Schuldenbremse

What Is Schuldenbremse?

The Schuldenbremse, or "debt brake," is a constitutional fiscal rule in Germany designed to limit government borrowing and ensure long-term fiscal policy sustainability. It is a key component of Germany's broader framework for public finance management, aimed at preventing excessive government debt and promoting economic stability. The Schuldenbremse mandates that the federal government's structural budget deficit cannot exceed 0.35% of its nominal Gross Domestic Product (GDP)), while federal states are generally prohibited from taking on new net debt.

History and Origin

The Schuldenbremse was enacted in Germany in 2009, during the global financial crisis, as a constitutional amendment. It replaced an earlier "golden fiscal rule" and was adopted to curtail rising public debt, which had exceeded the 60% of GDP threshold set by the Maastricht Treaty, largely due to reunification costs and tax revenue losses during the Great Recession. The amendment required a two-thirds majority vote in both the Bundestag (federal parliament) and Bundesrat (representation of federal states) to be enshrined in the Basic Law (Germany's constitution), specifically in Articles 109 and 115.¹³ The rule became fully effective for the federal government in 2016, with a transitional period for the states.¹² Its introduction reflected a strong commitment to fiscal prudence and a desire to ensure Germany's financial health in the face of future economic challenges.¹¹

Key Takeaways

• The Schuldenbremse is a constitutional fiscal rule in Germany limiting government borrowing.
• It caps the federal structural deficit at 0.35% of nominal GDP and largely prohibits new net debt for states.
• The rule includes mechanisms for cyclical adjustment and emergency clauses for natural disasters or severe crises.
• Its aim is to ensure long-term fiscal sustainability and prevent excessive public debt accumulation.
• The Schuldenbremse has faced debates regarding its flexibility and impact on public investment.

Formula and Calculation

The core of the Schuldenbremse for the federal government revolves around limiting the structural net borrowing. The formula accounts for the nominal GDP and allows for cyclical deviations.

The permissible structural net borrowing for the federal government is calculated as:

However, the actual net borrowing is adjusted for cyclical effects, meaning that in times of recession or economic downturn, higher borrowing might be permitted, while in economically robust periods, surpluses are expected. This is done through a control account that tracks deviations from the structural balance.¹⁰ The concept of "structural" implies that the allowed deficit is independent of the current economic cycle, focusing on underlying spending and revenue trends rather than temporary fluctuations.

Interpreting the Schuldenbremse

Interpreting the Schuldenbremse involves understanding its dual nature: a strict limit on structural debt and a mechanism for cyclical adjustment. The 0.35% of GDP limit for the federal structural deficit is a hard cap, designed to ensure that the government's long-term spending patterns align with its long-term revenue potential, rather than relying on persistent borrowing. The allowance for cyclical effects aims to prevent pro-cyclical fiscal policy, ensuring that the government can let automatic stabilizers operate during economic downturns without violating the rule.⁹ This means that while temporary increases in the budget deficit due to a recession are permitted, they must be offset by reduced borrowing or surpluses in better economic times. The rule also includes an emergency clause, allowing for higher borrowing in exceptional circumstances like natural disasters or severe crises, provided parliamentary approval is obtained and a repayment plan is established.⁸

Hypothetical Example

Consider a hypothetical country, "Economia," adopting a fiscal rule similar to the Schuldenbremse. Economia's nominal Gross Domestic Product (GDP)) is $3.5 trillion. Under its "Fiscal Anchor" rule, the structural net borrowing is limited to 0.35% of nominal GDP.

1. Calculate the maximum permissible structural net borrowing:
   Max Structural Net Borrowing = 0.35% of $3.5 trillion
   Max Structural Net Borrowing = 0.0035 * $3,500,000,000,000 = $12.25 billion

2. Scenario A (Normal Year): If Economia's government plans for a structural net borrowing of $10 billion, it would be in compliance with the Fiscal Anchor. Its public spending would be constrained to this limit, ensuring long-term fiscal health.

3. Scenario B (Economic Downturn): Due to an unexpected economic slowdown, Economia's tax revenue falls, and unemployment benefits increase, leading to a temporary increase in its overall deficit. The Fiscal Anchor, like the Schuldenbremse, would allow for this cyclically-induced increase in borrowing. However, the structural component of the deficit must still remain within the $12.25 billion limit, implying that any temporary overshooting of the total deficit must be due to the cyclical component, which would need to be repaid in future years when the economy recovers.

Practical Applications

The Schuldenbremse profoundly influences Germany's annual budget planning and overall fiscal policy. It serves as a strict framework for the allocation of public funds, compelling policymakers to prioritize spending and seek sustainable financing solutions. For example, during the COVID-19 pandemic, the emergency clause of the Schuldenbremse was invoked to allow for significant additional borrowing to finance economic aid and healthcare measures.⁷ However, as the emergency situation subsided, the government has been committed to re-adhering to the rule.⁶

Beyond budget creation, the Schuldenbremse shapes debates around infrastructure investment, climate change mitigation, and defense spending, as any new initiatives requiring substantial debt financing must navigate its constraints.⁵ It also impacts Germany's role within the European Union's fiscal framework, often seen as a proponent of fiscal discipline among member states.⁴ The rule's design, including its cyclical adjustment mechanism, aims to ensure that fiscal policy can be counter-cyclical without undermining long-term sustainability. The Federal Ministry of Finance provides detailed information on its application and the underlying constitutional law.³

Limitations and Criticisms

Despite its success in reducing government debt, the Schuldenbremse has faced significant criticism, particularly regarding its potential to hinder necessary public investment. Critics argue that the strict limits on borrowing can impede investments in crucial areas such as infrastructure, education, and digital transformation, which are vital for long-term economic growth and competitiveness. Some economists contend that by not differentiating between debt for consumption and debt for productive investments, the Schuldenbremse might act as a "future brake," limiting the country's potential.²

Another point of contention is its impact during periods of low interest rates, where the cost of borrowing for investment is minimal. Some argue that the rule forces a pro-cyclical fiscal stance in some situations, limiting the government's ability to stimulate the economy effectively during downturns if the structural balance is too tight.¹ Furthermore, debates have emerged regarding the interpretation and application of the emergency clause, especially concerning the financing of significant, unforeseen expenditures like those related to climate change or defense. The ongoing discussions highlight the challenge of balancing fiscal discipline with the need for flexible and adequate public spending to address evolving societal and economic demands.

Schuldenbremse vs. Debt Ceiling

The Schuldenbremse and a Debt Ceiling both aim to control government borrowing, but they differ fundamentally in their mechanism and flexibility.

While both tools are intended to restrain government borrowing, the Schuldenbremse provides a more dynamic rule-based framework tied to economic conditions, whereas a debt ceiling is a static numerical limit that, once reached, requires political intervention to avoid a default on existing obligations. The Schuldenbremse integrates economic fluctuations through its structural and cyclical components, aiming for a more predictable and economically sensitive approach to debt management compared to the often contentious nature of debt ceiling debates.

FAQs

What is the primary goal of the Schuldenbremse?

The primary goal of the Schuldenbremse is to ensure the long-term sustainability of public finances by limiting new government borrowing. It seeks to prevent excessive government debt accumulation and maintain economic stability by requiring the federal budget to be structurally balanced over the economic cycle.

How does the Schuldenbremse account for economic downturns?

The Schuldenbremse has a built-in mechanism for cyclical adjustment. This means that during an economic recession, when tax revenues might fall and social expenditures increase (acting as automatic stabilizers), the rule allows for temporary, cyclically-induced increases in the budget deficit. However, these cyclically-driven deficits must be offset by surpluses in economically prosperous times to maintain the overall structural balance.

Can the Schuldenbremse be suspended?

Yes, the Schuldenbremse includes an emergency clause that allows for its suspension in exceptional circumstances, such as major natural disasters or severe economic crises that are beyond the state's control and significantly impair its financial situation. Such a suspension typically requires a two-thirds majority vote in the German parliament and must be accompanied by a plan for how the excess borrowing will be repaid in due course. This flexibility was notably used during the COVID-19 pandemic.