Balanced Budget

Germany Must Lead by Example

piggy bank_DPA
Saving is a German virtue.
  • Why it matters

    Why it matters

    Germany expects to balance its budget in 2015 but still has large debts. The country is now debating whether now is a good time to invest in, for example, the welfare state or if taxes should be spent on the wider good.

  • Facts

    Facts

    • Germany has more than €2,100 billion ($2,677.1 billion) in debt obligations.
    • The country has not balanced its budget for 45 years.
    • The retirement age has recently been lowered to 63.
  • Audio

    Audio

  • Pdf

The sovereign debt crisis of the past several years was the worse global economic crisis since the end of the Second World War, which consequently led policymakers to set a goal of reducing debt. Five years ago, the German constitution was amended to introduce a balanced budget provision, the so-called Schuldenbremse, or “debt brake”, enshrining debt reduction as a constitutional principle.

Even so, the debt crisis seems all but forgotten in the fall of 2014. Increasingly, voices are heard saying not to take debt regulations so seriously. Complacency threatens a return to reckless economic behavior.

The French government is assuming more new debts this year than expected, increasing the nation’s budget deficit to three percent above France’s gross domestic product (GDP), considerably higher than European Union criterion. In contrast, the 2015 budget discussed by the German Parliament is supposed to contain schwarzer Null, or black zero, meaning a balanced budget for the first time since 1969.

After adding more debt by financing economic stimulus packages in the first years of the economic crisis, Germany now needs to see balanced national budgets across Europe.

Some politicians and academics justify more borrowing because they believe investment spending in Germany is too low.

Advocates of counter-cyclical fiscal policies generally demand higher government spending in recessions, but part of that strategy is to take the foot off the gas once the recession has been overcome. It is particularly imperative at the moment that Germany sets a good example. How can we credibly demand of our European neighbors that they balance their budgets if Germans don’t?

As a reminder, the first balanced budget in 45 years means simply that we will not add any new debt to the existing pile of more than €2,100 billion ($2,677.1 billion) in obligations. A balanced budget doesn’t mean we are paying off debts or even reducing them.

Some politicians and academics justify more borrowing because they believe investment spending in Germany is too low. They advocate more public spending, for example, to build and repair roads and bridges, which seems a sensible expenditure for the public good. Those improvements would benefit all citizens and please investors, who appreciate a well-developed and well-maintained infrastructure. The deciding question here, however, is whether we are willing to do without other public services in favor of more public goods.

The German federal government recently has been handing out gifts: retirement at age 63, mother or child-raising pension benefits and other goodies. We already enjoy a luxurious welfare state with about half of the German national budget devoted to “ensuring social welfare.” It makes much more sense to undo some of the wrong-headed socially and politically popular actions such as retirement at 63. This would create some maneuvering room in the budget policy.

Redistribution through social welfare networks – like subsidies for companies – only benefits those directly involved. If we use less tax money to satisfy individual interests, there will be more available for the public good. And we won’t need to increase our debt, either.

To contact the author: gastautor@handelsblatt.com

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