Debt Brake

A debt brake (German: Schuldenbremse) is a binding fiscal rule that restricts how much a government may borrow, typically by limiting the structural (cyclically adjusted) deficit rather than the headline balance. The best-known example is enshrined in Articles 109 and 115 of the German Grundgesetz (Basic Law) following a 2009 constitutional amendment passed under Chancellor Angela Merkel's grand coalition. The rule caps the federal structural deficit at 0.35% of GDP and, since 2020, requires the Länder (states) to run structurally balanced budgets.

Key design features typically include:

• A structural deficit ceiling that excludes the effects of the business cycle, allowing automatic stabilisers to operate in downturns.
• An escape clause for natural disasters or exceptional emergencies, which must be invoked by a parliamentary majority.
• A control account (Kontrollkonto) that tracks deviations from the rule and requires correction over time.

Switzerland adopted an earlier version in 2003 after a 2001 referendum, and its model influenced the German design. The EU's Fiscal Compact (Treaty on Stability, Coordination and Governance, signed 2012) obliged signatories to incorporate a similar structural balance rule into national law, preferably at constitutional level.

Debt brakes are politically contentious. Supporters argue they enforce intergenerational fairness and protect against bond-market pressure. Critics — including many economists at the IMF and within Germany's own Council of Economic Experts — contend they constrain public investment in infrastructure, climate transition, and defence. In November 2023, Germany's Federal Constitutional Court ruled that the Scholz government's reallocation of €60 billion in unused pandemic credit authorisations to a climate fund violated the debt brake, triggering a major budget crisis and reopening debate about reforming the rule.