustainable federal finances.
Instead of a permanent easing of the debt brake, we call for a comprehensive consolidation plan to ensure the long-term financial stability of the Federal Government and to leave room for manoeuvre for future generations.
More information on our recommendations can be found in our advisory report (only in German):