Please be honest!
How much debt is okay?
A debate contribution by Marcus Wortmann and Andreas Esche
December 3rd, 2023, 3:03 p.m
Many believe that, in view of the Federal Constitutional Court’s ruling, the state will now have to make do with what it earns. That sounds obvious – and yet it is wrong.
Some people may be rubbing their eyes in surprise these days. While the UN is reporting a dramatic worsening of the global climate crisis and a possible global warming of almost three degrees, in Germany everything revolves around the national budget crisis. Three degrees turn the trivializingly named “climate change” into an apocalyptic scenario of planetary destruction. Our children and grandchildren would very soon have to live in a different, more inhospitable world – if they even survive the expected distribution conflicts of this development. The prosperity we know today would probably be lost for most people in just a few decades without more consistent efforts to protect the climate.
So how is it that when faced with this problem we have nothing better to do than to argue intensively about whether there is an emergency, whether it is exceptional in the sense of our legislation or whether the planned 60 billion euros for the climate and transformation fund ( KTF) could have just been too much of a good thing? Or should the current generations tighten their belts when it comes to citizenship benefits, basic child benefits or pensions so as not to overburden future generations with too much debt?
Many believe that the state will now have to make do with what it earns. That sounds obvious and yet it is wrong. In view of the existential climate and environmental crises, we must take countermeasures with all our might – that also means investing on a large scale. We also have to make up for what has been missed in the last 20 years in terms of modernization and digitalization, education and infrastructure. However, today’s tax revenue is not enough to finance it. But it doesn’t have to – especially given the relatively low international debt ratio. Ultimately, the return on credit-financed climate protection investments would benefit our descendants in the form of reasonably intact livelihoods. But ideally also in the form of higher incomes, for example if the German industrial nation succeeds in becoming one of the international leaders in the production of climate-neutral technologies and products.
Significant explosive power
It would also be a mistake to try to plug the financial holes we have created by targeting the weakest and weakest in our society. They will be most affected by the climate crisis and its mitigation. Even drastic cuts in the welfare state would not be enough to close the gaps that have arisen in the auxiliary budgets. However, they could unleash considerable explosive power on the already fragile social cohesion and undermine acceptance of climate protection. In addition, social cuts would make little sense from a fiscal perspective, as they are mostly expenditures that are directly reintroduced into the economic cycle through private consumption. It has never been good to want to save in emergency situations, not when people are living on a subsistence level and especially not in recessions.
But is the national budget perhaps generally the wrong place for climate protection? After all, as we often hear at the moment, companies can be persuaded to change their production solely through incentives such as the CO2 price, without the need for government subsidies. But this must now increase so much that it has an effect. But relying on that alone is a misconception. Because if Germany just cracks the stick while all major competitors hand out the carrot, we can quickly become lonely. If CO2 prices are raised too quickly to the necessary levels, this could throw many companies off the curve, while at the same time causing massive price increases and even more social stress.
In the end, the state needs to work well together with the economy and private households: without state-funded network expansion, there will be no hydrogen economy, no additional rail transport, no electrification of production and mobility, no heating transition in residential properties. Without social support, for example through redistribution of CO2 income or support for climate-friendly heating, there is no escape from lock-in situations and no support for the transformation.
Massive investments needed
As legitimate as the CDU’s lawsuit against unfair financial tricks and as understandable as the Karlsruhe ruling may be, the reaction can only be to finally be honest. The only way to achieve climate neutrality in a timely, welfare-preserving and social way is through massive private and state investments in environmentally friendly technologies and infrastructure. Estimates of the state’s share of this vary widely, but they are all well above the previously announced financial resources. It may be that some of the planned climate and industrial policy measures – such as the planned electricity price or chip subsidies – are debatable in terms of their targeting and appropriateness. What is certain, however, is that we now have to invest a lot of money before investments either come too late or take place in countries where climate protection – as well as government spending – is handled much more loosely and where massive subsidies are used to attract foreign investment.
The fundamental blockade towards reform proposals for our debt rules (while at the same time rejecting any tax increases) creates a stable escalation spiral of loss of economic strength and international competitiveness, social unrest and climate policy failure.
Avoiding investment government spending will not bring us any financial stability – on the contrary: we actually urgently need the investments in order to enable productivity and potential growth in the face of demographic change, a prerequisite for future tax revenue. Already next year, the growth of the gross domestic product would be significantly lower due to the discontinuation of the projects financed from the fund, as numerous voices have already rightly warned. Then there would be fewer emissions in Germany in the future, but this would be due to less domestic production and not to a cleaner method of production. In fact, the debt ratio could even increase as a result, meaning that nothing would be gained in terms of national debt. And even if we kept this constant, what would future generations get from the most disciplined household on a scorched earth?
In short: State investments in achieving a sustainable social market economy should therefore be treated differently than other expenditure in the future through a constitutional reform of the debt brake. As difficult as it may be to differentiate investments from social and consumer spending, it is nevertheless necessary.
Civilizational turning point
A balanced reform does not have to mean the end of sustainable state finances or even national bankruptcy, as some hecklers would have you believe. Even regardless of a reform, the state is of course required to check its spending more closely again. What comes to mind here is the climate-damaging subsidies, which the coalition has already decided to reduce. They create false incentives, cost the state billions and are sometimes also questionable in terms of distribution policy (e.g. diesel, kerosene and company car privileges). Even if they are not superfluous in all cases and can be eliminated in one fell swoop (example: commuter allowance), there is still a significant need for reform and savings, which should now be implemented as part of the solution.
In this context, the federal government’s recently announced electricity price package, which would once again increase the current climate-damaging subsidies in the electricity tax area, should also be examined. Apart from the questionable consequences and incentive effects, such a broad tax discount would also be very costly for all industrial companies. The actual goals of protecting the transformation of strategically important areas such as the basic industries in Germany against global competition and establishing planning security for energy price developments would not be achieved with such unspecific funding. With the Karlsruhe ruling at the latest, the watering can in economic and financial policy should finally have had its day.
In the future, we will not only have to invest massively, but also in a more concentrated manner. The changing times in civilization, which we are experiencing more and more drastically every year with the multiple environmental crises, make it necessary to create the state’s scope for action to combat them. If we do not finally succeed in taking powerful countermeasures, the consequences of these crises will not only be reflected in the costs for public budgets, but will also at some point make any concern with debt ratios superfluous. Every year lost only increases the effort required. Nobody needs self-made budget crises in this situation.
Marcus Wortmann is a senior expert in the Sustainable Social Market Economy program at the Bertelsmann Foundation. Andreas Esche works there as a director.
This text was initially in the “macronomist” published, an online magazine for economic policy.