Debt brake: how it works in other countries
How to deal with public debt? This is not only an issue in the discussion about the debt brake in Germany. Internationally, there are various rules - or not. Here are a few examples:
EU
The debt rules at EU level essentially stipulate that the debt level of a member state may not exceed 60 percent of economic output. In addition, the general government deficit - i.e. the difference between the income and expenditure of the public budget, which must be covered primarily by borrowing - must be kept below three percent of gross domestic product (GDP). Due to the coronavirus crisis and the consequences of the Russian attack on Ukraine, the rules have been suspended until 2024.
A reform of the EU debt rules is currently being discussed. A proposal from the European Commission provides for highly indebted countries to be granted more flexibility in reducing debt and budget deficits due to the consequences of the coronavirus crisis and the war in Ukraine. There should be individual ways for each country to reduce debt and deficits in the long term. The proposals are controversial in European capitals. The German government, for example, is calling for strict and uniform minimum requirements, while France has spoken out against uniform rules.
France
Unlike Germany, France does not have a debt brake enshrined in its constitution and traditionally relies more on debt-financed investments rather than frugal budgeting. Pushing through strict austerity measures has always been unpopular in the neighboring country. Even during the coronavirus pandemic and the war in Ukraine, Paris supported companies and the purchasing power of the population with billions in lavish aid. With a debt ratio of 111.6% of economic output at the end of 2022, France is at the bottom of the table in the EU.
France's Court of Auditors has therefore long been calling for a consolidation of public finances. The government wants to bring the deficit back below the EU limit of three percent by the end of its term of office in 2027. A deficit of 4.9 percent is still expected in the current year, with the debt ratio set to fall to 109.7 percent.
USA
In the USA, Congress sets a debt ceiling at irregular intervals and determines how much money the government is allowed to borrow. The limit has been raised dozens of times since its introduction more than a hundred years ago, as otherwise the money would have run out. Republicans and Democrats regularly clash over raising the debt ceiling. This year, the USA, the world's largest economy, once again narrowly avoided default. The debt ceiling of around 31.4 trillion dollars (approximately 28.9 trillion euros) was reached at the beginning of the year. The Ministry of Finance had to tap into its capital reserves in order to meet its obligations.
After weeks of wrangling, both parties agreed that the debt ceiling in the US would be suspended until 2025 and, in return, the size of the federal budget, which US President Joe Biden's Democrats wanted to increase, would effectively be frozen. A default could have triggered a global financial crisis and an economic downturn. US Treasury Secretary Janet Yellen has repeatedly called for the debt ceiling to be abolished in its current form.
Italy
In Italy, too, budgetary discipline is actually enshrined in the constitution. Since 2012, it has stated: "Public administrations shall ensure balanced budgets and sustainable public debt in accordance with EU law." The mechanism is similar to the German debt brake with room for exceptions and interpretations. For example, higher new borrowing is permitted in the event of "extraordinary events" if parliament approves by an absolute majority.
However, the voluntary commitment to greater discipline has by no means been put into practice in Italian politics. The mountain of debt has not decreased since 2012, but rather increased significantly. According to the latest figures from the EU Commission, the national debt will amount to 139.8% of gross domestic product (GDP) by the end of this year. By 2025, experts are even predicting a gross debt level of 140.9 percent. The budget of Prime Minister Giorgia Meloni's government also envisages 16 billion euros in new debt for 2024. According to the government's forecast, the budget deficit would increase from the current 3.6 percent to 4.3 percent of GDP.
Great Britain
There is no statutory debt brake in the UK, but there are fiscal targets. These include the fact that net borrowing by the public sector should not exceed three percent of gross domestic product in the fifth year of an assessment period. According to the Office for Budget Responsibility (OBR), this target can be met on the current course. There is also a cap on social spending. However, both targets can be suspended by the Treasury in the event of a "significant negative shock to the UK economy".
In the EU, household debts are also subject to regulations, with the EU debt rules limiting the debt level of a member state to 60% of their economic output and the general government deficit to less than 3% of GDP. Due to the impacts of the COVID-19 crisis and the Russian invasion of Ukraine, these rules have been temporarily suspended until 2024.
Discussions about reforming EU debt rules are ongoing, proposing more flexibility for highly indebted countries to reduce debt and budget deficits in the long term, with individual strategies for each nation. This proposal, however, is controversial among European capitals, with some advocating for strict minimum requirements and others opposing uniform rules.
Source: www.dpa.com
