The debt brake repeatedly sparks discussions and as the next budget negotiations in Germany draw nearer, voices calling for a relaxation of the rules on debt limitation grow louder. There were good reasons for its introduction, including the ever-increasing public debt burdens.

The public debate in Germany is primarily conducted with unproven theses, assumptions, and assertions, as there has been no comprehensive study on the impact of the debt brake so far. To fill this gap, the Friedrich Naumann Foundation for Freedom commissioned an empirical report to analyze the debt brake.

Professor Lars Feld, Director of the Walter Eucken Institute and Personal Advisor to the Federal Minister of Finance for macroeconomic development, along with his team, has prepared the report “The Debt Brake – A Guarantee for Sustainable Fiscal Policy.” It empirically examines the causal effect of the debt brake on public debt levels, the primary balance of public budgets, interest rates on public debt, and particularly public investments.

The main findings are as follows:

1. Based on the results there is no evidence to support a correlation between federal public investments and the debt brake.
2. No statistically robust statement can be made regarding the impact of the debt brake on the development of the overall government investment ratio, encompassing federal, state, municipal, and social security investments.
3. The study demonstrates that the German debt brake is responsible for the successful fiscal consolidation in the years following its introduction.
4. Without the implementation of the debt brake, interest rates on public debt would have been significantly higher.
5. Without the debt brake, the federal government’s spending capacity would be smaller today, as interest rates and debt levels would be higher.

The debt brake secures fiscal leeway and financial sustainability. In addition to the unproven negative effect on public investments often claimed in debates, the positive impact of the debt brake on the sustainability of public finances is particularly notable.

Without the debt brake, the federal government’s spending capacity would be an estimated 15 to 20 billion euros lower today. This saving arises firstly from the almost 0.5 percentage point higher interest rate without the debt brake. Secondly, it arises from the approximately 20 percentage points higher federal debt level, which would also incur interest costs.

Continue exploring: 

Political Situation in Germany Before the European Elections with Ralf Fücks [PODCAST]

Multi-Crisis in Housing Market