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Martin Beznoska / Tobias Hentze / Michael Hüther IW-Policy Paper No. 7 13. April 2021 On the Handling of the Corona Debt: Simulation Calculations for the Debt Ratio

During the pandemic, the German government's debt level is expected to grow to EUR 2.7 trillion in 2022. The debt ratio will peak at 75 percent by the end of this year. Of the 650 billion additional national debt during the Corona crisis, around 480 billion euros can be classified as Corona-related.

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Simulation Calculations for the Debt Ratio
Martin Beznoska / Tobias Hentze / Michael Hüther IW-Policy Paper No. 7 13. April 2021

On the Handling of the Corona Debt: Simulation Calculations for the Debt Ratio

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During the pandemic, the German government's debt level is expected to grow to EUR 2.7 trillion in 2022. The debt ratio will peak at 75 percent by the end of this year. Of the 650 billion additional national debt during the Corona crisis, around 480 billion euros can be classified as Corona-related.

With the return to the debt brake, the debt ratio will continuously fall again, even if the decline will be more slowly than after the financial crisis. In order to secure sufficient room for manoeuvre for the public sector, there are three options for action to be considered:

1.  A time extension of the repayment of the corona-related debts would relieve the public budgets in the coming years.
2.  A moderate opening of the debt brake in accordance with the European fiscal pact is advisable to enlarge fiscal space, which is needed in the future, for example for defence and social spending.
3.  A limited, legally independent fund is recommended to invest an additional 45 billion euros annually in infrastructure, climate protection and education for ten years.

Even with these three actions the debt ratio could fall continuously to 61 percent in 2035. Tax increases, as partly suggested, would slow down economic growth. Private investments and innovations are key to economic dynamism, not least through digital approaches. If it is possible to establish a willingness to innovate and change, which establishes a renewed economic growth course, the corona debts remain sustainable.

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Simulation Calculations for the Debt Ratio
Martin Beznoska / Tobias Hentze / Michael Hüther IW-Policy Paper No. 7 13. April 2021

On the Handling of the Corona Debt: Simulation Calculations for the Debt Ratio

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