Berlin On Tuesday afternoon, Olaf Scholz (SPD) got on the plane to Washington. Between the soundings, the SPD candidate for chancellor takes two days to travel to the annual meeting of the International Monetary Fund (IMF). The agenda is so jam-packed that Scholz decided at short notice to travel to the USA. It’s about debt relief for poor countries, rising inflation or the introduction of the global minimum tax.
But in the back of Scholz’s head the probes are likely to be buzzing around in Washington as well. Above all, his thoughts are likely to revolve around one question: How does the traffic light coalition that Scholz wants to lead as Federal Chancellor get fresh money to finance all the election promises?
While the 2017 explorations were still about how much a new government has to distribute – 30 or 45 billion euros – the traffic light negotiators are faced with a completely different budget situation four years later. After the corona crisis, they find empty coffers and record debts. The self-proclaimed “progress alliance” lacks the necessary change to finance even a tiny bit of progress.
Increasing taxes and levies is not an option, but the FDP is opposed to this. The only way out: higher debt. That is why there have long been lively discussions in public, but also behind closed doors, about how the debt brake anchored in the constitution can most elegantly be bypassed.
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Scholz has prepared for this moment. For many years, the SPD politician himself developed concepts of how more funds can be mobilized despite the debt brake, a kind of Scholz’s debt plan.
The ideas range from the establishment of a federal housing association to a stronger role for the state-owned KfW Bank and other public companies and the establishment of public investment and transformation funds that provide companies with state equity.
Officially, the debt brake should not fall
Scholz is officially sticking to the debt brake, and recently emphasized this even more in interviews. The necessary government investments could be financed under the debt rule, said the Federal Finance Minister defiantly. A reform of the debt brake is therefore neither a majority nor necessary. Scholz knows that solid finances are sacred to many German citizens. And the potential coalition partner FDP, which defends the debt brake ironically, Scholz does not want to offend.
But as Federal Minister of Finance, Scholz had his officials develop corresponding debt concepts under the public radar, and as Hamburg mayor he had even implemented such concepts. All in all, this gives an idea of how the SPD candidate for chancellor could mobilize funds despite tight budgets to put a social-democratic stamp on a traffic light coalition.
The one big boom, such as a shadow budget for investments of 500 billion euros, as many well-known economists are calling for, should not exist in a traffic light coalition under Scholz. Instead, Scholz’s plan is made up of many smaller pieces of the mosaic.
One of them comes from his time as Hamburg mayor. Back then, Scholz actively promoted social housing in the Hanseatic city. He had the municipal construction company Saga build thousands of new municipal apartments. The saga later founded a subsidiary that rehabilitated schools. Nice side effect: the expenditure did not fall under the debt brake.
There are similar urban housing associations elsewhere, for example in Berlin. To this day, however, Scholz cannot understand why more federal states and municipalities did not follow his path and took the Hamburg model as an example to combat the housing shortage.
For some time now, Scholz has been thinking of involving the federal government more closely in housing construction and developing the Federal Agency for Real Estate Tasks (Bima), which administers and builds on federal properties, into a housing association. Fittingly, Scholz made a confidante Bima boss some time ago: Christoph Krupp, Scholz’s head of state chancellery in Hamburg for many years.
Scholz has similar simulation games for the state bank KfW. The SPD candidate for chancellor wants to develop it “into a modern innovation and investment agency which, together with the federal states’ promotional banks, directs the funds into strategically important future industries”, as it is called in the SPD election manifesto. In addition, the state bank could also provide cheaper loans to companies, for example for investments in green technologies.
Making greater use of existing public companies is one way of avoiding the debt brake. “In the federal states there are a number of models of how housing associations can mobilize funds for housing or school construction away from the debt brake,” says Sebastian Dullien, head of the union-related Institute for Macroeconomics (IMK).
For example, “the establishment of such companies” would also be conceivable for the expansion of the 5G network or a hydrogen infrastructure, according to Dullien. The federal government grants credit authorizations to either public companies. Or the federal government takes out loans itself and thus increases the equity of these companies, which would be financially neutral with a view to the debt brake.
Dullien is not alone with such ideas. Scholz’s own policy department head in the Federal Ministry of Finance, Jakob von Weizsäcker (SPD), has also been working on concepts for years to circumvent the debt brake. Scholz never commented on his simulation games, but let his strategists have their way.
One of Weizsäcker’s ideas: the establishment of state investment companies that are allowed to take on debts outside of the debt brake and through which the state then leverages higher investments. The proposal has found many supporters over the years, such as IW boss Michael Hüther or DIW president Marcel Fratzscher. They are even calling for a state fund of 500 billion euros.
For many economists, investment companies are the only way for the state to free itself from the constraints of the debt brake. “Public investment companies will now come after the election. It won’t work without them, ”says Düsseldorf economist Jens Südekum. “It is impossible to finance the necessary government investments within the framework of the debt brake.”
Südekum can hardly imagine a large investment company worth 500 billion euros. “But a lot can be achieved with various smaller companies and the exhaustion of existing opportunities such as strengthening KfW or public companies,” says the economist.
The corona rescue parachute could be repurposed
Some ideas go one step further. Scholz is said to have already dealt with so-called transformation funds. The federal government’s corona rescue fund, the Economic Stabilization Fund (WSF), could be merged into a climate transformation fund after the pandemic, according to one idea.
The federal government would use this fund to support companies in ecological change with state money. As is the case today with the WSF, various graduated forms of participation by the state in companies would be conceivable, including equity injections, i.e. a real partial nationalization.
However, all of these proposals are highly controversial. A transformation fund could be seen as an entry into a permanent state economy, against which an FDP should actually run a storm.
At the same time, the question arises as to how attractive such state holdings are for companies. In any case, Lufthansa is doing everything it can to get rid of the state, which got on board as the owner during the corona crisis, as quickly as possible.
“This is a recipe for nightmares”
And investment funds also harbor considerable risks, believes the Cologne-based finance scientist Michael Thöne. “I consider investment funds to be extremely dangerous, that’s a recipe for nightmares.” According to EU debt rules, investment funds must have a certain distance from the state so that they do not fall under the current debt rules. Such funds therefore threaten to “lead to the disempowerment of parliaments,” warns Thöne.
The economist thinks that investment funds also missed the point. More than 85 percent of federal investments are not real investments at all, but grants and subsidies to federal states, municipalities, companies and households. Thöne therefore advocates reforming the debt brake instead of trying to outsmart it.
Proponents of investment funds like Dullien or Südekum also see the dangers. “Investment companies are always only the second best solution,” admits Südekum. “But the second-best solution is still better than no solution at all.” Doing nothing against climate change but holding onto the debt brake forever does not help anyone.
In any case, the next Federal Finance Minister is facing uncomfortable years. Gone are the days when tax revenues flooding in and low interest rates cleaned up the budget on their own. The coalition’s wish lists, however, date back to those times when the financial situation was rosy. “The next federal finance minister,” says Thöne, “needs a lot of stamina.”
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