Council of Experts calls for a more flexible debt brake to secure the future - A financial expert analyzes the proposals.

Council of Experts calls for a more flexible debt brake to secure the future - A financial expert analyzes the proposals.

According to a report by www.sueddeutsche.de, the Council of Experts for the Assessment of Overall Economic Development (SVR) has suggested that the debt brake be revised moderately. Chairwoman Monika Schnitzer describes the current debt brake as too rigid and calls for an increase in flexibility in order to enable future-oriented public spending without endangering the sustainability of public finances.

The debt brake was introduced in order not to burden future generations unduly with interest and repayment payments. It stipulates that the states must manage without new loans in economically normal years, with the federal government having a debt leeway of 0.35 percent of economic output. Due to the current economic downturn, net borrowing of a good 22 billion euros is permitted. The rule may only be deviated from in emergency situations, e.g. after a natural disaster or during a pandemic.

The proposed reform envisages, among other things, the introduction of a transition phase and an increase in the standard limit, depending on the national debt ratio in relation to gross domestic product (GDP). The proposal justifies this by saying that economic crises can have major effects on the national economy even in the years after the acute emergency. The national debt ratio is currently around 64 percent of GDP, which, according to the reform proposal from the Council of Experts, would allow net borrowing of a good 28 instead of 22 billion euros.

As a financial expert, I see these reform proposals as an important step in giving states more scope to react appropriately in difficult economic times. Adapting the debt brake to the current economic situation and the long-term debt situation is crucial in order to enable a balanced fiscal policy strategy. This more flexible regulation could have a positive impact on the market as it would give governments more scope to invest in forward-looking projects such as climate change, digitalization and infrastructure. However, the potential risks of increased new debt should also be taken into account and carefully weighed up.