Germany’s debt brake and the art of fantasy budgeting

Like A SQUIRMING Harry Houdini, Germany’s government has once again wriggled its way out of a straitjacket it applied to itself. On July 5th, having blown through one self-imposed deadline to conclude a draft budget for 2025, the coalition’s negotiators pulled an all-nighter to avoid missing a second. The result, said a bleary-eyed Olaf Scholz, Germany’s chancellor, was a “work of art”.

That may be pushing it. But in the run-up to the talks, estimates had circulated of a fiscal gap of over €40bn ($43bn, about 1% of GDP) for the year. Closing it came close to blowing up the government. But in the end money was found for various pet projects and even some tax breaks. If the budget is not as austere as some had feared, that is in part because Christian Lindner, the finance minister, belied his reputation as Germany’s fiscal hawk-in-chief with a quiet flexibility in negotiation.

Two lessons may be drawn from the experience. The first is that Germany’s unpopular three-party coalition has become so fractious that routine negotiations become moments for high drama. The process was politicised from the start, with Messrs Scholz and Lindner, plus a senior Green, spending countless hours trying to make the numbers add up. mps from Mr Scholz’s Social Democrats, smarting from a dismal European election result, picked a very public fight with Mr Lindner’s Free Democrats over the debt brake, which limits borrowing. After the summer break and difficult state elections in Germany’s east in September, parliament will set to work on passing the budget. That will provide the next occasion for rows.

The second lesson is that the debt brake itself, a 15-year-old constitutional provision that limits annual structural deficits to 0.35% of GDP, is pushing the budgeting process to ever-greater heights of absurdity. With Germany’s sluggish economy leaving revenues flat, the complex provisions of the rule force politicians into endless accounting wheezes: disguising subsidies as loans, say, or rescheduling interest payments. Mr Lindner says the debt brake avoids burdening future generations. But Holger Schmieding, the chief economist at Berenberg Bank, reckons Germany could run deficits of 1.5-2% without markedly adding to its not-very-high debt load.

Binding its own hands seems unhelpful when Germany faces a municipal public-investment backlog of nearly €190bn, huge challenges decarbonising heavy industry and questions over long-term defence financing. “Far from forcing politicians to prioritise, the debt brake encourages them to play fantasy economics and ignore Germany’s actual challenges,” says Philippa Sigl-Glöckner of Dezernat Zukunft, a fiscal think-tank.

Everyone from the imf to German industry now wants to reform the debt brake. The two-thirds majority needed to amend it can probably not be found this side of the next general election, due in autumn 2025. But if, as polls suggest, the conservative Christian Democrats return to government, expect them to open discussion on reform to ease their passage to sensible budgeting, and that of their premiers in Germany’s states, where the brake squeezes even tighter. Unlike Houdini, Germany is tiring of straitjackets. ■

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