AbstractSince 2009 Germany has a new debt regime that requires the federal government to reduce its structural deficits to 0.35 percent of GDP until 2016 and the Länder to balance their budgets structurally until 2020. In this paper the rationale for a debt brake is discussed, the provisions of the new regime are summarized and its effectiveness is assessed. Although the new debt brake basically provides for a reasonable framework to achieve sustainable public finances, several loopholes remain that enable finance ministers to avoid fiscal consolidation. Particularly problematic are the provisions for the Länder which have incentives to appear excessively indebted until 2019 in order to negotiate better financial conditions in the fiscal equalization system that must be revised until 2019. These incentives may be stronger than the constitutional provision to reduce deficits.
Federalism, Grants, and Fiscal Equalization
