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Heavily indebted federal states: Is the introduction of clear debt ceilings the answer?

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Listed:
  • Jürgen Rüttgers
  • Georg Milbradt
  • Helmut Seitz
  • Max Groneck
  • Wolfgang Kitterer
  • Markus C. Kerber

Abstract

An increasing number of federal states have submitted unconstitutional budgets in recent years; three federal states have even filed suit at the Federal Constitutional Court for support in their the budget crises on the grounds of "solidarity". Can the introduction of unambiguous debt boundaries prevent federal states from incurring debt? In the opinion of Jürgen Rüttgers, Minister President of North-Rhine Westphalia, the regional authorities should strive to present balanced budgets without additional borrowing. This should be inscribed as a goal in the constitution. However, the budgets must be flexible enough to react to changes in the general conditions, for example investment spending could be regarded as a key budget item. But the concept of "investment" should be defined very carefully by federal and state authorities. Georg Milbradt, Minister President of the Free State of Saxony considers the most effective protection would be to write a general debt prohibition into the federal and state constitutions. Exceptions from this debt prohibition would only be allowed in carefully defined instances, for example, natural catastrophes. Helmut Seitz, Technical University of Dresden, also considers zero deficit rules to be the most suitable instrument. These must be designed such that emerging budget deficits would have to be balanced over a period of five to seven years. Max Groneck and Wolfgang Kitterer, University of Cologne, favour the abolition of the golden rule as a credit limit. In their opinion, clear quantitative boundaries of federal state indebtedness, as in the European Stability Pact would be preferable, with quantitative ceilings for the federal states and sanctions for violations. Markus C. Kerber, Technical University of Berlin, favours, for indebted federal states, that the responsibility for public finances be temporarily transferred to a commissioner and that an assessment be made of the political performance of the state government.

Suggested Citation

  • Jürgen Rüttgers & Georg Milbradt & Helmut Seitz & Max Groneck & Wolfgang Kitterer & Markus C. Kerber, 2007. "Heavily indebted federal states: Is the introduction of clear debt ceilings the answer?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 60(02), pages 03-19, January.
    • Handle: RePEc:ces:ifosdt:v:60:y:2007:i:02:p:03-19
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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