Outline:
1st
Introduction
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
9th Conclusions
1st Introduction
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.
9th
Conclusions
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.