Easing the Debt Brake? Not without Clear Prioritisation // ZEW Study Shows Additional Budgetary Funds Are Mainly Used for Consumptive Spending

ZEW Study Shows Additional Budgetary Funds Are Mainly Used for Consumptive Spending

Discussions on easing Germany's debt brake are gaining momentum. Given the urgent need for future investment in infrastructure, education and digitalisation, a possible relaxation of this fiscal rule is being considered. However, a study by ZEW Mannheim, supported by the Strube Stiftung, concludes that relaxing the debt brake would likely lead to increased consumptive spending, which would benefit short-run interests, rather than sustainable investment. The analysis focuses on how financial leeway in the federal budget from 2010 to 2019 was used in order to draw conclusions on the extent to which additional budgetary funds were used for consumptive or investment spending.

"Between 2015 and 2019, around 39.5 billion euros of the additional budgetary funds were used for consumptive spending, while only around 13.2 billion euros were spent on investment. This corresponds to a ratio of three to one," explains Friedrich Heinemann, head of ZEW's "Corporate Taxation and Public Finance" Unit. "Policymakers need to better prioritise the available budgetary funds. A reform of the debt brake, together with a verifiable increase of the future quota, can offer a solution and promote more target-driven spending in the federal budget," adds co-author Paul Steger, researcher in ZEW's "Corporate Taxation and Public Finance" Unit.