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The debt brake of the German states: a faulty design?

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Abstract

The debt brake for German states, which demands that they are forbidden from taking up new net debt from 2020 onwards, has two major shortcomings. First, states do not have tax autonomy. In fiscal crises, they can only make adjustments to expenditure but not on the revenue side. Given the fact that most expenditure is—at least in the short term—predetermined by law, in such a crisis a balanced budget without new debt is hardly feasible. Second, the measure does not take into account that large investments, in particular in small regional units, can scarcely be financed by current expenditure. Thus, there is a high probability that at least some states will take up new net debt even after 2020 and, therefore, violate the rules of the debt brake.

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Notes

  1. On this, see Potrafke and Reischmann (2015) or Burret et al. (2014, 2016).

  2. See Hrbek (2007) or Gunlicks (2008) for the first committee and Heinz (2010) or Feld and Baskaran (2010) for the second.

  3. See Deutscher Bundestag/Bundesrat (2010).

  4. For a detailed description of the German Debt Brake see Deutsche Bundesbank (2011).

  5. See Beljan and Geier (2013).

  6. Source of the data: Statistisches Jahrbuch der Schweiz 2013, Table T18.4.11, electronic version; Statistisches Jahrbuch der Schweiz 2016, Table T18.4.1, p. 445.

  7. Grundgesetz, Art. 109.

  8. See: Schäuble will Schuldenbremse lockern, FAZ.NET of 12 September 2014. http://www.faz.net/aktuell/wirtschaft/wirtschaftspolitik/schaeuble-will-schuldenbremse-fuer-laender-lockern-13149130.html (03/11/16).

  9. For a survey of the earlier literature, see Kirchgässner (2002, p. 147ff.); for more recent contributions, see Auerbach (2014) or Heun (2014).

  10. They show this for the effect of direct democracy, but there is no reason why the same should not also hold for debt brakes.

  11. See, for example, Southerland et al. (2005) or Vulovic (2010).

  12. On this, see Kirchgässner (2014a), von Weizsäcker (2014), or Holtfrerich et al. (2016).

  13. Whether a fiscal situation is sustainable or not can be checked without reference to the size of the public debt. See, for example, Burret et al. (2014, 2016), who check the fiscal sustainability of the German states by (statistically) comparing the developments in their revenue and expenditure.

  14. See also the more recent paper by Égert (2015).

  15. This is independent of the interest rate. The relationship between the interest rate and the growth rate determines, however, whether there is a primary deficit or surplus and how large the latter has to be if the relationship between debt and GDP is not to increase. On this, see Kirchgässner (2005, S. 25). The model of Domar (1944) provides the foundation for these calculations.

  16. On this, see Stehn and Fedelino (2009).

  17. See Ragnitz (2010).

  18. Here, see, for example, Feld and Baskaran (2010, p. 386).

  19. The problem of the lack of tax autonomy and the demand for at least some autonomy has already been discussed earlier. See footnote 26 below or Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2014, p. 337ff.). It has, however, not been discussed with respect to its relevance for the debt brake.

  20. See: Statistical Yearbook of Germany 2014, p. 254, p. 268.

  21. This holds, in particular, for consumption expenditure. It is, of course, possible, to reduce investment expenditure, but at the cost of increasing deterioration in public infrastructure. The state of Berlin is a good example. The successful consolidation of its finances was mainly due to a reduction in investment expenditure and interest payments. From 2001 to 2014, the share of investment in total expenditure fell from 14.5 to 5.7% and the share of interest payments fell from 2008 to 2014 from 10.9 to 8.3%. [See Rechnungshof von Berlin (2004, p. 13; 2016, p. 26f.).] This create a disastrous situation for its infrastructure: in 2014, only about one quarter of the bridges were in a good or very good state. “From 2005 to 2014 the condition of Berlin’s bridges has dramatically deteriorated.” (Rechnungshof von Berlin 2016, p. 61.).

  22. Detailed descriptions of the cantonal institutions are given by Yerly (2013) or Waldmeier and Mäder (2015) and can also be found on the website of the Conference of the Cantonal Finance Ministers http://www.fdk-cdf.ch/-/media/FDK_CDF/Dokumente/Themen/Finanzpolitik/Haushaltsregeln/121218_hh_regeln_update_def_d.pdf?la=de-CH (03/11/16).

  23. This holds in absolute and relative terms: in 2014, the four cantons, Geneva, Basel Town, Fribourg and St. Gallen had the following gross debt per capita: CHF 39,271, CHF 37,250, CHF 7335 and CHF 8834. The relationship between gross debt and resource potential was 88.0, 84.0, 32.0 and 36.6%. Source of the data: Eidgenösische Finanzverwaltung, Berichterstattung, https://www.efv.admin.ch/efv/de/home/themen/finanzstatistik/berichterstattung.html (03/11/16); Bundesrat (2014, p. 236).

  24. See, for example, Musgrave and Musgrave (1984, p. 515f.).

  25. See also Burret and Feld (2016). For a survey of the empirical evidence, see Kirchgässner (2013).

  26. See footnote 27.

  27. See Schweizerische Steuerkonferenz SSK (2013).

  28. See on this also the discussion in Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2007, p. 62ff.).

  29. On this, see Deutscher Bundestag/Bundesrat (2010, p. 77ff., in particular p. 79).

  30. Ibid (p. 152ff., in particular p. 153, p. 162).

  31. Source of the data: Germany: http://de.statista.com/statistik/daten/studie/73061/umfrage/bundeslaender-im-vergleich---bruttoinlandsprodukt/ (28/09/16); Switzerland: Statistik Schweiz, Regionale Indikatoren, Bruttoinlandprodukt nach Kanton, http://www.bfs.admin.ch/bfs/portal/de/index/themen/04/02/05.html (03/11/16).

  32. Source of the data: Germany: Deubel (2014, p. 45); Switzerland: Bundesrat (2014, p. 235).

  33. In the referendum of 22 September 2013, 50.9% of the Hamburg electorate voted for this repurchase.

  34. In the 16 states, of the Prime Ministers who held office in June 2009 when the debt brake was decided on in the Upper Chamber of the German Parliament (Bundesrat), only three still held office in December 2016: Horst Seehofer (Bayern), Erwin Sellering (Mecklenburg-Vorpommern) and Stanislaw Tillich (Sachsen).

  35. See Hayo and Neumeier (2014).

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Authors and Affiliations

  1. Swiss Institute for International Economics and Applied Economic Research (SIAW-HSG), University of St. Gallen, Bodanstrasse 8, 9000, St. Gallen, Switzerland

    Gebhard Kirchgässner

  2. Leopoldina, Halle (Saale), Germany

    Gebhard Kirchgässner

  3. CESifo, Munich, Germany

    Gebhard Kirchgässner

  4. CREMA, Basel, Switzerland

    Gebhard Kirchgässner

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Correspondence to Gebhard Kirchgässner.

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This paper is partly based on the shorter German version Kirchgässner (2014b).

This paper appears posthumously because Gebhard Kirchgässner—a towering figure in both Public Choice and Constitutional Political Economy—passed away on April 1, 2017.

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Kirchgässner, G. The debt brake of the German states: a faulty design?. Const Polit Econ 28, 257–269 (2017). https://doi.org/10.1007/s10602-017-9240-3

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