The fight against the consequences of the pandemic is causing the debt to skyrocket. How can the state repay them? Economists at the Institut der deutschen Wirtschaft consider the previous plans to be wrong.
National debt is growing rapidly in the pandemic. According to calculations by the employer-related Institute of the German Economy (IW), the federal, state and local governments will pile up around 650 billion euros in new debt by 2022. According to a new IW study, the debt level of the German state will grow to a total of 2.7 trillion euros by then. “Depending on what happens in the coming weeks and months, this number can get even bigger,” said IW Director Michael Hüther at the presentation. At the same time, economists are asking themselves: What is the best strategy to reduce this debt again and not to restrict the state’s scope for necessary investments too much despite high repayment burdens?
According to IW, the debt ratio in Germany will already peak at 75 percent at the end of this year. This ratio describes the relationship between debt and gross domestic product. According to the criteria of the EU Maastricht Treaty, it should be a maximum of 60 percent. In 2019, Germany just kept to this mark. In the US, the debt ratio was over 108 percent.
“Greatest Challenge of the Post-War Era”
“The corona pandemic was and is the greatest economic and socio-political challenge of the post-war period,” said Hüther. Never since 1945 has the state spent so much money in such a short time on a goal as to combat the corona pandemic. The question now is how the costs can be managed. The IW states that the state would have to repay 24 billion euros annually if all of Germany’s corona debts were to be repaid within 20 years, as the federal government is planning. As a result, the federal government would have to save elsewhere, so that the public sector would generate surpluses. According to IW, it could not be reconciled otherwise with the debt brake.
Scope for investment
“The current repayment plan is very sporty, but inconsistent and leads to unnecessary macroeconomic problems,” said Hüther. The economic experts at the IW are therefore suggesting that debt reduction should be avoided too quickly and that the public sector should rather be given leeway for necessary investments in infrastructure, for example. “Instead of 20 years as planned by the federal government, the debt should be repaid in 40 years,” the study says. In addition, the experts recommend “a moderate opening of the debt brake” in order to increase the federal states’ room for maneuver – and the establishment of a special fund for investment purposes. The debt ratio could fall from 75 percent in 2021 to 61 percent in 2035.
IW against higher taxes
Tax increases, as they are proposed in part in the upcoming federal election campaign, on the other hand, would slow down economic growth and weaken Germany as a business location, according to the IW experts. Rather, economic dynamism must be promoted. From the point of view of the institute’s experts, reducing the debt ratio after the crisis should primarily take place through economic growth. For this, in turn, attractive framework conditions are an essential prerequisite, not least in terms of infrastructure and taxes.
Germany Fund for Investments?
In order to address the existing investment deficits in infrastructure, climate protection and education, a Germany fund could also be set up, which could invest 45 billion euros annually in climate protection, education and infrastructure for ten years. Countries get into debt by issuing government bonds. Institutional investors such as pension funds, asset managers, fund providers, hedge funds, companies and banks, but also private individuals act as creditors. In view of the mass of bonds issued and the billions of dollars that governments need, private investors hardly matter.
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