The criticism of the debt brake of the Basic Law is not new. Opponents say it doesn’t allow for enough investments and is at the expense of important future expenditures. Now there is an original argument: it impairs Germany’s ability to act in foreign policy.
At first glance, this seems entirely plausible. According to our constitution, the federal government is solely responsible for international relations. He alone finances defense, diplomacy and foreign aid. And the Bundeswehr in particular has been chronically underfinanced for years. However, the defense budget began to plummet before the debt brake came into force in 2011, and the reverse of the thrust was still possible in the last election period. The same applies to development aid. The target of 0.7 percent of GDP was reached for the first time in 2020.
However, it is becoming apparent that after the turn of the century, permanent additional expenditure for Germany’s international obligations will be unavoidable. The traffic light coalition agreement provides for spending three percent of economic output. Nevertheless, the proposal to dispense with the debt brake does not go far enough. In addition, he does not consider the associated risks and side effects.
In view of the unavoidable demands on the state both externally and internally – for example in education, infrastructure, social security and climate protection – the financing requirements of the public sector in Germany continue to increase. This is undeniable. It will not work simply by cutting and reallocating existing expenditure. This is shown by the experience of the past decades.
So it’s about increasing government revenue. They essentially consist of taxes and, secondarily, loans. Anyone who only looks at the abolition of the debt brake ignores the central challenge for public finances: securing and increasing tax revenue.
To do this, we first have to consistently apply existing tax law. The fight against tax fraud has a significant international dimension, as evidenced by the Panama Leaks and other revelations. The Alliance for Democracy launched by US President Biden must become an alliance for international tax justice. Democracies in particular are existentially dependent on financing through taxes. The chancellor cannot just expropriate a couple of oligarchs like Mr. Putin.
Second, high incomes and private wealth must contribute more to the common good. That means they have to be taxed more heavily. The challenges of the turning point go far beyond foreign policy. It’s about the resilience of our society and our survival in the systemic competition with authoritarian states like Russia and China. In the next few years we must prove that open, democratically governed and rule-of-law societies are capable of organizing prosperity, security and sustainability.
This also requires a financial effort from the federal, state and local governments. The federal government alone will not be able to tackle the expansion of childcare, digitization and the energy transition. Even if he takes on more and more of the financing, it remains the responsibility of the federal states and municipalities to implement it. And the solution cannot be to open the floodgates for debt at all levels.
Undesirable side effects occur. The debt brake has been most effective in its function as a brake on tax cuts over the past ten years. Aside from constitutionally required income tax adjustments, there were no across-the-board tax cuts. Even if there is a majority in favor of it in the Bundestag, as under Black and Yellow, the vast majority of the federal states of all stripes cannot afford the resulting loss of income. This little-noticed side of the debt brake is fundamental to the state’s ability to act.
A repeal would inevitably result in the game of tax cuts being reopened. Limiting borrowing to investment expenditure is being discussed as a follow-up regulation to the debt brake. But at the same time additional leeway would be created in the budget for tax cuts. Incidentally, there was just such a regulation before the debt brake – with the well-known result: high levels of debt, less and less investment and a great appetite for tax cuts, which further eroded the financial basis of the public sector.
The structure of the debt brake takes this into account – and at the same time reduces the risk of excessive government spending. We should not lightly question this political balance of the debt brake, which made it possible for a majority to be adopted in the first place. That should not prevent us from correcting the debt brake where it has weaknesses. This applies, for example, to the debt limits of the federal states, which are even stricter than those of the federal government.
At the same time, they have not been granted any additional tax collection rights (except for real estate transfer tax), although they are key players in childcare, education, research and infrastructure together with the municipalities they finance. The staff shortages in state and municipal administrations are an important stumbling block for good education and childcare and for accelerating the energy transition, housing construction and the expansion of transport routes.
The federal and state governments could also be allowed to take on more cyclical debt. Ultimately, the stability pact’s debt rules need to be made more flexible and eurobonds are possible in order to strengthen cohesion and growth in the euro area.
But completely abolishing the debt brake would be a mistake. Their main problem is not that they contain public debt. Rather, it is of a political nature: if borrowing is more difficult, the basis for tax revenue must be broadened. The flight into debt is a sham solution that cannot be used to cope with the additional expenditure that is permanently necessary to cope with the turn of the century. By the way: tax laws require a simple majority, constitutional amendments such as lifting the debt brake require a two-thirds majority. So let’s focus on the more realistic path towards sustainable financing of the turning point.
The criticism of the debt brake of the Basic Law is not new. Opponents say it doesn’t allow for enough investments and is at the expense of important future expenditures. Now there is an original argument: it impairs Germany’s ability to act in foreign policy.
At first glance, this seems entirely plausible. According to our constitution, the federal government is solely responsible for international relations. He alone finances defense, diplomacy and foreign aid. And the Bundeswehr in particular has been chronically underfinanced for years. However, the defense budget began to plummet before the debt brake came into force in 2011, and the reverse of the thrust was still possible in the last election period. The same applies to development aid. The target of 0.7 percent of GDP was reached for the first time in 2020.
However, it is becoming apparent that after the turn of the century, permanent additional expenditure for Germany’s international obligations will be unavoidable. The traffic light coalition agreement provides for spending three percent of economic output. Nevertheless, the proposal to dispense with the debt brake does not go far enough. In addition, he does not consider the associated risks and side effects.
In view of the unavoidable demands on the state both externally and internally – for example in education, infrastructure, social security and climate protection – the financing requirements of the public sector in Germany continue to increase. This is undeniable. It will not work simply by cutting and reallocating existing expenditure. This is shown by the experience of the past decades. So it’s about increasing government revenue. They essentially consist of taxes and, secondarily, loans. Anyone who only looks at the abolition of the debt brake ignores the central challenge for public finances: securing and increasing tax revenue.
To do this, we first have to consistently apply existing tax law. The fight against tax fraud has a significant international dimension, as evidenced by the Panama Leaks and other revelations. The Alliance for Democracy launched by US President Biden must become an alliance for international tax justice. Democracies in particular are existentially dependent on financing through taxes. The chancellor cannot just expropriate a couple of oligarchs like Mr. Putin.
Second, high incomes and private wealth must contribute more to the common good. That means they have to be taxed more heavily. The challenges of the turning point go far beyond foreign policy. It’s about the resilience of our society and our survival in the systemic competition with authoritarian states like Russia and China. In the next few years we must prove that open, democratically governed and rule-of-law societies are capable of organizing prosperity, security and sustainability.
This also requires a financial effort from the federal, state and local governments. The federal government alone will not be able to tackle the expansion of childcare, digitization and the energy transition. Even if he takes on more and more of the financing, it remains the responsibility of the federal states and municipalities to implement it. And the solution cannot be to open the floodgates for debt at all levels.
Undesirable side effects occur. The debt brake has been most effective in its function as a brake on tax cuts over the past ten years. Aside from constitutionally required income tax adjustments, there were no across-the-board tax cuts. Even if there is a majority in favor of it in the Bundestag, as under Black and Yellow, the vast majority of the federal states of all stripes cannot afford the resulting loss of income. This little-noticed side of the debt brake is fundamental to the state’s ability to act.
A repeal would inevitably result in the game of tax cuts being reopened. Limiting borrowing to investment expenditure is being discussed as a follow-up regulation to the debt brake. But at the same time additional leeway would be created in the budget for tax cuts. Incidentally, there was just such a regulation before the debt brake – with the well-known result: high levels of debt, less and less investment and a great appetite for tax cuts, which further eroded the financial basis of the public sector.
The structure of the debt brake takes this into account – and at the same time reduces the risk of excessive government spending. We should not lightly question this political balance of the debt brake, which made it possible for a majority to be adopted in the first place. That should not prevent us from correcting the debt brake where it has weaknesses. This applies, for example, to the debt limits of the federal states, which are even stricter than those of the federal government.
At the same time, they have not been granted any additional tax collection rights (except for real estate transfer tax), although they are key players in childcare, education, research and infrastructure together with the municipalities they finance. The staff shortages in state and municipal administrations are an important stumbling block for good education and childcare and for accelerating the energy transition, housing construction and the expansion of transport routes.
The federal and state governments could also be allowed to take on more cyclical debt. Ultimately, the stability pact’s debt rules need to be made more flexible and eurobonds are possible in order to strengthen cohesion and growth in the euro area.
But completely abolishing the debt brake would be a mistake. Their main problem is not that they contain public debt. Rather, it is of a political nature: if borrowing is more difficult, the basis for tax revenue must be broadened. The flight into debt is a sham solution that cannot be used to cope with the additional expenditure that is permanently necessary to cope with the turn of the century.
By the way: tax laws require a simple majority, constitutional amendments such as lifting the debt brake require a two-thirds majority. So let’s focus on the more realistic path towards sustainable financing of the turning point.