1 Introduction
The modern democratic welfare state is a key institution to secure human rights and the capabilities1 of their enjoyment. Yet, it is prone to an unsustainable overreach that can be attributed to a lack of participation. The anonymous burden of taxpayers and further future obligations from debt financing pale in comparison to spending decisions whose beneficiaries can be easily identified. Parliamentary budgetary powers are seen as a remedy, but already Wicksell has argued that the parliamentary political process is biased in favour of the short-term advantages of spending against the medium- to long-term detrimental effects of high taxes and interest obligations of public debt.2
Graphs on the historic development of government debt show that the expansion of modern infrastructure and the welfare state as well as the expansion of state indebtedness occurred more or less in parallel. The sustainability of debt financing was put to the test in the aftermath of the 2008 financial crisis and many states failed to secure debt capital on the financial market. Constitutional limitations on debt were employed, but their effectiveness and their adverse effects on both investments and vulnerable groups are disputed, especially in a time of low interest and urgent challenges like climate change. Nevertheless, government debt poses the provocative question of whether sustainable financing of the state can only be achieved if the power of the democratic legislator is curtailed. Does less participation really lead to more sustainability?
To answer this question, this contribution takes account of selected constitutional or factual limitations on debt and analyses their effectiveness and consequences (see supra 2.). While the European legal framework paints the big picture in the context of the Economic and Monetary Union, the examples of
2 Overview: Constitutional and Similar Legal Limitations on Debt
2.1 The European Legal Framework
Within the Eurozone, constitutional or para-constitutional limitations of debt financing are imposed by European and public international law. Accordingly, the legal framework restricts borrowing to a small share of GDP with exceptions for natural disasters and “breathing limitations” that allow additional spending in times of recession in return for additional amortisation in the following years.
The Maastricht Treaty of 1992 and the respective protocol included in the wake of the Economic and Monetary Union prescribed two main limits for government debt: a 3 per cent of the GDP annual cap on incurring new debt and an overall 60 per cent of the GDP for the whole public sector.3 Originally only an entrance threshold to the common currency, the criteria have been made permanent in the Stability and Growth Pact.4 The preambles do not mention sustainability as such, but focus on “sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation”.5 The 3 per cent threshold was seen as a sufficient reserve to allow for deficit spending in the case of a
In 2005, political pressure prevented sanction proceedings against Germany and France thus crippling the functionality of the Stability and Growth Pact.7 The debt crisis from 2009 on led to a reform of the Stability and Growth Pact through the so called ‘sixpack’, six regulations and directives.8 The annual thresholds has been reduced from 3 per cent to 1 per cent and member states exceeding the overall 60 per cent threshold are now obliged to reduce the excess amount by one twentieth a year. Sanctions have been partially automatised with now a qualified majority necessary to stop proceedings under article 6(2) Regulation 1173/2011. Furthermore, preventive measures like monitoring9 and mandatory deposits10 have been introduced. The directive urges the member states to introduce effective national rules that constrain the incurring of new debt.11 The preambles do not include references to sustainability but focus on the functioning of the Economic and Monetary Union.
Only a year later in 2012, the Stability and Growth Pact was complemented by a public international law treaty, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, or in short: the European
A report of the European Commission on the transformation of the balanced budget rule from 2017 observed that out of 22 members states only 11 had transformed the balanced budget rule in their national constitutional law or other laws of higher hierarchical status like the ordinary budget law.12 Four states made other arrangements or indirect use of constitutional norms to give the budget rule a comparable level of binding force. Five states used special independent institutions to supervise non-constitutional balanced budget rules.
Furthermore, bail out programmes lead to de facto limitations on the incurring of debt. Several states faced downgrades of their credit ratings resulting in their inability to incur further debt on the market or with interest rates that were perceived as affordable.13 To prevent state bankruptcy within the Eurozone, financial aid, so called bail-outs, were granted not only by the International Monetary Fund (IMF) but also by special newly founded vehicles, the European Financial Stabilisation Mechanism14 and the European Financial Stability Facility15 and their replacement European Stability Mechanism.16
This led to a problem well known from the practice of the IMF with regard to developing and emerging countries: the national democratic process is ‘short-circuited’, as the states are dependent on the payments and thus need to commit and fulfil the commitments. While the intentions of the conditionalities are good, their effectiveness and suitability are put into doubt by the lack of local participation.19 Moreover, it is disputed whether a state bankruptcy or an exit from the Eurozone would have been better alternatives, even if they would also have had adverse effects.20
An overall assessment of the European framework shows a tension between the imposition of hard limits on debt and the political character of the enforcement mechanisms. While reforms on the one hand have tightened the rules and placed them on a constitutional level, they have grown more complex and opened up space for the flexibility and discretion needed in addressing the multiple crises Europe faces.21 Thus, the European framework can be described as a principled framework for budgetary dialogue for the purpose of ensuring sustainable fiscal policies.22 The interlocutors are commission and
2.2 Germany – The Much-disputed Constitutional Limitation on Debt
2.2.1 Historical Development
Historically, the German constitution limited the incurring of new debt at the federal level to cover only extraordinary circumstances (1848,24 187125) with the later addition of fiscal space for investments (1919,26 194927). These rules had their background in 19th century economic thinking, according to which a state should in principle finance all its needs through taxation and debt should be used only to create or acquire businesses that will create profits to offset the debt.28
In 1969, the restriction on extraordinary circumstances was abolished while the limitation on investments was maintained. The vagueness of the exception rendered the limit on investments widely ineffective. The parliament was more or less free to assign the label ‘investment’ for specific expenditures. The German Federal Constitutional Court abstained from defining ‘investments’ out of respect for the budgetary prerogative of the legislator and only urged the legislator to do so – but to no avail.29 The legislator informally followed a wide macroeconomic understanding covering any investment that maintains, expands or enhances the means of production for the whole economy.30
Yet, a further exemption was introduced that allowed for non-investment to intercept a disturbance in the economy’s equilibrium (“gesamtwirtschaftliches Gleichgewicht”). This exemption allowed for Keynesian deficit spending in an attempt to globally control the economic cycles.31 There was no exhaustive constitutional definition of economic equilibrium and it was also deliberately left open to be adapted to new economic findings. Systematic reference was
In 2006, there was an attempt for a holistic constitutional reform that explicitly included the principle of sustainability.35 The already existing art 20a Basic Law that protects the environment with an implicit regard to sustainability should have been complemented by an art 20b Basic Law that would have explicitly obliged the state on the principle of sustainability and the protection of future generations. With regard to public debt, the ‘disturbance of the equilibrium of the economy’-clause in art 109(2) Basic Law was to be complemented by an additional specific reference to the principle of sustainability and the protection of future generations. Even though the bill was supported by 105 members of the parliament from all caucuses except the far left, it did not reach the required majority. One reason might be that the proposal called at the same time for the reduction of government debt as well as for more investment into education and research without resolving the conflict of goals.36
2.2.2 The Current Constitutional Limitation on Debt and its Exemptions
In 2009, a constitutional limitation was introduced, the so called Schuldenbremse, literally ‘debt brake’. It has been modelled after examples from the Swiss practice, where debt brakes known on the cantonal level since 1929 are widespread.37 Art 109(3) of the Basic Law in principle forbids the incurring of debt for the federal as well as the state level with the relevant exemptions of social security as well as the municipalities. The interdiction of debt financing in principle has several exemptions.
A second exemption applies to natural disasters or extraordinary emergency situations that go beyond the control of the state and have relevant effects on the budgets. Unfortunately, the past two years provided us with an example: the Covid-19 pandemic. The federation and the states incurred high amounts of debt under this exemption for direct measures against the pandemic as well as economic measures to stabilise the economy like lump-sum payments for entrepreneurs or short-time work / furlough schemes. Affected states also invoked the clause with regard to catastrophic floods in the Ahr and Erft valleys of Summer 2021.
This leads us to the question of whether ongoing climate change as such allows for a general exemption. The German government has not yet tried to directly invoke the emergency exemption with regard to climate change but wants to retroactively reassign unused emergency debt authorisations from the pandemic response to climate change. This reassignment is constitutionally doubtful and pending before the Federal Constitutional court. If the government could directly and fully invoke the emergency exemption, this would on the one hand render the debt limitation ineffective over the next decades and thus seems excessive. On the other hand, damage resulting from events like floods or extreme droughts constitute natural disasters. Why should the prevention and mitigation of damages be excluded when the compensation for damages can be paid out of debt? Where to draw the line between ‘controlled’ preventive measures and ‘reacting’ mitigation measures? At this point, one has to be reminded that the limitation on debt does not hinder action on climate change but only debt-financing in cases where the deficit could have been avoided through planned alternative financing sources like tax increases or budgetary shifts. While natural disasters can make any financial planning obsolete and thus need the flexibility of raising debt, medium to long-term preventions and mitigation programmes can be systematically financed by taxation and budget policy, eg the proposed introduction of wealth taxes to combat climate change.
A third ‘de minimis’-exemption only applies on the federal level. art 109 (3) (4) Basic Law allows for the incurring of new debt if it does not exceed 0.35 per cent of the GDP. This amount of new debt is seen as unproblematic, as its interest burden is offset by inflation. Yet, the questions remain, why this exemption does not apply to the states.
2.2.3 A Loophole by Design?
Besides the three exemptions, the German debt limitation is additionally prone to circumvention. While it applies to the regular budgets of the federal level and the states, it does not apply to social security authorities and legally independent special estates, even if they are fully owned by the state.39 Thus, it is possible to establish private law companies, provide them with a small amount of equity from the budget and then let the company incur debt unconstrained by the debt limitations. While this extra budgetary debt will be subject to review under the European debt limitation, it will not be considered under German constitutional law. The legislative materials justify this exemption with unrealisable information requirements in the case of legally independent companies and estates, which is rather unconvincing. Being the owner, the federation would have the possibility to account for all its special estates and it does so according to the European Union rules. More likely, the legislator wanted to preserve a loophole for incurring debt for special purposes.
Limitations to this approach are discussed with regard to the general disallowance of an abuse of law, especially if the private company or estate only serve as a shell to formally incur the debt while the instalments are directly paid by the state.40 The use of these loopholes is currently under discussion within the new German government, consisting of Social Democrats, Greens
2.2.4 Summary
Constitutional limitations on debt have a long history in the German constitution. While the current absolute limitation on debt is relatively rigid, it contains many exemptions and possibilities of circumvention. It has a de-minimis threshold, allows for Keynesian deficit spending, yet with a rigid symmetry of debt repayment, and contains a natural disaster and extraordinary exemption clause. The latter is open to generous interpretation and might be employed to – at least temporarily – finance urgent measures against climate change. Finally, state-owned special estates and companies are not covered by the limitations. This seems to be a loophole that has been deliberately left open and will most probably also be used to finance measures against climate change.
2.3 Portugal – The Power of the Financial Market vs. Fundamental Rights
2.3.1 Introduction
The sustainability of debt limitations has been litigated before the Portuguese constitutional court following so called austerity measures during the first half of the last decade. Portugal was affected by the financial crisis beginning in 2008. It had already seen the need for fiscal consolidation in the years before and the economic crisis exacerbated the fiscal situation.42 In 2011, after several rating downgrades and difficulties in incurring debt at the financial market, Portugal applied for a bail out with the ‘troika’ of the ECB, the Commission and the IMF: the Financial and Economic Adjustment Programme. In return for loans with a submarket interest rate, Portugal undertook international commitments for yearly fiscal objectives as well as public policy reforms.43 These reforms included pay cuts and additional working hours for public service
2.3.2 Civil Service
The cases on public workers cover a steady flow of impairments of their status.44 While public servants have special obligations to the public good and thus have to endure some pay cuts, the limits of sacrifice have been seen as violated following the 2013 pay cuts, especially as the abolished 13th and 14th salary was also common in the private economy.45 The constitutional court stressed the importance of the deficit reduction, the international and European law commitments and the prerogative of parliament to decide between expenditure cuts and revenue increases.46 It gave less weight to economic fundamental rights or specific legitimate expectations as to the general principle of equality, deeming the burden placed on public sector workers was far greater than that of private sector workers.
Furthermore, the reduction of overtime payments and benefits as well as the increasing of the weekly working hours from 35 to 40 and beyond in 2012 and 2013 were approved by the constitutional court with the argument that public sector workers would then be treated in a way more similar to private sector workers. As an increase of working time equals a factual pay cut, this differentiation seems to be inconsistent. Yet, some coherence can be detected: after public sector workers had been subjected to similar working conditions as private sector workers in 2013, specific pay cuts to public sector workers could not be justified anymore. Notably, one difference remained: the protection against dismissal except for subjective due reason was upheld in 2013, but also in regard to the 2012 pay cut that had been justified with the special status of public workers.
This leads to a coherent picture, where some pay cuts were allowed with regard to the role of public servants and their job security, while working times could be equalised to those of private sector workers. Further cuts to payments or dismissals were interdicted by the constitutional court. In result, the public servant workforce was maintained and thus the potential production of public goods and services upheld, while achieving some deficit reduction.
2.3.3
With regard to social security expenditures, Portugal applied measures to retired people.47 As part of their benefits, they have also been eligible for a 13th and 14th payment at holiday and Christmas time. The cut was declared unconstitutional as a violation of equality.48 Similar to the reasoning in case of public sector workers, the court found no justification to burden this group of people. Furthermore, retired persons have been seen as more in need of protection, as they had legitimate expectations with regard the economic security in old age.
Another measure was the special solidarity contribution commencing in 2011 for high payments, a special due that was applied to public and private pension payments. Effectively this reduced the payments. Rates increased in 2012 with the result of a further reduction. In 2013, a new system was founded starting with pensions from 1,800 to 3,600 Euros facing a 16 per cent contribution, higher pension a schedular system with rates from 10 per cent from the first Euro up to 50 per cent beyond 7,545 Euros. The court qualified this measure as a temporary special security contribution that was justified and proportional with regard the international law obligations of the state to reduce its deficit.49 The additional cut to the more generous benefits of public servants was declared as unconstitutional, as its lump-sum cuts would violate legitimate interest of the beneficiaries. While some rules of the special pension system were favourable to the general system, some were less so. Thus, a thorough reform and recalculation was permissible only if the systems should be made more equal.
The temporal special solidary contribution was to be replaced by a permanent special sustainability contribution from 2014 onward. It applied a contribution to all public pension payments starting at 2 per cent for people earning less than 2,000 Euros, 5.5 per cent for people earning between 2,000 Euros and 3,500 Euros, and 3.5 per cent for people earning over 3,500 Euros, in all cases applying to the whole amount. Private pensions were not burdened. The court ruled that by excluding private pensions and being made permanent, the contribution equalled a cut to the public pension system.50 It was declared unconstitutional, as its lump-sum approach violated equality, proportionality and the protection of legitimate expectations. Austerity measures could not
A similar reasoning was applied with regard to sick and unemployment contributions, which also resulted in a cut of the respective benefits. The court ruled in 2013 this cut to be unconstitutional, as its lump-sum approach also applied to cases where the benefits only reached the minimum amount for subsistence.51 A reformed version of 2014 was again declared unconstitutional, this time under a more fundamental reasoning. The court ruled that even in the time of financial crisis, further burdens on people affected by disease or unemployment were not reasonable.52
2.3.4 Tax Law
Portugal introduced a special 45.88 per cent personal income tax rate bracket for high income earners starting from 150,000 Euros in 2010 before the bailout.53 In 2013, a 3.5 per cent surtax was introduced that applied to the tax base above the minimum wage and certain special income items (ie so called ‘unjustified wealth increases’). The tax raised specific questions under the Portuguese constitutional provision of income taxation, especially as it decreased the progressiveness of the personal income taxation system but was deemed to be within the legislator’s margin of appreciation.54 The temporal nature as well as the ‘extraordinary’ needs of public finances were also taken note of.55
The 2013 tax reform reduced the number of tax rate brackets from eight to five and generally increased tax rates, while again reducing the level of progressivity – the rate difference between small incomes and high incomes further decreased, even though the top rate had been raised. Again, the constitutional court accepted the reform with regard to the margin of appreciation. Furthermore, the 2013 tax reform reduced the number and scope of itemised deductions for inter alia health, education, housing or senior care expenses. This affects the ability to pay principle, that calls for some expense deductions in order achieve an equal tax burden. Yet, the court ruled that the legislator again has some margin to define ability to pay and thus can also broaden the tax base in line with the revenue needs.56
2.3.5
The Portuguese legislator resorted to very rough measures of deficit reduction, trying to generally cut expenses and raise additional revenue in a lump-sum manner. While some of the first reforms tried to spare vulnerable groups and burden people with higher income, further measures also burdened vulnerable groups. The exclusion from the financial market and the troika’s conditionalities therefore led not only to structural reforms, but also to rigid measures resulting in hardships.
The constitutional court acknowledged the severe financial situation and the urgency of deficit reduction as well as commitments at the international and European level. While it mainly allowed for the first wave of deficit reduction measures, arguing also with their temporal measures, additional and permanent measures led to a verdict of unconstitutionality. The constitutional court took account of the cumulation of burdens in the payment of workers, social security and taxation and paid special attention to unequal burdens and the protection of vulnerable groups. Financial sustainability must thus be achieved through an even distribution of burden. Cutting expenditures, especially benefits and wages, is therefore more problematic than general increases of personal income tax, which is the best instrument for equally distributing burden. Cutting expenditures can threaten social responsibility, as vulnerable groups might not be able to maintain the capabilities needed for exercising their fundamental rights. Disallowing tax deductions can have the same effect. To prevent the protection of problematic privileges, the constitutional court wisely chose the equality principle. However, one can argue that the courts’ guidelines on public service interfered with the role of the legislator and thus also aimed for sustainability by curbing participation.
Overall, the Portuguese experience shows the importance of a sustainable fiscal policy that limits dependence on the financial markets and maintains a good credit rating. Otherwise, the need for emergency debt reductions arises and can cause severe hardships. Notably the parliamentary democratic process was neither capable of avoiding the excess debt nor balancing the debt reduction in a proportionate manner. The alternative of exiting the Eurozone and paying the debt by devaluation and inflation has not been seriously pursued by any affected European government regardless of their political direction and would have entailed adverse consequences.
3 The Notion of Sustainability
3.1 From Fiscal Policy to Monetary Policy
The limitations on debt financing point at first glance to a rather limited understanding of sustainability. Sustainability is seen an as the capacity to incur and
Nevertheless, the consequences of debt financing are more profound and thus also the notion of sustainability has to be extended. The limitations on debt financing within the EU are a foremost part of its monetary policy; art 126 Treaty on the Functioning of the European Union (TFEU) has to be seen in the context of art 127 ff. TFEU. It is part of the goal of price stability and thus the control and limitation of inflation. Inflation reduces the burden of government debt but poses a hidden burden on citizens diminishing their wages and savings. The use of inflation to reduce government debt can be seen as functional equivalent of a hidden tax on workers and small savers that do not possess the economic capabilities to invest in more inflation-safe assets like real estates or shares.57 Outside monetary unions, government debt can also affect exchange rates leading to a burden on cross border activities.58
Finally, interest rates may be affected by debt financing. While the ECB is independent, there is the argument that its interest rate policy is also made with consideration of the consequences to indebted states. Even if the central bank directors try to ignore the repercussions on debt financing of the states, there is the danger of a subliminal bias. Furthermore, states will probably nominate experts whose views are favourable to their policy goals. A recent empirical study showed that there is a correlation between the monetary policy views of ECB directors and their home state indebtedness. The higher the level of indebtedness of the home state the more likely the ECB director endorses expansive monetary policies with their inherent danger of increases in inflation.59
The example of Portugal illustrates further consequences. Due to the Monetary Union and the fear of its collapse, there was no room to use inflation or exchange rates to reduce the debt burden. Severe tax increases and spending cuts were the consequence and, especially the cuts, provided hardships
In times of long-ranging low or sometimes even negative interest rates, the aforementioned dangers are greatly relativised. It is seen as a missed opportunity that low interest rates are not used to debt finance a green transformation of the economy with regard to climate change.60 This suggests that a limitation on debt should not be absolute but dependent on the general interest rate level. However, such a relationship would intensify the influence of state indebtedness on monetary policy.
3.1.1 Cultural Aspects
Cultural aspects may provide additional legitimacy. The German Chancellor Angela Merkel used the metaphor of the ‘Swabian housemaker’,61 who is associated with being very frugal and avoiding debt. Thinking further, these cultural differences may be ascribed to the protestant work ethic,62 which roughly correlates with the faction building between the northern and southern European states. Yet, these cultural aspects are not universal and cannot substitute the search for an underlying rationality.
3.1.2 Trade-offs and Multidimensionality
The European as well as the constitutional limitations on debt financing are not absolute and provide for exceptions. Thus, not every debt seems to be unsustainable. Exemptions for unforeseeable circumstances like disasters date back to the 19th century.63 There is also some tradition in exempting investments or literally expenditures that help to raise new income (“Ausgaben für
The idea of ‘good debt’, that offsets itself by generating additional income, can also be found in Keynes-inspired deficit spending. Under this perspective, the question of incurring debt is a technocratic one. The optimal debt financing ratio would be determined by economists with regards to the need of the economy and capacity provided by the financial market, especially interest and exchange rates. The exemption for Keynesian deficit spending is seen as to narrow.66
For the sake of analytical clarity, the financing policy and the financed policy must be distinguished. Debt can finance very sustainable policies, eg with regard to education or conservation of natural resources. Yet, these policies could also be financed by taxation and especially by higher taxation on corporate and capital income. In consequence, a distinction should be made between the financing of state expenditures and the policies financed.
Nevertheless, political and legal practice also takes account of the policy financed. Exemptions to limitations on government debt for emergencies or recessions show that trade-offs exist between the sustainability of financing policy and the policy financed. Sustainability in this regard is multidimensional. Limitations of debt might ensure the sustainability of state financing, but in certain contexts the sustainability effects of the policy financed might be more important (eg climate change). This analytical differentiation is important to make the trade-off transparent and the decision on the preference accountable. In consequence, an overall assessment is needed: the prima facie unsustainability of debt financing can be compensated and outweighed by the sustainability of the policy financed.
3.1.3
Furthermore, it is argued that constitutional limitations disproportionately affect long-term investments67 and thus contribute to the decay of public infrastructure and the underfunding of public schools. The original critique of Wicksell emphasised that the parliamentary process has a bias for short term consumptive spending over long-term investments. This bias is not resolved but the underlying distribution conflict exacerbated, as the potential amount of spending is reduced. Under constrained budgetary options, long-term investment expenditures more often fall victim to short-term consumptive spending, at least in the absence of an exception for investments. Even then, the question remains how to define investment in a way that provides guidance and boundaries.
3.2 Sustainability as a Problem of Lacking Inter-generational Democracy?
Sustainability is a matter of inter-generational equity. To all appearances, incurring debt for today’s investments seems not to be equitable with regard to the following generations and their parliaments which will still have to pay interest as well as repay the principal for past investments. Nevertheless, it is often argued that some level of debt or debt-financed investments are sustainable.
With regard to investments, the argument is made that the debt-financed investment also benefits future generations.68 The debt-financed school built today will be of benefit tomorrow. Measures against climate change today will help to contain its consequences tomorrow.
Yet, there are several limitations to this argument. Most investments lose value over time due to wear and tear or changing technologies and needs. A school build today as well as a bridge must be renovated after thirty years or maybe even replaced. This concern is relativised by data analysis, which suggests that there is a public capital-growth-nexus and that it yields high marginal returns of 10 to 30 per cent of public capital.69 This would likely outweigh the costs of depreciation and interest in the long run.70 Yet, problems
A looser connection is drawn by concepts of supply side economics that advocate deficit spending to overcome recessions. However, already in the original concept by Keynes, the repayment of excessive spending in boom times was an essential part of the concept. Economic history shows that the repayment part was often skipped or fell off in quantity. Nevertheless, European law allows for a ‘breathing’ limitation of debt with some deficit spending on the condition that its repayment is legally secured.
Climate change is also a good example for a trade-off that should qualify as a ‘natural disaster’ under the exemptions from the debt limitation. Yet, there are already tendencies to include a wide range of policies under programmes to tackle climate change. While measures against climate change should not be limited to damage response and should include prevention and long-term adaption, permanent measures as well as general social or economic policies have to be excluded for the purpose of debt limitations otherwise they could be effectively undermined.
As the ‘breathing’ limitation on debt and the disaster exemption shows, the law leaves space for different concepts of sustainability that can still be concretised by participation of the public. As the concept of sustainability is remarkably blurred in the context of debt financing, this seems to be a good design, albeit one hardly acknowledged in the current debate.
4 Role and Perspectives of Participation
4.1 Introduction
The provocative research question of this contribution is whether the law of public finance is an exemption, where participation does not aid, but harms sustainability. Constitutional limitations on debt after all curtail the parliamentary budgetary process and thus impair the participation through representative democracy. But we have already seen in the previous section, that the limitations on debt often contain exemptions that have to be concretised by the legislator. Furthermore, we have seen that while the sustainability of
This all suggests that there is still room and also a need for participation. Even if there is a problem with the parliamentary budgetary process, it might be reformed (see infra 4.2.) and also complemented by means of direct participation (see infra 4.3.). Finally, also institutionalised expert knowledge plays a role in the limitations on debt and provides further input (see infra 4.4.).
4.2 Prevalence, Pitfalls and Perspectives of Representation
Public participation is limited to voting decisions, as other instruments of participation like referenda often explicitly exclude funding decisions.
The limitation of direct participation can be explained by the budgetary prerogative of the parliament. The budget not only allows for control of the government by parliament, but its spending decisions are also of tantamount importance in the modern welfare state. The parliament shall not only have the power to appropriate funds but also bears the responsibility for the budget and its balancing.
In theory, representative democracy seems to be suited for this process, as there are always winners and losers of the spending decisions. Yet, as already seen in the introduction, the political economy of this process is flawed because of a tendency to make the current electorate the winner at the expense of future electorates. And this tendency has not been taken care of by constitutional limitations on debt; on the contrary, it has been exacerbated. The smaller the cake, the relatively bigger are the short-term expenditures.
A modification of the budgetary process would provide an alternative. The basic idea is to remove infrastructure expenditures from the general budget and finance them through special separate budgets or infrastructure funds. While different technical constructions are possible, they all would enable long-term spending commitments on infrastructure. For example, an infrastructure funds could be created with a long-term political commitment to fund such projects according to an objective estimate of the needs. This would keep infrastructure out of day-to-day politics. A new government might change the commitment, but any change would be rather transparent and subject to relatively high political costs.
This model has proven to be quite effective in the Netherlands. In 2020, the Dutch government funded a National Growth Fund that was administered by the Ministry of Finance and the Ministry of Economics and Climate protection. The sum of 20 billion Euros was earmarked for the period of five years for
Such funds or separate budgets pose problems with regard to budgetary law and democratic control. Two common main principles of budgetary law are that all expenditures must go into the general budget and that there must be a new general budget every year. These principles secure the parliamentary democratic control of the budget. The exclusion of any parts via earmarking will over several years severely reduce democratic parliamentary control and thus needs to be justified. It is questionable whether the cause and the advisory committee provide sufficient legitimacy as compensation. While technical micromanagement can be delegated, the principal distribution decision usually is not. The idea that a small group of talented experts can make an objective and to a certain extent de facto binding recommendation, is technocratic. It adds some input legitimacy but cannot substitute participation.
4.3 Direct Participation
4.3.1 Financial Referenda
While budgetary sensitive decisions are barred from referenda in Germany,74 Switzerland regularly has referenda on specific parts of a budget at the cantonal and communal level.75 The applicable rules might provide for facultative
It is argued that financial referenda lead to more sustainable budgets, as expenditures are subject to closer scrutiny and need greater legitimisation.76 Empirical research shows that financial referenda curb government spending.77 Yet, even if one assumes a high effectiveness of these financial referenda, many Swiss cantons saw the need to additionally introduce constitutional limitations on debt.78 While a reduction of government spending might reduce the amount of indebtedness, there is no evidence that the spending choices as such are sustainable. There is the danger of a similar bias like in the case of constitutional debt brakes; when the amount of spending is limited, short term spending will most probably displace long-term spending. Voters generally can only accept or reject the budget. Thus, the effectiveness of control differs between the general amount of spending and the distributive spending decisions.
4.3.2 Participatory Budgets
While referenda are an exception, low-level forms of participation are more widespread. At the municipal level, there is a practice of participatory budgets. These budgets are mostly only advisory in nature but ensure greater transparency in the allocation of funds. Citizens become aware of the financial possibilities and can voice their needs and prevalence, for example, whether to build a public library or swimming pool. Therefore, this early mode of participation can also complement financial referenda.
A model project in the German state of North Rhine-Westphalia conducted and analysed participatory budgets in six cities with different sizes (between 21,000 and 181,000 inhabitants), partly with balanced budgets and partly with financial problems. The participation consisted of three steps.79 The first step included the provision of information concerning the draft budget via leaflets, information books, presentations and an internet portal. The second step is the consultation of the citizens on the whole draft or certain parts of it.
Generally, the quality of participatory budgets is heterogeneous, as there are no norms or standards. Sometimes only the draft budget is downloadable and accompanied by an email-address. Sometimes the participatory budget is part of a bigger participation portal with visualised data. Sometimes leaflets82 and invitations to workshops are sent by post.
Overall, the experience with participatory budgets is mixed. While it is in principle seen as a useful tool, it is often only a part of the general information and participation offer. Though, without tailored presentations and data visualisations, the barrier for participation is high. The German experience of many discontinued participatory budgets suggests that there is room for improvement.
4.4 Participation through Experts?
Under European and German law, participatory elements of debt limitations are left to scientific councils that search for an economically ‘optimal level’ of indebtedness. Yet the optimal level of indebtedness is highly disputed in economic science with senior researchers changing their positions under limited knowledge and changing trade-offs. Due to the lack of agreed objective standards, decisions are prone to be influenced by political preferences and, the experts are most probably selected with regard to political preferences. A pluralistic composition of membership can reduce these biases. Overall, the inclusion of expert advice is an important element of good governance and
5 Conclusion: Securing Participation by All Generations in a Second-best World
Is the issue of state indebtedness the big exception, where less participation leads to more sustainability? In an ideal world: no. In the real world of second-best solutions: yes, but …
The question whether to incur debt is a question of inter-generational equity and distributive justice. It is the question of how much of the resources should be consumed and how much should be invested for the benefit not only of the current electorate but also future generations. A certain amount of debt financing of such investments can be justified, as it equally distributes benefits and burdens between the generations.
The problem lies in the incentives for the current electorate to pass on the burden to future generations, as it allows for lower taxes or more short-term spending. The history of rising debt levels and their socially regressive reduction through inflation or exchange rate shifts shows that there is a strong tendency to shift burdens into the future. A tendency that is abetted by the lack of participation of future generations.
An optimal solution would thus be to increase the participation of younger and future generations. While unborn generations cannot participate, it is important that the voices of young people and also the parents and guardians of young people get the opportunity to be heard. Unfortunately, the changing demographic relegates the young generation to the permanent minority. And unlike earlier generations, the promise that every further generation will be better off than the preceding, sounds doubtful in the terms of changing demographics and climate change. Thus, we need more participation with regard to the budget and its financing. Participatory budgets should be mandatory on a communal as well as state level and its accessibility secured and improved through digitalisation. Special attention should be drawn to the participation of the younger generations, eg through youth councils or youth parliaments, as they are more affected by and thus tendentially more aware of the negative effects of the shifting burden.
While there are some ways to increase the participation of the younger generation, it will most probably only have a small impact on the majority decisions of the electorate. Furthermore, neither the whole electorate nor the younger generations can see into the future and so we still have the problem of limited knowledge with regard to inter-generation equity. In cases where
As participation and constitutional courts are insufficient to overcome the short-term bias of the parliamentary democratic process, second-best solutions have to be employed. While they reduce the participation of the current electorate, they preserve the participation of future electorates. The participation of one generation has to find its limitations, particularly when the resulting dispositions generally reduces the effectiveness of participation by younger and future generations.
Constitutional limitations on debt are second-best solutions, not perfect ones, in some instances harmful in the short term, but poised to avoid harm in the long term. The current absolute limitations on incurring new debt in the fiscal compact are better than their reputation. They allow for Keynesian deficit spending and their natural disaster exemption is open for a wide interpretation covering also climate change. On the downside, there is no need to curb new debt to just 0.5 per cent of the GDP, especially in times of low interest. Long-term spending is even more likely to lose out against short-term spending. Also, they are prone to circumvention through special entities and budgets. However, they have a strong symbolic value and thus influence the political process and the stability perceptions of financial markets.
An alternative or cumulative measure would be the return to investment exceptions that allow for an unlimited debt financing of investments. The big advantage of this clause is its multidimensionality, combining sustainability in both the financing policy as well as in the financed policy. Its biggest disadvantage is the need to define investments that securely provide benefits for younger and future generations. While too narrow a definition can give wrong incentives (‘concrete instead of people’), history shows that the legislator is prone to giving itself a free pass if he defines it by himself. Thus, a constitutional investment clause should include an enumerative specific list of investments that can
A combination of a symbolic, but nevertheless politically and not irrelevant commitment against new debt, a binding reasonable high allowance to incur new debt and a limited enumerative investment exemption should provide a comprehensive second-best solution. This, however, has to be complemented with more participation in the budgetary process on all levels of government. This combination might have the chance to influence the political process, so that the future (financial) freedom of the young and future generations is preserved to a greater extent.
Amartya Sen, Development as Freedom (OUP 1999); Martha Nussbaum, Frontiers of Justice (HUP 2006); Martha Nussbaum, Creating Capabilities (HUP 2011).
Knut Wicksell, Finanztheoretische Untersuchungen nebst Darstellung und Kritik des Steuerwesens Schwedens (Gustav Fischer 1896); concurring: Geoffrey Brennan and James M Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution (CUP 1980).
Treaty on European Union [1992] OJ C191/1, art 104c; Protocol on the excessive deficit procedure to the Treaty on European Union [1992] OJ C191/81, art 1.
Council Regulation (EC) 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1997] OJ L209/1; Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6; Council Resolution 97/C 236/01 of 7 July 1997 on the Stability and Growth Pact [1997] OJ C236/1.
Council Regulation (EC) 1466/97, n 4, at preamble (1); Council Regulation 1467/97, n 4, at preamble (2).
Critically on the perpetuation of this arbitrary number: Achim Truger, ‘EU Governments Must not Return to Their Dysfunctional Fiscal Rules’ (2021) 1 The Economists’ Voice 2.
Commission, ‘The situation of Germany and France in relation to their obligations under the excessive deficit procedure following the judgement of the Court of Justice’ (Communication) COM (2004) 813 final, p 9; Roel MWJ Beetsma and Xavier Debrun, ‘Implementing the Stability and Growth Pact: Enforcement and Procedural Flexibility’ (2005) IMF Working Paper 05/59, 3 <www.imf.org/en/Publications/WP/Issues/2016/12/31/Implementing-the-Stability-and-Growth-Pact-Enforcement-and-Procedural-Flexibility-18017> last accessed 30 April 2022.
Parliament and Council Regulation (EC) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1; Parliament and Council Regulation (EC) 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8; Parliament and Council Regulation (EC) 1175/2011 of 16 November 2011 amending Council Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2011] OJ L306/12; Parliament and Council Regulation (EC) 1176/2011 of 16 November 2011 amending Council Regulation (EC) 1466/97 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/25; Council Regulation (EC) 1177/2011 of 8 November 2011 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2011] OJ L306/33; Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41.
Parliament and Council Regulation 1175/2011, n 8, arts 1, 2a, 6, 10, 11.
Parliament and Council Regulation 1173/2011, n 8, arts 4ff.
Council Directive 2011/85/EU, n 8, art 5.
Commission, “Report from The Commission presented under article 8 of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union” COM (2017) 1201 final.
Bartholomew Paudyn, ‘Credit rating agencies and the sovereign debt crisis: Performing the politics of creditworthiness through risk and uncertainty’ (2013) 20 Review of International Political Economy 788; Kathleen McNamara, ‘Banking on Legitimacy: The ECB and the Euro Zone Crisis’ (2012) 13 Georgetown Journal of International Affairs 143; Silvia Ardagna and Francesco Caselli, ‘The Political Economy of the Greek Debt Crisis: A Tale of Two Bailouts’ (2014) 6 American Economic Journal: Macroeconomics 291; Ian Traynor and Phillip Inman, ‘Eurozone bank bailout deal throws lifeline to Spain and Italy’ The Guardian (Brussels and London, 29 June 2012) <www.theguardian.com/business/2012/jun/29/eurozone-bank-bailout-spain-italy> last accessed 30 April 2022.
Council Regulation (EC) 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism [2010] OJ L118/1.
Council, ‘Extraordinary Council meeting Economic and Financial Affairs’ (Press Release) 9596/10 of 9/10 May 2010.
Commission, ‘Treaty Establishing the European Stability Mechanism (ESM)’ (Press Release) D/12/3 of 1 February 2012; For a detailed analysis see Mauro Megliani, ‘From the European Stability Mechanism to the European Monetary Fund: There and Back Again’ (2020) 21 German Law Journal 674.
For an analysis of deficit reductions in Ireland see Robert Hick, ‘Enter the Troika: The Politics of Social Security during Ireland’s Bailout’ (2018) 47 Journal of Social Policy 1.
Treaty on Stability, Coordination and Governance in the Economic and Monetary Union [2012] T/SCG/en 1, 8.
Tony Killick, IMF Programmes in Developing Countries: Design and Impact (Routledge 1995); Shantayanan Devarajan et al, Aid and Reform in Africa: Lessons from 10 Case Studies (World Bank 2001).
Antonio Estella, ‘Potential Exit from the Eurozone: The Case of Spain’ (2015) 22 Indiana Journal of Global Legal Studies 335; Ruby Devine, ‘Emerging Issues: Is a Grexit - A Greek Exit from the Eurozone - the Solution?’ (2016) 4 University of Baltimore Journal of International Law 157; Lee C Buchheit et al, ‘Revisiting Sovereign Bankruptcy’ (2013) <www.ssrn.com/abstract=2354998> last accessed 30 April 2022.
Matthias Goldmann, ‘art 126 TFEU’, in Helmut Siekmann (ed), The European Monetary Union: A Commentary on the Legal Foundations (Hart Publishing 2022).
Ibid at 145.
Ibid at 148.
Sec 51 Frankfurt German Imperial Constitution (Verfassung des deutschen Reiches (“Paulskirchenverfassung”) of 28 March 1849, RGBl 1849, 101.
Sec 73 German Imperial Constitution (Verfassung des Deutschen Kaiserreichs (“Bismarcksche Reichsverfassung”)) of 16 April 1871, RGBl 1871, 6.
Art 87 German Imperial Constitution (Verfassung des Deutschen Reichs (“Weimarer Reichsverfassung”)) of 11 August 1919, RGBl 1919, 1383.
Art 115 German Basic Law (Grundgesetz), BGBL I 1949, 1.
Lorenz v Stein, Lehrbuch der Finanzwissenschaft (5th edn, Nabu Press 1885); Adolph Wagner, Finanzwissenschaft (3rd edn, C.F. Winter 1883).
BVerfGE 79, 311,352; BVerfGE 119, 96,160.
BVerfGE 79, 311, 354; BVerfGE 119, 96, 179.
Cf. BVerfGE 119, 96, 157.
Sec (1)(2) Act to Promote Economic Stability and Growth (Gesetz zur Förderung der Stabilität und des Wachstums der Wirtschaft) of 8 June 1967, BGBl I, 1967, 582.
BVerfGE 119, 96, 163.
Critical Ekkehart Reimer, ‘Nachhaltigkeit durch Begrenzung der Staatsverschuldung‘, in Wolfgang Kahl (ed), Nachhaltige Finanzstrukturen im Bundesstaat (Mohr Siebeck 2011).
Bill of 9 November 2006, BT.-Drucks 16/3399.
Joachim Wieland, ‘Soziale Nachhaltigkeit und Finanzverfassung‘, in Wolfgang Kahl (ed), Nachhaltige Finanzstrukturen im Bundesstaat (Mohr Siebeck 2011).
Gebhard Kirchgässner, ‘Fiscal Institutions at the Cantonal Level in Switzerland’ (2013) 149 Swiss Journal of Economics and Statistics 139.
Tobias Hentze, ‘Anhörung des Haushalts- und Finanzausschusses: Stellungnahme zum Entwurf des Haushaltsgesetzes 2022 des Landes Nordrhein-Westfalen‘ (2021) 37 IWReport ٦.
Hanno Kube, ‘Art 109 GG‘, in Günter Dürig, Roman Herzog and Rupert Scholz (eds), Grundgesetz-Kommentar (C.H. Beck supp 95 July 2021).
Ibid.
Coalition Agreement between SPD (Social Democrats), den Grünen (Greens) and FDP (Liberals), ‘Mehr Fortschritt wagen’ (2021) 159.
Mariana Canotilho, Teresa Violante and Rui Lanceiro, ‘Austerity measures under judicial scrutiny: the Portuguese constitutional case-law’ (2015) 11 European Constitutional Law Review 155.
Ibid at 155, 157.
Ibid at 155, 160 ff.
Portuguese Constitutional Court 5 April 2013 187/13 summary <www.tribunalconstitucional.pt/tc/en/acordaos/20130187e.html> last accessed 30 April 2022.
Canotilho, Violante and Lanceiro, n 42, at 155, 160.
Canotilho, Violante and Lanceiro, n 42, at 155, 172 ff.
Portuguese Constitutional Court 5 April 2013 187/13 summary <www.tribunalconstitucional.pt/tc/en/acordaos/20130187e.html> last accessed 30 April 2022.
Ibid.
Portuguese Constitutional Court 14 August 2014 575/14, summary <www.tribunalconstitucional.pt/tc/en/acordaos/20140575s.html> last accessed 30 April 2022.
Portuguese Constitutional Court 5 April 2013 187/13, n 49, at 20.
Portuguese Constitutional Court 5 April 2013 187/13, n 49.
Canotilho, Violante and Lanceiro, n 42, at 155, 176.
Portuguese Constitutional Court 5 April 2013 187/13, n 49.
Canotilho, Violante and Lanceiro, n 42, at 155, 178.
Portuguese Constitutional Court 5 April 2013 187/13, n 49; Canotilho, Violante and Lanceiro, n 42, at 155, 180.
James Tobin, ‘Taxes, Saving, and Inflation’ (1949) 39 The American Economic Review 1223; The Yale Law Journal Company, Inc., ‘Inflation and the Federal Income Tax’ (1973) 82 The Yale Law Journal 716; Martin Feldstein, ‘Inflation, Tax Rules, and the Prices of Land and Gold’ (1980) 14 Journal of Public Economics 309.
Jan Toporowski, ‘International credit, financial integration and the euro’ (2013) 37 Cambridge Journal of Economics 571; Philip R Lane, ‘The Real Effects of European Monetary Union’ (2006) 20 The Journal of Economic Perspectives 47.
Friedrich Heinemann and Jan Kemper ‘The ECB Under the Threat of Fiscal Dominance – The Individual Central Banker Dimension’ (2021) 18 The Economists’ Voice 5, <www.doi.org/10.1515/ev-2021-0014> last accessed 30 April 2022.
Deirdre Cooper, ‘Low rates provide a historic opportunity to tackle climate change’ Financial Times (London 26 December 2019) <www.ft.com/content/c752698c-200c-11ea-92da-f0c92e957a96> last accessed 15 December 2021; regarding green bonds see Sarah La Monaca, Katherine Spector and James Kobus, ‘Financing the Green Transition: Addressing Barriers to Capital Deployment’ (2019) 73 Journal of International Affairs 17.
Anton Hunger, ‘Die schwäbische Hausfrau’ FAZ (Frankfurt, 14 July 2016) <www.faz.net/aktuell/wirtschaft/wirtschaftspolitik/sparpolitik-merkel-und-die-schwaebische-hausfrau-14333164-p2.html> last accessed 30 April 2022; Julia Kollewe, ‘Angela Merkel’s austerity postergirl, the thrifty Swabian housewife’ The Guardian (London, 17 September 2012) <www.theguardian.com/world/2012/sep/17/angela-merkel-austerity-swabian-housewives> last accessed 30 April 2022; Raymond Guess, ‘Economies: Good, Bad, Indifferent’ (2012) 55 Inquiry 331.
Max Weber, Die protestantische Ethik und der Geist des Kapitalismus (4th edn, C.H. Beck 2013).
Art 87 German Imperial Constitution (Verfassung des Deutschen Reichs (“Weimarer Rechtsverfassung”)) of 11 August 1919, RGBl 1919, 1383.
Truger, n 6, at 3.
Dwight R Lee, ‘The Keynesian Path to Fiscal Irresponsibility’ (2012) 32 Cato Journal 473.
Truger, n 6, at 3.
Hermann Pünder,’§ 123 Staatskredit’, in Josef Isensee and Paul Kirchof (eds), Handbuch des Staatsrechts der Bundesrepublik Deutschland: Band V Rechtsquellen, Organisation, Finanzen (3rd edn, C.F. Müller 2007); Truger, n 5, at 3; Richard Abel Musgrave and Peggy B Musgrave, Public Finance in Theory and Practice (5th edn, MC Graw-Hill Inc. 1989).
Pedro R D Bom and Jenny E Ligthart, ‘What Have We Learned from Three Decades of Research on the Productivity of Public Capital?’ (2014) 28 Journal of Economic Surveys 889.
Truger, n 6, at 3.
Christian Calliess, ‘Innovationsföderalismus und nachhaltige Finanzverfassung‘, in Wolfgang Kahl (ed), Nachhaltige Finanzstrukturen im Bundesstaat (Mohr Siebeck 2011).
De Rijksoverheid voor Nederland, ‘The National Growth Fund’, <www.nationaalgroeifonds.nl/english/the-national-growth-fund> last accessed 30 April 2022.
De Rijksoverheid voor Nederland, ‘Government allocates €646 million to projects to boost economic growth’, <www.nationaalgroeifonds.nl/english/government-allocates/government-allocates-%E2%82%AC646-million-to-projects-designed-to-boost-economic-growth> last accessed 30 April 2022.
See for example art 60 sec 6 Constitution of Baden-Württemberg and sec 21 Cl. 2 Gemeindeordnung (Law on communal self-government); art 73 Constitution of Bayern; art 68 sec 1 p 3 Constitution of North Rhine-Westphalia.
Gebhard Kirchgässner and Lars Feld, ‘On the effectiveness of debt brakes’, in Reinhard Neck and Jan-Egbert Sturm (eds), Sustainability of Public debt (MIT Press 2008).
Ibid.
Patricia Funk and Christina Gathman, ‘Does direct democracy reduce the size of government? New Evidence from historical data 1890–2000’ (2011) 121 The Economic Journal 1252.
Kirchgässner and Feld, n 76, at 228.
Bertelsmann-Stiftung, Kommunaler Bürgerhaushalt: Ein Leitfaden für die Praxis (Innenministerium Nordrhein-Westfalen) 9.
Ibid, at 32 ff.
Statusbericht Bürgerhaushalt (2018) 21, 22 <www.buergerhaushalt.org/sites/default/files/downloads/9._Statusbericht_Buergerhaushalt.pdf> last accessed 30 April 2022.
For example, in the German City of Stuttgart <www.buergerhaushalt-stuttgart.de/d/faltblatt_buergerhaushalt_2021_0.pdf> last accessed 30 April 2022.
BVerfG, ‘Verfassungsbeschwerden gegen das Klimaschutzgesetz teilweise erfolgreich‘ (2021) 24 NJW 1723.
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