The German Debt Brake – Anchor of Stability or Blocker of Investments?

Of the half of participants who call for a reform or abolition of the debt brake, most support is given to an exemption rule for investments. Here, 44% are in favor of exemptions for net investments and 18% for exemptions for gross investments. In addition, 36% want to make the economic component more generous. In a crisis, higher debt would then be permissible, but this would have to be balanced out during an upswing. Of those who support a reform of the debt brake, 30% are in favor of the proposal to exempt certain expenditure categories such as climate and defense from the debt brake. Around 18% support an increase in structural net borrowing in normal times to more than 0.35% of economic output. Only 12% want to abolish the debt brake. In addition, 15% responded with “Other.” They mention, for example, a more restrictive design of the debt brake, a softening of annuality, or a return to the old debt brake rules. Around 2% answered “Don’t know.” Multiple responses were permitted.

Negative Consequences Expected in the Short Term Due to the Ruling on the Debt Brake

The majority of economists expect the government debt ratio to improve in both the short and medium term as a result of the Federal Constitutional Court’s ruling. However, the economics professors assume that the ruling will contribute to a deterioration in the political and economic situation over the next one to two years. A deterioration in how the economy develops generally is expected by 52% of the participants. With regard to the transformation of the economy toward modern technologies and industries, 46% of economists expect negative consequences as a result of the ruling, as do 46% with regard to climate action and 59% with regard to political stability. In the medium term – i.e., the next five to ten years – the assessment at least brightens slightly. With regard to general economic development in the medium term, only 24% expect the ruling to worsen, 28% even expect an improvement, and most expect no impact (42%). The situation is similar for the transformation of the economy toward modern technologies and industries, climate protection, and political stability. In each case, one-third expect the Federal Constitutional Court’s ruling to have a negative impact in five to ten years’ time, while more than 40% of participants do not expect the ruling to have any effect on these areas.

Majority in Favor of Suspending the Debt Brake in 2023

A large majority of 66% of economics professors support the federal government’s plan to declare another extraordinary emergency in 2023 and suspend the debt brake. They argue that this is the only way to end the year with a constitutional budget in the short term. It is not possible to turn back the clock and save more during the year. All alternatives would cause considerable uncertainty for companies and households and jeopardize climate targets. In their view, the energy price crisis at the beginning of the year provides the necessary substantive conditions for an emergency situation. In contrast, 28% of economists reject the suspension of the debt brake for 2023. They do not consider the objective requirements of the Basic Law for an emergency situation to be met and therefore see no legal basis for this step. Around 6% answered “Don’t know.”

How Should the Gap in the Budget Be Closed from 2024 Onward?

The key question arising from the Federal Constitutional Court’s ruling is: How should the gap in the federal government’s budget planning resulting from the ruling be closed? For the year 2024, the economists are calling for greater efforts on the part of the federal government. Around half of the participants are in favor of closing the budget gap primarily through savings. They point out that the government budget is large enough overall and contains potential for cuts, particularly in social spending and subsidies. They believe that closing the gap through taxes or debt would be detrimental to the economy in the long term. In contrast, there is a large camp of economics professors who see an increase in new debt as the primary solution in 2024 as well. However, they favor different approaches: around 15% call for a reform or abolition of the debt brake to create scope for investment, while a further 18% want special funds for climate and infrastructure to be enshrined in the Basic Law because this would create planning security and the funds would be earmarked. Meanwhile, 5% are in favor of suspending the debt brake again because they believe this is the most readily implementable option. A small group of 5% of participants primarily call for tax increases to close the budget gap in 2024. In addition, 7% responded with “Other.” In many cases, they support a mixture of savings and higher tax revenues. Around 6% responded with “Don’t know.”

Potential Savings Are Seen in Subsidies and Social Services

The question of potential savings in the federal budget regularly arises in the budget policy debate. Where do economists see the greatest scope here? Participants were able to answer the question about potential savings in free text. A total of 126 economists took part in the discussion on potential savings. At 63%, subsidies were cited most frequently as a source of savings. Specifically, the subsidies most often identified were those promoting company relocations and those that damage the climate. More than half of the participants who provided free text answers also cited the social sector as an area where savings were possible. In particular, the most frequently mentioned areas were the basic income (and its planned increase) and basic child allowance. In the area of climate measures, 25% see savings potential and often link this to the demand for higher taxation of CO₂ as a steering instrument. Potential savings are also seen in pensions (20%), administration (11%), asylum (9%), and development aid (5%). Around 2% explicitly stated that they did not support any savings. Multiple responses were permitted.

Tax Increases Are Demanded First and Foremost in the Area of Emissionsh2>

A total of 101 economists named areas for increases in taxes and duties in the free text. Of these, 19% explicitly stated that they reject tax increases. In contrast, 37% demand higher taxes on CO₂ and other emissions. In addition, 30% state that inheritance and gift tax should be increased, while 21% also call for higher income tax. However, this should only affect people in the top or wealth tax rate bracket. Moreover, 17% want to increase tax revenues by waiving tax relief, primarily the company car privilege. The situation is similar for the 15% of economists who are in favor of an increase in VAT: they merely want to abolish VAT exemptions. What’s more, 11% demand higher taxes on assets and 6% higher taxes on capital gains. Multiple responses were permitted.