(Bloomberg) -- Germany should loosen constitutional borrowing limits to free up as much as €220 billion ($232 billion) of fiscal space through 2030 to boost infrastructure and military spending, according to the Bundesbank.
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In a report Tuesday discussing options for the country’s so-called debt brake, it recommends significantly higher ceilings of as much as 1.4% of gross domestic product for structural net borrowing — primarily to fund investment.
Upper limits would depend on whether the debt ratio is above or below 60% — the threshold of sound fiscal policies set out by the European Union, the central bank said.
The Bundesbank’s suggestion, which builds on a proposal from 2022, “preserves sound public finances while at the same time facilitating urgently needed investment,” Bundesbank President Joachim Nagel said in a statement.
The proposal feeds into an increasingly heated political debate about ramping up public spending. Economists advising German parties estimate as much as €500 billion is needed for infrastructure and €400 billion for defense after years of under-investment in roads and railways, and as the US pulls back from the region.
To assuage concerns that looser borrowing rules would open the floodgates to reckless spending and jeopardize Germany’s fiscal health, the Bundesbank also backed strict budget regulations in the future.
“The debt brake has proven its worth in the past — it’s helped to ensure sound public finances and to comply with the relevant EU requirements,” it said. “This doesn’t preclude its further development in order to take account of experience gained to date and changed framework conditions, provided that it continues to fulfill its basic purposes.”
What Bloomberg Economics Says...
“Debt-brake reform is desirable, but politically extremely challenging. To meet Germany’s urgent investment needs in the short run, off-budget measures seem to offer a more promising path forward.”
—Martin Ademmer, economist
The Bundesbank’s proposal would raise Germany’s scope for structural borrowing to 1.4% from its current level of 0.35% of GDP, provided the debt ratio is below 60%. About two-thirds of the increased amount would be reserved for investments and grants to state and local governments. The rest could be used for other purposes.