The Challenges to the Sustainability of Germany’s Public Finances

At the same time, the national agenda includes challenging projects such as decarbonisation and the digitalisation of both the economy and society as a whole, all of which will require state investment. Moreover, over the next 20 years a dramatic ageing of the German population will put pressure on the financing of such public expenditure as the statutory pension, health and long-term care insurance schemes. This, too, will noticeably increase federal spending and probably the debt-to-GDP ratio. Discussions of policymakers’ fiscal room to manoeuvre thus inevitably centre on Germany’s “debt brake”, a constitutional cap on federal borrowing. Given all these challenges, the question arises as to the sustainability of Germany's public finances in the medium and long term and how much fiscal leeway exists or can be achieved through reforms. Three contributions to an IW-Trends: Forum tackle these issues by analysing the status quo and the prospects for government debt and discussing fiscal policy options. First, Dr. Katja Rietzler (Macroeconomic Policy Institute – IMK) describes the current options for the federal budget; then Dr. Martin Beznoska and Dr. Tobias Hentze (German Economic Institute – IW) deal with the medium-term sustainability of government debt; and finally Prof. Martin Werding (Ruhr University Bochum; member of the German Council of Economic Experts – SVR) takes a look at the long-term sustainability of government finances in the light of the demographic transition.