Finance: Bundesbank: Reform of debt brake for more investments

According to calculations by the Bundesbank, a reform of the debt brake could provide the federal government up to 220 billion euros in scope for investments in infrastructure and defense. The central bank proposes to expand the upper limits for the inclusion of additional loans in the debt brake in the Basic Law.

The European debt rules should by no means be questioned, as Bundesbank President Joachim Nagel assures: “Our reform proposal for debt brakes keeps solid state finances and at the same time relieves urgently needed investments.”

The new debt should be based on whether public debt is over or below 60 percent of economic output. This brand is ripped off in the EU Maastricht contracts as a debt limit.

With its renewed reform proposal, the central bank turns itself on to a permanent political dispute on how the state should finance the abundance of expensive challenges. That is why the Union and SPD also struggle for a possible black and red federal government during their ongoing explorations.

Larger scope for new loans

The debt brake, which has been anchored in the Basic Law since 2009, only allowed the federal government to a limited extent: the annual new debt must not exceed 0.35 percent of gross domestic product (GDP).

The Bundesbank considers it to be justifiable in terms of stability policy to raise the border for the structural net credit of the federal government in debt rates below 60 percent to up to 1.4 percent of GDP. Above 60 percent, the central bank sees the limitation of 0.9 percent of GDP. In a former reform proposal from 2022, the Bundesbank had moved in at 1.0 percent or 0.5 percent.

The now proposed larger debt scope should “be largely reserved for additional material investments,” as the Bundesbank emphasizes. In the best case, such a reform of the debt brake could, according to its calculations, increase the state’s scope for around 220 billion euros compared to the current status by 2030. Even with a debt rate of over 60 percent, it would be around 100 billion euros.

EU debt rules “central orientation point”

The EU rules are “central orientation point of the suggestions,” writes the Bundesbank. With a higher debt rate, the upper limit must be chosen so that “it attributes the debt rate to less than 60 percent”.

Like most states in the euro area, Germany has been crossing the 60 percent limit for years-despite a tendency to fall. In 2023, the quota in Europe’s largest economy was 62.9 percent according to an overview of the Federal Statistical Office. According to the Bundesbank, 62.4 percent was at the end of the third quarter of 2024.

Stop sign for new debt

The debt brake is intended to prevent the mountain of liabilities from becoming so large that the state must always take out new loans in order to remove it. In its current version, the debt brake already allows additional debts to be accepted during an economic downturn. These must be removed when the economy runs again.

In addition, the debt brake can “be suspended in the event of natural disasters or extraordinary emergencies that are evaded by the state’s control”. This exemption was used in 2020 to 2022 – first because of the Corona pandemic, then to cushion the economic consequences of the Russian attack on Ukraine including energy crisis.

In the Bundestag, a simple majority is enough to determine an emergency. Two thirds of the votes are necessary to change the rules in the Basic Law. The potential government partners Union and SPD in the new Bundestag themselves do not have such a majority with the Greens. They would be dependent on voices from AfD and the left, which together have a blocking minority.

Debate about reform of the debt brake

Critics believe that the debt brake in its applicable form is disabled, for example in climate protection and the infrastructure such as roads and rails. It is also unclear how Germany wants to finance higher defense spending.

Bundesbank President Nagel said at the beginning of last week that it was important that “the debt brake remains anchored as an instrument of stability”. However, Germany is “in a different environment than 15 years ago when the debt brake saw the daylight”.

Similar credit spaces and investment protection, as now proposed, could also be implemented with a special fund from the Bundesbank’s point of view that could be limited for a limited or volume. “We prefer a fundamental reform of the debt brake, which offers better predictability, but a special fund with a comparable financial framework would also be possible,” said Nagel.

However, more flexibility in debt brake is not a panacea, as the Bundesbank made it clear in its monthly report February: it remains “indispensable to check priorities and use funds more effectively”. And: “A focused administration would also be important, which makes decisions quickly and without exuberant requirements and better use the opportunities of digitization.”

Federal Ministry of Finance on debt rules and debt brake Bundesbank proposal for the reform of the debt brake 2022 Bundesbank on Maastricht deficit and debt status Bundesbank on government debt and debt ratio 2023 MONATION reports Basic Law Article 115 Statistical Federal Office: debt ratings of the EU member states.