Pandemic-Related New Debt in the Federal States

However, it is the responsibility of the Länder to define the specifics of this exception rule and in particular of the repayment rule required by the Basic Law. Most Länder have incorporated the debt brake into their respective state constitutions. In some cases, however, it is laid down only in the state’s financial regulation; in only a few Länder are there explicit provisions on debt repayment.

Debt Brake in the Individual Federal States

Debt Brake in the Individual Federal States (in German, May 3, 2021)

The necessary approval from the budgetary legislator for further borrowing has not yet been granted in all cases. However, it is to be expected that this will soon be done everywhere. Restrictive repayment rules could pose a problem in some Länder. In some cases, the envisioned repayment periods may be too short in view of the high net borrowing that is now required. Given that federal states do not have the legislative power to raise their own taxes, meaning the only way for them to make loan repayments is by cutting expenditure, there is a risk that they will restrict expenditure in the future simply because it is readily available. This could particularly affect investments as well as the areas of culture and science, which employ a large number of temporary staff.

Long-Term Repayment Rules Required

For this reason, the ifo Institute thinks long-term repayment rules should be drawn up that take into account the severity of the current exceptional situation. One possibility would be to place the loans that are taken out now in a special fund that is redeemed over longer periods of time.

Last updated: June 26, 2020