A Fiscal Prescription for Economic Decline

Dilapidated railway networks, schools in need of renovations, run-down streets: Germany’s infrastructure has seen better days. Yet much of the necessary investment is lacking, despite the fact that both laypeople and experts are strongly in favour of such investment. Why is this?

German politicians often point to what is known as the “debt brake”, a legislative mandate that prohibits Germany’s federal states from taking on new debt and strictly limits debt at the federal level. Yet this seemingly solid consensus has begun to falter. More and more people are calling for reforms to the debt brake, if not its abolition, so as to clear the way for wide-ranging public investment.

Our author Samuel Decker takes a closer look at what the debt brake is and the impact it was intended to have. He also discusses the policy positions on the debt brake of the various parties represented in the German parliament and outlines how things might unfold after the election.

Frequently Asked Questions:

On 29 May 2009, the grand coalition between the Christian Democrats (CDU) and the Social Democrats (SPD) — with Angela Merkel as chancellor and Peer Steinbrück as finance minister — passed legislation establishing the debt in the German federal parliament, the Bundestag, with a two-thirds majority. The German government had taken on huge debts in order to stabilize the banks during the global financial crisis and shore up the economy with stimulus packages. A programme of strict savings rules was adopted in order to get debt under control in the long term and — according to the arguments made at the time — ensure low interest rates in the future.

With the debt brake now enshrined in Germany’s constitution, the Basic Law, any new “structural” public debt, meaning independent of the nation’s economic cycle, is forbidden for the federal states and limited to a maximum of 0.35 percent of GDP for the federal government. In addition to this new structural debt, there is also a “cyclical component”, which determines the extent to which the federal government is allowed to take on debt in order to cushion economic decline, and also how much it must save during periods of growth in order to pay off such debts.

The cyclical component is measured using a complex procedure that takes an estimation of the economy’s productive potential into account when determining it. The economy’s potential is the decisive measure, as the permissible amount of new debt is dependent upon the extent to which current GDP deviates from it.

For 2024, for example, the federal government estimated that the economy’s underutilization of labour resources amounted to 38 billion euro, and it was consequently permitted to increase its debt by a further 8 billion. The seeming flexibility of the cyclical component thus only allows for an extremely small amount of new debt when measured against overall GDP.

The cyclical component, or rather the measure of productive potential at its core, is calculated according to a mainstream economic method known as the Cobb–Douglas production function. It assumes that the economy’s potential is independent of the current political situation and state intervention, that a certain minimum level of unemployment is necessary in order to fully exploit that potential, and that the potential roughly corresponds to past economic performance. This method is completely incapable of taking into account the impacts of massive public investment in productive potential and structural changes to the economy.

The debt brake is the product of a strongly ideologically tinged view of the economy and society that dominates financial policy and mainstream economics. At the core of this view is the argument that public debt is incurred at the expense of future generations. It claims that debt thus represents a danger to the common good.

Yet debt is passed on not only through government debt, but also through the possession of government bonds, and creditors and debtors often belong to the same generation. Moreover, what the money is used for is just as decisive. If, for example, the government debt is used to finance investment in public infrastructure and the social-ecological transformation of society, then future generations in particular will stand to benefit.

The idea that debt is supposedly incurred at the expense of future generations is closely entwined with another even more deeply rooted ideological assumption of mainstream neoclassical economics and neoliberal economic doctrine: the idea that debts are ultimately proportionate to savings, and that the state should not spend more than it earns.

Debts accrue independently of savings, as banks create credit “out of nothing”. In that sense, nothing stands in the way of providing funding for social and environmental issues through public borrowing.

Inflation only becomes a problem when public investment causes demand to grow faster than productive capacities can be expanded. The previous phase of price increases from 2022 onwards, by contrast, was not due to public debt, but rather to increasing energy prices and the price-setting power of corporations, which were earning additional profits due to higher prices caused by the war in Ukraine.

The fairy tale about the indebtedness of future generations and warnings about the supposed risk of inflation serve primarily to protect the material interests of creditors and employers. Tough debt regulations, which are portrayed as a supposed “practical constraint”, prevent the malleability of the economy from becoming apparent and prevent the idea of a democratic steering of the economy toward social and environmental goals from ever gaining traction.

Germany has a large investment backlog, meaning that in recent decades, the state has not invested enough in the maintenance and modernization of infrastructure such as roads, bridges, railways, canals, and schools. Dilapidated school roofs, closed freeway bridges, and train cancellations and delays have long since become everyday problems. At the same time, even “within” capitalism there is significant pressure to transform production by switching to post-fossil fuel sources, something that individual companies are either unwilling or unable to address on their own.

Joint calculations conducted by the German Economic Institute (IW), which represents the interests of employers, and the Macroeconomic Policy Institute (IMK), which represents the interests of employees, indicate just how much extra public investment will be needed to ensure Germany is prepared for the future. Their findings: approximately 600 billion euro need to be invested over the next decade. Increased defence spending, which many have been calling for since the outbreak of the war in Ukraine and increasingly since Donald Trump’s re-election as US president, is not included in their calculations.

The study cites the figure of 200 billion euro as the amount needed to make the economy climate-neutral. Among other things, this includes the re-fitting of the energy systems of public buildings, rebate programmes for private real estate, public shares in the development of power and hydrogen infrastructure, and the conversion of public transport into emissions-free energy sources. For cities and municipalities, the authors of the study estimate that 177 billion euro in investment are needed for both the refurbishment and construction of administration and school buildings, the maintenance and repair of municipal streets and paths, as well as for new housing construction, the railway network, and public transport. Both research institutes are therefore calling for a reform of the debt brake’s deficit regulations in order to facilitate the financing of the necessary investment through borrowing.

The debt brake can be criticized even more sharply if we understand the social-ecological transformation of industry and the development of (public) infrastructure to be an even more urgent and comprehensive task than is assumed by the IW and IMK study. If, for example, we are to strive for a complete overhaul of transport and public mobility as well as a conversion of the automobile industry, the 600 billion euro figure provided is not sufficient. A publicly planned transformation of all economic sectors, with the goal of ensuring that meaningful production and employment still exist in 50 or 60 years, while also keeping in line with climate change targets, would be a mammoth task requiring multiple kinds of credit and for which market mechanisms and private enterprise would only be able to play a subordinate role.

Germany’s federal states are suffering particularly intensively under the debt brake, as they have been completely prohibited from incurring any new structural debt since 2020. In Berlin, a comprehensive austerity budget was recently passed in order to bring it into line with the debt brake. As a result, the debt brake is also coming under direct criticism from some federal state governments, even those where the CDU forms part of its coalition government.

• The Alternative für Deutschland (AfD) wants to maintain the debt brake. It claims that Germany does not have “a revenue problem, but a spending problem” and would seek to introduce radical cuts to climate mitigation, social welfare, and development cooperation.
• The Free Democratic Party (FDP) also insists on strictly maintaining the debt brake. Maintaining it (and a restrictive interpretation of what exactly it entails) led to the collapse of the traffic light coalition in November 2024. In the party’s election campaign, “intergenerational justice” is the primary justification provided for maintaining the debt brake. In order to generate revenue, the FDP recommends selling off public stakes held in companies to private investors.
• In its election programme, the CDU also claims that debts are incurred at the expense of future generations, and therefore wants to maintain the debt brake as it is enshrined in the constitution. It has promised to undertake a strict stocktake in the period following the federal election. Unemployment benefits will be severely cut in order to reduce spending. Despite claiming to be in favour of the debt brake in its election programme, the CDU primarily emphasizes the potential of making cuts to the budget and the supposed possibility of stimulating economic growth and private investment by lowering taxes. We can therefore assume that, in a coalition with the SPD or the Greens, the CDU would agree to a moderate reform — particularly regarding exceptions for the federal states — so as to be able to negotiate the lowering of corporate taxes and cuts to unemployment benefits.
• In their election programme, the Greens claim to be in favour of “modernizing” the debt brake. They recommend a moderate reform, which would primarily aim to change how the cyclical component described above is calculated. The resolution of the Greens’ conference of federal representativesfrom November 2024 calls for a reform “with the goal of facilitating public borrowing to the extent that the state in turn makes investments”. The cyclical component, the resolution continues, must “be expanded to allow for the necessary room for manoeuvre so as to ensure that the state is more capable of acting in economically difficult times”. It also calls for the establishment of an investment fund (the so-called Deutschlandfonds or Germany Fund), which would be financed by public borrowing.
• The SPD is also calling for a Germany Fund, into which the state would pay 100 billion euro financed through borrowing. The word debt brakeonly appears once in its official election programme — in reference to the need for exceptions to be made for the federal states. In a paper from December 2024, the SPD group in the German federal parliament called for adjustments to be made to the “outdated criteria of the cyclical component of the debt regulation such that it is brought in line with current economic realities”. The upper limit for taking on new structural debt should be abolished, it says. The SPD is also in favour of reforming the regulations regarding emergencies. In exceptional circumstances such as wars or natural disasters, the government should be granted the authority to borrow for multiple years in advance, rather than have to start over every year.
• In its election programme, the Sahra Wagenknecht Alliance (BSW) claims it is in favour of debt brake reform, yet fails to provide any specific details as to how this might be achieved.
• In its draft electoral programme, Die Linke calls for the “abolition of the debt brake and for its replacement by the ‘golden rule’, according to which state investment is financed through borrowing”. In financial policy, the golden rule means that any increase in new public debt can only occur to the extent that it is accompanied by an at least similarly large increase in the public net assets. This would also be of benefit to future generations, such that they would also be able to participate in financing at a later date. In its draft electoral programme, the party refers to an estimated “600 billion euro of additional investment” that would be necessary “to make infrastructure, the economy, and society ready for the future”.

It is striking that the SPD, the Greens, and the BSW do not question the debt brake as such, but instead call for its “modernization” or reform. Yet whether the reforms of the SPD and the Greens would actually increase the borrowing room for manoeuvre to a sufficient degree is more than questionable.

The emphasis both parties place on the cyclical component in their election programmes is also revealing — in the event that they should find themselves in a weak bargaining position vis-à-vis the CDU, they could ensure that such a reform would pass with a minimal degree of compromise.

Calls for debt brake reform have long ceased to be the domain of parties like Die Linke and the Left more generally, and reform as such is not necessarily a progressive demand. In the meantime, members of the German Council of Economic Experts, the International Monetary Fund, the Federation of German Industries (BDI), the German Bundesbank, major economic research institutes (such as the DIW), and even Peer Steinbrück and Angela Merkel — the original architects of the debt brake — have called for reform.

Yet unlike the left-wing proposals, the general thrust of such calls — including those made in the SPD and Greens’ electoral programmes — aim specifically at supporting private enterprise and increasing defence spending. There is little talk of a kind of Green New Deal in the public debate, which would entail massive public investment in order to transform the economy in a socially and environmentally just manner, and in doing so maintain or expand decent employment conditions and create public infrastructure that would benefit everyone.

A distinguishing feature of the current debate over debt brake reform is the distinction between “consumption” and “investment” public spending. Yet the power to define what counts as a worthwhile investment in the future — that is, as investment borrowing — is subject to the balance of forces and majority opinion in society. In that sense, the right-wing and conservative camp is currently the strongest. Yet allowing more borrowing room for manoeuvre for freeways, the military, the police, and fusion energy research would not be helpful.

In other words: reforming the debt brake would not necessarily lead to money being spent on the right things. This holds even in the case where there would be broad public support for more comprehensive reforms that would go beyond merely reconfiguring the cyclical component, which the CDU has strenuously rejected to date. Even with an increase of the upper limit on structural new debts from 0.35 to 1.5 percent of GDP, which is what German Bundesbank president Joachim Nagel has called for, the question arises as to what the money would then be spent on.

The reform of the debt brake thus cannot be considered in isolation. It is embedded in broader social conflicts over what basic direction should be set for the future. In this context, the distinction between consumption and investment spending, upon which even the golden rule is ultimately based, is of limited help.

For example, spending that would traditionally be classified as consumption (e.g. welfare spending) can also function as investment spending in the long term, while investment spending (such as on freeways) can turn out to create money pits and be environmentally damaging in the long run. Nonetheless, it would be a reasonable first step to exclude investments from the debt brake and to return to the golden rule. At the same time, however, we must wrestle with the question of which investments are considered worthwhile and future-oriented, and which are not.

Despite the enormous public investments that were made in recent years in an attempt to cushion the effects of the Covid-19 pandemic from 2020 onwards and the energy price crisis that first took hold in 2022, and despite the massive rearming of the German armed forces by means of a special fund of 100 billion euro, most parties remain fundamentally committed to the debt brake. The AfD, FDP, and CDU intend to use the artificially created lack of fiscal flexibility to push through cuts to social welfare and climate mitigation. In that sense, the debt brake serves their political agenda.

Depending on the composition of the future government, the following scenarios seem plausible:

• No debt brake reform, and neoliberal rollbacks: A black–yellow (CDU and FDP) coalition government holds adamantly to the debt brake and does not even make use of the room for manoeuvre that the traffic light (SPD, FDP, and the Greens) coalition government used to make additional investments. In the context of a reactionary social climate, severe cuts are made to social welfare, migration and integration, and climate mitigation. Corporate taxation is drastically reduced.
• A compromise between investment and austerity policies: In a CDU-led government with a weakened SPD or Green Party as coalition partner (possibly also with the participation of the FDP), a small amount of additional debt room for manoeuvre is created for the federal states through a recalculation of the cyclical component and possible changes to deficit rules. In addition, a rather ill-endowed rather than well-endowed investment fund is established. Public investment flows partly into dilapidated infrastructure, but is otherwise channelled into specific branches of industry in the form of subsidies. Cuts, for example to unemployment benefits, and the lowering of corporate taxes by a few percentage points accompany the investment policies.
• Reform of deficit regulations are reformed: In the context of a change of public sentiment, which is also apparent in the election results, not only the cyclical component is reformed, but also the limit on new structural debt is abolished. In addition, a public investment fund is established. In this scenario, too, public funds are primarily channelled into military spending and subsidies for specific branches of industry. Austerity measures and a lowering of corporate tax rates could also come into play here as part of a political compromise.

The debt brake has come under criticism from various quarters, a development that is also a result of past progressive struggles. But a conservative, minimal reform of the debt brake combined with cuts to corporate taxes would not be helpful. That is why it is important for progressive forces to draw attention to the necessity of massive investment in the social and environmentally just transformation of industry.

Particularly when it comes to debt brake reform, the many civil society voices drawing attention to the need for such reform can be of assistance when it comes to putting pressure on the CDU. For a major reform that goes beyond merely reworking the cyclical component and also increases the limits on new structural debt, there would have to be a broader social debate over what the additional fiscal flexibility should be used for. This would allow for the increased politicization of economic and financial policy, and the introduction of progressive positions. A change of the general social mood and accordingly of social majorities could then make use of the additional investment room for manoeuvre for progressive political goals and further water down or completely abolish the regulations around public debt.

When presenting the case for a reform or abolition of the debt brake, it can be helpful to highlight the tremendous need for investment, most glaringly evident in dilapidated infrastructure (delayed trains, the collapsed Carola Bridge in Dresden, run-down schools). Public opinion about debt brake reform tends to be somewhat sceptical, yet the need for public investment is widely recognized. Generally speaking, discussions about reform should not distract from that fact that the issue of the debt brake actually revolves around the question of the fundamental course that should be set for the future and about very concrete kinds of spending that will improve the lives of many people.

Translated by Marty Hiatt and Louise Pain for Gegensatz Translation Collective.