What is happening with the debt brake?

Last Updated: 9. Februar 2024By

The debt brake is more than ever a topic of discussion. In Germany, the financial instrument has been enshrined in the Basic Law since 2009, and the debt brake came into effect in 2011.

During the financial crisis of 2008, money was spent with open hands to rescue struggling banks and companies. Between 2008 and 2010, public debt skyrocketed from 60% to 80% of GDP. Therefore, it was necessary to set a limit on new borrowing.

Why is there a debt brake? The aim of the debt brake was and is to put public finances on a solid long-term footing and prevent excessive national debt. The debt brake can be suspended in case of an emergency. For example, it was suspended due to the coronavirus.

This year, the debt brake was supposed to apply again after the pandemic, which posed a challenge for the government.

The budget is now in place, but the discussion about the debt brake continues. The Council of Economic Experts has reignited the debate. They argue that the debt brake is too strict and economically inefficient. „We want to increase flexibility and create room for maneuver so that we can make future-oriented public spending without undermining the sustainability of public finances,“ Monika Schnitzer, the chairwoman of the Council of Economic Experts, is quoted on tagesschau.de.

The weaknesses of the financial instrument Tagesschau.de summarizes why Schnitzer is calling for a reform of the debt brake. On the one hand, there is no transitional rule for the period after an emergency, which creates uncertainty that is problematic for the economy. On the other hand, Schnitzer criticizes the debt limit of currently 0.35% of nominal gross domestic product. She argues that it is unnecessarily low.

The leeway could be increased depending on the debt ratio. In addition, the Council of Economic Experts sees a need for reform in the so-called economic component of the debt brake. Simply put, the worse the economic situation, the higher the allowed borrowing. The problem is that this decision is based on forecasts. This means that sometimes too much, and other times too little, debt leeway is granted. This is not economically efficient.

Criticism of the reform A two-thirds majority is needed in the Bundestag for a reform of the debt brake. Therefore, the votes of the coalition alone would not be enough. Finance Minister Christian Lindner has already expressed his opposition to loosening the debt brake. „You cannot turn constitutional requirements on and off like a light switch,“ Lindner is quoted on tagesschau.de. He also argues that adhering to the debt brake is economically reasonable. „This is a matter of prudence. Otherwise, we will eventually have to make spending cuts or raise taxes just to pay for the debts of the past.“

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