The Limits of Fiscal Policy: Four Top Economists in Short Cut on the 100 Billion Euro Question

The German armed forces are to receive 100 billion euros in special funds. What does this mean for the finance minister’s course and the financing of other major crises? These were the leading questions of our New Economy Short Cuts with Jens Südekum, Philippa Sigl-Glöckner, Hubertus Bardt and Sebastian Dullien. We have summarized the highlights of the debate.

The key takeaways

An initial assessment of the fiscal situation was provided by Jens Südekum, who said he was surprised by the Chancellor’s announcement of an additional 100 billion for the Bundeswehr. “The special fund for the Bundeswehr joins a series of emergency operations to which we have already become accustomed in terms of the debt brake.” Most recently, he said, the rule mode had been abandoned for corona reasons, and now the next emergency operation was following in response to the Ukraine war (with the difference that the special assets for the Bundeswehr are to be constitutionally secured (editor’s note)). That a state of emergency should be linked to a constitutional amendment seems strange, Südekum said. Instead, he called for a more fundamental discussion about the sense and future design of the debt brake. In addition, he said, it should be borne in mind that the target of spending 2 percent of GDP on the defense budget, even with the help of the special fund and an increase in regular spending to 50 billion a year, is only realistic for the next five years. How the 2 percent target is to be achieved from 2026 remains unclear in the current debate.

Even more pressing, however, is the question of what implications the special fund has for other areas, he said. “Is there a threat of cuts now? Or does something like this now also apply to investments, climate, education? I would answer yes to that question. It is a question of political will. But we have to get away from emergencies and attempts to squeeze reality into the corset of the debt brake.” Rather, we need a sustainable concept for fiscal policy at national and European level, Südekum concluded (Jens Südekum had to leave the call after 30 min).

Hubertus Bardt added that in view of the Russian attack on Ukraine, we are facing an exceptional situation, but that the special funds now planned merely make up for the investments missed in past years. Therefore, he said, it is absurd to declare the current situation an exceptional circumstance. “Delayed spending is not an exceptional circumstance,” Bardt said. Such an ad hoc action, out of a political momentum, could therefore not serve as a template for other emergency situations. Rather, he said, the budget must be designed to allow necessary spending within the regular framework. Despite the huge sums now being discussed, the budget is still on the edge of its seat, and a systematic response to the gigantic investment needs in infrastructure, climate, etc. is missing.

Philippa Sigl-Glöckner commented that the special fund for the German Armed Forces was already the third attempt in a short time to push through special rules and shifts within the framework of financial policy and the debt brake.

Even if there has been no official change in the principles of fiscal policy in Germany, de facto this is exactly what has happened, Sigl-Glöckner said. It is therefore important to ask what a new framework for fiscal policy should look like. Until now, the debt ratio had been the anchor. Now, however, the federal government is saying with its actions that this could be overlooked in emergency situations. This leaves big question marks.

Sigl-Glöckner also pointed out that a budget with numerous special assets is also difficult to manage in practical terms. The money is booked when it flows into the special fund, not when it is actually spent. This leads to a lack of transparency. Moreover, such a policy is always reactive; it is only possible to react when the pressure of suffering is already very great. “Financing consumer spending (e.g. salaries) with one-offs is the opposite of sustainable fiscal policy.”

Sebastian Dullien argued that the maneuver was economically correct, though absurd in its rationale. He said that since the rules were designed to be stricter than necessary to comply with the debt ratio, despite the emergency clause, it was understandable that they would be circumvented. Overall, however, the justification for the debt brake is becoming increasingly absurd, and budgets are becoming increasingly opaque. It is already difficult to keep an overview of the individual budgetary pots. There is also a need to discuss the efficiency of the funds used. France has a more operational military with a similarly high budget.

What else was discussed

On the question of how to evaluate spending under the European debt rules, a final answer was not yet possible, according to the tenor of the participants. Sebastian Dullien pointed out that the European fiscal rules are equipped with numerous margins for evaluation. Before infringement proceedings are initiated, there are many discretionary steps. Hubertus Bardt suggested that we have a cultural problem with fiscal policy in general. “We have difficulty changing the cultural imprint of the debt brake.” Nevertheless, he said, he was glad that we have more leeway in this country than countries with higher debt, such as Italy. Rather, he said, there was a lack of debate about what people were saving for.

The Limits of Fiscal Policy

Very clearly, the current debate shows how difficult it is to determine the limits of fiscal policy. While it is undoubtedly clear that there are limits to debt, Sigl-Glöckner said. “But is it possible to say in advance where these are before shooting across them?” Current fiscal policy poses great risks in that we are heading toward an increasingly dramatic trade-off of necessary spending, to the point where important investments can no longer be financed, she said. With respect to the European debate, there is also an urgent need to rethink the common narrative that it is good for government payments to fail and that financing costs can quickly show large variances. “In a situation where this could also weaken European sovereignty, this narrative should be reconsidered,” Sigl-Glöckner said.

The post-2022 debt brake

Finally, the debate took a look at the future. The audience wanted to know how likely it was that – regardless of the special funds – the debt brake could really be met again in 2023, given the current crisis, rising energy prices, and so on.

There was agreement that significant additional costs would probably continue to be incurred in 2023. In particular, an import or supply freeze triggered by the Ukraine war would pose a high risk due to the cascading effects in the production chains. For the coming year, Sigl-Glöckner, Dullien and Bardt therefore also expect major budgetary effects to arise, which would have to be resolved by means of a further emergency clause if the debt brake was to be adhered to. In any case, there is a threat of a financing and expenditure conflict in the coming years, which has only been temporarily circumvented with the special fund.