DThe coalition feels compelled to launch a third relief package. Too much has happened in the hot summer. Energy prices are skyrocketing. The higher costs unsettle consumers and entrepreneurs. Growth prospects suffer. Nevertheless, Federal Finance Minister Christian Lindner has opposed all demands from the ranks of the Greens and SPD to make use of the exception clause in the Basic Law again next year in order to be able to continue to take out almost unlimited loans. That wasn’t and isn’t necessary.
One crisis (pandemic) is not yet over when the next one strikes (Russia’s war of aggression with all its consequences for the energy markets). While the impact is painful, this does not allow the debt rule to be suspended again. The Basic Law is clear on this: This is only possible in the event of natural disasters or exceptional emergencies that are beyond the control of the state and have a significant impact on the state’s financial situation.
After Putin’s attack on Ukraine, the Bundestag decided on a special fund to be able to better equip the neglected Bundeswehr – an amendment to the Basic Law ensures that these funds can be raised without the debt rule. Conversely, this means that Russia’s war in Ukraine cannot be used to suspend the debt rule again.
Fiscal policy remains expansive
Starting this Tuesday, the Bundestag will be discussing the 2023 budget. The draft law, which the federal cabinet launched before the summer break, provides for net borrowing of a good 17 billion euros. In this case one can speak of a precision landing. This is exactly what is allowed under the debt rule. That was anything but a sure-fire success – and it didn’t work entirely without creative design. For example, not only an extra surcharge of 2 billion euros is planned for the health insurance companies, but also a multi-year loan of one billion euros. For now, this has helped reach the safe shore. This is because loans are treated differently than grants when calculating the allowable deficit.
Minister Lindner has vowed to return to the debt rule so often that he can hardly back down without losing face. There is no economic reason for this either. The labor market is still proving to be robust. This provides revenue for the Treasury and social insurance, while the good employment situation is putting pressure on transfer spending. This year, Lindner will have an additional 8 billion euros at its disposal. Next year, the new traffic light package will burden the federal budget with around 24 billion euros, Lindner has already made provisions for 9.2 billion euros, the rest has to be covered under the debt rule.
The debt rule is not rigid
It is not yet clear how everything will be financed. In any case, it helps that the debt rule is a lot more flexible than most people think. A cyclical component ensures that the upper limit for new loans increases when the economy grows less or even shrinks. A look back shows how big this effect can be. In normal times, the federal government is allowed to take on new debt of 12 billion euros. In the 2020 budget, this limit increased to a good 60 billion euros in the end, mainly because of the significantly poorer development of gross domestic product – that is five times the normal new debt.
So the debt rule is anything but rigid. The coalition uses the new scope to relieve citizens and companies. Half of the third package of 65 billion euros is to be raised within the framework of the federal budget. Skimming off “chance profits” on the electricity market should make a significant contribution, with the federal states having to make a comparatively small contribution.
These days, many citizens are forced to do business carefully in order to be able to absorb the massively increased prices for gas, electricity, fuel and food. It remains right to end the exceptional situation in which the debt brake is not working due to the pandemic and almost everything seems to be financeable. In times of high inflation rates and record-high government debt in the euro area, a cautious financial policy is indicated.
To avoid misunderstandings: Exploiting the debt rule is not restrictive, fiscal policy remains expansive. In addition, the government can cut less important expenditures in order to finance urgent ones. That hasn’t happened for a long time, but it’s still possible. The federal government must learn again to budget with its funds.
