“Tough Ruling Desirable for the Sake of Budget Transparency”

This week, the German Federal Constitutional Court is set to announce its ruling on the supplementary budget, which saw the current German government transferring loans amounting to 60 billion euros to the Climate and Transformation Fund at the beginning of its term. Originally intended to combat the COVID-19 pandemic, these loans were approved under the crisis clause of the debt brake. The conservative opposition party, CDU, brought the lawsuit, arguing, among other points, that this reallocation violated the debt brake provisions.

Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“The Federal Constitutional Court’s verdict on the supplementary budget for 2021 holds significant importance for public finances. The debt brake was instituted to allow substantial deficits for the federal and state governments only in acute crisis situations. The 2009 constitutional amendment had the financial crisis in mind. There is no doubt that the pandemic constituted a similar emergency, justifying the high deficits in line with the Basic Law. However, subsequently, both the federal government and many states ventured deep into the legal gray area of the debt brake. With special funds such as the Climate and Transformation Fund, debt is now being incurred for long-term transformation tasks. These, however, are not short-term crises but rather adjustment processes that will extend over various decades.

If the Constitutional Court were to fully approve incurring debt for these tasks, this would mark the end of the debt brake and its original purpose. However, it’s improbable that the court will endorse such a bypass without conditions. Various outcomes are conceivable. A relatively harmless scenario would be a reprimand including tighter guidelines for future supplementary budgets. But it is possible that a more spectacular ruling could declare that the supplementary budget for 2021 violated the Basic Law. Such a verdict would also have serious consequences for the states – from Saarland to North Rhine-Westphalia. Because if the federal supplementary budget violates the Basic Law, then this applies all the more to the special funds of the federal states.

Ultimately, for the sake of budget transparency, a tough ruling is desirable. If fiscal policy believes that future challenges can only be addressed with higher debts, the honest approach is to reform the debt brake, rather than resorting to ever-new creative solutions to circumvent it.”