Wider Repercussions From Court Ruling Could Reduce Public Investments However, the arguments on which the constitutional court based its decision* imp
Wider Repercussions From Court Ruling Could Reduce Public Investments
However, the arguments on which the constitutional court based its decision* imply stricter rules and greater scrutiny on similar budgetary practices used by the Bund for other special funds, and Germany’s 16 federal state governments. Notably, these have also set up special funds during the Covid-19 pandemic and increasingly allocate unused funds to tackle long-term challenges such as the energy transition.
The judgement thus adds uncertainty to the viability of current budgetary practices at the federal and state levels, and could dampen the investment outlook in the near term, weighing on Germany’s already weak growth outlook.
Germany’s net fixed capital formation from the public sector averaged just 0.1% of GDP a year over the past three decades (Figure 1), far lower than economies of other sovereigns rated AAA by Scope Ratings (1.0%), and behind other large economies such as the United States (1.3%), Spain (1.2%), the United Kingdom (0.7%), France (0.6%) and Italy (0.2%). If investments had been in line with said economies of AAA-rated sovereigns, Germany’s government would have invested an additional EUR 303bn over the past decade.
Figure 1: German public sector investments have lagged behind for decades
Net fixed capital formation, general government, % of GDP
Decision Could Impact Domestic and European Fiscal Rules
The court’s ruling will likely reignite discussions around reforming the debt brake rule to address investment needs required to meet Germany’s ambitious green transition targets. Fundamental reform of the debt brake requires a two-thirds majority in parliament, and hence support from the opposition CDU/CSU party, which is unlikely in the near term. Tensions are therefore likely to increase between the coalition partners, in particular the Green Party and the more fiscally conservative Liberal Democrats, as spending priorities now need to be reassessed.
The ruling is also likely to affect the final negotiations of the forthcoming EU fiscal rules as it highlights the trade-off between enforcing strict fiscal rules and maintaining budgetary flexibility to address emergencies as well as investment needs.
Scope expects general government debt as a share of GDP to fall below 60% by 2027. This implies that Germany has some fiscal space to increase investments. With the country’s rapidly ageing population and shrinking growth potential, policymakers will need to focus more on enhancing the country’s future competitiveness to avoid storing up long-term fiscal imbalances.
*First, the court found that the government did not demonstrate a sufficiently strong link between the emergency response to the pandemic and the new uses of the credit authorisations. Secondly, the planned use of credit authorisations was due to happen too long after the pandemic had ended. Finally, the second supplementary budget was passed only in early 2022, making retrospective adjustments to the 2021 budget a violation of budgetary principles.
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Eiko Sievert is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.
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