Easing the Debt Brake? Not without Clear Prioritisation
Research
01.07.2024
ZEW Study Shows Additional Budgetary Funds Are Mainly Used for Consumptive Spending
Discussions on easing Germany’s debt brake are gaining momentum. Given the urgent need for future investment in infrastructure, education and digitalisation, a possible relaxation of this fiscal rule is being considered. However, a study by ZEW Mannheim, supported by the Strube Stiftung, concludes that relaxing the debt brake would likely lead to increased consumptive spending, which would benefit short-run interests, rather than sustainable investment. The analysis focuses on how financial leeway in the federal budget from 2010 to 2019 was used in order to draw conclusions on the extent to which additional budgetary funds were used for consumptive or investment spending.
“Between 2015 and 2019, around 39.5 billion euros of the additional budgetary funds were used for consumptive spending, while only around 13.2 billion euros were spent on investment. This corresponds to a ratio of three to one,” explains Friedrich Heinemann, head of ZEW’s “Corporate Taxation and Public Finance” Unit. “Policymakers need to better prioritise the available budgetary funds. A reform of the debt brake, together with a verifiable increase of the future quota, can offer a solution and promote more target-driven spending in the federal budget,” adds co-author Paul Steger, researcher in ZEW’s “Corporate Taxation and Public Finance” Unit.
Consolidation first, then expansion
During the consolidation phase from 2010 to 2015, the German government used rising tax revenues and falling interest costs to reduce the budget deficit. Consumptive expenses such as allocations to social security systems were also consolidated in this phase, while investment spending remained largely constant. In the expansionary phase from 2015 to 2019, there was more financial leeway due to rising tax revenues and the already achieved budget balance. In this phase, consumptive spending grew three times faster than investment spending.
Relaxation is no alternative to solid budgets
Given this experience from the expansionary phase of the public budget in the years 2015 to 2019, caution is called for in setting higher debt limits without ensuring that this leeway is actually used for future-oriented tasks. The ZEW analysis suggests that policymakers will primarily use the additional financial leeway for consumptive spending. “If policymakers want to invest more in future-oriented projects, they will have to better prioritise the available budget funds or ensure higher tax revenues. In order to make sure that greater financial leeway is actually used for investment and not for consumptive spending, independent monitoring bodies are necessary,” concludes Friedrich Heinemann.
