Germany Should Keep Its Debt Brake

ifo President Clemens Fuest and Niklas Potrafke, Director of the ifo Center for Public Finance, argue that the German debt brake should be retained without reforms. The economists present their reasoning in a recent article for ifo Schnelldienst. “It forces politicians to set priorities. At the same time, it gives the government sufficient leeway to take on debt in cases where it makes economic sense,” Fuest says. The current regulations also include the possibility of special cases for taking on debt, as for the German Armed Forces. Requiring a two-thirds majority in a Bundestag vote is appropriate in such instances.

The authors point out that empirical studies attest to the considerable economic benefits of effective debt rules. Countries with debt rules enjoy economic growth that is 0.5 percentage points higher on average than countries without debt rules. Such rules also reduce risk premiums on government bonds. Countries with fiscal rules had to pay an average of some 1.5 percentage points less interest on their bonds than countries without fiscal rules. “This means that fiscal policy will have to provide fewer public funds to repay interest on public debt, and so the funds can be used for other projects, such as investments in climate action,” the authors write. This is particularly relevant in times when the interest burden is on the rise. “If politicians want to limit budget deficits, debt ratios, and risk premiums on government bonds while at the same time strengthening economic growth, they should stick to an effective debt rule.”