Habeck advisory board proposes debt brake reform

Suspend, abolish, reform? The debt brake is causing controversy. The advisory board of the Ministry of Economic Affairs believes it makes sense in principle, but also sees a need for reform. The advisory body makes two proposals.

The Scientific Advisory Council to the Federal Ministry of Economics has proposed a fundamental reform of the debt brake and has put forward an exception for net public investment and the establishment of investment promotion agencies as measures that could be applied alternatively or combined with one another. The Council considers a debt brake to be fundamentally sensible and necessary in order to counteract the short-term orientation of politics, in particular the tendency to shift the costs of current government spending onto future generations.

"However, the same short-term orientation also makes it more attractive to make government consumption expenditures at the expense of government investments. This is why a reform of the debt brake makes sense," said Eckhard Janeba, Chairman of the Advisory Board. The Advisory Board makes two reform proposals that are not mutually exclusive. Firstly, the debt brake should be developed into a "Golden Rule Plus". This would mean that net public investments that are debt-financed would not count towards the maximum net borrowing limit of the debt brake if their investment character is confirmed by an independent institution.

"The restriction to net investments forces the state to finance the maintenance of the existing capital stock from regular budget funds. Only additional investments are exempt from the debt brake," said Advisory Board member Klaus Schmidt. As net investments have been very low in the past, this would provide a strong incentive to invest, which would only lead to moderate additional debt.

Secondly, in their new report, the advisors to Federal Economics Minister Robert Habeck reportedly propose the establishment of investment promotion companies, which would have binding contractual or statutory entitlements to constant funding allocations over a period of several years in order to guarantee a stabilization of investments in public budgets. However, the Council is "critical" of these companies' own borrowing capacity, said Janeba.

Pressure on public finances is increasing

Germany is facing "considerable fiscal policy challenges, and not just since the ruling of the Federal Constitutional Court", Schmidt stated. The pressure on public finances will increase dramatically in the coming years and decades due to demographic developments as well as the digital and ecological transformation. "We will have to realign our defense and foreign policy, with considerable fiscal consequences, and interest expenditure will also increase significantly due to the rise in interest rates," he said.

"In this situation, the ruling of the Federal Constitutional Court now means that budgetary leeway will be drastically restricted over the next few years." This is a major problem because it will primarily be at the expense of public investment, which is very low by international standards. Janeba emphasized, however, that the report had been prepared before the Karlsruhe ruling.

With regard to the reform of EU fiscal rules, the academics recommended that the government insist that European and German budget rules do not diverge too far. Independent institutions should also be used more for monitoring purposes. According to Schmidt, the academics also called for "financial planning in Germany that goes beyond medium-term financial planning".