Zero fiscal space: Why the German federal budget should be reformed - and how

Florian Schuster and Philippa Sigl-Glöckner

Papers from Dezernat Zukunft - Institute for Macrofinance, Berlin

Abstract: The discretionary share of the federal budget is now only around 16 percent and could disappear altogether over the course of the next ten years. The main drivers are rising interest expenses and growing social transfers to support low-income households. Blanket spending cuts will not solve this problem. Without fundamental reform, an excessively tight budget is looming. Financial leeway will then only be available through special funds, which must be approved by a two-thirds majority in both houses of Parliament each time. Our recommendations for action: • Reorient the federal budget towards the objective of high employment, incomes and sustainable growth by getting more people into well-paid jobs as well as making more companies profitable, which in turn reduces the need for subsidies • Conduct rapid reviews of key spending areas to achieve this objective, covering innovation, the transfer and tax system, public services, and infrastructure development • Reform the debt brake because even a reformed budget does not fit within the framework of today's fiscal rule, which means that either Germany is governed in a permanent state of emergency or the debt brake is reformed

Keywords: Budget; growth; fiscal (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:dzimps:325329

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