The Credibility of Germany’s "Debt Brake" Is at Risk

Under the balanced budget amendment (or "debt brake") in Germany’s Basic Law, as of 2020 the federal states will be forced to balance their budgets and as of last year the limit on the total national deficit is set at 0.35 per cent of the gross domestic product. Barely three years before the amendment fully comes into effect, the Alliance 90/ The Greens fraction in the German Bundestag has moved to attach an investment rule to the balanced budget amendment. The rule would force the federal government to offset at least a depreciation in public assets through investment. Professor Friedrich Heinemann at the Centre for European Economic Research (ZEW) in Mannheim, today offered his thoughts on this motion in the Bundestag as an invited expert at the public hearing of the Budget Committee. In his statement Heinemann called for greater transparency through independent councils rather than new regulations.

"The overriding objective of the motion is important," said the head of the ZEW Research Department "Corporate Taxation and Public Finance" regarding the Greens’ suggested initiative. He added that looking at deficits and debt was not enough to be able to evaluate the sustainability of budgetary policy.However, Heinemann found the suggested investment rule neither conceptually convincing nor likely to succeed. Indeed, the definition of “investment” is just as hotly debated now as ever before.

Heinemann argued that investments are more than just new buildings and roads, with expenditure on education, research and security also contributing to economic growth. This means the use term "investment" can be fairly arbitrary. "There is a great danger that the debt brake with its clear mandate for a balanced budget could lose its credibility as a result of an investment rule with rather hazy terminology." Heinemann added that the goal of keeping public assets at a constant level was not always conceptually convincing. Regions with a shrinking population, for instance, are required to strip back public infrastructure.

Greater transparency through independent budgetary watchdogs

This new rule is also coming at an extremely inopportune moment. With the "debt brake" still in a period of transition before it comes into full effect for the federal states in 2020, the rule is currently in an important phase in building up its credibility. "In this introductory phase, nobody – however strong their arguments for doing so may be – should be tinkering with the debt brake, as this can only damage the reputation of these new regulations," said Heinemann in his statement.

The ZEW expert recommended a different strategy to improve the sustainability of German budgetary policy: "Independent councils of experts such as the German Council of Economic Experts or the independent advisory board to the Stability Council should be given more influence and be tasked with comprehensively reviewing the sustainability of public budgets." One advantage of this would be that the budgeting rights of the state parliaments are in no way restricted while the public is better informed about the quality of budgetary policy than they were previously. "Instead of more new, complex rules with little credibility, we need greater transparency through independent budgetary watchdogs – that is the best strategy", Heinemann concluded.

For further information please contact

Prof. Dr. Friedrich Heinemann, Phone +49(0)621/1235-149, E-mail heinemann@zew.de