"Ludwig Erhard would ask: Does the debt brake fit the times?"
IW head Michael Hüther calls for a reform of the debt brake in order to finance the restructuring of the economy. "Without these investments, we will not achieve the goal of climate neutrality in time," he says in an interview with ntv.de. A reduction in corporate taxes, which are very high by international standards, is also not possible with the debt brake in its current form. Hüther accuses the CDU/CSU and the FDP of refusing to engage in the discussion. "I find it intellectually unworthy to evaluate a rule that was once found by chance as a sacred event."
ntv.de: What will happen after the budget freeze?
Michael Hüther: The budget freeze has led to a significant increase in uncertainty about the budget policy framework, as it is no longer just about the expenditure of the Climate and Transformation Fund and the Economic Stabilization Fund. The federal government must now draw up a constitutionally compliant budget for 2024 as quickly as possible. It is probably impossible to overestimate the paralyzing effect on the German economy, which is still stagnating.
Since the Federal Constitutional Court's ruling on the climate and transformation fund, the debt brake has been increasingly discussed. Should it be abolished or retained?
I won't get involved in this alternative. I don't want to abolish the debt brake, I want to reform it. The public debate is suffering precisely because of this pointed question. Even a critical comment is seen by the guardians of the debt brake as an attack on the basic idea. Of course we need a fiscal rule. The Basic Law always had one. The Basic Law of 1949 had a debt rule, as did the Basic Law of 1969, and then the current one was added to the constitution in 2009. You just have to ask whether it fulfills its task and is appropriate.
Is it?
In my view, the debt brake in its current form is out of date. Limiting new borrowing to 0.35 percent of gross domestic product is not justified, either theoretically or empirically. In addition, it must be brought into line with another constitutional court ruling that has since been made - the one on climate protection.
In 2021, the Federal Constitutional Court declared the Grand Coalition's Climate Protection Act to be partially unconstitutional. Although politicians had adopted targets, they had not taken any measures to achieve these targets.
This ruling also binds politicians through the Climate Protection Act: Germany is to be climate-neutral by 2045. This is a historic task and requires considerable investment, even if - like the EU - 2050 is taken as the target year.
You are proposing a reform of the debt brake to make these investments possible.
Investments in the transformation of the German economy will primarily benefit future generations. I therefore believe it is legitimate for future generations to participate in the financing. This was also the position of the German Council of Economic Experts in its 2007 report on the appropriate design of a debt rule. The Scientific Advisory Council to the Federal Ministry of Finance and the Scientific Advisory Council to the Federal Ministry of Economics objected to this at the time, arguing that government consumption and government investment could not be easily separated. This led to the alternative solution with the fixed quota. However, the transformation investments that we have to make are relatively clearly identifiable. A climate and transformation fund seems to me to be a suitable vehicle for this.
Why?
The investments are planned for several years, and a fund provides a reliable framework. The state cannot make such a transformation of the economy with a twelve-month perspective. In the current situation, the easiest way would therefore be to incorporate the climate and transformation fund into the Basic Law in the same way as the special fund for the German armed forces. This would not affect the debt brake.
But?
We should still consider whether other fiscal rules are not wiser. Switzerland, for example, has an expenditure rule, not a pure deficit rule. You can also ask whether other indicators such as the interest-tax ratio are not also important. It is also a good idea to include an investment clause in the Basic Law. Even the Federal Ministry of Finance asked in a non-paper on the discussion about the European Union's fiscal rules whether an investment exception could be introduced.
They are expressly not interested in relaxing the debt brake in order to create greater leeway in social policy, for example.
No, for God's sake - of course that should never happen. What can be financed from the normal budget must be financed from the normal budget with taxes and levies. This applies to social policy as well as other consumer spending. It would actually also affect defense spending, but the problem we have with the Bundeswehr is that 16 years of underfunding cannot be corrected in a tax budget.
Some economists are calling for the transformation to be controlled by increasing the price of CO2.
This would assume that we can safely expect to become climate-neutral by 2045. However, this does not seem plausible to me, as an increase in the CO2 price alone will not bring about an energy transition. We need to invest in offshore wind energy and the grid infrastructure now, and the charging infrastructure won't fall from the sky either, to name just a few examples of publicly supported investments. It is not enough to do this at some point, it has to happen now. Without these investments, we will not achieve the goal of climate neutrality in time. Anyone who doesn't want this should say so.
I would like to make another argument: With the debt brake in its current form, no major tax reform could be implemented. The tax reform under the then Chancellor Helmut Kohl, introduced in three stages in 1986, 1988 and 1990, resulted in considerable tax shortfalls. In the logic of the debt rules at the time, this was possible because it could be argued that this tax reform would mobilize macroeconomic activity and thus refinance itself at some point. This was also the case with the three-stage tax reform under Gerhard Schröder in 2001, 2003 and 2005. Today, we have corporate tax rates that are very high by international standards. Irrespective of the transformation task, there is also a need for action here. However, I do not believe that a significant reduction in corporate tax rates should be possible under the conditions of the debt brake.
One argument for not touching the debt brake is the potential impact on the rest of the EU. Wouldn't we be setting a bad example?
I don't think that's a convincing argument, because Germany has another effect on the EU: we are normally economically strong enough to give the EU a boost. We are not doing that at the moment. We are stuck in stagnation, the growth forecast of the German Council of Economic Experts is just under half a percentage point by the end of the decade. Europe cannot be happy about that. If we could change this with a smart investment and transformation policy, it would be in everyone's interest.
This year, Germany has spent almost 30 billion euros on interest alone. Isn't that getting too expensive?
The question is not how much debt there is, but how sustainable it is. The debt ratio has a numerator and a denominator: the numerator is the debt, the denominator is the gross domestic product. Last year, the debt ratio was 66.3 percent - so we are in a relatively good position. No company would finance its investments from cash flow alone. If we were to finance investments solely from the annual budget, this would mean that the respective generation would have no reason to do anything, as they themselves would not benefit from it. For me, for example, there is no need to organize a transformation, I'm 61 and I couldn't care less about climate change. But the issue is important for my children and grandchildren. It would be too short-sighted to understand intergenerational justice only in fiscal terms.
Following the ruling by the Federal Constitutional Court, the CDU/CSU and FDP have emphasized how good it is that the debt brake has now been strengthened. Doesn't this actually make it clear that this discussion is politically doomed to failure?
That may be the case, but I accuse both parties of the same thing. I find it intellectually unworthy to judge a rule that was once found by chance as a sacred event. The parties you mentioned like to invoke Ludwig Erhard or regulatory economists like Walter Eucken. But none of them would have argued so poorly, they would always have asked: Does the rule fit the times? I am of the opinion that we need to have this discussion. Not having it has brought us exactly to where we are now. This ruling is not only a disaster for the government, but also for the complaining opposition party, which has no answer as to how the transformation investments should be financed. A serious, grown-up debate must allow us to reflect on a rule that was well justified in its time. This taboo surrounding the debt brake really annoys me to no end. If politics takes place like this, then it's finished.
Hubertus Volmer spoke with Michael Hüther
ntv.de: What are the implications of the debate on climate policy and budget policy for the upcoming interviews with coalition partners?
Michael Hüther: The debate on climate policy and budget policy, specifically the need for investment and potential reform of the debt brake, will undoubtedly be a major topic in forthcoming interviews with coalition partners. The public demands action and clarity on these issues, and politicians must demonstrate their willingness to engage in constructive dialogue and find solutions that benefit the German economy and its future generations.
As part of the traffic light coalition negotiations, can the issue of debt brake reform be included in the climate policy and budget policy discussions?
In the context of traffic light coalition negotiations, the issue of debt brake reform in relation to climate policy and budget policy is certainly not off the table. It is crucial for policymakers to consider the long-term ramifications of their decisions and ensure that Germany's economic transformation can be financed effectively without compromising fiscal sustainability. A collaborative and open-minded approach to addressing this challenge will be essential for achieving a successful coalition agreement.
Source: www.ntv.de
