Brandenburg Budget Debate: Balancing Long-Term Strategy and Budget Risks
New Debt Rule Assessment: Manageable yet Carrying Potential Risks - New study suggests debt regulation is viable, yet carries potential hazards
Get the tea, folks! The Brandenburg state government's plan to adjust the debt rules during economic slumps is stirring up a buzz among researchers. The SPD/BSW coalition aims to lengthen the economic development comparison period to a whopping ten years, giving them leeway to tackle high debt. But, as they say, every coin has two sides!
Economist Achim Truger from the University of Duisburg-Essen thinks a ten-year period is on the money, given Brandenburg's sluggish economic performance compared to the national average. He expressed this opinion during the budget committee meeting of the state parliament. However, he raised a valid concern:Will there be fewer resources down the line to service the debt?
Critics Sound the Alarm
Meanwhile, Jens Boysen-Hogrefe, deputy head of the research center for conjuncture and growth at the Kiel Institute for the World Economy, took a more skeptical stance. He warned about the risk of cyclical misjudgment if a symmetry requirement for debt repayment during good times is disregarded.
Economist Tom Krebs from the University of Mannheim, however, finds a ten-year smoothing of the cycle economically plausible and sensible, especially in the current climate. He shared an interesting analogy: If Germany is considered an elderly man, cautious with money, a three-year comparison period might be suitable. If, on the other hand, Germany displays signs of economic vigor, a ten-year perspective makes more sense.
Billions in Debt on the Horizon
The coalition intends to borrow billions for the budget, with the debt brake in the Brandenburg constitution allowing new debt in times of cyclically-induced revenue shortfalls.
The opposition CDU, though, has expressed reservations about the planned change. CDU budget spokesperson Steeven Bretz is wary of the risks of arbitrariness. A study by the Kiel Institute for the World Economy, commissioned by the CDU faction, advises against a ten-year smoothing of the business cycle and emphasizes the danger of perpetual additional debt.
A Closer Look at Brandenburg's Economic Landscape
- Economic Contribution: Brandenburg contributes a modest 2.3% to Germany's GDP, ranking it among the smaller states economically.
- Inflation Stability: As of April 2025, Brandenburg's inflation rate hovered at a manageable 2.2%. However, the state has witnessed significant inflation fluctuations in the past.
Insights on the Pros and Cons
Potential Risks:
- Data Challenges: Prolonging the comparison period may introduce challenges in data collection and analysis due to changes in economic indicators over time.
- Inflation Fluctuations: Inflation rates can vary wildly over a decade, as seen in Brandenburg's CPI changes. This fluctuation could distort long-term budget planning if not adequately accounted for.
- Policy and Political Changes: A ten-year comparison might involve multiple administrations with different economic priorities, making it difficult to evaluate the effectiveness of long-term budget decisions.
- Economic Cycles: Extending the comparison period may capture full economic cycles, making it more challenging to isolate the impact of specific policies.
Potential Benefits:
- Long-Term Strategy and Sustainability: A longer comparison period allows for a more comprehensive evaluation of budgetary decisions in the context of long-term economic development.
- Trend Analysis: Extending the comparison period can provide insights into long-term trends in economic indicators, aiding in making informed decisions about future investments.
- Enhanced Accountability: A longer time frame provides greater accountability for budget decisions, as the impact of short-term measures can be assessed against long-term outcomes.
- Investment in Infrastructure and Human Capital: A ten-year perspective encourages investments in infrastructure and human capital with long-term benefits for economic growth.
In the Brandenburg state budget debate, economist Tom Krebs from the University of Mannheim finds a ten-year smoothing of the economic cycle economically plausible and sensible, comparing it to Germany's economic vigor, implying a longer comparison period might better reflect the state's long-term potential. On the other hand, Jens Boysen-Hogrefe, deputy head of the research center for conjuncture and growth at the Kiel Institute for the World Economy, warns about the risk of cyclical misjudgment if a symmetry requirement for debt repayment during good times is disregarded, highlighting the potential financial implications for future budget resources.
Critics such as the opposition CDU's Steeven Bretz expressed reservations about the long-term strategy, emphasizing that a ten-year smoothing of the business cycle may pose risks of arbitrariness, perpetual additional debt, and decreased accountability in policy-making, especially in light of potential data challenges, inflation fluctuations, and economic cycles.
