2nd Comparison with private households
3rd Social redistribution undesirable?
4th Significance of the use of the credits
5th Consideration of side effects
6th The position of the Keynes School
7th Criticism of the Keynes School
8th Arguments against a pro-cyclical policy
In almost all major parties in the FRG, but also in most European countries, the thesis is taken for granted that national debt is a burden on future generations and that it is therefore one of the most important goals of financial policy to reduce national debt. For these reasons, the limitation of public debt was included in the Basic Law in the FRG. The German government is campaigning for such a regulation to also be anchored in the constitutions of all other states belonging to the European Union.
In this article I would like to show that public debt is a very complex, diverse problem that affects a multitude of objectives and can therefore not be justified or rejected simply by pointing to the burden on future generations. I already drew attention to the diversity of problems associated with public debt in January 2008 in my article published on the internet (see Archive No. 025) 'Public debt, blessing or curse?’. These considerations shall be taken up in this article and, above all, the question of what it depends on, if and to what extent a national debt will lead to a burden on future generations, will be examined in greater depth.
I would like to show that it depends on the circumstances if and to what extent the future generation is actually burdened by a national debt. Not every increase in public debt has undesirable effects on future generations.
For a long time after the Second World War, the left-wing parties (above all the social democrats and socialists) were 'firm' supporters of the teachings of John Maynard Keynes. Keynes had famously argued that depressions and recessions - and thus mass unemployment during economic downturns - were caused by the demand for goods being too low to employ all the workers. Unemployment could therefore only be reduced if the state were to replace the lack of demand from private households and enterprises with its own demand. The state would therefore have to increase its expenditure. However, this increase in government spending would only lead to the necessary increase in the demand for goods if government spending was financed in deficit (i.e. through a deficit in the government budget). If this additional government spending was financed by way of tax revenues, private demand would decline to the same extent as government spending would increase and thus the desired effect on employment would be missed.
The willingness to follow the Keynesian message was even so great among the socialists and social democrats that they accepted that this expansive fiscal policy recommended by Keynes would lead to an increase in entrepreneurial profits and thus to a change in income distribution at the expense of employees. These distributional effects were seen as the necessary price to be paid for achieving full employment in this way.
In their assessment of national debt, the social democrats made a complete U-turn a few years ago. For a long time, public debt was seen as a blessing, but now it was seen as a curse, because it would burden future generations. But as already said, this view has been adopted by almost all major parties recently.
2nd Comparison with private households
The thesis that public debt per se burdens future generations is based on a fallacy. One begins with the situation of a private household, shows that a household that is in debt today will burden its children and children's children, and then transfers this conclusion to public budgets as a matter of course. But this conclusion is by no means justified.
The fact that a private household getting into debt burdens the children and children's children is in fact likely to correspond to reality in general. If the parents fall into debt and do not repay these debts during their lifetime, the children (and the other beneficiaries of the inheritance) also inherit these debt titles, so that they are indeed burdened in financial terms.
But also here one must consider, in a somewhat more in-depth view, that under certain circumstances the real wealth inherited by the children has increased precisely because of the parents' indebtedness, so that the welfare level of the children may well have even increased in the past precisely because of the parents' indebtedness. Let us take the example that the parents got into debt, but used the loan they took out to give their children a better education. The burden of inherited debt corresponds to the increase in human capital and only the balance between the increase in real capital and the inherited debt can decide whether the debt of the parents in the past led to a reduction in welfare or even to an increase in welfare for the children.
If we now transfer this consideration to the debt of a public budget, these conclusions initially only apply to government debt towards foreign states. Here, in fact, the conclusions established for private households can also be transferred to a government debt.
However, when we speak of public debt, we usually think of the state selling public debt to its own citizens. The state, as the administrator of its citizens, is therefore indebted to these very citizens, if one wants say so, to itself. In this case, however, the comparison with private households is no longer valid. If the state is indebted to its own citizens, the overall balance sheet of future generations does initially and directly not deteriorate at all. If the state levies additional taxes in the future and thus burdens the taxpayers, these sums of money will be paid out in their entirety to the owners of the government securities either in the form of interest payments or through amortisation. The future generation as a whole is therefore neither burdened nor favoured initially by these transactions and by the debt as such.
3rd Social redistribution undesirable?
Now, one could object that, ex definitione, the entire future generation is not burdened by a national debt, but that here a redistribution of income from poor to rich takes place. And that therefore the social conditions of the future generation deteriorate due to the national debt incurred at present.
But this conclusion also proves to be wrong on closer examination. Let us divide the future population into three income groups according to their income level: the lower, the middle and the higher income group. Let us first ask ourselves how these three income groups are differently favoured by the payments made by the state to the owners of government securities. Experience has shown that an ever-increasing proportion of workers, due to increased income, accumulate savings and buy securities with these funds.
However, there are considerable differences in the savings behaviour of the three income groups. The lowest income group invests its savings - if it is able to save at all - mainly in passbooks. Although this income group receives only a low interest rate, they take almost no risk because these savings can be withdrawn relatively quickly and because the state guarantees the security of these funds by obliging the banks to maintain reserve funds.
The middle-income group, which includes smaller self-employed persons, employees, civil servants and skilled workers, invest their savings in the long term primarily in fixed-interest securities, which include above all government bonds. These securities are characterised by the fact that the interest rate - provided the central bank guarantees monetary stability - roughly corresponds to the long-term inflation rate, but that also here the risk taken is low. The amount of money paid in is repaid again at par after a few years; there is only a small risk insofar as the owner may have to sell these securities prematurely at a time when the current price is below the nominal value of these bonds or that the issuers of these securities go bankrupt.
The highest income group invests its savings primarily in shares and share funds, which are always associated with a higher or lower risk, but which also guarantee a significantly higher interest rate. This income group can invest their savings in risky securities because they have a sufficient asset cushion and therefore do not already run the risk of going bankrupt or falling into poverty if prices fall.
Secondly, let us ask ourselves how the tax payments that the future state will have to collect to pay for interest and amortisation are distributed among the individual income groups. From empirical studies we know that the lowest third of income recipients has to pay almost no income tax. As is well known, the income tax liability only starts from a certain minimum income. It is true that this income group participates in the revenue of indirect taxes, i.e. above all turnover tax, since here the tax is included in the price of goods. However, since the nominal incomes of transfer income recipients in particular are calculated in such a way that they receive a real subsistence minimum, and since an increase in VAT therefore usually leads to an adjustment of transfer incomes, we want to exclude indirect taxes from our consideration.
Furthermore, empirical studies show that about 2/3 of the income tax revenue is paid by the upper third of income earners. The lion's share of the additional tax burden is therefore borne by the richer.
The remaining middle third is also burdened by additional tax rates, but this burden corresponds to an average burden because here one third of the income earners also have to bear one third of the tax burden.
Let us now take stock. The lowest income group does not participate in the additional tax revenue, but also does not receive any interest payments and amortisation payments from the state, since it does not own any government securities. The lowest income group is therefore not affected at all by the alleged burdens resulting from the public debt incurred today.
The top income group is characterised by the fact that - as shown - it participates disproportionately in the tax revenue; it bears about 2/3 of the tax burden, although it makes up only 1/3 of the taxpayers. But on the other side, they are mostly not the beneficiaries of the interest payments of the state, since this group invests its savings mainly in shares and not in government securities.
The remaining middle income group benefits from almost all interest payments made by the state to the owners of the government bonds and, on the other hand, participates in the tax revenue according to its share of the total citizens. For this income group, therefore, it is true that on balance it derives neither welfare gains nor welfare losses from government debt in the past.
Therefore, it is also wrong to speak of today's national debt leading to an inverse social redistribution in the future. Rather the opposite is the case. The poorest income group will not be affected at all due to the past national debt. The richest income group - as repeatedly demanded - will also be disproportionately burdened with taxes. So also from a social point of view, today's debt will not lead to an imbalance, which is to be avoided, in the future.
4th Significance of the use of the credits
These considerations do not mean that a national debt can in no case impose a burden on future generations. We were merely talking about the fact that debt as such does not have a negative impact on future generations. It is much more a question of how the additional revenues collected by the state through debt are used. We will see that there are uses of the credit sum that place a heavy burden on future generations, but that there are also other uses in which future welfare actually increases as a result of government debt. Therefore, it cannot be said that the greater the national debt, the greater the future burden. Rather, it depends on how the state spends the additional tax revenues.
Therefore, it is not helpful to measure the welfare change due to government debt on the basis of the size of government debt. The only useful measure of the burden on future generations is the expected welfare level and thus the gross domestic product of the future generation, and this welfare level is determined by the level of overall economic productivity. It must therefore be clarified whether the expenditures that the state makes with the help of the additional loans increase or decrease the overall economic productivity.
Now, on what does it depend whether deficit-financed spending increases or decreases overall economic productivity? First and foremost, the level of productivity depends on whether the additional government spending is used for consumption or investment. We can assume that savings that are invested on the capital market are primarily used for investment expenditure. If investors demand private securities, these are usually shares, equity funds or fixed-interest bonds issued by enterprises.
These loans are always taken out by private enterprises and used for investment purposes. If these funds are used to purchase government securities and the state uses these funds primarily for consumption purposes, it must be feared that overall economic productivity will decline. Consumptive uses are mainly when the state grants subsidies to private households, mainly to the lower income class, for social reasons, e.g. increases in unemployment benefits or old-age and accident pensions. We want to note that in the case of consumptive use of government expenditure in connection with debt, productivity-reducing effects must be expected in any case in the future.
But even if the state invests the additional expenditure financed by loans, this can have a negative impact on productivity and therefore on the future. In the case of investment, the state can, firstly, carry out investments itself, i.e. so-called infrastructure investments. The expansion of transport routes, but also of educational facilities, represent such infrastructure investments. These can, but need not, increase the productivity of the national economy.
A positive effect can be expected if, for example, the expansion of transport routes reduces existing bottlenecks or transport costs and if, for these reasons, production can also be increased in future periods. The expansion of the education system can also be expected to increase production and technical progress in the future, since better trained skilled manpower will be available in the future.
However, also here it must be considered that the state may make misguided investments, i.e. expenditures that are made for investment purposes but are not able to improve future production possibilities. In transport policy, for example, roads could be built that are not used due to a lack of demand, or in education policy, courses of study could be promoted and improved for which there is no demand at all among enterprises.
Even if the investment expenditures of the state for infrastructure investments have a productivity-increasing effect in and of themselves, it must still be checked whether this productivity increase is actually greater than if these savings had not been used for the purchase of state bonds but for the purchase of private securities. Only if the increase in productivity due to state infrastructure investments is greater or at least not less than in the case of otherwise made private investments there will be no burden on future generations.
The third possible investment use of government expenditure is that the government grants subsidies to enterprises to induce them to increase their investment volume and thus promote future growth. Firstly, it must be reckoned with the possibility that so-called deadweight losses occur. We always speak of a deadweight loss when enterprises receive subsidies for investments or for an expansion of production that they would have carried out even without these state subsidies.
This danger is very great because the state cannot see how much the enterprises would have invested if no subsidies had been granted. The state can only determine whether the subsidies were used for the intended purpose or not, and even when checking the use of the subsidies, it cannot be ruled out that individual enterprises use these funds for other purposes. For example, it is known that certain goods were only exported abroad in order to collect state premiums, but these goods were then imported again.
Secondly, in the case of state subsidies, there is a risk that these funds will be used to make investments that in retrospect turn out to be bad investments or at least do not generate the same return as could have been achieved with other types of use. Especially when private investments are stimulated by state subsidies, i.e. when there is no risk of deadweight losses, there is a danger that state subsidies will stimulate investments that would not have been made without subsidies simply because they are unproductive investments.
In the most general sense, we assume that the market is much more likely to direct scarce resources to the most productive uses and to avoid loss-making investments than when these investments are encouraged by the state. In a functioning market economy, private enterprises are under a double productivity-enhancing incentive.
On the one side, high profits are enticing in the event that productivity-enhancing investments are made; on the other side, enterprises suffer high losses, up to and including bankruptcy, in the event that bad investments are made. It is precisely these incentives that are missing for the politicians or civil servants who carry out or initiate investments on the part of the state. Neither do they receive a material profit on a successful investment, nor are they liable with their assets if it turns out that bad investments were made.
Indeed, a politician who has led an economy out of a crisis by means of subsidies can gain fame for this. Experience shows, however, that as a rule this fame either fails to materialise and the re-election chances do not improve because this success cannot be clearly attributed to the politicians or because the politicians are attacked for other activities or simply because the voters forget very quickly and at the next election, they only consider the events that occurred immediately before the election.
5th Consideration of side effects
I mentioned at the beginning that public debt has a variety of effects, and that almost all macroeconomic goals are affected, above all the employment goal, the goal of monetary stability, the external balance and the distribution of income in both social and intertemporal terms. In view of this complex character of government debt, the justification of a government deficit policy cannot, of course, be measured simply by whether and to what extent future generations are burdened.
Even if one justifies the reduction of public debt solely on the grounds that future generations must not be burdened, a responsible policy must always examine what undesirable side effects on other goals of economic policy must be expected. For the sake of simplicity, however, we will limit ourselves here to examining the effects on the goal of full employment. With regard to the other possible effects of deficit fiscal policy, we refer once again to the above-mentioned article on 'Government debt, blessing or curse' here in the archive.
6th The position of the Keynes School
I have already pointed out above that John Maynard Keynes had argued in favour of government debt. He justified this plea for a budget deficit with the fact that the economic downturn and thus also mass unemployment in times of depression and recession had to be attributed to insufficient private demand for goods. The state therefore has the task of replacing the lack of private demand by way of a deficit in the national budget. It is not enough to simply increase government spending. If this is financed with additional tax revenues, government demand only takes the place of private demand, but in this case aggregate demand has not increased. An increase in demand on the part of the state can only be expected if the additional state expenditure is financed on a deficit basis (with loans). Thus, according to the Keynesians, government debt does have a positive, employment-increasing effect.
However, if public debt increases employment and thus also the domestic product, this in turn benefits the future generation. If workers receive less private disposable income due to unemployment and short-time work, this loss is also reflected, among other things, in the fact that these households can save less and will therefore pass on less wealth to their children. By ensuring that full employment prevails through public debt, the state also indirectly contributes to future generations having greater inherited wealth at their disposal.
7th Criticism of the Keynes School
Now, these Keynesian proposals are and have always been extremely controversial within economic sciences. There are many additional conditions that must be met in order for a budget deficit of the state to really have a positive effect on employment. The discussion about the Keynesian doctrine has shown:
1st Not all major unemployment can be explained by insufficient demand for goods. Supply factors can also cause unemployment, e.g. when employees in the lower income brackets cannot find work because their training is not sufficient to meet the requirements in the enterprises. A shortage of skilled workers can also contribute to the fact that certain productions cannot be carried out at all and that, for these reasons, some of the workers in the lower income bracket also do not find work.
Above all, it must be considered that the German economy does not have sufficient supplies of important raw materials, especially energy raw materials, and is therefore dependent on imports of these raw materials. If there is a shortage here, raw material prices rise and this increase in costs can lead to an economic slump, as experience with the two oil crises in the 1970s and 1980s showed. At that time, the Arab oil states imposed an oil boycott on the Western states because these states supported Israel in its fight against the Palestinians. This boycott led to a drastic economic slump and thus also to a sharp rise in unemployment.
2nd Even if, due to a government budget deficit, aggregate demand rises sufficiently, it is by no means certain that especially the demand for domestic labour will increase. It is possible that entrepreneurs will relocate part of their production abroad because domestic labour costs seem too high to them and because these parts of production can be produced abroad at lower labour costs.
3rd Milton Friedman has shown that the positive employment effect can only be expected to be temporary. The initial expansion of production due to an expansive fiscal policy of the state only takes place as long as prices and with them profits rise due to the increase in demand. Sooner or later, however, in the subsequent collective bargaining, the trade unions will push through wage compensation for the price increases and, to the extent that the trade unions succeed in this, the profits of the enterprises will fall again, the incentive to maintain the increase in production will now be removed, but employment will also fall again to its previous lower level.
Eventually, entrepreneurs will not react to the increased demand at all, because they have learned in the meantime that the price increase is only temporary. They will then forego the additional production because the profit is only temporary and because once they have employed more workers and the demand for labour decreases again, then they will not be able to dispose of the newly hired workers so quickly because of rigorous dismissal legislation.
One can also speak of the fact that the success of expansionary fiscal policy only lasts as long as the additional demand of the state occurs unexpectedly and as long as the market partners (trade unions and entrepreneurs) have not yet adapted to the changed situation. These conclusions also explain that Karl Schiller, as Minister of Economics and Finance in the 1960s, was quite successful in his attempt to stimulate the economy with a state deficit policy. It was a novel policy, it came as a surprise to entrepreneurs and trade unions, they did not yet have the opportunity to adapt to the changed situation.
4th William D. Nordhaus has pointed out that the process of representative democracy in connection with state fiscal policy actually leads to a worsening of economic swings. In order to be re-elected, the government increases its spending immediately before elections. This leads to an increase in income and employment immediately before the elections. The price increases that occur in this context due to the increase in the money supply in circulation, occur much later, though, i.e. after the elections.
Since the voters make their electoral decisions dependent on events that occurred immediately before the election and are in this sense forgetful, this expansionary fiscal policy has the effect that the voters prefer to vote for the governing parties. Once the government is in office again after the elections, however, it is forced to introduce contractionary measures in order to stop the inflation triggered by the increase in the money supply in circulation. However, due to the high forgetfulness of the electorate, these measures are unlikely to have a negative impact at the next election in four to five years' time, although they will of course again lead to a reduction in incomes.
5th It is questionable whether private investment will actually increase on a sustained basis as a result of the economic stimulus provided by the state, since the permanent changes in government spending and tax rates due to economic policy increase the risk associated with almost every investment. And thus, precisely for these reasons, tend to paralyse rather than stimulate the willingness of businesses to invest.
6th The opponents of a Keynesian fiscal policy have also pointed out that there is a very large time lag (about 1 1/2 years) between the occurrence of the economic downturn, the expansionary measures introduced by the state and the expansion of production. A rational fiscal policy would need to take this time lag into account and introduce the expansionary measures at a time when the economy is still booming. Conversely, contractionary measures would also have to be initiated at a time when mass unemployment still prevails. It cannot be expected that politicians, who have to win elections at periodic intervals, are prepared to pursue such a far-sighted policy, since superficially the opposite is being done for the mass of voters than what would seem to be necessary - from a layman's point of view - namely to implement expansionary measures as long as there is still unemployment.
7th Even Keynes' thesis that in times of economic downturn, enterprises would not be willing to invest sufficiently even if interest rates were lowered, since they have surplus capacities due to the decline in sales, has to be modified. This thesis only applies to the so-called expansion investments. In fact, entrepreneurs cannot be expected to expand their production capacities at a time when they have surplus capacities due to the decline in sales. In addition to expansion investments, however, we also distinguish between rationalisation investments, which serve to increase the productivity of production. Especially in times of economic downturn, enterprises are forced to rationalise in order to slow down the decline in sales. The thesis of the interest rate inelasticity of investments therefore only applies to expansion investments, but not to rationalisation investments, which will increase just during the recession.
Now, it must be borne in mind, however, that investments in rationalisation are generally associated with technical progress and that it depends on the type of technical progress how the employment situation changes. We distinguish between labour-saving, capital-saving and so-called neutral progress. If labour-saving progress comes into play, unemployment can indeed arise under certain circumstances. However, we should also not overestimate this danger.
Firstly, rationalisation investments always trigger two compensating effects. On the one hand, labour is substituted by capital, this effect partially leads to an increase in unemployment. On the other hand, demand increases with the investment and this effect (the so-called compensation effect) partially leads to an increase in employment. As a rule, it can therefore be expected that even with labour-saving technical progress, the increase in unemployment will on balance at least be limited.
Secondly, Erich Streißler had shown in an empirical study that in the course of the last one hundred and fifty years, technical progress was on average capital-saving, which resulted above all from the possibility of reducing costly stocks. Thus, historically, investments in rationalisation did not lead to unemployment on average.
Thirdly, the question of which type of technical progress prevails depends crucially on the ratio of factor prices (the wage-interest ratio). There is always a wage-interest ratio that corresponds to the scarcity ratios and that precisely for this reason does not trigger unemployment. The difficulty is that the Keynesian employment policy tends to make the wage-interest ratio too high. On the one hand, the state tries to keep interest rates low, not because this is supposed to stimulate investment - as is well known, Keynes assumes that investment reacts only to a very small extent to interest rate cuts - but above all in order to reduce the interest burden on the state.
On the other hand, purchasing power theory argues that in times of economic downturn, expansionary wage policies are needed to increase consumer demand. I have shown in another section that the purchasing power theory is wrongly based on Keynes. For in the Keynesian system, only changes in autonomous demand (e.g. in the propensity to consume) lead to increases in employment, but not the induced increases in demand that are expected solely as a result of an increase in income.
Thus, we must assume that precisely in the course of implementing Keynesian employment policy, effects are triggered that favour labour-saving progress and thus, under certain circumstances, generate the unemployment that this policy supposedly wants to reduce.
8th Arguments against a pro-cyclical policy
In other words, there are a multitude of reasons why it must be doubted whether government debt - and thus a counter-cyclical fiscal policy - can actually be used to effectively combat unemployment as claimed by Keynes. However, these considerations should not lead to the conclusion that a pro-cyclical fiscal policy would therefore be desirable. We always speak of a pro-cyclical fiscal policy when tax rates are increased and government spending is reduced during an economic downturn or when tax rates are reduced and government spending is increased during an economic upswing.
Despite the fact that demand theorists (Keynesians) and supply theorists (neoclassics) disagree on how to effectively combat unemployment, both schools agree on one point: pro-cyclical policies are undesirable in any case, as they contribute to exacerbating cyclical fluctuations and thus also to unemployment in times of recession. If the state cuts government spending and/or increases tax rates in times of economic downturn, it reduces aggregate demand in two ways: on the one hand, government demand decreases and, on the other hand, private demand is also curtailed, since an increase in tax rates reduces ex definitione the privately disposable income of private households.
The difference between the two schools is therefore not that one calls for an anti-cyclical, the other for a pro-cyclical fiscal policy, but that the Keynesians try to fight unemployment by means of a 'go and stop' ( via acceleration and deceleration) the opponents of the Keynesian school call for a long-term oriented fiscal policy that implements a spending policy over an economic cycle independent of the economic situation. Only in this way, and not through permanent changes in economic data (interest rates and government spending), could according to supply-side theorists the security be achieved which enterprises need for their long-term investments.
The decisive point is now: the demand that the state should work towards ensuring that no additional state debt occurs, in other words that the current state budget is always balanced, forces governments to pursue a pro-cyclical fiscal policy. In times of economic downturn, tax revenues decline, they even fall disproportionately because of the progressive income tax, and government expenditure increases while spending rates remain constant. For example, the statutory unemployment insurance has to pay out an increasing amount of unemployment benefits because of the increase in unemployment. Thus, budget deficits automatically arise in times of economic downturn, which can only be avoided if the state increases tax rates and/or reduces expenditure rates, in other words acts pro-cyclically and thus contributes to a worsening of the economic situation.
What conclusions can be drawn from these considerations for the attempt to drastically reduce new government debt? In 2009, parliament decided to anchor a debt brake in the Basic Law. According to this, the annual net borrowing of the federal government may not exceed 0.35% of the gross domestic product; for the federal states, net borrowing was prohibited completely. However, this limit only applies to the structural, i.e. non-cyclical budget deficit, and exceptions are also allowed in the event of natural disasters and severe recessions. The Federal Government is working to ensure that this debt brake is introduced throughout Europe.
This regulation does not seem appropriate to me for several reasons. Firstly, the wording is very vague. The government can take this debt brake very seriously, it will then get into big trouble. However, the provision leaves enough loopholes open to continue borrowing on a large scale if necessary and governments will justify this debt precisely by saying that it is due to cyclical and not structural reasons.
In my opinion, there are two main points to criticise. Firstly, it is being pretended that new borrowing as such is undesirable (and indeed burdensome for the future), although we have shown above that it is not so much the absolute amount but rather the use of the borrowing that determines whether the welfare level of future generations is reduced or also increased in this way.
Secondly, the regulations of the debt brake refer to the new debt incurred in the short term, year after year; we have seen above that in this case governments have no choice but to pursue a pro-cyclical fiscal policy, i.e. to raise tax rates and curb government spending in times of recession and depression. However, this necessarily leads to a worsening of the cyclical swings. This policy is thus designed in such a way that it brings about or at least reinforces precisely the exceptional conditions which then allow - at least for the federal government - a deficit budget after all. Since the federal states are no longer allowed to run deficits at all, this means at the same time that the federal government has to financially help the states in distress to an increasing extent, with the result that a tendency towards centralism is triggered, the opposite of what our constitution actually provides for.
With regard to the use of a state budget deficit, it should be noted that the Basic Law already permits only net state borrowing that is covered by state infrastructure measures. This provision addresses much better the question of the extent to which a budget deficit is a burden on the future and therefore undesirable.
Furthermore, the goal of ensuring that the government at least does not exacerbate the cyclical swings can only be achieved by applying the deficit ban to the entire economic cycle and not to the individual year. This is the only way to avoid pro-cyclical fiscal policy and to ensure that government activity does not exacerbate the business cycle.
If we consider that public debt is not only a possible burden on future generations, but that other goals, such as the goal of monetary stability and external balance, are endangered, it is indeed necessary to ensure that no public budget deficit is realised over the course of an economic cycle. Above all, it must be considered that, as I showed in my article 'Government debt, blessing or curse', democratic control of politicians by the electorate is only possible if consumer government spending is covered by tax revenues in the long run. Only in this case can the voters, in their majority, freely decide whether an expansion of government spending and thus at the same time a reduction in the private use of economic resources is desirable.
However, the attempt to legally anchor this commitment to a balanced budget requirement over the entire economic cycle raises difficulties, since a legislative period does not coincide with the length of an economic cycle and since, moreover, the specific economic cycles also cover a rather different time span.
One can only meet the demand for a long-term budget balance by obliging governments to pay off debts respectively in times of economic upswing, to the extent to which tax revenues increase and a part of government expenditure, such as subsidies to unemployment insurance, decreases due to the economic situation, before deciding on new, non-contractual expenditure increases.