Finance Minister Lindner Wants a Debt Brake Overhaul Next Year
In an upcoming reform, Lindner intends to adapt the economic component's calculations to the "latest economic research findings." This change, according to Lindner, will adjust the fluctuation range without inflating the potential debt in the long term.
The economic component in the debt brake allows for new loans in tough economic situations, but these must eventually be repaid in better times. Calculations for permitted net borrowing are determined by specific formulas.
Adjusting the economic component does not necessitate tinkering with the Basic Law or seeking a two-thirds majority in the Bundestag and Bundesrat because only implementing regulations for the debt brake require amendments. Thus, the traffic light coalition's majority suffices for this reform.
The Bundestag recently suspended the debt brake for the fourth consecutive year, retroactively for 2023. The traffic light coalition justified the move due to the war in Ukraine and its impact on the energy markets and Ahr valley flood. However, the debt brake suspension stems from the Federal Constitutional Court's budget ruling in November, requiring a supplementary budget for 2023.
The Karlsruhe ruling prompted grueling negotiations within the coalition, resulting in closing a €17 billion budget gap for 2024 through measures such as savings, tax hikes, and subsidy cuts. While the debt brake is expected to be followed as closely as possible next year, Chancellor Olaf Scholz (SPD) did not rule out additional suspensions in case Ukraine's military or financial situation drastically worsens.
The debt brake, enacted in the Basic Law in 2011, obligates the federal and state governments to balance their budgets in principle without loans. However, suspending the debt brake is permissible in times of natural disasters or exceptional emergencies beyond the state's control.
Insights
Lindner, a member of the Social Democratic Party (SPD), pushes for softer debt brake restrictions to enable more government investments, addressing Germany's aging infrastructure and other economic challenges[3]. However, the intricacies of Lindner's proposed debt brake reform remain unclear.
A Forsa survey revealed that 55% of the German population endorse reform or abolition of the debt brake[5]. This could potentially involve loosening the deficit limit during economic downturns or exempting select expenditure categories like infrastructure investments and climate action from the 0.35% GDP cap, allowing for increased stimulus spending and addressing immediate economic hurdles while potentially boosting the debt-to-GDP ratio over time[4].
