A new fiscal policy for Germany

Philippa Sigl-Gloeckner (), Max Krahé (), Pola Schneemelcher (), Florian Schuster (), Viola Hilbert () and Henrika Meyer ()
Additional contact information
Philippa Sigl-Gloeckner: Dezernat Zukunft
Max Krahé: Dezernat Zukunft
Pola Schneemelcher: Dezernat Zukunft
Florian Schuster: Universitaet zu Koeln
Viola Hilbert: Deutschen Instituts fuer Wirtschaftsforschung (DIW)
Henrika Meyer: Mercator Research Institute for Global Commons and Climate Change

No 2a, Working Papers from Forum New Economy

Abstract: The sustainability of public finances should be measured by the debt-to-GDP ratio; the debt-to-GDP ratio is best controlled by keeping the deficit in check. For decades, these ideas shaped German fiscal policy. In 2009, with the introduction of the debt brake, this approach found its way into the German constitution. Recent research, however, has shown that this paradigm yields suboptimal results in the current environment: It neither ensures the long-term sustainability of public finances, nor limits external imbalances, nor effectively contributes to solving the challenges Germany faces today, in particular decarbonisation and demographic change. As this is increasingly being recognised, a lively debate on the future of fiscal rules has developed, both in Germany and internationally. This working paper contributes to that debate by developing reform ideas that depart from a positive goal for fiscal policy rather than from the deficiencies of the current rules. The paper starts off with an overview over the current reform debate. Following this literature review, three closely related questions are answered: what is the right objective for fiscal policy? What might an institutional framework look like to put this objective into practice? And what concrete, politically realistic reform options could move us in that direction? In response to the three questions, we identify sustainable full capacity utilisation of the economy as a sound objective for fiscal policy; make a proposal for a framework consisting of four components; and develop detailed proposals for initial re-form steps to begin implementing this framework in Germany, including an adjustment of the cyclical component of the debt brake (governed by ordinary law), introducing an investment fund for municipal investments, and adding a watchman indicator for rising interest costs.

Keywords: Fiscal Policy; Fiscal Rules; Debt Brake; Debt Management (search for similar items in EconPapers)
JEL-codes: E02 E62 H62 H63 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2021-06
New Economics Papers: this item is included in nep-cwa, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:agz:wpaper:2102a

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