“Policymakers Wish No Abolition of the Debt Brake, but Additional Scope for Investment”

The COVID-19 crisis has sparked a new debate on the debt brake. Initial proposals from the political arena are aimed at changing the German Basic Law to allow higher borrowing by the public sector. Dr. Sebastian Blesse, researcher in the “Corporate Taxation and Public Finance” Department at ZEW Mannheim, comments on this matter.

“Public budgets continue to be heavily burdened by last year’s deep economic slump and the ongoing COVID-19 pandemic. As a result, voices are increasingly being raised in favour of relaxing the constitutional debt brake or even removing it from the Basic Law. There is no doubt that neither the federal government nor the federal states can manage without new debt for the time being. They are right to use exceptions to the debt rule for natural disasters or extraordinary emergencies in order to cope with the additional expenditure caused by the crisis. It is legitimate for the federal government to go out on a budgetary limb here. However, the existing debt brake obliges policymakers to make repayments at a later date. This healthy portion of discipline for long-term stable budgets would be eliminated by deleting the debt rule from the Basic Law.
 
Regardless of current opinions, a change or even abolition of the debt cap is only possible with a constitutional majority. Whether such a majority could be reached is unclear. It is helpful to take a look at current surveys on this issue. Support for the debt brake on the part of state-level politicians is undiminished in the pandemic: Members of state parliaments are supporting the debt brake, even after the crisis. These are the results of a recent ZEW survey. A majority of 68 per cent of all state-level politicians surveyed are in favour of returning to a balanced budget after the end of the crisis. This is a remarkable result. It proves that, basically, the debt brake enjoys great support in the federal states. Despite this large support, however, the state-level politicians see a need to adjust the existing design of the debt rule in the wake of the COVID-19 crisis.
 
A majority of over 56 per cent of the state MPs surveyed are in favour of an investment clause. This would, for example, allow additional debt-financed investments in infrastructure. Such an exception could be a long-term compromise between much-discussed investment needs in roads and digital infrastructure and the legitimate demand of German fiscal policymakers for balanced public budgets in the long term. However, even in times of crisis, this does not require the abolition of the debt brake, but merely a discussion about a possible readjustment of the deficit limit in the Basic Law.”