How does it work? Why is it important?

Since the financial crisis, Germany has written in the Basic Law to curb new debt – the debt brake has been introduced. But how does it even work?

The corona virus shakes Germany’s budget. For a long time, the principle of the “black zero” applied, so the state should not spend more than it earns. In the Corona crisis it was said: Get rid of it.

And the changes go even further: The federal government has also loosened the so-called debt brake. But what is the debt brake anyway? How is it related to the “black zero”? And how useful is the debt brake anyway?

What is the debt brake?

The debt brake is a mechanism designed to ensure that Germany does not become over-indebted. Ultimately, the state is no different from its citizens: if a citizen has too high expenses that he cannot cover and continues to borrow for his expenses, he may at some point become insolvent.

This is to prevent the federal debt brake: The federal government may only borrow a maximum of 0.35 percent of the gross domestic product. The permitted new borrowing therefore depends on the economic situation in Germany.

In the Basic Law there is no term “debt brake”, it is just the common name for two provisions in Articles 109 and 115.

Debt brake was introduced after the financial crisis

The background to the debt brake was, among other things, the high level of national debt after the 2008/2009 financial crisis. Therefore the Basic Law was changed in 2009. This change took effect in 2011.

Subsequently, transitional regulations still applied. For the federal government, the debt brake will apply from 2016, for most federal states only from 2020.

Is the debt brake just another word for the “black zero”?

No. The so-called “black zero” goes beyond the debt brake anchored in the Basic Law. The “black zero” is the idea that the federal government may not spend more than it has income – so that there are no new debts.

The debt brake as an instrument still allows a margin of 0.35 percent of the gross domestic product in terms of new debt. The main difference: while the debt brake is regulated in the Basic Law, the “black zero” is only a political guideline. Since a balanced budget was achieved for the first time in 2014, the finance ministers have adhered to the rule – until the Corona crisis.

Are exemptions from the debt brake possible?

Yes. Article 109 of the Basic Law states that the federal and state governments could provide for “regulations on the effects of an economic development that deviates from the normal situation”. This is also possible in the case of “natural disasters or extraordinary emergency situations which are beyond the control of the state and which have a considerable negative impact on the state’s financial position”.

In plain language, this means: The federal government may go into debt above the normal rate of 0.35 percent of GDP – if the situation requires it. This exception rule was used in the Corona crisis. For the federal states, separate state laws regulate the details.

How is an exception made?

The majority of the Bundestag has to approve the lifting of the debt brake. What is necessary for this is the so-called “Chancellor majority”, i.e. the majority of the members of the Bundestag – and not just the majority of the parliamentarians present at the vote.

Will the debt brake then be permanently suspended?

No, that is not easily possible. It says in Article 115 of the Basic Law: “The resolution must be combined with a repayment plan.” In order to abolish the debt brake or to permanently override it, the government must explain how it intends to repay the loans that it takes out. Because: “The loan taken out must be repaid within a reasonable period of time.”

How useful is the debt brake?

Economists, politicians and trade unions are arguing about this. Above all, the opponents of the debt brake use the argument that investments are prevented by the debt brake.

Proponents of the debt brake, on the other hand, state that the debt brake ensures intergenerational equity. Because a high national debt would put a great strain on the coming generations.

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