Austerity is risking our future!

Those who would have to endure the consequences of Germany’s harmful fiscal restraint can be forgiven for baulking at it.

When Germany’s Christian-democrat health minister, Jens Spahn, was challenged in a January interview as to why Europe had not spent more money to incentivise vaccine production, his defence was: ‘But imagine if we had provided €30 billion and it had not worked? Then you would now be putting to me other questions entirely.’ In the same vein, the Austrian government initially only authorised a maximum of €200 million to buy vaccines.

With hindsight, such thinking seems petty, considering the success of vaccination campaigns in Israel, the United Kingdom and the United States. Those countries outspent the European Union many times over, per capita, on vaccine procurement.

Still, Spahn and his Austrian counterparts exemplify a reasoning which has long been considered the ‘gold standard’ on public spending in Germany—fiscal austerity. This is the dogma that government spending should be modest, the state’s budget balanced and public debt low.

Adverse effect

Market-liberals and conservatives have successfully sold this mindset to the German public, disguised as a future-oriented policy which provides Generationengerechtigkeit (intergenerational justice), as current generations would not bequeath huge amounts of public debt to their children. But vaccine procurement is far from the only field where this thinking has proved harmful—and, indeed, to have an adverse effect on the future.

The budgetary schwarze Null (mandatory zero deficit) and its close relative, the Schuldenbremse (debt brake), have failed us younger generations by impeding key investments which are necessary to prepare the country for the future. The pandemic laid bare the poor state of a public administration denied sufficient funding to equip it for the 21st century.

Not only did the German track-and-trace operation still rely on fax machines (!) at the end of 2020 but the education system was also utterly unprepared for any form of distance learning. All the while, pupils, students and remote workers relied on a digital infrastructure which ranges from patchy to outright miserable. 

Considering the looming environmental disasters, the climate and biodiversity crises, austerity again seems set to interfere with the policies necessary to avoid their worst effects. Enormous investments are required to manage successfully the transformation to a carbon-free economy which protects biodiversity instead of destroying it. But a just transition will hardly be possible under the current Schuldenbremse. Why would anyone really believe that young people would prefer a low public debt ratio over saving the planet?

Widely discussed

Yet, a post-pandemic return to austerity is already being widely discussed in Germany’s political debate. How do conservatives still claim that frugality benefits future generations?

They insist that the cohorts to come would have to pay back any public debt incurred by current governments and that this would constrain the fiscal capacity of future governments. Such claims are however wrong or at least misleading.

Government debt is considered sustainable as long as the ratio of debt to gross domestic product remains stable. More recently academic debate has focused on interest payments, as the primary cost associated. Neither of these measurements provides any compelling reason continually to reduce government debt.

In fact, even to keep the debt ratio stable, it is hardly ever necessary to reduce the nominal amount. For example, Germany’s debt/GDP ratio decreased from 81 to 60 per cent between 2012 and 2019. Actual repayment of debt, a historic anomaly, accounted for only 5 per cent of this reduction—growth and inflation were the main drivers.

Typically, states just roll over debt, meaning that government debt is serviced by issuing new bonds, instead of paying investors out of the state’s budget. In this sense, the claim that we as the younger generation would have to pay back public debt is disingenuous.

True, if investors suddenly lost faith in the ability of the German government to roll over debt in the future, and demanded immense risk premia, the debt would become a burden. This scenario may generously be described as highly implausible.

Public investment

Indeed, under current circumstances, government debt is likely to be beneficial for future generations, if used to finance public investment. In times of low interest rates, expected returns often exceed the interest payments incurred. Right now, improving the state’s infrastructure, investing in digitalisation and avoiding the climate disaster seem the only smart public policy.

Unsurprisingly, this is what young people in Europe want their countries and the EU to prioritise. ‘Protecting the environment and fighting climate change’ was the number one concern voiced in the 2019 Youth Eurobarometer, ahead of improving education and reducing inequality. Public debt did not feature at all among the issues respondents regarded as important.

This is not due to a lack of economic ‘rationality’ among young people—it just reflects the fact that education, inequality and, above all, the climate crisis are much bigger problems than public debt. Indeed, only policies which take these preferences into account can truly be described as in the interest of future generations.