“The dramatic economic downturn as a result of measures to combat the Corona pandemic is causing Germany’s debt to soar dramatically. Even more than the officially designated borrowing by the federal government and the Länder, the debts hidden in the social security system are accounted for.
It is becoming particularly bitter for future tax and contributors. After all, most of the additional burden on the corona is shifted by politics to the younger generation.
Total debt rises by 125 percent of gross domestic product (GDP) in one fell swoop as a result of the crisis, bringing the total to 345 percent of annual economic output. This translates into a sum of EUR 11.9 trillion. This is the result of the current generational balance sheet presented by the financial scientist Bernd Raffelhüschen from the University of Freiburg together with the Stiftung Marktwirtschaft in Berlin.
“Corona is a shock to public finances”
“The Corona pandemic is a real shock to public finances,” the economist said. Last year, the sustainability gap was much smaller, at 219 percent of GDP, and would have increased only marginally to 236 percent of GDP without the economic downturn. Now, however, the extreme increase in spending, while revenues are falling away, is putting public finances in a state of disarray.
The sustainability gap shows the long-term liabilities of the state, which it does not counter-finance with reserves. Because, unlike private insurance, German social insurance companies do not build capital reserves, but live virtually from hand to mouth, their promises of benefits, which cannot be financed in the long term with the current level of taxation and contributions, ultimately mean debt. This applies to pension rights as well as to medical care, care and civil servants’ pensions.
However, the State does not report this type of budgetary liabilities. “German public debt is like an iceberg: you don’t see what’s really dangerous,” Raffelhüschen complains. In Corona times, officially declared debt is also soaring. It is jumping from just under 60 percent of GDP this year to nearly 80 percent.
The federal and state governments have repealed the debt brake enshrined in the Basic Law in order to mitigate the impact of the crisis on the economy and citizens with short-time working, rescue measures for companies and economic aid. This year, the federal government alone is borrowing EUR 214 billion in new loans to finance it.
This brings to an end the era of “black zero”, the balanced budgets, which has been ushered in since 2014. And this explicit national debt accounts for just under a fifth of total actual debt, as the financial scientist predicts.
In the fight against the pandemic, the policy of the economy has imposed a full brake. Because the world economy has collapsed and this type of crisis is historically unprecedented, no one can seriously predict how the economy will develop in the coming months and years.
The federal government expects the recovery to pick up speed in the autumn. But many economists are skeptical, expecting the rise from the deep valley to take longer. “People may change their behaviour permanently, and Germany will not return to the old growth path,” says Raffelhüschen.
The economic development has a huge impact on public debt. The longer the crisis lasts, the bigger the sustainability gap. In the recession, social benefits increase, while at the same time there is a lack of tax and contribution income.
“Pensioners are the winners of the crisis”
The head of the Centre for Intergenerational Contracts used the government’s comparatively optimistic scenario in his calculation. It envisad a 6.7 percent contraction in the economy this year and growth of 5.2 percent next year. However, if the slump this year is as high as 9 percent, and growth remains weak in subsequent years, there is even a risk of total debt of 514 percent of GDP.
In any case, it is the young generation that has to shoulder a large part of the Corona-related financial burden, Raffelhüschen emphasizes. “Pensioners, on the other hand, are the winners in the crisis , because their salaries are rising sharply this year and cannot fall in the future.” Pensions were raised by 3.45 per cent in the West and 4.2 per cent in the East as of July 1.
A “pension guarantee” in the law prevents the expected reduction in wage income from being transferred to pensions in the coming year. And with the 2018 pension pact, Employment Minister Hubertus Heil (SPD) has also ensured that the lost savings are not made up in later years of recovery, as was usual in the past.
As a result, the level of pensions, i.e. the ratio of pension levels to net wages, is expected to rise from the last 48 percent next year to well over 50 percent. “The economic pressures on employees as a result of short-time working, unemployment and stagnant wages this year will never be felt by pensioners,” criticises the economist, who warns against a “de-solidarisation between old and young by the Corona pandemic”.
Officials are also unfairly shielded from the consequences of the sharp economic downturn, Raffelhüschen criticizes. After all, the legislator regularly transfers the last collective bargaining agreement of the civil service to civil servants’ salaries and pensions, which are therefore now rising despite the serious crisis.
The age groups affect the corona-related additional loads differently. The highest costs are for ten- to 40-year-olds, who can account for up to almost 40,000 euros per capita. A newborn is burdened with a good 30,000 euros due to the corona consequences.
However, a sustainability gap can also be reduced in several ways. If a future federal government decides to increase VAT to finance the holes in the social security funds, this measure would also affect the elderly and thus at least somewhat relieve the younger ones.
Savings on social benefits have been even more pronounced in the direction of intergenerational justice – but they are politically difficult to enforce, given the ever-increasing dominance of older voters.