Public Debt

Public Debt

Subtopics:

In recent decades the state has taken on more and more responsibilities. Since tax revenues have been insufficient to finance these new tasks and politicians have been reluctant to raise taxes, Germany has taken on new debt.

Now the federal, state and local governments are some € 2 trillion – more than 80% of the country’s annual economic output – in the red. Servicing this debt already swallows up every eighth tax euro, thus limiting the scope for public investment. The visible public debt is actually low compared with the hidden liabilities lurking in the social insurance systems. As a result of Germany’s ageing population, spending on pensions, health care and geriatric nursing is set to soar.

In fact, there are rules designed to stop this mountain of debt growing. The constitutiostipulates that new borrowing must not exceed the level of public investment. And the European Union requires the annual net increase in debt to be below 3% of gross domestic product (GDP). Neither of these provisions has done much good. Recently, therefore, the constitution has been changed to include a so-called 'debt brake', which provides that the federal government must reduce its structural deficit, i.e. that proportion of new borrowing which does not fall even in an economic upswing, to 0.35% of the nation’s economic output. The state governments will in future be forbidden any structural deficit at all, although they have until 2020 to balance their budgets.


To meet these constitutional requirements, governments at all levels must make an immediate start on consolidating public finances. As the population can hardly be expected to accept higher taxes and levies, savings must be achieved through cuts in subsidies, social insurance or public administration. As other countries have shown, in many fields the same results can be achieved with less money.

Tobias Hentze

Tobias Hentze

Senior Economist for Financial Policy and Tax Policy

Tel+49 221 4981-748

Mailhentze@iwkoeln.de

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