May 10, 2024 Europe

German public investments too low

Debt brake is increasingly being called into question

In Germany public investment – government spending on durable goods, such as roads, schools and kindergartens, as well as on data networks, the response to climate change, social housing, health care and infrastructure[1] – is significantly lower than in other developed countries. That is beginning to be seen as a serious problem and there are growing calls for change.

Public investment is very important in its own right and also as a driver of private investment, as the German Federal Ministry of Finance pointed out in 2021.[2] The reason it is being neglected in Germany is the so-called debt brake and black zero. The debt brake stipulates that the federal and state budgets must always be in balance, without any need for borrowing. This is enshrined in Article 109 of the German Constitution.[3] Black zero is a way of referring to a balanced budget in which public expenditures do not exceed revenues, so that no new borrowing is necessary.[4]

Public investment in Germany lags well behind other countries

Sources: European Commission, DWS Investment GmbH as of November 2023

Both of these concepts are currently the subject of much debate as the lack of public investment means urgently needed measures to secure Germany's future as a business location are not being taken. The calls for change are coming even from within the governing coalition. The SPD and the Greens want to fundamentally rethink the debt brake given the large number of pressing issues that government must tackle.[5] The FDP, however, fundamentally rejects the idea of dropping the debt brake. Polls show a small majority of voters, 54%, take the same view and want the debt brake retained. But polls also show that four out of ten Germans would like to see it relaxed.[6] The OECD certainly sees it that way. It suggests that the German government should take measures to stimulate economic growth, including a reform of the debt brake to create room for net investment.[7]

Martin Moryson, Chief Economist Europe at DWS, is sympathetic to criticism of the debt brake. In his view, though a debt brake might seem wise given Germany's aging population and the need to avoid burdening future generations with a mountain of debt, "the design of the debt brake is turning out to be a brake on growth." The government needs to ensure that future generations continue to have access to sufficient capital, and the brake on investment therefore needs to be eased.

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1. Öffentliche Investitionen, Friedrich Ebert Stiftung as of 5/7/24

2. Öffentliche Investitionen als Triebkraft privatwirtschaftlicher Investitionstätigkeit, Bundesfinanzministerium as of April 2021

3. Bundesfinanzministerium as of 5/7/24

4. Schwarze Null, Bundeszentrale für politische Bildung as of 5/7/24

5. Neuer Haushalt, alte Debatte, as of 5/3/24

6. Asylpolitik wichtigstes Thema bei Europawahl, as of 5/2/24

7. OECD für Reform der Schuldenbremse, as of 5/2/24

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