Not every project in the coalition agreement, however sensible, justifies an exception to the fiscal rules. Why we need the debt brake.
A guest commentary by German Finance Minister Christian Lindner
The greatest current threat to our prosperity is inflation. The inflation rate in August was just under eight percent. There is no improvement in sight for the time being. Economic research institutes are already forecasting inflation rates of around nine percent for the coming year.
Inflation causes companies to shy away from taking risks and to refrain from making investments. It is an impoverishment program for broad sections of society. My first priority is therefore to fight inflation. Inflation would otherwise undermine our economic foundation and damage our social cohesion.
To get a grip on high inflation rates, the European Central Bank (ECB) has raised the key interest rate sharply. However, the effect of such an interest rate hike would be limited if fiscal policy were to run in the opposite direction at the same time. Monetary policy and fiscal policy must not be allowed to counteract each other, especially now. The German government and the ECB must work independently of each other, but hand in hand in terms of effect.
It is a misconception that we can get inflation under control with additional debt. There is no doubt that there are major tasks that also need fiscal support. The debt brake does not prevent these, but it does force us to prioritize them. This will make fiscal policy more restrictive overall. Not every project in the coalition agreement, however sensible, justifies an exception to the debt brake in the current situation.
We have to acknowledge that we have to adapt our actions to the new circumstances. Only if there is a sudden, unforeseeable shock from outside would an exception to the debt brake be the last resort. Immediately after the start of the Ukraine war, I had to use such an exception. I submitted a supplementary budget to finance the reception of refugees, to help Ukraine and to cushion the very acute consequences of the crisis.
Trying to solve every situation with more and more new debt cannot be the solution. Germany should also set an example here in Europe. In Europe, too, we will not get inflation under control by repeatedly suspending fiscal rules. It would be counterproductive to compete with each other for scarce resources with ever new public demand programs. Instead, we must abandon expansionary fiscal policy in the EU as well and move toward sound and sustainable public finances.
In the Corona crisis, we experienced a demand shock. Here, the state used tax revenues to replace a lack of demand. Today, we have a shock on the supply side. In times of scarce supply, we need to increase it with ambitious measures. In the energy sector in particular, we have to pull out all the stops. In the electricity sector, this includes bringing all the capacity we have available online – including power plants that run on coal or nuclear. We also urgently need investments to drive forward the digital and climate-neutral transformation. As a federal government, we are therefore investing more than previous governments, even while complying with debt rules.
Protecting the productive substance of our economy must now be our premise. Especially in times of inflation, we must avoid additional tax burdens. We fully compensate for the cold progression. In this way, we prevent the state from becoming the inflation winner. We strengthen the purchasing power of people and companies. We support companies that are particularly affected by the massive increases in energy prices with direct subsidies. We must not pour tax money out with a watering can. Instead, we must prevent structural disruptions with targeted aid. The effective use of public funds is crucial here. If we do our job well, we avoid inflationary impulses and stabilize and increase production potential, which allows an expansion of supply. This has a price-dampening effect.
There are those who suggest that debt has become acceptable anyway and that the financial consequences of the war can be casually financed by loans or higher taxes. Let us reply to them: We are not just facing a year of fiscal effort, but a decade. That is why we must not fall into short-sighted complacency now.
We cannot pull the debt brake exception every year because crises are piling up. We cannot operate permanently on credit. We should adhere to the debt rule precisely because it imposes efforts on us, because it is a wise limit on political spending desires. In this way, we do not additionally drive inflation and at the same time ensure the long-term sustainability of our public finances.