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The debt brake of the German states: a faulty design?

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  • Gebhard Kirchgässner

    (Swiss Institute for International Economics and Applied Economic Research (SIAW-HSG), University of St. Gallen
    Leopoldina
    CESifo
    CREMA)

Abstract

The debt brake for German states, which demands that they are forbidden from taking up new net debt from 2020 onwards, has two major shortcomings. First, states do not have tax autonomy. In fiscal crises, they can only make adjustments to expenditure but not on the revenue side. Given the fact that most expenditure is—at least in the short term—predetermined by law, in such a crisis a balanced budget without new debt is hardly feasible. Second, the measure does not take into account that large investments, in particular in small regional units, can scarcely be financed by current expenditure. Thus, there is a high probability that at least some states will take up new net debt even after 2020 and, therefore, violate the rules of the debt brake.

Suggested Citation

  • Gebhard Kirchgässner, 2017. "The debt brake of the German states: a faulty design?," Constitutional Political Economy, Springer, vol. 28(3), pages 257-269, September.
    • Handle: RePEc:kap:copoec:v:28:y:2017:i:3:d:10.1007_s10602-017-9240-3
    DOI: 10.1007/s10602-017-9240-3
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    1. Caselli, Francesca & Reynaud, Julien, 2020. "Do fiscal rules cause better fiscal balances? A new instrumental variable strategy," European Journal of Political Economy, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Debt brake; Balanced budget requirement; Tax autonomy; Investment expenditure;
    All these keywords.

    JEL classification:

    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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