The weak economic growth and demographic change threaten the German state with large fiscal gaps over the next decades, according to what emerges from its federal’s new “sustainable report”, Christian Lindner, which Handelsblatt reveals. According to the report, Germany’s debt level could be increased from current 64% of gross domestic product (GDP) to worst case scenario at 345% in 2070. Federal Finance Minister Christian Lindner (FDP) plans to present the sustainability report to the cabinet on Wednesday (20.03.24). The report is drawn up once per legislative period (i.e. every four years). It sets out the “predictable effects of demographic ageing and the risks arising for the long-term development of public finances in Germany”, as Lindner writes to his cabinet colleagues. With the report, the Ministry of Finance must reveal every four years how stable state finances are in the medium term. Compared to the analysis four years ago, the result is even worse. It is true that the demographic trend has improved somewhat due to the high level of migration. However, the current economic weakness now has a negative impact. “The deterioration compared to the last 2020 report is also due to the economic recession as a result of recent crises,” the document says. In the report, economists calculated two scenarios for the development of public finances by 2070 – one with highly favourable and one with highly adverse assumptions. They estimate expenditure in the fields of old age, health and care, unemployment and education and family care and consider whether the state can afford it at all. Insufficient sustainability for the future “The forecasts of expenditure trends reveal the insufficient sustainability of existing regulations,” the report says. For example, state spending related to age increases significantly in both scenarios. The increase in expenditure creates a financial gap at federal, state, local and social level. The financial gap increases during the period and, in the worst case, amounts to 6.93 % of GDP per year in 2070. This today accounts for around EUR 285 billion. And even in the best case scenario, the budget gap still stands at 2.67% of GDP, corresponding to EUR 110 billion. From the point of view of economists, politicians must take countermeasures to avoid ‘secure fiscal scenarios’. The report also appreciates what could happen if the state does nothing. The annual new debt would then increase sharply. In the worst case scenario, the annual public deficit will be 21.9% of GDP by 2070, which will amount to 902 billion euros today. Compared to last year, the deficit amounted to 82.7 billion euros. And even in the favourable scenario, it would still be 7.9% of GDP in 2070, which currently accounts for around EUR 325 billion. Due to high deficits, the level of debt will continue to increase over the years. “In an adverse scenario, rising financial deficits would lead to an accelerated increase in debt ratio to about 345% of GDP in the long term,” the report says. In the favourable scenario, the ratio would still increase to around 140% of GDP by 2070. According to the EU debt line, 60% is allowed. The calculations do not take into account the fact that politicians may take countermeasures by increasing the rates of social security contributions. This would reduce deficits – but at the expense of contributors, who should pay higher social security contributions. The debt brake, which currently bans such high deficits, is also missing. Reforms are required in all policy areas The sustainability report emphasises that ‘because of the great uncertainty of the calculations of models that reach far into the future’, these are not forecasts. “On the contrary, the gaps identified should be taken as a signal that the sustainability of public finances is not given,” the report says. In order to comply with the debt ‘sense’ and to ensure the long-term sustainability of public finances, structural reforms and further legislative changes will be needed “in all relevant policy areas”, economists write. These include, in particular, measures that permanently increase specialised immigration and encourage people to stay in the labour market for a longer period of time. According to the report, the average age of the population in Germany in 2021 will be 45 years. In 1990, it was still 39 years. Over the next 15 years, the proportion of people working age (20 to 66 years) will drop significantly from around 62% in 2021 and is expected to be only 56 to 57% of the total population by 2037. The percentage of 67-year-olds and over will increase particularly sharply over the period by 2040. In addition to demographic data, weak economic growth is felt. That is why the new sustainability report is more worrying than the previous four years. According to the report, the coronaean pandemic and the energy crisis resulting from the Russian offensive war in Ukraine have “simply exacerbated the start of the German economy and hence public finances”. Consequently, the Ministry of Finance points out in the report that, in addition to measures such as migration, reforms are also needed for greater economic growth. The report states: “The supply-oriented economic and financial policy must play a special role”. For the Ministry of Finance, this includes reducing the tax burden, reducing bureaucracy and a policy of competition friendly to growth. Finance Minister and FDP leader Linner has been campaigning for these measures for weeks, especially in view of recent reduced economic forecasts. However, he has encountered the scepticism of the Social Democrats and the Greens. Another controversial issue in the coalition is the debt brake. Here, Lindner sees the sustainability report as supporting his position. “The results of the report underline the importance of constitutional debt brakes,” he says. It requires politicians to take steps to address demographic growth in expenditure. Therefore, it operates as an insurance policy for the sustainability of public finances.
Lindner report: ‘Bombs’ in the German budget weak growth and subnatality
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