BBW: Mr. Professor Lucke, is national debt generally a bad thing?

Lucke: That depends entirely on what the state does with the money. If it simply consumes it, financing consumption with it, then national debt is bad because the current generation consumes and future generations have to pay for that consumption – without having anything to show for it. However, if the state creates value with the money and passes it on to the next generation, then debt can be very sensible. If the state builds a bridge with debt, then the next generation inherits not only the debt but also the bridge. Ideally, the value of the bridge corresponds exactly to the value of the debt – then the next generation cannot complain.

BBW: But many bridges in Germany are now very dilapidated...

Lucke: That's correct, bridges and all infrastructure facilities wear out over time. There is aging and wear that diminishes value. This would not be a problem if the state maintained the infrastructure continuously. It would also not be a problem if it gradually paid back the borrowed debt – ideally exactly to the extent that the infrastructure loses value. Unfortunately, however, state debts are almost never repaid. They are always replaced by new state debts. More precisely: The state pays off old debts by taking on new debts. 

BBW: But isn't the wear and tear of German infrastructure a good reason to enable infrastructure investments through a large special fund now? We must not simply leave a rundown infrastructure to the next generation!

Lucke: One must distinguish whether new infrastructure is being created, or whether the old is to be repaired or replaced. Repairs or replacements should not be financed with debt because then the coming generation is doubly burdened: It inherits the debts with which the bridge was originally built and it inherits the debts with which this bridge is now replaced by a new one. Thus, it inherits the debts of two bridges, worth one bridge.

BBW: And how does one plan to use the money from the special fund – for new projects or for repair and replacement?

Lucke: To my knowledge, nothing is known yet. Since there is so much talk about our "dilapidated infrastructure," I fear that the plan is primarily to repair or replace existing facilities. Doing this with debt financing would not be fair to future generations. For this purpose, one should provide funds from ongoing tax revenues, as the wear and tear of the infrastructure is indeed a consumption. Consumption should not be financed through debt, as it only benefits the current generation. Therefore, it should use tax money to address wear and tear.

BBW: Why is it actually called a special fund when it is still debt?

Lucke: There are historical reasons for that. In the past, the state used certain sources of revenue for specific purposes, such as a toll. A road had to be secured or a bridge built for that purpose. The right to levy the toll had a monetary value – it represented an asset. It was referred to as a special fund because revenues were managed separately. Today, the term is also used when the only source of revenue is the permission to incur debt outside the debt brake.

BBW: Before the debt brake was decided, the state's new borrowing was never allowed to exceed its investments. Wasn't that a better regulation? Investments create values for future generations.

Lucke: No, the previous regulation was worse. This is because state investments also include replacement and repair investments – and these should not be financed with debt because they only offset what the current generation consumes. Economically, a distinction is made between gross and net investments. Net investments are what is really created in terms of new value. However, gross investments also contain replacement and repair expenses beyond that. The old constitutional article referred to gross investments and therefore enabled excessive indebtedness.

BBW: What do you think of the fact that the debt brake should be suspended for defense spending once it exceeds one percent of GDP? Is it so urgently necessary to strengthen the Bundeswehr?

Lucke: I am not a defense expert, but it seems that the Bundeswehr is hardly combat-ready anymore. And it is right and important that we ensure reliable, good national defense. In that regard, I think it is fundamentally correct that in a threatening situation, everything that is militarily necessary for national defense and alliance obligations can also be financed. The exception provided in Article 109 paragraph 3 of the Basic Law for emergencies is not applicable for preventive measures like the ones at hand. However, if our security is genuinely threatened because an attack is imminent or an ally is no longer reliable, then one should not shy away from incurring debt to ensure our defense.

BBW: So you believe it is right for Germany to be able to incur unlimited debt as soon as there is an extraordinary external threat?

Lucke: Yes. After all, an exception for defense is not the worst thing, because one may hope that no politician would want to unreasonably pump a lot of money into defense. It would be much easier to win voters with social benefits. Therefore, an exception in the debt brake for defense spending is much more justifiable than, for example, an exception for social policy.

But of course, politicians must responsibly evaluate what is truly necessary for defense capability. There is always the danger of a hysterical reaction, where greater threats are exaggerated than actually exist. This could lead to an arms race whereby the presumed opponent responds with equally large defense efforts. One could then fall into an expensive, inefficient, and dangerous arms race. I fear that the unlimited ability to incur debt for defense and security purposes could facilitate such an unfortunate development. 

BBW: But if new armaments are procured, then the debt incurred for it is at least fair to the generation, right? The debts are then backed by a much more valuable Bundeswehr?

Lucke: When it comes to new weapon systems, yes, but if only existing systems are replaced, not really. But we do not know the details yet. And now it seems that the personnel costs of the Bundeswehr can also be financed through debt. However, personnel costs are clearly consumption of the current generation, and should therefore not be financed with debt. The same applies to arms deliveries to Ukraine. That also falls under consumption, as these are not assets that we pass on to the coming generation. 

BBW: So you are not fundamentally against suspending the debt brake for defense spending, but you find the specific implementation unsatisfactory?

Lucke: Yes. I find the exception provision in the debt brake fundamentally justifiable, provided it concerns a defense need that exceeds the normal and is beyond our control. However, the compromise between the Union, the SPD, and the Greens does not do justice to that. NATO has long agreed that normal defense spending should be at two percent of GDP. Germany has neglected this in the past but has recently reached it again. However, the current agreement allows defense expenditures to be financed with debt already when they exceed one percent of GDP. That falls short. At least two percent of GDP should be financed from regular tax revenues as normal defense spending, as defense is one of the core responsibilities of the state.

BBW: And what if 5% becomes the new normal?

Lucke: Then only defense spending above 5% should be able to be financed with debt. In that case, the threshold from which defense is exempt from the debt brake should be gradually raised. We are starting now with 2% because that has been the norm, next year it will be 2.5%, and so on, until we reach the new normal state, which is 5%. A structural burden must not be financed with debt indefinitely – the Federal Constitutional Court has already made this clear in its ruling. Unfortunately, the plan from the Union, SPD, and Greens does not provide for the exception from the debt brake to be somehow aligned with what will permanently be the normal defense needs. 

BBW: Furthermore, the 500 billion euro special fund for infrastructure is also a further significant exception to the debt brake.

Lucke: Correct, and this is an important criticism of both the special fund and the exception for defense. Because if strict attention is not paid to ensure that financing is fair to generations, then both can easily be misused to make the debt brake practically ineffective. This creates such large possibilities to outsource expenditures from the budget and finance them through debt that suddenly there is a lot of room in the budget for new expenditures of all kinds. And when money is available, it is usually spent lavishly. This also applies to defense and infrastructure, by the way. I have serious doubts that the funds, which will now be made available in such large quantities, will actually be used sparingly and only for meaningful purposes – simply because there will suddenly be so much money. Since the additional orders often encounter limited production capacities (armament, construction), significant price increases are also to be expected, which will further burden the public sector financially.

BBW: At least one could always finance the replacement and repair expenses for both infrastructure and defense with the regular budget funds – and that would then be fair to the generations.

Lucke: If there are enough well-planned, approval-worthy projects, that could be done. But I doubt it will happen. Because the planned constitutional amendments also set a bad example in this respect. You see, today they justify it by saying, "We unfortunately have not spent enough on defense and infrastructure for decades, therefore we now have to take on high debt once and for all to finance the entire backlog." But there is fear that this example will set a precedent. The next governments will then again neglect repair and replacement expenses and prefer to spend the necessary money elsewhere because they know they can repeat the game: They will wait and observe how the problems worsen over years and then say, now the situation has become so dire that they must immediately put a lot of money on the table and further dilute the debt rules of the constitution. This certainly does not lead to sustainable debt policy. 

BBW: In the long run, the German national debt should also adhere to EU law. No more than 60% of GDP is permissible, but the SPD recently stated that it wouldn't be such a big deal if the debt ratio rises to just under 90% because of the special funds.

Lucke: That is indeed the problem that the debt brakes are always precisely ignored and discredited when they do what they are supposed to: To curb the rising national debt and enforce that the necessary maintenance and repair expenses are met from current tax revenues. Of course, debt rules or brakes are uncomfortable at the moment they apply a brake – but that is their task. It is a huge political failure that politicians do not take this seriously, but always pretend as if there is a particularly exceptional emergency at the moment that requires not to pay for the necessary measures themselves but to impose the payment on our children and grandchildren.