The debt brake is causing trouble. Some want to abolish it as quickly as possible, others are sticking to it adamantly. In an interview with ntv.de, economist Philippa Sigl-Glöckner explains why a reform is the better solution and what the debt brake of the future could look like.
ntv.de: Politicians are arguing about the debt brake. There seem to be only two positions there: ardent supporters and vehement opponents. Which side are you on?
Philippa Sigl-Glöckner: Neither of them. It is absolutely sensible and necessary to have a rule on government borrowing. The debt brake is actually quite progressive in part because it allows Keynesian financial policy. The government is allowed to take on more debt when the economy is underutilized and unemployment is high. In return, the government should save when the economy is at full capacity. This is a good idea and should be implemented. Nevertheless, the debt brake should definitely be reformed.
Why?
The question is: When is an economy at full capacity? The debt brake’s answer: This is the case when people work roughly as much as in the past.
And that’s not a good basis?
No. Simply because in Germany the labor force participation of women used to be lower than that of men. The image of society has now changed. More women want to work. More importantly, one of the biggest financial challenges is future pensions. The main issue is that pensions are too low for women who have paid in little in the past and are therefore faced with a significant pension gap. The state has to subsidize this from the federal budget. Pension subsidies currently amount to 130 billion euros. The federal government should definitely address this problem by ensuring that everyone who can and wants to work in the best qualified jobs possible. The more people earn enough to retire, the less the state has to support. Investments in education and training are therefore particularly important today.
What is your suggestion?
If politicians do more to increase the workforce, then they should be given more scope for debt as part of the debt brake. An example: If more daycare places are made available and more women can work, then the scope for debt increases. Because then the potential of the economy is higher than before. Incidentally, the opposite would happen if pensions were introduced at 60. Then the scope decreases because work potential disappears. But that is not the only reason to reform the debt brake.
Proponents of the debt brake argue that it sets strict limits on the state’s debt and prevents a government from throwing money out the window.
The debt brake does not limit national debt. It limits the government’s new debt, i.e. how much more it spends in the budget than it takes in. However, new debt is only one factor that influences the development of the debt ratio – interest rates, growth and inflation often play a larger role.
The debt brake limits the federal government’s net borrowing to 0.35 percent of gross domestic product. Does it make sense to link the permitted new debt to a specific ratio?
Philippa Sigl-Glöckner is co-founder and director of the Dezernat Zukunft think tank.
Good financial policy cannot be defined using an algorithm. The debt brake in its current form allows politicians to evade responsibility. They claim: We adhere to the debt brake and therefore our financial policy is good. And if the brakes are not adhered to, financial policy is bad. But it has to be about laying out the debt brake and explaining the how and why to the population. There are a few sentences in the Basic Law regarding the debt brake. The rest is a matter of interpretation in the form of laws and regulations. I would like to see a discussion about how we can design the debt brake in such a way that it fits our times and enables us to respond appropriately to the very big challenges.
What do you think is good financial policy?
She considers which expenses currently make sense, are sustainable and can be financed. Answering that is important. To achieve this, numerous factors must be taken into account. Companies also constantly ask themselves questions like this: What do I spend money on? What are my capital costs? How is the budget structured? What do we want to achieve? What are the risks? This is all very complex. That’s why I’m surprised if the Federal Republic’s financial policy is based on an arbitrary number.
For reasons of debt sustainability, should the state only spend the money it earns?
Why should he? No kiosk owner would act like that. He also has to invest and usually takes out a loan to do this. But there is a more fundamental point: government debt is very different from private debt. The kiosk owner has to make sure that he earns enough to be able to service his loan. The state produces the money itself with which it pays its loans; it cannot go bankrupt.
The Ministry of Finance says: Germany does not have a revenue problem, but rather a spending problem. Instead of talking about even more debt, we need to talk about how all that money is being spent.
Of course, there needs to be a discussion about whether the state is spending the money wisely. In this country we could certainly have better processes to ensure this. In other countries, things have progressed much further; for example, they have institutions outside the government that scrutinize individual expenditures. Unfortunately, spending quality plays a much smaller role in this country than the absolute debt limit.
Can you explain this with an example?
Let’s take the planned Intel factory in Magdeburg. The federal government is funding the factory with ten billion euros. With so much money, you should clarify beforehand what this subsidy actually brings. How many jobs will be created? How much will the tax revenue be? How do suppliers and other sectors of the economy benefit? My hope is still that this calculation exists, I just don’t know it.
So does Germany just have a spending problem and the debt brake forces us to set the right priorities?
That is what is said again and again. But the mechanism doesn’t make sense to me theoretically, nor has it worked in practice. Even under the debt brake, the spending behind which the strongest political interests stand has priority, not the spending with the greatest economic benefit. Let’s take the example of environmentally harmful subsidies – including the diesel privilege and the commuter allowance. They have a volume of 40 billion euros. So we are promoting CO2 emissions with 40 billion instead of putting the money into decarbonizing transport and the auto industry. This contradicts the climate goals. But behind every single subsidy there is a political force. That’s why it’s so difficult to actually reduce these subsidies. It is not the debt brake that helps, but rather a direct look at the political balance of power.
But shouldn’t the rapidly rising interest rates be a warning?
You have to look at the interest rates. But interest rates are not rising that quickly. The figures from the Federal Ministry of Finance look particularly high due to a special booking technology. In recent years, many government bonds have been sold at a very high price, but also at a high interest rate. Investors paid the state 130 euros for a bond that was actually only worth 100 euros and received a high interest rate in return. This 30 euro extra income is completely offset against today’s interest payments in the federal government’s accounting and makes them look particularly low – the higher interest expenses in the future are ignored. If the interest is recorded in such a way that it actually approximately reflects the current costs of national debt, the interest did not rise from 4 to 40 billion euros within two years, but from 21 to 34 billion.
Is it part of intergenerational justice not to pile up a mountain of debt for future generations?
How can it be fair between generations to leave our children with dilapidated schools, a lousy infrastructure and an economy that is losing growth potential? Germany is fortunate to pay very low interest rates on its national debt. As long as we have growth, the debt will fall on its own. However, a loss of economic substance is very difficult to make up for. Financial policy is always associated with risk; it is a question of consideration. And in my opinion, we too often set the wrong priorities here.
With Philippa Sigl-Glöckner spoke to Jan Gänger