Fiscal Rules and Economic Growth. Implications for Economic Policy in Light of the COVID-19 Pandemic

Tasks

The project examines the challenges posed by the Covid-19 pandemic for the sustainability of Germany’s public finances.

Methods

We derive implications for economic policy based on our recent research project on the growth effect of fiscal rules against the backdrop of the corona crisis.

Results

The corona crisis currently requires expansionary fiscal policy. This strategy is undisputed. Germany has the necessary scope for this expansionary fiscal policy because fiscal rules such as the German debt have laid the foundation for a sustainable budget policy. These margins can now be used to alleviate the current recession.

The economic effects of fiscal rules are intensively discussed. The debate on the German debt brake has been dominated by concerns about a decrease in economic growth caused by a reduction in public investments. Our new study shows that fiscal rules have not slowed economic growth - provided that they were enshrined in the constitution. This applies to both national and regional fiscal rules.

Germany must return to a sustainable long-term fiscal policy in compliance with the debt brake once the crisis has been overcome. The corona crisis illustrates how abrupt crises can occur that would not be manageable from a fiscal policy point of view if inadequate provision was made. The positive budgetary situation of the past years also hides the fact that the demographic change will lead to a drastic change in the relationship between employees and pensioners in the near future. This change will pose major challenges for the federal budget.