The Bundesbank is expanding its reform proposals for central government’s debt brake, laying out a stability-oriented path towards increased government investment. It is thus presenting a concept that supports the necessary measures to strengthen infrastructure and defence whilst ensuring sustainable public finances over the long term, in line with European rules. At the same time, it maintains its position that debt brakes enshrined in Germany’s Basic Law make an indispensable contribution to sustainable public finances over the long term. “With regard to the debt ratio, Germany is doing well by international standards. Our reform proposal for the debt brake preserves sound public finances whilst at the same time facilitating urgently needed investment,” Bundesbank President Joachim Nagel said. 

The Bundesbank’s latest Monthly Report outlines the detailed concept, which builds on proposals it presented back in 2022. Advising the Federal Government on issues of monetary policy importance is part of the Bundesbank’s statutory mandate.

Its reform proposal is centred on the 60% reference value enshrined in the EU Treaties becoming the touchstone of the debt brake. Under this proposal, central and state governments (the latter by means of investment grants) would be able to invest up to an additional debt-financed €220 billion in total up to 2030, provided that the debt ratio is below 60%. Should the debt ratio exceed 60%, this amount would be capped at around €100 billion up to 2030. The reform proposals do not replace the need to rethink consumption expenditure, though. “A stability-oriented reform of the debt brake would create additional scope for major investment, such as in infrastructure and defence,” Mr Nagel continued.

In concrete terms, the proposal envisages increasing central government’s scope for borrowing from 0.35% to a maximum of 1.4% of gross domestic product (GDP) if the debt ratio is below the 60% mark. This scope would comprise 0.5% of GDP as a “low-debt base” that would not be earmarked for any particular purpose, and a further 0.9% of GDP for the sole purpose of additional investment. Part of this investment component would be intended for grants to state and local governments, which account for the majority of fixed asset formation. 

If the debt ratio were to exceed the 60% mark, the 0.9% investment component would remain, but the 0.5% “base” would no longer be available. “This would reward a debt ratio of below 60% whilst at the same time creating planning certainty for investment,” Mr Nagel explained.

Similar scope for borrowing and investment protection could also be provided by a special fund that could be temporary or limited in terms of volume. “We would prefer a fundamental reform of the debt brake that affords better predictability, but a special fund with comparable financial parameters would also be an option,” Mr Nagel continued.