Wednesday July 28, 2021
Expensive corona crisis
How dangerous is record debt?
By Jan Gänger
Public debt is rising rapidly and is higher than ever before. That is not yet a cause for concern. It depends on how the next federal government reacts.
The numbers are huge: the national debt in Germany reached around 2.1 trillion euros at the end of last year. That is almost 274 billion euros more than a year earlier and, according to the Federal Statistical Office, the “highest debt level ever measured in the debt statistics at the end of a year”. That sounds dramatic at first.
But that is not a cause for concern. This is mainly due to the fact that the rapid increase is a one-time answer to the corona crisis. For 2020 to 2022, the corona-related new debt – due to the aid packages and the temporary VAT reduction – totaled 480 billion euros.
It is important to put the debt in relation to the gross domestic product (GDP) – the absolute number is hardly meaningful. Seen in this way, the national debt has increased massively. The Institut der Deutschen Wirtschaft (IW) expects the national debt ratio, i.e. the ratio of liabilities to annual economic output, to reach almost 75 percent this year – well above the 60 percent allowed in the euro zone. But the rate would still be significantly lower than it was after the financial crisis, says the Scientific Director of the IMK Institute, Sebastian Dullien. At that time it was around 82 percent of GDP.
The rate is likely to decrease significantly from next year, as the federal government wants to significantly reduce new borrowing. In an international comparison, Germany’s quota is already in the lower third, according to Dullien.
Maastricht rules and debt brake only suspended
The decisive factor is not how high the current mountain of debt is, but what the current and the next federal government are doing to meet the requirements of the European fiscal rules and the German debt brake again. Both sets of rules were suspended due to the corona pandemic – but must be complied with again as soon as possible. It would not be a good idea, however, to stifle the economic recovery by, for example, hefty tax increases or excessive government spending cuts.
In addition to the 60 percent quota for the current level of debt, the “Maastricht” criteria stipulate that the budget deficit must not exceed three percent of GDP. According to the debt brake, the federal government is only allowed to go into debt to a small extent and the states no longer at all – except in exceptional cases such as natural disasters or severe recessions.
“If the debt brake is adhered to again from 2023, the question arises of how the state can manage to compensate for the difference between the repayment installment (i.e. what is repaid every year in terms of loans) and the maximum possible net new debt and at the same time allow budgetary room for maneuver secure “, writes the Institut der Deutschen Wirtschaft (IW) in a study. There are two ways of doing this.
On the one hand, the debt brake could be released and the federal and state governments could be granted additional leeway of 0.15 percent of GDP. That would correspond to an additional net new debt of around six billion euros and would still be in line with EU requirements, according to the IW.
On the other hand, the repayment could be stretched. So far, the federal government is planning to pay off its corona debts within 20 years. According to the IW, this would mean for the state as a whole that it would have to repay around 24 billion euros of the loans every year. If the repayment were extended to 40 years, the state would only have to spend half on debt servicing.
.