THE STATE  |  WORKING PAPERS

For an investment rule as the centerpiece of a reform of the German debt brake

BY

BY TOM KREBS

PUBLISHED

4. SEPTEMBER 2024

This study discusses the options for reforming the German debt brake in order to finance additional public investment by the federal government through borrowing. The focus of the analysis is on an investment rule enshrined in the constitution to finance the necessary future investments. The proposal developed here is the introduction of an investment rule enshrined in the constitution, which limits the structural borrowing of the federal government to the investment expenditure in accordance with budgetary demarcation (financial statistics). This reform can be implemented with a minimal adjustment to the German debt rule enshrined in the Basic Law (Article 109 GG and Article 115 GG). The application of the proposed investment rule, taking into account the European fiscal rules, would have permitted structural net borrowing of 1.5% of gross domestic product in 2023 – an increase of 1.15 percentage points compared to the currently permitted structural net borrowing of 0.35% of gross domestic product. In contrast to the current European fiscal rules, the proposed investment rule provides an incentive to prioritize investment spending in the federal budget.

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ABOUT THE STATE

KNOWLEDGE BASE

For decades, there was a consensus that reducing the role of the state and cutting public debt would generate wealth. This contributed to a chronic underinvestment in education and public infrastructure. New research focuses on establishing when and how governments need to intervene to better contribute to long-term prosperity and to stabilize rather than aggravate economic fluctuations.

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