How much debt is okay?

Many people believe that, in view of the ruling by the Federal Constitutional Court, the state must now make do with what it takes in. That sounds plausible - and yet it is wrong.

Some people may be rubbing their eyes in amazement these days. While the UN is reporting a dramatic escalation of the global climate crisis and a possible global warming of almost three degrees, everything in Germany is focused on the national budget crisis. Yet three degrees turns the trivialized term "climate change" into an apocalyptic scenario of planetary destruction. Our children and grandchildren would very soon have to live in a different, more inhospitable world - if they survive the expected distribution conflicts of this development at all. The prosperity we enjoy today would probably be lost for the vast majority of people in just a few decades without more consistent efforts to protect the climate.

So how is it that we have nothing better to do in the face of this problem than to argue intensively about whether there is an emergency, whether it is exceptional in terms of our legislation or whether the planned 60 billion euros for the Climate and Transformation Fund (CTF) might just have been too much of a good thing after all? Or should the current generation tighten their belts when it comes to citizens' income, basic child benefits or pensions so as not to overburden future generations with too much debt?

Many believe that the state must now make do with what it earns. That sounds obvious, but it is wrong. In view of the existential climate and environmental crises, we must do all we can to counteract them - which also means investing on a large scale. We also need to make up for what has been neglected over the last 20 years in terms of modernization and digitalization, education and infrastructure. However, today's tax revenue is not enough to finance this. But it doesn't have to be - especially with a comparatively low debt ratio internationally. After all, the return on credit-financed climate protection investments would benefit our descendants in the form of reasonably intact livelihoods. At best, however, it would also be in the form of higher incomes, for example if the German industrialized nation succeeded in becoming one of the international leaders in the manufacture of climate-neutral technologies and products.

Considerable explosive power

It would also be a mistake to try to plug the financial holes we have created ourselves by cutting back on the weakest and most vulnerable in our society. They will be hit hardest by the climate crisis and its containment. Even drastic cuts to the welfare state would not be enough to close the gaps that have arisen in secondary budgets. However, they could unleash considerable explosive force for the already fragile social cohesion and undermine the acceptance of climate protection. In addition, social cuts would also make little sense from a fiscal point of view, as they mostly involve expenditure that is immediately fed back into the economic cycle via private consumption. It has never done any good to want to make savings in emergency situations, not on people's minimum subsistence level and certainly not during recessions.

But is the national budget perhaps the wrong place for climate protection in general? After all, as we often hear at the moment, companies can be persuaded to convert their production through incentives such as the CO2 price alone, without the need for state subsidies. However, this would first have to increase enough to be effective. But relying on this alone is a misconception. Because if Germany only wields the stick while all its major competitors are handing out carrots, we can quickly become lonely. If CO2 prices are raised too quickly to the necessary levels, this could throw many companies off the curve, while at the same time causing massive price increases and even more social stress.

Ultimately, the state needs to work in close cooperation with the economy and private households: No hydrogen economy, no additional rail transport, no electrification of production and mobility, no heat transition in residential properties without state-subsidized grid expansion. No escape from lock-in situations and no support for the transformation without social support, for example through the redistribution of CO2 revenues or funding for climate-friendly heating systems.

Massive investment needed

As legitimate as the CDU's complaint against unfair financial tricks and as understandable as the Karlsruhe ruling may be, the reaction can only be to finally be honest. The only way to achieve climate neutrality in a timely, prosperous and socially responsible manner is through massive private and public investment in environmentally friendly technologies and infrastructures. Estimates of the government's share of this vary widely, but are all significantly higher than the financial resources announced to date. It may be that some of the planned climate and industrial policy measures - such as the planned electricity price or chip subsidies - are debatable in terms of their accuracy and appropriateness. What is certain, however, is that we need to spend a lot of money now before investments either come too late or take place in countries where climate protection - as well as government spending - is handled much more loosely and massive subsidies are used to attract foreign investment in particular.

The fundamental blockade of reform proposals for our debt rules (while at the same time rejecting any tax increases) creates a stable escalation spiral of loss of economic strength and international competitiveness, social discord and climate policy failure.

The renunciation of investment-related government spending does not bring us any fiscal stability either - on the contrary: we actually urgently need investment in order to enable productivity and potential growth at all, even in the face of demographic change, which is a prerequisite for future tax revenues. As early as next year, the growth in gross domestic product would be significantly lower due to the discontinuation of the projects financed by the fund, as numerous voices have already rightly warned. Although fewer emissions would then be produced in Germany in future, this would be due to less domestic production and not to a cleaner production method. On the contrary, the debt ratio could even increase as a result, meaning that nothing would be gained in terms of national debt. And even if we kept it constant, what would future generations gain from the most disciplined budget on a scorched earth?

In short, government investment in achieving a sustainable social market economy should therefore be treated differently from other expenditure in future through a reform of the debt brake in the constitution. As difficult as it may be to distinguish investments from social and consumer spending, it is nevertheless necessary.

A turning point in civilization

A balanced reform does not have to mean the end of sustainable public finances or even national bankruptcy, as some hecklers would have us believe. Even independently of a reform, the state is of course required to review its expenditure more strictly again. In particular, climate-damaging subsidies come to mind, which the coalition has already decided to reduce. They create false incentives, cost the state billions and are sometimes questionable in terms of distribution policy (e.g. diesel, kerosene and company car privileges). Even if they are not superfluous in all cases and can be abolished at a stroke (e.g. commuter tax allowance), there is still a considerable need for reform and savings, which should now be implemented as part of the solution.

In this context, the German government's recently announced electricity price package, which would once again increase the current climate-damaging subsidies in the electricity tax area, should also be put to the test. Apart from the questionable knock-on and incentive effects, such a broad tax rebate would also be very costly for all industrial companies. The actual objectives of protecting the transformation of strategically important sectors such as the basic industries in Germany against global competition and creating planning certainty regarding energy price trends would not be achieved with such unspecific support. With the Karlsruhe ruling at the latest, the watering can in economic and financial policy should finally have had its day.

In future, we must therefore not only invest massively, but also in a more concentrated manner. The turning point in civilization, which we are experiencing more and more drastically every year with the multiple environmental crises, demands that we create the scope for government action to combat them. If we do not finally succeed in taking powerful countermeasures, the consequences of these crises will not only be reflected in the costs for public budgets, but will at some point make any concern with debt ratios superfluous. Every year lost only makes the necessary efforts even greater. Nobody needs self-made budget crises in this situation.

Marcus Wortmann is a Senior Expert in the Bertelsmann Stiftung's Sustainable Social Market Economy program. Andreas Esche works there as Director.

This text was first published in "Makronom", an online magazine for economic policy.