German balanced budget amendment

Germany's balanced budget amendment (German: Schuldenbremse) is a fiscal rule enacted in 2009. The law, which is in Article 109, paragraph 3 and Article 115 of the Basic Law, Germany's constitution, is designed to restrict structural budget deficits at the federal level and limit the issuance of government debt.

History

The amendment was enacted because the nation's debt-to-GDP ratio exceeded the 60% threshold fixed in the Maastricht Treaty, primarily a result of the heavy payments to reconstruct former communist Eastern Germany after reunification and a loss of tax revenue during the Great Recession. The law required a change to the constitution and in 2009, it was approved with a two-thirds majority both by the Bundestag and the Bundesrat, under the Grand coalition of the First Merkel cabinet. At the federal level, the law limited the budget deficit to 0.35% of the GDP beginning in 2016 and German states that approved the law were prohibited from taking on debt after 2020. Three states, Berlin, Mecklenburg-Vorpommern and Schleswig-Holstein, did not establish the law in their constitutions. In the years prior to the Covid pandemic, the law helped reduce Germany's debt to 59.5% of GDP. The balanced budget amendment is not absolute and allows the country to exceed the borrowing limits during a national emergency or a recession.

The amendment was suspended in 2020 to allow the country to deal with the costs of the COVID-19 pandemic in Germany and was set to come back into force in 2023.

Although the mechanism was successful in its stated goal, reducing government borrowing, it was criticized by left-of-center parties including the Social Democrats and the Greens, which suggested that the law limited necessary government investment. During the 2021 German federal election campaign, the Greens proposed reforming the rule to allow spending on infrastructure, healthcare and education. In 2022, the government, led by Chancellor Olaf Scholz, succeeded in obtaining the two-thirds majority necessary to amend the debt ceiling to allow Germany to establish a 100 billion euro defense fund that would not be subject to the restrictions. The change was spurred by the 2022 Russian invasion of Ukraine.

In December 2021, via an amendment to the original budget for 2021, the ruling traffic light coalition reallocated €60 billion of unused funds intended to combat the COVID-19 pandemic to its Climate and Transformation Fund (KTF) for climate and green industry projects. On November 15, 2023, the Federal Constitutional Court, having been prompted by the opposition CDU/CSU conservative alliance, ruled this maneuver to be unconstitutional. The ruling prompted a discussion about whether the amendment in its current form would still be appropriate, with even some conservatives calling for a reform to raise the relatively weak level of investment, compared to European neighbors, which had prevailed for several years. On November 27, the cabinet agreed to extend the lifting of the amendment to 2023.

Discourse

The German debt brake has been both lauded and criticized by economists and policymakers alike. Critics argue that the debt brake constraines the government's ability to respond flexibly to economic downturns. Moreover, some contend that the strict austerity measures enforced by the debt brake hinderes long-term growth prospects by causing underinvesting in infrastructure, education, and innovation.

The German Council of Economic Experts (GCEE)

The German Council of Economic Experts (GCEE) has advocated for a pragmatic reform aimed at enhancing the flexibility of fiscal policy while safeguarding debt sustainability. Firstly, they propose spreading the process of returning the structural deficit to its regular limit over multiple years following the application of the exception clause. Secondly, they suggest that the annual limit for the structural deficit should be contingent upon the level of debt. If the debt falls below a specified threshold, a higher structural deficit would be permissible. Lastly, the experts recommend methodological changes in estimating potential output, a crucial part of calculating the structural deficit.

Discourse among German economists

The debt brake has been controversial since its introduction. At that time numerous German economists spoke out against the introduction of the debt brake in a public letter. German professors remain divided about this issue. A recent report from the Ifo Institut in Munich shows that 48% of economics professors oppose a reform of the debt brake, 44% support a reform, and 6% want to abolish it all together. 2% of economists are undecided.

See also

• Debt-to-GDP ratio
• Structural and cyclical deficit
• Government budget balance