The debt brake and climate protection

The debt brake and climate protection

Are we destroying our climate?

Government spending and public debt are a sensitive issue, especially after the financial crisis. It is not only the political camps that are divided on the question of how high government debt should be and whether borrowing for investment is justified. Even high-ranking economists such as economic experts argue about these issues. In the wake of the global climate crisis and the necessary transformations in our economy and society, and not least due to the tough austerity measures in the German government’s Ministry of Finance, voices are becoming louder that strongly criticize our current austerity policy (policy of balanced budgets and debt reduction). Rigid austerity would block necessary investments in climate protection. Are we ruining our climate and the future?

What is government debt?

At first and second glance, a low level of government debt makes perfect sense. A monetary system cannot function if states can simply incur unlimited debt without consequences. However, politicians’ frequent slogans about the budget should be treated with caution. Anyone who talks about “Swabian thriftiness” in relation to the national budget or says that we should not live beyond our means is more likely to contribute to confusion than to enlighten. Government debt cannot be compared with debt in private households, where expenditure must also be reduced as income shrinks. This is because state budgets can influence both their expenditure and their income. [1]

In Germany, the debt of the overall public budget has risen over the last twenty years and recently reached a new record. At the end of 2022, Germany’s public debt stood at around 2.37 trillion euros.[2] The Taxpayers’ Association, which is committed to radical debt reduction, converts this debt per capita and arrives at a debt burden of 30,191 euros per capita in July 2023.[3]

At first glance, however, this enormously high level of German debt is only of limited significance in itself. And even though the state’s monopoly on the use of force means that all citizens are ultimately liable for government debt,[4] a per capita conversion of pure debt is misleading and populist at best. In order to assess the total debt of a state, it must inevitably always be set in relation to other economic indicators.

Expenses vs. income

The state has two ways of financing the considerable expenditure it incurs in the course of its “activities”:

1. Levies (taxes, fees, compulsory contributions, etc.)
2. Loans (raising of debt)

The first option creates a new budget of funds available to the state every year. If expenditure exceeds revenue, we are talking about a primary deficit. If revenue is higher than expenditure, a primary surplus is created.

If the state is faced with a primary deficit, i.e. the revenue from the aforementioned category 1 is not sufficient, this deficit is usually financed by borrowing (category 2). This results in so-called net new debt[5].

Deficit ratio

Now it is not helpful to only quantify the pure net new debt. This is because this net new debt is offset by tangible assets such as a functioning infrastructure, public buildings such as schools, successful companies, i.e. the total economic output. The higher the gross domestic product (GDP), the higher the potential revenue of a state through taxes, levies, etc. and therefore the greater the possibility of servicing the debt incurred in the future. In order to classify the size of the new loans taken out, these are set in relation to economic output. This percentage ratio is referred to as the deficit ratio.

Government debt ratio/debt-to-GDP ratio

The government debt ratio or debt-to-GDP ratio is distinguished from the deficit ratio. The government debt ratio quantifies the sum of all net new debt of a country and also puts this in relation to GDP. The government debt ratio can therefore be used to quantify how high the total debt taken on is in comparison to a country’s economic output.

Both ratios are important indicators for assessing creditworthiness and the development of public finances. The higher the deficit ratio in the long term, the more likely it is that the government debt ratio will also rise. The higher the GDP is in the long term, the lower the deficit ratio and therefore also the government debt ratio.

The interest burden must also be taken into account. The debt level also depends, among other things, on whether the state generates a primary deficit due to upcoming interest payments. Depending on how high the interest burden is and a state’s revenue is, the debt level automatically increases year on year. If the government did not want to take on any new debt to service the interest payments and wanted to keep the debt ratio the same, it could counter this by increasing the primary surplus, for example by raising taxes or cutting spending. [6]

Finally, inflation is missing in this example. Inflation has a positive effect on the state’s debt, particularly the interest burden. Steady inflation with simultaneous economic growth, set in relation to the deficit ratio, therefore has a positive impact on the government debt ratio in the long term. To put it more simply: “To reduce the government debt ratio, it would be entirely sufficient to keep further growth [der Staatsverschuldung] below the GDP growth rate, including price increases.”[7]

Summary: The debt ratio provides an indication of the extent to which the state is able to service the debt level through potential tax revenues. The deficit ratio is an extract from the debt ratio and shows the direction in which the debt level is developing. Government debt should always be seen in the context of economic performance. This is because it is decisive for the tax revenue used to service the debt and the interest accrued on it.

Germany’s public debt ratio in a European comparison

In a European comparison (see Figures 2.3), Germany has a debt-to-GDP ratio of 66.3%, which is below the European average and has always been lower except for 2010. Since the last major borrowing due to the financial crisis, Germany has steadily reduced its debt-to-GDP ratio until the COVID-19 pandemic caused us to take on more debt again. The debt-to-GDP ratio therefore shows a diametrically different picture of the national budget than the pure debt level in the first chart. The steady decline in our debt ratio can be explained by the austerity policy in the EU following the financial crisis and the associated introduction of the debt brake in Germany and is generally regarded as a positive development.

How much debt can a state incur?

If we want to clarify whether we can go into debt in the name of climate protection, we must first ask whether a state can go into debt at all and, if so, how much. This question has been the subject of controversial debate both in the past and today. As the essay “National debt: Causes, Effects and Limits” by Holtfrerich et al. (2015) shows, the view on government debt in the historical context evolved from “government debt is the road to ruin for an economy”, to “government debt is the major cause of the rise of the British economy as a world power”, to today’s views that the debt-to-GDP ratio should not exceed 60 percent.[8]

There is no universally valid answer to this question. Not only are different economic camps divided here, from supporters of modern monetary theory to Keynesianism and neoliberal camps, but there is also the simple fact that monetary systems are structured differently around the world. Accordingly, there is no universal rule or upper limit for debt levels. Theoretically, as shown above, a state can take on an infinite amount of debt. As long as GDP increases at the same rate, creditworthiness remains available under certain conditions. The government debt ratio in Japan in 2022 is a whopping 261.29 percent[9], making Japan the country with the highest government debt ratio in the world. It is followed by Greece (177.43 percent), Eritrea (163.77 percent), Venezuela (157.81 percent) and Italy (144.7 percent).

This list already makes it clear that even a high government debt ratio is not the only factor in assessing a country’s creditworthiness. Japan will be given a different credit rating than Eritrea or Italy. Nor does a high government debt ratio automatically mean a low GDP, as the formula for the government debt ratio from the first part of this article suggests. Although Japan’s public debt ratio is significantly higher than that of Germany, Japan still has a higher GDP (Japan: USD 4.941 trillion > Germany: USD 4.26 trillion) and lower unemployment (Japan: 2.6 percent < Germany: 5.8 percent). [10] Accordingly, a high government debt ratio does not automatically mean insolvency or poor economic performance, as can be seen in the following chart.

The lender to which the government is indebted also plays a decisive role. In Japan, the government bonds issued are guaranteed by the Japanese central bank (52% of government bonds are held by the Bank of Japan [11]) and the Japanese population. The central banks are therefore firmly integrated into the state’s monetary policy. Only 13 percent of Japanese government bonds are in foreign hands. [12] This allows the Japanese government, together with the central banks, to push down interest rates on government bonds and issue more bonds. The principle is that the Japanese government is indebted to its own population, i.e. to itself. Japan has been living with a steadily rising national debt ratio for decades. Whether the system will work or whether there is a risk of national bankruptcy is the subject of controversial debate and depends largely on the Japanese population’s confidence in their government’s monetary policy.

This type of monetary policy would not be possible in Germany because we have a common currency area with other EU countries. Whether such an increase in the government debt ratio can go on forever is also a matter of debate among experts. However, it is clear that there is not necessarily any economic justification for sticking rigidly to a certain national debt ratio. Accordingly, the debt brake and the common fiscal policy in the eurozone can also be questioned in terms of their economic sense.

So how should a country’s debt level be assessed and are we allowed to take on debt in the name of climate protection? An important principle in monetary policy is that the debt burden must be sustainable in the long term. A stabilized and controlled debt ratio that neither rises sharply nor falls sharply is essential. Accordingly, the state would take on debt to the extent that its economy grows. Whether the debt-to-GDP ratio is stabilized at 60 percent, 100 percent or 150 percent seems irrelevant at first glance.

A second important prerequisite for the assessment of debt ratios is the stability of the economy, inflation and interest rates. If interest rates rise massively, the deficit ratio increases sharply and so does the debt ratio. This effect is reinforced as the rise in interest rates causes inflation to fall, leading to a further increase in the debt ratio. Inflation, interest rates and economic growth are parameters that are less easy to control than the primary balance and the associated net new borrowing.

Government debt therefore becomes a problem above all when it explodes in economic crises due to poor deficit ratios and at the same time government bonds lose value because confidence in monetary policy has been lost. It is not so much the high debt levels as the financial and economic crises that push state budgets to their limits due to the collapse of the economy.

This insight can be proven historically: “Since 1980, there have been more than 20 (…) banking crises (…) in the developed OECD economies. The increase in the public debt ratio following banking crises has averaged over 30 percent of GDP since 1980.”[13] This insight is important because it shows that, according to some economists, the focus of fiscal policy should be less on debt levels and much more on preventing banking crises.

Austerity policy in the eurozone after the financial crisis

The world experienced such a crisis in 2007/2008, when the financial and economic crisis that began in America spread to Europe and developed into a sovereign debt crisis. As a result of the economic slump, European countries lost important tax revenues, which in turn led to a heavy burden on individual national budgets, some of which were already under strain (see Figures 2, 3).

In Europe, a great deal of aid and loans were granted to countries to overcome the crisis (e.g. Greece, Ireland and Portugal), banks were rescued and investments were made in economic stimulus programs to prevent the economy from crashing further. These disbursements were accompanied by major reforms aimed at stabilizing the European Union, tightening regulation for credit institutions and the European financial market and aligning the different budgetary policies of the member states. [14]

Germany also introduced new regulations as part of the reforms, although the German economy recovered comparatively quickly. Back in July 2007, the Federal Constitutional Court ruled that legislators had to replace the old laws with more effective laws to limit debt. [15] With the second federalism reform on June 12, 2009, the debt brake was incorporated into the Basic Law by the Bundesrat.[16]

The debt brake

Since its introduction, the debt brake in Germany has been criticized by economists
[18]
organizations such as the German Bundesbank
[19]
and parties such as the FDP
[20]
have strongly defended it against its critics.

According to the European Court of Auditors, the reforms and austerity measures introduced in the EU were aimed at making the EU economy more resilient, regulating the financial market more closely, breaking up links between states and banks, expanding the powers of supervisory authorities and generally harmonizing the economic and budgetary policies of the EU member states.[21]

Are we destroying the climate?

This austerity policy has been increasingly criticized, especially recently. Ailing infrastructure, a lack of money for education and underinvestment in climate protection are just some of the arguments. However, the people and organizations criticizing the debt brake are by no means unknown. Critics of the debt brake include not only parties such as the Left Party [22] or the SPD[23]but also the German Trade Union Confederation[24] and high-ranking economists such as Prof. Dr. Adam Tooze[25] and Prof. Dr. Achim Truger[26]. However, some CDU politicians have also criticized the debt brake. Most recently, Kai Wegner, Governing Mayor of Berlin, called for it to be suspended for five years. [27]

In order to understand this argument and also the criticism regarding the effects on climate and environmental protection, the main points of criticism of the debt brake and austerity policy since the financial crisis must be explained. It should be noted in the following discussion: It is not so much the necessary reforms for banks and the financial sector that must be seen as critical, but rather the consequences that the austerity targets have for EU national budgets and associated investments.

Social consequences

The differences between countries within the EU are sometimes massive. Germany has already been accused on several occasions of suppressing other countries in the EU with a strict austerity policy from the “high horse” of an export nation and fueling social decline there. In countries such as Italy, Greece, Spain and Ireland, the new regulations have led to massive cuts in social spending, lower salaries and higher taxes. In Ireland, for example, wages fell by more than 22% after the financial crisis [28] and social assistance and allowances for single parents were cut.[29]

The rigid austerity policy is particularly problematic for economically disadvantaged people. When social spending is reduced or taxes are increased – i.e. cuts are made to the welfare state and other state services such as the generally accessible healthcare system, social benefits, local public transport, cultural funding or freely accessible education – economically disadvantaged people are the first to suffer.

At this point, defenders of austerity policies, in particular the German Taxpayers “Association, argue that government spending simply needs to be distributed more efficiently and that the welfare state is already bloated anyway. However, this argument must be critically questioned. Cuts in spending always entail the risk of affecting important areas of public services. Examples of a lack of funds for dilapidated and neglected infrastructure, insufficient cultural offerings, too few kindergartens and daycare centers can be found in large numbers in Germany. Even if the Taxpayers” Association never tires of criticizing the reduction in spending on government programmes such as the National Climate Protection Initiative (a total of 1.2 billion euros spread over a period of 12 years) or the abolition of the Festival Fund (5 million euros in total), [30] such cuts do not solve the problem of the growing need for investment.

Prof. Dr. Achim Truger and Prof. Dr. Monika Schnitzer, both members of the German Council of Economic Experts (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, or Wirtschaftsweisen for short), show that although the efficient use of funds should be a matter of course, restructuring and increased efficiency are unlikely to save tens of billions of euros.[31] However, such high savings are necessary if the debt brake is to be adhered to. The budget gaps currently amount to 9.9 billion euros in 2022, 16.4 billion euros in 2023 and 16.2 billion euros in 2024. This adds up to a total of 42.5 billion euros. [32]

Holtferich et al. also argue that high social spending is not necessarily linked to government debt: “Nor is it possible to prove that the welfare state is responsible for the increase in national debt, although this is often assumed. The fact that social spending takes up a high proportion of the national budget says little about its financing through loans or levies.”[33]

If we apply this criticism of the social consequences of austerity policies to the aspect of the climate crisis, it becomes clear what was reported in the article on environmental justice in the previous issue of UfU Information (Environmental (in)justice in Berlin – environmental pollution hits Neukölln harder than Steglitz-Zehlendorf). The climate crisis is hitting economically disadvantaged people much harder than wealthy people (more on this in the Environmental Justice Atlas of Berlin). With the increase and intensification of severe weather events, heat waves and other phenomena caused by the climate crisis, more, not less, investment will be needed for these population groups in the future. It is therefore not only a question of mitigating the consequential costs of the climate crisis, but also of providing investment incentives at micro level. Against this background, the debt brake should not be endorsed.

However, as the German Taxpayers’ Association criticizes the efficiency of government spending, it is worth mentioning that a calculation by the Federal Environment Agency concludes that the total amount of climate-damaging subsidies per year is 65.4 billion euros.[34] Perhaps the abolition of some of these subsidies would offer an approach to reducing government spending without simultaneously counteracting climate protection and allowing subsidies for cultural events and climate protection to continue.

Economic consequences

The harsh austerity policy of recent years has also been repeatedly criticized from a macroeconomic perspective. This is because the austerity policy has primarily led to cuts in public spending and investment and, according to some economists, is therefore contributing to the deterioration of the economy. Prof. Dr. Adam Tooze argues that there are areas in which credit-financed public investment leads to economic growth. [35] Continuous public spending on infrastructure, for example, is essential if capacities in planning authorities and the construction industry are to be maintained. However, if expenditure is only made on a cyclical basis and its level is influenced by austerity policies, it will not be possible to maintain capacity for important infrastructure projects in the long term. [36] The argument goes so far as to suggest that the austerity policy would even actively harm the economy. A study by the New Economic Foundation and Finance Watch, as well as the figures above, confirm that Greece, Italy, Portugal, Spain and France, for example, are now struggling with a much higher debt-to-GDP ratio than before the financial crisis, despite the very tough austerity policies of recent years. Frank Van Lerven, Program Director for Macroeconomics at NEF, makes it clear: “The last decade of austerity has damaged European economies and prevented our living standards from improving” [37]

Interest and missed opportunities

This criticism of the debt brake with regard to the economic consequences becomes particularly serious when looking at interest periods. Borrowing by governments is often viewed critically, above all because of the interest burden. If the state takes out large loans today, interest and compound interest will accrue to future generations who will have to pay for today’s expenditure. However, this conclusion, which is correct in itself, only applies if interest is due on the loans acquired by the state and if the interest burden is so high that the state generates a primary deficit. In the last ten years, however, the world has been in a phase of low interest rates. This means that it was incredibly cheap for the state to borrow money. In some cases, there were even negative interest rates on government bonds, which meant that the state was even able to earn money by incurring debt. [38] Opponents of austerity policies point out that a historic window of opportunity has been missed. This argument is particularly important with regard to climate protection and other necessary transformations. Necessary credit-financed investments in, for example, an energy infrastructure independent of Russia and other autocracies or the modernization of the German armed forces would have been much cheaper in the last ten years than they are today. The reason for this is that the US Federal Reserve and the European Central Bank have already raised the key interest rate several times. With the ninth rate hike since July 2022, the key interest rate in Europe now stands at 4.25 percent. [39] If loans were to be taken out now, the interest incurred would be significantly higher.

This is the case for the special fund of 100 billion euros for the Bundeswehr and also for the special fund to cushion the energy crisis.[40] Initial reports put the interest burden on the special assets for the Bundeswehr at around 13 billion euros[41]The IFO estimates slightly lower with an interest burden of 8 percent (as of July 2023) [42]. As the interest burden has to be borne by the special fund itself, the available assets shrink by the interest incurred to 87 billion or 92 billion euros. Added to this is the current high inflation, which further reduces the purchasing power of the 100 billion euros. As the state is only allowed to borrow in certain emergency situations due to the debt brake, these loans naturally fall in times of crisis. Consequently, these are times that may be less favorable for borrowing from an economic perspective than in stable, high-income times.

The following calculation can help to correctly “hit” historical time frames: The interest rate level for safe investments such as government bonds rises when the trend towards government debt is currently high worldwide. Conversely, interest rates fall when government debt is being reduced worldwide. In this respect, it could be wise for individual national budgets to act anti-cyclically. [43]

With regard to the climate crisis, it quickly becomes clear that the conversion of the grids, the expansion of renewable energies and the numerous other transformations that inevitably have to take place could have been started on much more favorable terms if we had invested heavily over the last ten years. Provided, of course, that we consider the implementation of these transformations to be at least partly the responsibility of the state.

Another problem arises with the argument of the missed low-interest period for investments in climate protection. Not only are the costs of the transformation currently higher than they were 10 years ago, but the delay means that it must now be implemented more quickly and more radically at a societal level. If we believe the numerous scientific reports and assume that we only have a limited amount of time left for transformation and that severe weather events and other climate change-related phenomena will also occur more frequently in Germany, the costs of transformation and preserving our natural environment will increase exponentially with every year that passes.

The cost of the climate crisis

Let’s keep the above criticism of the debt brake in mind and turn our attention to the climate crisis and the associated costs. On April 4, 2023, an IPCC report made it clear: annual global greenhouse gas emissions from 2010-2019 were the highest in human history. If we do not want to miss the 1.5 degree target, emissions must now be significantly reduced in all sectors. [44] Converted to Germany, this means that German industry will have to reduce emissions by 24 percent in the next ten years compared to today in order to achieve the climate targets, as economist Claudia Kemfert calculates.[45]

This report is particularly interesting: The IPCC’s latest report makes it clear that current financial investments in climate protection are three to six times too low to stabilize the climate to below two degrees of warming by 2030. The report outlines that there is a particular lack of investment in public sector financing. At the same time, the report makes it clear that there would be no lack of capital and liquidity globally to close this investment gap. [46] The experts also report that the calculated global GDP would “only” fall by a few percentage points compared to our current policy if we were to establish the necessary regulations now for a transformation of the economy and society towards a maximum global warming of two degrees. The economic benefits of preventing climate catastrophes are not even included in this calculation. So what is stopping us? Or to put it another way: what will it cost us to delay the necessary measures?

In May of this year, the German government published a clear message on this subject: by 2050, climate change in Germany will cost us between 280 and 900 billion euros![47] Admittedly, the figures in this forecast are very far apart. If you look at the costs already incurred, the study commissioned by the Federal Ministry for Climate Protection estimates that climate change will cause 145 billion euros in damage between 2000 and 2021. A distinction can be made between “direct damage costs” (e.g. destroyed buildings), lower public revenues (e.g. lower agricultural yields), expenditure on climate adaptation and other indirect costs (e.g. costs in the healthcare system). Another aspect of indirect costs that should not be underestimated is that the federal government has to buy so-called emission allowances if_{CO2 budgets} are exceeded. According to the German Federal Audit Office, a total of 260 million emission allowances will be needed by 2030, which could lead to costs of a further 22.1 billion euros for the taxpayer. [48] The most expensive disaster in Germany to date was the flood in the Ahr valley and the Erft river in July 2021, which cost over 40.5 billion euros in damage.[49]

In addition to the costs of the climate crisis, however, we can also outline the costs of climate protection and transformation. Prof. Dr. Truger and Prof. Dr. Schnitzer clearly emphasize that we cannot avoid annual investments in the double-digit billions if we want to take climate protection, education and digitalization seriously. [50] Prof. Dr. Joachim Wieland cites even more expensive calculations in his article on the Verfassungsblog, according to which, according to a study by Boston Consulting and Prognos, investments of at least 75 billion euros (sic!) would be necessary in Germany every year if climate neutrality is to be achieved by 2050.[51]

In a study by Agora Energiewende entitled “Public financing of climate and other future investments”, the costs of the transformation between 2021 and 2030 are calculated at EUR 90 billion in federal investments, EUR 170 billion in municipal investments and EUR 200 billion in private investments in climate protection measures (see Figure 5).[52]

The picture is clear: on the one hand, climate protection and a successful transformation of our economy and society will require multi-billion sums, while on the other hand, the costs of the climate crisis and the missed opportunities are already running into billions.

The discussion about the debt brake and its impact on climate protection has reached a critical point at this point. In this context, it is often debated whether at least the investment costs should actually be borne by the state, the federal states or the municipalities and, above all, whether they should be financed by debt. Critical voices note that investment in new drive technology, for example, should come from the (automotive) industry and not be financed by state investment. The regulatory role of the_{CO2 price} is also repeatedly mentioned in this context. There are therefore camps that fundamentally reject state intervention and prefer that the transformation to a climate-neutral society should come entirely from market mechanisms.

From the perspective of most environmental associations, however, there is considerable doubt that the transformation of our economy and society will work without government investment. In particular, the transformation of our energy sources and the associated expansion of infrastructure such as the electricity grid, hydrogen network and charging infrastructure will require unimaginable amounts of investment.

In its two-year report, the Expert Council for Climate Issues explains that the industry’s greenhouse gas target can only be achieved with a reduction in industrial activities if the necessary investments towards fossil-free energy sources are not made. The same applies to the areas of transport, buildings and others. [53] There is therefore considerable doubt that this can be achieved by the private sector alone.

We are circumventing the debt brake anyway!

In order to unite both camps, let’s assume that both the costs that are already being incurred (e.g. Ahr valley) and the billions of euros of investment required must be borne by both the private sector and the state. Green infrastructure, flood protection, climate adaptation in cities, heat transition in the building sector, energy and transportation transition and much more. At the same time, large sums of money are already needed for other crises and related problems such as the modernization of the German armed forces, the digitalization of administration or the cushioning of crises (gas price brake).

However, experts and decision-makers continue to disagree on where these sums should come from when it comes to the proportion that should be borne by the state. In addition to the demand that these funds must come from the budget itself and the opposing demand that the debt brake should be abolished in principle, it is also repeatedly argued that such investments would be compatible with the debt brake. Can Germany invest in climate protection without lifting the debt brake?

In fact, the debt brake is repeatedly circumvented in order to take on debt and at the same time comply with the rules of the debt brake. There are several ways to do this.

Special assets

One option for borrowing despite the debt brake is the creation of so-called special assets. The legal text of the debt brake described above allows the formation of special assets in cases of emergency situations that are beyond the control of the state and significantly impair the state’s financial situation. These special funds are therefore part of the debt brake.

Such special assets, recently also called “Wumms” and “Doppelwumms”,[54] were created in the wake of the coronavirus crisis, the energy crisis and the Russian crisis. However, critics argue that these special funds and, above all, the inflationary use of this special regulation dilute the actual austerity policy and thus the functioning of the debt brake, thereby reducing the debt brake itself to absurdity. 100 billion euros for the Bundeswehr [55], 200 billion euros for the energy crisis[56], 130 billion euros for the corona crisis[57] – huge sums for current crises, formed as special funds. In the meantime, several federal states (Bremen, Berlin NRW, Saarland) want to set up special funds worth billions for climate protection and argue with this very emergency situation. [58] This also seems perfectly understandable. In view of the records currently being broken in this summer of heat and all the results of the IPCC reports, it is not clear how our planet should not currently be in an emergency situation. The climate crisis, as mentioned in the Federal Government’s report above, is having a considerable impact on the state’s financial situation.

Prof. Dr. Wieland argues in his text on the Verfassungsblog with precisely this argument of necessity. According to him, the debt brake does not take precedence over the preservation of fundamental freedoms. In Mr. Wieland’s opinion, the climate crisis meets the requirements of an extraordinary emergency situation. Mr. Wieland also argues against the argument that emergency situations can only be short-term, stating that long-lasting borrowing was also possible in the course of German reunification and qualifies as an emergency situation. [59]

The problem with this type of argumentation, however, is that it leads to pedantic discussions about terminology. Current discussions are asking whether climate change is an emergency, what an emergency really is, whether emergencies need to be precisely limited in time, whether climate change is beyond the control of the state and so on. These discussions end in cherry-picking about the interpretation of the debt brake. In view of the numerous special funds and the attempts by some federal states to create further special funds, the real question must gradually be asked: Doesn’t this need for special funds show that credit-financed investments in a state budget are now necessary and should perhaps not be formed once the child has already fallen into the well? Doesn’t the need for billions in special assets call the debt brake itself into question?

Public investment companies

Another alternative to circumvent the debt brake is to form legally independent extra budgets as investment companies. To do this, these companies must have a clearly defined task. Examples of such companies are Deutsche Bahn or the Bundesimmobiliengesellschaft. Other companies of this type could be set up, such as a federal climate protection agency. [60] Such companies would have credit authorization and can operate outside the debt brake.[61]

Here too, however, the question arises: how sensible do we think it is for the state to set up further companies along the lines of Deutsche Bahn in order to do justice to its task of climate protection, infrastructure expansion and digitalization, while at the same time giving the impression to the outside world that it is complying with the debt brake? Wouldn’t the direct route via state investment in transformation make more sense?

So what remains? The list of these examples shows that there is already an enormous need for investment, which is being “cheated” past the debt brake in one way or another. This seems unclean and, above all, gives the impression that the aim is to create the appearance of a balanced budget while new debt is being taken on via special channels. For this reason, advocates of investment in climate protection are increasingly calling for the debt brake to be suspended or abolished.

The Golden Rule and intergenerational justice

If you want to abolish the debt brake completely, alternatives should be mentioned. For most critics, the alternative is the “golden rule”.

One of the main criticisms of the debt brake is the lack of differentiation between debt and investments. After all, not all debts are the same. If the state takes on debt to increase pensions, finance a scrappage scheme or mitigate the consequences of expensive energy prices for citizens, for example, this is different from taking on debt to expand infrastructure. The former examples can compensate for social imbalances and/or boost the economy and can be seen as an economic stimulus in times of crisis. However, they are to be classified as consumer spending, which flows out of the state budget and only flows back into the budget in the form of taxes, such as VAT, to a lesser extent. Normally, pension payments, pension funds, civil servants’ salaries, etc. are part of the so-called implicit public debt. are part of the so-called implicit public debt. The financing of this debt, which is largely defined in social legislation, is normally financed from the public budget via revenues. [62] This is why implicit debt, also known as hidden government debt, is treated differently to explicit government debt. In cases such as the examples mentioned above, however, explicit debt is sometimes incurred in times of crisis for consumption expenditure that is actually financed by the budget.

This contrasts with borrowing, for example for the expansion of infrastructure. Although a credit-financed expansion of infrastructure increases the debt level in the national budget, it also increases the state’s tangible assets. Put simply, if I spend 100 euros on an expensive dinner, this is consumer spending. The money is gone after the meal. If I spend 100 euros on a bicycle, that is an investment. The money is gone, but the bicycle is a tangible asset.

Investments differ significantly from consumer spending in terms of the type of amortization (compensation/repayment) and longevity. This is because, unlike consumer spending, investments can lead to a return on the money initially invested. A loan-financed expansion of school infrastructure is one such example. The loans taken out for such a project have to be serviced over a long period of time and generate interest charges. However, the expansion of school infrastructure leads to better education, better qualifications, a higher employment rate and ultimately higher tax revenues. The investment can ultimately lead to a profit and exceed the initial costs.

Another example would be the credit-financed expansion of drainage and sewer infrastructure, which does not produce any long-term profits, but reduces ordinary government spending in the long term by increasing cleanliness and thus lowering social costs for the healthcare system and the burden on social costs.

With regard to the climate crisis, this important distinction between types of investment has already been explained in the section “The costs of the climate crisis”. Investment in decent flood protection and nature conservation in the Ahr Valley is urgently needed to prevent a repeat of the devastating consequences of the disaster. At the same time, we need to invest in transformations that will secure our prosperity in the future.

Most of these examples of credit-financed investments belong to the area of public services of general interest or to the sovereign sphere of the state, federal states or municipalities: energy and water supply, broadcasting, our healthcare system, education, defense, transport infrastructure, state housing construction, etc. What is common to these examples is that we are reluctant to place these tasks in private hands (this view is not shared by all political/economic camps). Furthermore, in some cases these investments are too risky or not lucrative enough for private investors. [63] It is also true that, in most cases, large amounts of money are required for such investments in order to ensure expansion, operation and maintenance. In most cases, this exceeds the assets of private providers.

If these investments are not made, the economy will ultimately suffer and with it the budget of a country. There is therefore a justified discussion that loans can also be taken out for such investments, as these investments will have a positive impact on the budget in the future, or the absence of these investments can cause lasting damage to the budget. It has recently been argued that the areas of climate protection, nature conservation and climate adaptation are also part of this type of investment, as otherwise our society could face extreme costs, as mentioned above.

This type of distinction between investment and consumer spending is commonly referred to as the “golden rule”. The Golden Rule was enshrined in Article 115 of the German Basic Law until 2010. [64] The golden rule allows public debt to be taken on to the extent that net assets will increase. In other words, if public investment generates a plus of X for the state budget in the future, debt may be incurred in the same amount. In other words: “In the context of public finances and intergenerational equity, this means that debt can be built up to the extent that future generations receive assets or growth opportunities through investments.” [65]

This argument can also be used to argue against or for intergenerational justice. After all, intergenerational justice is often used by advocates of the debt brake to argue that it is irresponsible to leave “mountains of debt” to future generations. A good example of this is Federal Finance Minister Christian Lindner. [66] This principle applies particularly when it comes to wasteful spending or payments that happen in the here and now. In other words, when the state takes on debt today, for example to increase pensions or pay subsidies. However, the situation is different with the investments mentioned above. Investments in infrastructure, climate protection or education primarily benefit future generations. In this sense, it is therefore intergenerationally just if future generations also pay the price for such investments, as they are the main beneficiaries. Prof. Dr. Achim Truger also argues this time and again. In this sense, even the rigid austerity policy that argues with a balanced budget can be described as intergenerationally unjust. After all, if investments in the energy transition have to be paid for purely from budget revenues, as provided for by the debt brake, current generations will bear the burden of these investments without reaping the rewards. These revenues would therefore be better suited to increasing pensions or social spending than to investing in infrastructure. Intergenerational justice can be argued even more clearly if the predicted considerable costs of climate change materialize. Future generations will then have to foot the bill for today’s prosperity at the expense of the environment.

From a legal perspective, loans for climate protection can also be argued with intergenerational justice: “The debt brake does not take precedence over the constitutional requirement to tackle the climate crisis in a timely manner. Nor can such a priority be justified by sparing future generations from the obligation to repay loans taken out now. Burdening future generations with the burdens resulting from a delay in combating the climate crisis would lead to an unconstitutional restriction of fundamental freedoms in the future and therefore contradicts fundamental rights. The protection of fundamental rights is not restricted in accordance with the financial constitution. Rather, the financial constitution is a follow-up constitution.”[67]

Of course, in a cohesive economic system, generations and their income and expenditure cannot be so clearly separated from one another. Increasing pensions or social spending will also have positive effects in the future if it reduces poverty and increases demand for goods. However, the examples show that intergenerational equity can be argued not only in terms of the debt brake, but also in terms of credit-financed investments in the future.

However, the golden rule is also criticized. The main argument is that such reasoning would leave the door wide open for any kind of investment. Who decides what is actually a profitable investment and how high the benefit could be in the future? Can future generations be expected to make the bad investments of today? In fact, it would have to be precisely defined which type of investment is an investment that falls under the Golden Rule and which does not, so that this mode of operation is not abused. However, it is not an alternative not to make the necessary investments in infrastructure if the current budget is not sufficient or to make cuts elsewhere, usually in social spending (see the examples above).

Another point of criticism of the Golden Rule relates directly to climate protection. Calculating the return or benefit and thus justifying investments by borrowing is easier in cases of infrastructure, education or healthcare systems than in the area of climate protection. Climate change is such a long-term and global problem that it is not easy to justify investments with this calculation: “(…) the purchase of an e-bus in the local community will not have a decisive impact on the climate of the coming decades in that very place.” [68] Accordingly, the return on this investment is low and can hardly be justified by the Golden Rule. This argument is often linked to the fact that the effect of German climate protection measures is negligible if other countries_{emit all the moreCO2} . Prof. Dr. Lepsius does not accept this argument: “This argument can be used to reject all efforts to protect the climate. However, the Basic Law applies to the Federal Republic of Germany. We cannot evade our constitutional obligations by pointing to other countries and their laxer climate policies.”[69]

The German Council of Economic Experts was asked for an expert opinion before the Basic Law was amended to include the debt brake in March 2007. The economic experts recommended retaining the Golden Rule with slight changes. [70] However, the whole truth is that the economic experts are now divided on the issue of the debt brake. One half supports the debt brake, the other half criticizes it. [71]

Conclusion

Germany needs massive financial resources to transform its economy and society. The potential costs of the climate crisis cited above and the level of investment required in the transformation of numerous sectors make this clear.

The debt brake is a major obstacle to this, according to the opponents of this law. As mentioned in the first part of this essay, there are justified doubts about the economic sense of the debt brake and the setting of upper limits for the deficit ratio and the national debt ratio. Especially in view of the massive challenges we are facing. The numerous examples in which massive loans are taken out by the state despite the debt brake also show that even the government itself has a great need for financial resources.

However, there will still be numerous advocates, above all the FDP and its Federal Finance Minister Christian Lindner, who consider the debt brake to be sensible and do not share the arguments of this essay. They will defend the debt brake by any means necessary.

In view of the current political situation and the high degree of path dependency, abolishing the debt brake and returning to the golden rule is also relatively unlikely. A two-thirds majority would be required to remove the debt brake from the Basic Law. In this respect, the attempts outlined above to raise credit-financed investments for climate protection while retaining the debt brake appear more promising. Focusing on the argument of the emergency situation, special funds and public investment companies are currently the only way to finance climate protection outside the normal budget. But even these ways are being contested. Only recently, the Union announced that it would take action against attempts by individual countries to set up special funds for climate protection. [72]

However, those who want to stick to a balanced budget at all costs and prevent taking on debt to invest in the future still do not have an answer as to where the necessary sums in the multi-digit billion euro range are to come from. What is the point of sticking to all the fiscal policy rules if we end up with a broken planet?

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