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Return to the debt brake in 2023? Then the household threatens to crash into the wall

2022-09-30T03:36:09.272Z

Return to the debt brake in 2023? Then the household threatens to crash into the wall Created: 09/30/2022 05:27 Prof. Achim Truger is a member of the Advisory Council for the Assessment of Overall Economic Development and Professor of State Activities and State Finances at the University of Duisburg-Essen © N. Bruckmann/M. Litzka/SVR Finance Minister Christian Lindner (FDP) wants to comply with



Return to the debt brake in 2023?

Then the household threatens to crash into the wall

Created: 09/30/2022 05:27

Prof. Achim Truger is a member of the Advisory Council for the Assessment of Overall Economic Development and Professor of State Activities and State Finances at the University of Duisburg-Essen © N. Bruckmann/M.

Litzka/SVR

Finance Minister Christian Lindner (FDP) wants to comply with the debt brake again from 2023, despite the energy crisis and the aftermath of the corona pandemic.

The economist Prof. Achim Truger considers Lindner's insistence to be a mistake and, in view of the growing danger of recession, urges that the regulation be suspended again.

Duisburg – The bad news has been piling up for weeks.

Although the German economy has not yet fully recovered from the corona crisis, now that Vladimir Putin has finally turned off the gas tap, the energy crisis is getting worse.

The dramatic increase in energy prices, especially for natural gas, and the excessive inflation are reducing real incomes and causing private consumption to collapse.

All forecasts now assume another recession and a contraction of the economy in 2023.

The government's relief packages so far have been helpful - despite all the criticism in detail - but there is still a huge gap: So far there has been no gas price brake* and support measures for companies amounting to at least a mid-double-digit billion amount.

Christian Lindner has walled himself in on the debt brake

Obviously, in this renewed emergency there is more than enough reason to use the exception clause of the debt brake again in 2023.

All eyes have therefore been on Federal Finance Minister Christian Lindner for weeks.

But he has completely walled himself in when it comes to the debt brake and wants to comply with it no matter what the hell in 2023 without an exception clause.

It is obviously more about political symbolism for the FDP core clientele than about economic arguments, because the justifications from the BMF sometimes sound really weird.

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This applies to current news, but also to very fundamental questions: How do the billions in corona aid and the debt brake go together?

What can we do about the climate crisis without jeopardizing our competitiveness?

How do we secure our pension?

And how do we generate the prosperity of tomorrow?

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First, it was announced that because of the increased interest rates, one could simply no longer afford higher government debt.

Even if debt is becoming somewhat more expensive, the German fiscal policy starting point is undramatic and debt sustainability is not in jeopardy.

Recently we read that higher loans from the exceptional rule would have to be repaid quickly, then we threatened to strangle ourselves.

But who is supposed to be convinced by the argument of the need to repay the debt quickly if the traffic light coalition has decided to repay the corona debt, which will not begin until 2028 and then drag on for 30 years until 2057?

The attempt to sell compliance with the debt brake in 2023 as a measure to combat inflation is ultimately transparent political marketing: the support measures to be financed for companies and households are not about a classic economic stimulus program that drives inflation, but about targeted help to maintain production potential .

In some cases, as with the gas price cap, they can even lower inflation and dampen the risk of a price-wage spiral.

The anti-inflation narrative is also badly compatible with the BMF's enforcement of expansive tax cuts such as the reduction of the cold progression in the third relief package.

Now something seems to be happening.

Although Christian Lindner continues to insist on compliance with the 2023 debt brake, he recently indicated that there was an idea of ​​how the necessary additional support measures, which would cost tens of billions, could still be financed.

This could result in a way being found – for example via a fund solution – to take out additional loans outside of the debt brake.

Ultimately, that would be a continuation of the pragmatic policy of using credit leeway with the debt brake, as expressed in the coalition agreement and in the second supplementary budget for 2021.

more on the subject

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ECB: What is important when fighting inflation

200 billion euros more for energy: Germany is threatened with recession

Great dangers for the federal budget in the medium term

Even if such a solution would end the fiscal impasse and finally open the way for the financing of the outstanding support measures, it could be premature to celebrate.

Because even if everything necessary could be accommodated within the framework of the 2023 budget, one should not lose sight of the medium-term perspective from 2024 onwards.

And in the medium term there are great dangers lurking for the federal budget.

Recently, tax revenue has almost always been better than expected, but due to the expected recession, reduced revenue must now be expected because profits and private consumption are collapsing.

As part of the debt brake, such cyclical shortfalls should actually be absorbed by the economic adjustment.

However, if there are no signs of a quick recovery in 2024, a significant part of the loss of revenue would be booked as structural, i.e. the economic scope for the budget would be severely curtailed.

In addition, the federal budget will be permanently weakened due to the considerable permanent tax cuts of more than 10 billion euros for the federal government alone contained in the third relief package - above all the reduction of the cold progression in income tax.

Budgeting could be in for a rude awakening in 2024

It is particularly risky that the federal government, in its efforts to comply with the debt brake again by all means in 2023, will use up the existing general reserve of over 40 billion euros in the 2023 budget almost in one fell swoop, leaving only a small remainder of just under 8 billion euros will remain as a buffer.

For this reason, there could be a rude awakening when planning the budget for 2024 next year, as large gaps open up and the budget threatens to hit the wall.

Then the logic of the debt brake would take hold and there would be a risk of a debate on cuts, in which both the economy and key projects of the traffic light coalition would fall by the wayside.

In order to prevent such a scenario, three measures are needed: First, the debt brake must be suspended again in 2023.

Secondly, the reserve must be preserved in 2023 and kept as a buffer for later years.

Finally, thirdly, it would be helpful to postpone the dismantling of cold progression or to partially finance it by raising the income tax rate for high incomes.

*Editor's note: The article was written before the gas price brake was announced.

About the person: Prof. Achim Truger is a member of the Advisory Council for the Assessment of Overall Economic Development and Professor of Government Activities and Public Finances at the University of Duisburg-Essen.

Source: merkur

All news articles on 2022-09-30

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