ifo Dresden: Coronavirus Debt No Danger to German Federal State Finances

Most German federal states will return to their 2019 debt levels over the next five to ten years, regardless of the maturity of the loans, according to calculations by the ifo Institute’s Dresden Branch. “The key consideration here isn’t repayments, but economic growth,” says ifo researcher Remo Nitschke. “As economic output rises over the coming years, the proportion of debt will fall.”

The most important thing is for the economy to quickly return to the same rate of growth as before the pandemic. That is why repayment plans shouldn’t necessarily be designed to achieve rapid repayment of the loans, but rather should leave sufficient scope to strengthen growth. Very high annual repayments would be particularly problematic if making them meant cutting spending in areas that have a bearing on growth, such as public investment or education.

Planned repayment periods range from less than ten to a maximum of 50 years, with a majority of Länder aiming for repayment within 20 to 30 years. The coronavirus pandemic forced the states to take on substantial new debt. There are considerable differences among Länder, both in the amount of their approved credit authorizations and in their plans to repay the emergency loans.

Nitschke’s complete article can be found under the title “The Burden of Coronavirus Debt – What Pressures Can Länder Budgets Expect over the Coming Years?” in issue 01/2021 of ifo Dresden berichtet, which has just been published (in German).