SPD fiscal policy and the "Golden Rule”
11. Januar 2012 _ Michael Miebach
Germany’s constitutional debt "brake” sets the context in which the SPD works to combine social democratic values and strict fiscal discipline
What are Germans most afraid of? According to a recent poll, the number one national concern in Germany is government debt: 63% of respondents are worried about the level of indebtedness. This is followed by fears about future pensions and incapable politicians.
In accordance with public opinion, the SPD has taken a firm stance on fiscal policy over the last few years. Generally speaking, the position of the party corresponds well with the philosophy outlined in the In the Black Labour pamphlet recently published by Policy Network. German social democrats have defined tough targets for deficit reduction and set clear spending priorities. Some may find it counter-intuitive for a left opposition party to advocate harsh budgetary discipline. But this must be seen in the light of Germany’s historical levels of debt since the 1970s.
At the end of 2010, German debt exceeded the €2 trillion barrier. This means that each newborn baby is in debt by €25,000. And every fifth euro of fiscal revenue on the federal level flows directly into debt repayment – lost money which could well be used for public investments. Even worse, over pressure on budgets will increase considerably over the coming years. For example, the German state has failed to provide for future civil servants’ pensions, and demographic change will further widen the funding gaps in the social insurance system. Experts refer to this as the “implicit debt” which exceeds the “explicit debt” of €2 trillion many times over.
It was not always like this. In 1970, the national debt amounted to only 18% of GDP. Since then, the debt ratio grew steadily to 40% in 1989, the year before unification. In the run-up to the financial crisis in 2008 the figure was 64%. Today debt amounts to 82% of GDP, which is 22 percentage points above the Maastricht limit.
The reason for this expansion is twofold. First, obvious footprints were left by German unification (which is estimated to have cost around €1.5 ¬¬trillion until today) and by the economic crisis following 2008, which led to stabilising measures for the banking system and the economy. The second reason is the pattern of public spending over the last 40 years. During downturns, German governments often increased spending in order to stimulate the economy. Yet in boom times they did not reduce the deficit either. Rather, they tended to further increase spending, sometimes in combination with tax cuts. This is exactly what we are currently witnessing: the conservative-liberal coalition is borrowing more money than necessary, while cutting taxes at the same time. In the case of Germany it can be said that Keynesianism obviously goes against the logic of the political system.
In this context, the SPD agreed to implement a constitutional debt brake during the grand coalition in 2009, despite strong opposition within the party by advocates of a “breathing” policy on the budget. The German debt brake confines the federal state’s structural net borrowing to 0.35 per cent of GDP. Exceptions are permitted in the case of natural disasters or deep recessions – as long as the additional expenditures are provided with a redemption plan in a defined timeframe. Approving the debt brake was a landmark decision. It will shape the SPD’s fiscal policy for the foreseeable future.
Consequently, the financial plan which the party adopted at its national conference in December 2011 completely fits with the targets predetermined by the debt brake: the social democratic ‘Pact for Education and Debt Relief’ encompasses a detailed plan for how to eliminate the federal deficit by 2016 through spending cuts and a moderate increase in the top tax rate, as well as a new wealth tax. The concept also earmarks clear spending priorities, above all investing in education and providing more money to the chronically under-funded cities and municipalities. The Pact sets out a political framework and will have restrictive consequences for all other policy fields in which social democrats might come up with new, potentially costly policy ideas.
The plan received a good deal of positive feedback in the media. Even the announced tax increases were seen as appropriate in view of the fact that the top 10% of people now own almost 70% of all property, and the recognition that the financial resources of the state are insufficient when measured against the expectations and demands of its citizens. The SPD has apparently succeeded in bringing together social democratic values and strict fiscal discipline, arguing that we need a functional state that is capable of acting in order to provide social security: that we owe it to our children to leave behind tidy budgets; that Germany must become more independent of the financial markets; that we must not rely on (unrealistic) high-speed growth or on (socially unjust) inflation to grow our economy out of debt. In other words, “fiscal conservatism” should be framed as a precondition for social democratic policy.
The SPD’s position seems to coincide with the "In the Black Labour" philosophy in terms of defining fiscal goals and setting priorities, although the Policy Network pamphlet is possibly more radical, for instance when it suggests “constrained funding for healthcare, pensions and welfare for the foreseeable future”, thus reminding German social democrats what might be at stake if the economic situation worsens significantly. Where the pamphlet has something further to say to the SPD is in its emphasis on institutional reform to achieve social justice, rather than tackling problems by throwing taxpayer’s money at them. Spending is easy; institutional reforms are complicated and often unpopular. As the current debate inside the SPD about lowering the pensionable age shows, the party remains tempted to choose the easy solution.
This article forms part of a series of international responses to Policy Network's discussion paper In the black Labour: Why fiscal conservatism and social justice go hand-in-hand