Gov­ern­ment debt car­ries on reach­ing record highs, from 18% of GDP in 1970 to more than 66% in 2008 and around 82% by 2011. Debt has nev­er been high­er in peace time.

Ris­ing unem­ploy­ment in the 1980s, Ger­man Uni­fi­ca­tion in the 1990s and eco­nom­ic dis­lo­ca­tion fol­low­ing the bank­ing crash in 2008 have all played a role in rais­ing gov­ern­ment debt. Com­pe­ti­tion between par­ties has also led to ris­ing debt. There are struc­tur­al incen­tives for politi­cians to promise us more of future people’s mon­ey since the boost from extra spend­ing is felt now but the inter­est paid lat­er. Empir­i­cal stud­ies in many democ­ra­cies have shown that gov­ern­ments issue more debt when there are more par­ties in coali­tion, when they find it hard­er to agree, when it seems as if they are like­ly to be vot­ed out and when their time in office is short. The weak­er a gov­ern­ment the more like­ly it is to “buy” cred­i­bil­i­ty fund­ed by extra debt.

High debts can also engen­der a death spi­ral. High inter­est pay­ments might neces­si­tate extra bor­row­ing, which in its stead caus­es even high­er inter­est pay­ments lat­er and so on. Ris­ing gov­ern­ment debt in the last two decades is part­ly down to this vicious circle.

 

The Consequences

High lev­els of pub­lic debt effec­tive­ly redis­trib­ute mon­ey from the poor and the voice­less to the rich and the pow­er­ful. Inter­est paid by the tax pay­er flows into the pock­ets of cred­i­tors with cap­i­tal to lend. And suc­ces­sive gov­ern­ments have less and less mon­ey to spend – pol­i­tics becomes less about chang­ing soci­ety and more about man­ag­ing decline.

Short-sight­ed man­age­ment of the pub­lic finances today has to be paid for tomor­row. Inher­it­ed debts stop future gov­ern­ments doing what they were elect­ed to do. Dis­cre­tionary spend­ing has been com­ing down since the 1970s, i.e. gov­ern­ments have been spend­ing less on their own poli­cies and more on ser­vic­ing debt and man­ag­ing the long-term con­se­quences of deci­sions made by pre­vi­ous gov­ern­ments. The deep­er a coun­try falls into a debt trap the more it is at the mer­cy of finan­cial mar­kets. Not major­i­ty deci­sions in legit­i­mate par­lia­ments but anony­mous spec­u­la­tors in cap­i­tal mar­kets begin to deter­mine the future of a country.

 

The aim

Man­age­ment of the pub­lic finances which is just for future gen­er­a­tions requires shar­ing out the debt bur­den equal­ly. That doesn’t have to mean pay­ing down the entire pub­lic debt or tak­ing on no more debt in the future. It means find­ing a way to reduce pub­lic debt through a com­bi­na­tion of high­er tax­es and less spending.

A sin­gle gen­er­a­tion must not be allowed to con­sume more than it pro­duces. It should wher­ev­er pos­si­ble leave things in a bet­ter  state than which they found them. Mon­ey and pub­lic debt are not all that mat­ter, there are oth­er very impor­tant aspects like the envi­ron­ment.

The lev­el of pub­lic debt tak­en by itself doesn’t say very much about how bur­dens are shared between the gen­er­a­tions. The debt pile is eas­i­er to shoul­der if,the econ­o­my con­sis­tent­ly grows faster than the nation­al debt, for instance. The ratio of debt to GDP or of inter­est pay­ments to over­all gov­ern­ment spend­ing are more use­ful indi­ca­tors.  But these are not per­fect either, inter­est pay­ments, for exam­ple, can vary a lot from one year to anoth­er quite inde­pen­dent­ly of the total amount of pub­lic debt. In 2002 the Ger­man gov­ern­ment spent 14.9% of its bud­get on inter­est pay­ments whilst debt to GDP was 61% but it spent 10.9% in 2010 even though total debt to GDP had risen to 83%.

Pub­lic bor­row­ing can also be inter­gen­er­a­tional­ly just when it is used for invest­ments which future gen­er­a­tions will also prof­it from. This gold­en rule has nev­er­the­less proved open to abuse; projects are some­times jus­ti­fied on the grounds the ben­e­fits they will bring future gen­er­a­tions. But these “ben­e­fits” are often unclear, and the depre­ci­a­tion or declin­ing util­i­ty of an invest­ment over time is often not fac­tored in, mean­ing that the real costs and ben­e­fits are often uncertain.

A sec­ond legit­i­mate rea­son for tak­ing on more pub­lic debt might be counter-cycli­cal spend­ing, i.e. bor­row­ing and spend­ing dur­ing reces­sions to stim­u­late the econ­o­my. “Deficit spend­ing“ makes eco­nom­ic sense at the right time, but debts should be paid off when the econ­o­my picks up again. But expe­ri­ence has shown that politi­cians do a bad job of restrain­ing spend­ing and bring­ing the debt back down even when times are good. Eco­nom­ic upturns seem instead to be anoth­er excuse to spend more mon­ey on tar­get vot­ers. Thus reces­sions seem to always leave big piles of debt in their wake.

Inter­gen­er­a­tional­ly just pub­lic finances mean mak­ing smart sav­ings on the one hand and rais­ing tax­es in the right way on the oth­er. The debt brake, intro­duced in 2009, has an impor­tant role to play here and the FRFG will pres­sure politi­cians to respect it.

 

The debt brake in the German constitution

In spring 2009 the Ger­man con­sti­tu­tion was amend­ed to include the debt brake which should ensure a bal­anced bud­get for struc­tur­al spend­ing (i.e. day-to-day long-term expens­es as opposed to cap­i­tal spend­ing like invest­ment in infra­struc­ture). This is a great step in the right direc­tion and the first seri­ous mea­sure which should restrain the pub­lic debt and force the gov­ern­ment, the courts and region­al par­lia­ments to take future gen­er­a­tions into account. The FRFG is keep­ing a close eye on the new debt brake and stands ready to offer crit­i­cism and advice when it is needed.

Get in touch with us here.

 

Read our position paper (in German)