1 Why is the Bundesbank involved in the debate on reforming the fiscal rules?

Sound government finances are a key prerequisite for a stability-oriented monetary policy. Fiscal rules, in turn, are intended to make a significant contribution to sound government finances. That is why the Bundesbank has a vested interest in fiscal rules. In this vein, it regularly comments on the functioning of said rules and makes recommendations on how they can be further developed at the national and European level. 

The Bundesbank most recently presented a reform proposal for the debt brake in March 2025. The newly revised proposal takes concrete account of current rules and challenges. It now has three stages. The first stage adheres to the current borrowing ceilings, while the second stage is a transitional (adjustment) period. The third stage is the target zone: in this stage, the debt brake is fundamentally restructured. To this end, the Bundesbank has made moderate amendments to its March reform proposal.

2 Does Germany’s existing fiscal framework need to be reformed again already? It was just amended recently ...

In view of the major defence and infrastructure challenges, an ad hoc redrafting of the fiscal rules was carried out in March. In order to overcome these challenges, more extensive scope for borrowing is appropriate on a temporary basis. However, the new rules will no longer be in line with EU rules in the future. Moreover, they will no longer sufficiently safeguard sound government finances. The Bundesbank thus considers a reform to be crucial.

3 What are the main objectives of the proposal?

The main objective is to safeguard sound government finances in Germany and to create a national framework that is fundamentally compatible with EU rules. The proposal builds on and further develops the existing national rules that are in place. It temporarily allows for larger deficits to address the current challenges concerning defence and infrastructure. It envisages a transitional period during which government finances are consolidated in order to return to a sound structural footing. The proposed consolidation steps are ambitious, but they will prevent an abrupt pivot. In the target zone, sound government finances are safeguarded and EU rules are taken into account. Investment expenditure is given special treatment, which should provide a firmer guarantee of positive infrastructural developments than has been the case to date. The aim of the proposal in its precise form is to facilitate relatively steady fiscal policy.

4 How does the Bundesbank decide on the specific parameters – why aren’t they more relaxed or more ambitious?

The Bundesbank has set out its proposal within specific parameters. In its view, this makes the reform well suited to achieving the previously stated objectives. Naturally, there is room for debate over how the individual parameters are selected and combined. The Bundesbank also refers to other possible specific designs in its proposal. Ultimately, it is up to legislators to weigh up the advantages and disadvantages of various designs and to decide on a specific fiscal rule. 

More relaxed parameters increase the risk of the debt ratio not falling towards 60 %. This would then also put the German rules at risk of becoming ineffective, as the EU rules may potentially be more ambitious on a regular basis. Sound government finances will then be less well safeguarded or, indeed, no longer safeguarded at all by the national rules.

A more ambitious design would increase consolidation requirements, thus lowering the debt ratio more quickly. Generally speaking, the Bundesbank has nothing against this, should it be politically desirable. The ultimate design of the debt brake is a political responsibility. 

However, the Bundesbank considers its proposal to be balanced and entirely justifiable from a stability policy perspective. Plus, it is important that a change to the current rules is accepted as widely as possible, as the current borrowing limits no longer lay down appropriate fiscal guardrails. 

5 Should the Basic Law be amended again?

From the Bundesbank’s perspective, it is important to enshrine the essential elements of a fiscal rule in the Basic Law. This gives the rule a firmer legal grounding, makes it more easily enforceable and also more credible. Confidence in sound government finances is thus generated, facilitating borrowing in the capital markets at favourable conditions, amongst other things. 

The Bundesbank does not consider the current rules enshrined in the Basic Law to be suitable for reliably safeguarding sound government finances. Exempting borrowing for defence spending from time or volume restrictions, in particular, runs contrary to this aim. The Bundesbank recommends raising the borrowing threshold (currently 1 % of GDP) in appropriate steps and ultimately getting rid of this borrowing exemption altogether.At the same time, the fundamental requirements and intentions of the relevant rules should be enshrined in the Basic Law. More concrete and detailed design aspects would then have to be legally anchored at an easily accessible level, i.e. in a non-constitutional federal act.

6 Why do we need national fiscal rules if we have EU fiscal rules?

The EU rules are intended to ensure sound government finances in the euro area Member States. Taken as a whole, they are very complex, also with regard to their concrete implementation. They only set requirements for general government, not for individual government levels. 

National fiscal rules with constitutional status and clear borrowing limits for individual governments ensure sound government finances directly through national law. Compliance with the rules can also be reviewed via national constitutional court proceedings. This framework is binding for national governments and parliaments that are responsible for fiscal policy. The national rules are well established in Germany and are based on the national budget planning and disclosure systems. 

Individual national borrowing limits are therefore easily justifiable. That said, they would become ineffective if they were to regularly grant more leeway than the limits imposed by the EU rules. For this reason, the proposal and its borrowing ceilings are also based on the EU rules. 

7 Does it make sense to use the current EU rules as a basis although they have been criticised from various standpoints?

Appropriate budgetary limits can certainly be derived from the EU rules in order to safeguard sound government finances. The EU rules are enshrined in European legislation and in the EU Treaty, which means that they are also binding for Germany. This applies, for example, to the 60 % limit for the debt ratio. The Bundesbank’s proposal is geared towards sound government finances and the EU rules – and, in particular, this 60 % anchor. 

8 Does it make sense to commit to the EU rules, seeing as their actual budgetary limits cannot be exactly determined in advance?

The EU rules are very complex. Neither exact numerical targets for the balance nor the precise implementation of the rules can be anticipated in any amount of detail. There is scope for negotiation and interpretation that may limit the binding effect.

Nevertheless, it is possible to derive quantitative targets from the EU rules – in particular, a sound structural footing based on standard macroeconomic assumptions. Once this footing has been achieved, the debt ratio is highly likely to fall towards 60 %, or at least to not rise above this level. The budget target derived in the proposal is aligned with the purpose and methodology of the EU rules.

Building on the EU rules, the Bundesbank identifies focal points for a concrete redesign of the debt brake. The proposal is intended to safeguard sound public finances and, in principle, align with a strict interpretation of the EU rules. At the same time, it builds on the existing national fiscal framework and remains relatively transparent and easy to understand. 

9 How can compliance with the EU rules be ensured if they are more ambitious than the national rules?

In Germany, national fiscal surveillance falls under the remit of the Stability Council, which is supported in its tasks by an Independent Advisory Board. These bodies monitor Germany’s compliance with the EU requirements. The Stability Council proposes adjustment measures where appropriate. The narrower the safety margin to the stipulations of the EU rules, the more significant this ongoing monitoring will be. The Bundesbank’s proposal for the reformed debt brake is based on the EU rules. However, these rules could certainly be more stringent, in part, than provided for by the national rules. Should that be the case, the EU rules would take precedence due to the legal supremacy of EU law and the Stability Council would have to call for a more ambitious fiscal stance.

At the same time, the Stability Council’s current surveillance should be improved, irrespective of the reform proposal presented here. In this vein, the Bundesbank and the Independent Advisory Board to the Stability Council have submitted proposals on how developments in government finances could be monitored more effectively. This would involve, not least, increasing the transparency of central and state government finances.

10 The EU rules set out spending limits for the fiscal plans while the Bundesbank proposal sets out borrowing limits. How does that fit together?

The EU requirements on expenditure limits for the coming years are derived from deficit targets. These deficit targets are the result of, amongst other things, sustainability analyses that incorporate the 60 % debt ratio anchor. A multi-year fiscal plan is then agreed to achieve the deficit targets. This plan contains the expenditure ceilings required for this purpose. European fiscal surveillance then checks that these expenditure limits have been complied with.

However, compliance with these expenditure ceilings is not and cannot be readily ensured in the German federal system. For this reason, the Bundesbank’s proposal is based on established borrowing limits. These are set up in a way that is intended to guarantee the achievement of deficit targets determined using the European analysis method. If the European requirements were to be tighter in specific years, the budget plans would have to be that much more ambitious.

11 Isn’t 60 % an arbitrary limit to set for the debt ratio? Aren’t there better ways of ensuring sound government finances?

There is no universal approach to determining the sustainability of government finances based on specific indicators or accurate thresholds. However, it is widely acknowledged that high debt ratios are fraught with problems. They restrict fiscal leeway, create uncertainty (not least in the capital markets) and generate additional macroeconomic costs. Ultimately, fiscal rules need to contain limits ambitious enough to create confidence in sustainable government finances.

The 60 % limit is entirely suitable as an anchor in this regard. This should provide enough of a safety margin toward the debt service limit. Failing to use all the available scope for borrowing is less problematic than having a debt ratio that exceeds a critical level. 

This is why the 60 % limit is enshrined in the EU Treaty, which also means it is binding for Germany. With regard to fiscal developments, as the largest country in the euro area, Germany also plays a prominent role as a fiscal anchor.

12 When will the debt ratio fall below 60 %, according to the proposal?

If the proposed borrowing ceilings are adhered to, the decline in the debt ratio will depend, amongst other things, on future growth in nominal GDP (in the denominator of the ratio). Other factors can alter the debt ratio, too. Financial transactions (e.g. sales or purchases of financial assets by the government) are one such example – they do not count towards structural borrowing, but they do alter the debt level. 

Under the Bundesbank’s proposal, the borrowing ceiling of 1 % of GDP per year would apply from 2036 onwards. Under the given assumptions, the debt ratio would then stand at 72 % in 2036. If nominal GDP growth remains steady at just over 2½ %, a simplified extrapolation puts the debt ratio at below 60 % for the first time in the mid-2050s. 

Depending on whether developments are more favourable or less so, the debt ratio may also fall below the 60 % limit a few years earlier or later. The Bundesbank defines sufficiently ambitious borrowing ceilings as values that ensure that the debt ratio is highly likely to reliably approach the reference value. It assumes that the proposal will achieve this, and therefore considers it appropriate. Somewhat less ambitious limits during the adjustment period would see the debt ratio fall more slowly. Less ambitious limits in the target zone would mean that the 60 % threshold might not be met. Conversely, if a faster decline in the debt ratio is considered necessary, smaller structural deficits in the first two stages and/or a more ambitious level for this in the target zone would have to be chosen. 

13 Don’t other factors besides deficits (in the numerator) and nominal GDP (in the denominator) also influence the trajectory of the debt ratio?

Yes. The change in debt may differ from the structural deficits. If, for example, central government purchases or sells participating interests (financial transactions), this does not count towards the deficit, which is what the EU rules are aimed at. However, the new borrowing (for purchases) or the reduction in debt (for sales) this creates is reflected in the debt ratio – known as deficit-debt adjustments (DDA). Cyclical influences also play a role.

The Bundesbank’s calculations assume (as the projections under the EU rules usually do) that no DDA will occur on balance and that cyclical factors will offset each other over time. Without a doubt, these assumptions will turn out not to be true in some years. 

14 Shouldn’t central government set stricter limits on its deficits from the outset and start the consolidation process earlier?

The Bundesbank proposes leaving the existing borrowing ceilings unchanged until 2029. This is in line with the fiscal-structural plan agreed under the EU rules.[1]

The central government budget is nonetheless under pressure, partly because new deficit-increasing measures have been adopted or are planned. For example, from 2027 onwards, central government’s fiscal plan for the period up to 2029 contains an urgent and growing need for action in order to comply with the debt brake. Significant measures are needed to close the budget gap. 

The Bundesbank also recommends that the new scope for borrowing be more strictly earmarked for additional defence spending and extra infrastructure investment. This will limit budgetary leeway for other items and make it more important to set priorities. 

From 2030 onwards, the Bundesbank proposes the start of a transitional phase in which a significant and continuous reduction of the deficit takes place.

15 Is the proposal not ambitious enough because it envisages significantly higher deficits than the former debt brake?

The old debt brake was essentially aimed at limiting the structural general government deficit to the former EU target of 0.5 % of GDP. To safeguard the EU objective, there was a borrowing ceiling of 0.35 % of GDP for central government and no structural scope for the federal states. The additional scope for borrowing for the Armed Forces Special Fund from 2022 onwards was already a limited easing measure. The EU rules were amended in 2024; the 0.5 % target was scrapped. 

Under the former debt brake, the debt ratio would probably have fallen to well below 60 % in the long term. The Bundesbank has already proposed a moderately more relaxed debt rule compared to this (most recently in its proposal of March 2025, but also as far back as April 2022). A debt ratio below the 60 % reference value can be stabilised even with somewhat higher deficits than permitted by the old debt brake. This seems acceptable with regard to sound government finances. 

16 Isn’t the proposal overly ambitious in setting out such low longer-term borrowing ceilings?

The borrowing ceiling in the target zone was chosen such that a debt ratio of over 60 % can properly approach the reference value with a relatively high degree of certainty and in line with the EU rules. If the debt ratio is under 60 %, the proposal envisages a deficit that is sufficient to keep the debt ratio below this level. If the figures were much less ambitious in each case, the targeted debt developments would probably not be achieved.

17 Don’t we need a longer period overall in which deficits can be higher in order to cope with the major challenges concerning defence and infrastructure? 

The current rules allow considerably wider government deficits to meet these challenges. But even for essential defence spending, large deficits are sustainable only for a limited transitional period. This does not mean that this defence spending should not be made; rather, additional structural needs of this kind should generally be financed through current revenue. The later or more slowly action is taken to reduce high deficits, the greater the pressure becomes to adjust government budgets. Interest burdens rise. 

The Bundesbank’s proposal is also geared toward the requirements of the EU rules. Barring exceptional circumstances, the EU rules stipulate that deficit and debt ratios above the 3 % and 60 % mark are to be reduced gradually. Structural deficit ratios must be limited for this purpose. The proposed consolidation steps are in line with these EU rules and appear appropriate. 

Reducing the large planned deficit and pursuing a markedly less ambitious target later than 2030 would appear difficult to reconcile with the EU rules. The current fiscal/structural plan runs until 2029. A new plan would therefore have to be agreed for the years from 2030, if not sooner. This would then be the responsibility of the new government formed after the 2029 general election. Besides this, as things currently stand, the EU exemption for defence spending will have expired in 2029. It is presently set to last until 2028, with the Federal Government apparently expecting an extension of one year. 

From today’s perspective, consolidation steps of less than ½ % of GDP are unlikely to be compatible with EU requirements. This would be the case particularly if Germany were in an excessive deficit procedure. The procedure is to be expected because deficit ratios are likely to be well above 3 % (even after the EU exemption for defence spending runs out).

18 Could annual consolidation be set to a different level during the transitional phase?

The transitional phase could also be structured differently. However, it should be noted that the proposal is based on the EU rules. The Bundesbank believes that the steps are also appropriate independently of these rules. They involve a significant amount of consolidation. Larger steps could be taken. It should be borne in mind that smaller steps could well result in growing conflicts with the EU rules. 

19 How were the figures of 1 % and 1½ % for the borrowing ceiling in the target zone settled on?

The borrowing ceilings are derived from the interplay between the 60 % anchor for the debt ratio and the assumptions made for nominal GDP growth: if it is assumed that nominal GDP will grow by around 2½ %, a borrowing ceiling of 1 % should ensure that higher debt ratios are very likely to converge to the anchor value (roughly in line with EU rules). For debt ratios below 60 %, a borrowing ceiling of around 1½ % should keep the debt ratio below the 60 % limit. The proposed borrowing ceilings also correspond to the requirement in the EU rules that the deficit limit of 3 % be undershot by a certain safety margin (deficit resilience safeguard). 

20 Should the borrowing ceilings in the target zone be adjusted if potential GDP changes?

The calculations in the reform proposal are based on parameters within the current forecast spectrum (inflation: around 2 %, real potential growth: around ½ %). Specifically, a nominal rate of 2.6 % was assumed for potential GDP growth from 2028 onwards (2 % GDP deflator and 0.6 % real potential growth). Real potential growth for the period from 2029 onwards is taken from the Federal Government’s most recent estimate of 8 October 2025. The Federal Government also uses its estimates of potential output in the context of the debt brake (e.g. for budget planning) and in the European Semester (most recently in the spring estimate in the 2026 draft budgetary plan). The Federal Government’s October 2025 estimate of potential output has been independently assessed by the Joint Economic Forecast Project Group and is considered to be within the limits of plausibility. At present, the Federal Government’s estimate is somewhat above ½ %, while estimates by the Bundesbank, the German Council of Economic Experts and the Joint Economic Forecast, for example, are somewhat lower.

If potential growth is indeed higher, the debt ratio would decline more quickly and stabilise at a lower level if the borrowing ceiling were to remain unchanged. For example, if the nominal potential growth path were to be raised markedly from 2½ % to 3 % while the target debt ratio remained the same (60 % anchor), the scope for borrowing would increase by ¼ % of GDP per year, all other things being equal. If the borrowing ceiling were to remain unchanged, however, the debt ratio would not fall below 60 % until the end of the 2040s, even with this higher growth. 

By contrast, if potential growth were to prove considerably lower than assumed in the calculations, the EU rules would probably tend to be tighter than the proposed national limits. In that case, it might not be possible to achieve the objective of anchoring the debt ratio to the 60 % level. This would then suggest that the borrowing ceilings in the national rules should be set to a lower level. 

Against this background, the Bundesbank suggests in its proposal that borrowing ceilings be validated in a rules-based manner. It could be checked at regular intervals whether the underlying assumptions are still appropriate and whether the borrowing ceilings are still suited to ensuring sound government finances and compliance with EU rules. Overall, the ceilings could be lowered if potential growth were weaker, and could also be raised accordingly if potential growth were stronger. It would make sense to assign third parties to carry out or certify these checks. It would then be the task of legislators to weigh up and, if necessary, implement a change in the rules.

21 Why should the defence spending exemption expire even though defence spending is likely to remain high in the longer term? 

Given the major short-term challenges and additional needs for defence, it makes sense to create some fiscal headroom to address these in a transitional phase. In the longer term, extensive and potentially unlimited debt financing for defence spending is incompatible with sound government finances. 

Defence capabilities and sound government finances are not a contradiction in terms. However, persistently high defence spending ultimately has to be financed within binding and appropriate borrowing limits. Accordingly, the Bundesbank proposes that it increasingly be covered within the framework of the regular budget (be it through higher revenue or by eliminating lower-priority expenditure). From an economic standpoint, too, external and internal security are essential public services, just like education and healthcare services. 

In principle, the Bundesbank’s proposal allows for borrowing of up to 0.8 % of GDP for government fixed asset formation. The Bundesbank proposes that expenditure be defined pragmatically based on the relevant budget categories. Politicians would still need to decide whether this investment borrowing should also include, for example, some military investment (no fixed asset formation by budget category). 

Aside from this, the current exemption for defence and security reduces the transparency of central government finances.[2] In addition, it puts the binding effect of the debt brake at risk. For example, legislators could reclassify more and more expenditure under the privileged defence category without the reasons for this being easy to follow. 

22 Why does the Bundesbank’s proposal envisage scope to borrow in the amount of 0.8 % of GDP for investment expenditure?

In setting the amount at 0.8 % of GDP, the proposal is broadly based on the annual scope for borrowing of the Infrastructure and Climate Neutrality Fund (evenly distributed in relation to GDP up to the end of the transitional phase (2035)). The Bundesbank’s proposal also stipulates the additionality of relevant (non-military) fixed asset formation relative to 2024. This will stabilise the government investment ratio at a markedly higher level than in recent decades and should pave the way for improving infrastructure. If a higher or lower borrowing limit were chosen for investment expenditure, a balance would then need to be struck between this and the freely usable scope for borrowing available to central government and state governments in order to ensure compliance with the EU rules.

23 Would unlimited debt financing not be a better way to cover investment spending?

The option of unlimited debt financing is not suitable for safeguarding sound government finances and EU rules. That is why the Bundesbank explicitly advocates a cap on borrowing for investment (“capped golden rule”). At the same time, the proposal places a cap on overall deficits owing to the limited borrowing scope for investment. 

The “golden rule of fiscal policy” has the advantage of accelerating a build-up of assets, complementing the rise in debt. However, a rule linked to net investment also poses problems. These relate, amongst other things, to how investment is defined, how depreciation is measured during planning and settlement, and a potential threat to sound government finances through unlimited debt financing. The Bundesbank therefore proposes a pragmatic approach to the concepts of investment and additionality. Moreover, the cap on borrowing for investment (capped golden rule) prevents the soundness of government finances from being put at risk.

24 How can additional investment be defined in the context of the cap on borrowing for investment?

The proposal follows a pragmatic approach here: the basis for comparison is infrastructure-related investment as per the budget accounts for 2024. This distinction appears to be a sensible way of ensuring additionality and focusing on infrastructure. It is important not to set the requirements for additionality too low or to opt for a very broad definition of investment. The danger of this would be that, ultimately, the scope for borrowing would only be used to close general budget gaps and finance current expenditure. This would jeopardise the objective of modernising and improving infrastructure and keeping it well maintained. 

The Bundesbank’s proposal provides a specific budget definition for central government’s infrastructure-related investment expenditure (defined according to the classification scheme).[3] According to the proposal, investment is considered “additional” if it raises the investment ratio of a given year above the actual value of this ratio from 2024 (the base ratio). The investment ratios here are investment expenditure over nominal GDP. By referring to the ratio, the increase in economic output is taken into account for the coming years. 

In addition, state governments should use the debt-financed investment grants from central government to boost their own fixed asset formation and that of their local governments in a comparable manner. 

The Bundesbank recommends that final settlement be based on the actual investment ratios in the budget outcomes. If only planned figures are used, investment can be reduced during budget implementation to create borrowing scope for other expenditure. 

25 Could the borrowing ceilings be split differently between central government and the state governments? 

The Bundesbank’s proposed distribution builds on the current setup since the March 2025 reform: central government assumes the scope for investment borrowing and the interest burdens that come with it. The freely usable scope for borrowing is distributed equally between central government and state governments. 

However, both the borrowing scope for investment and the freely usable component could also be split differently without being at odds with the basic objectives of the proposal. From the Bundesbank’s perspective, there is, for example, a case to be made for focusing borrowing scope on central government (as had been envisaged in the Bundesbank’s March 2025 proposal). Not only does central government have more favourable conditions for borrowing, but some federal states are already highly indebted, or are at risk of this if they exhaust higher borrowing limits. 

26 Are there not deficits at other levels besides central government and state governments?

Yes. Social security funds and local governments could also record deficits. In the case of the social security funds, however, these are offset over time by corresponding surpluses: the social security funds are not permitted to borrow from the capital market. This means that, as a rule, deficits can only arise if there are reserves that were previously built up using surpluses. In some cases, central government extends short-term loans, but accompanying deficits and surpluses in the social security funds also offset each other over time. 

Local governments are only permitted to borrow for investment based on their financial capacity. Given this, there are relatively strict limits on the deficits. The currently large deficits accumulated by local governments therefore require adjustments to be made. Cash advances can be taken out to bridge short-term gaps. However, longer-term outstanding amounts indicate structural imbalances that, in some cases, are difficult for the affected local governments to manage on their own. To tackle local government budget imbalances, the Bundesbank has proposed that local governments take out such cash advances from their home states and that these amounts be counted towards those state governments’ debt brakes (see Local government finances: how cash advances can be limited and budget imbalances avoided). This would increase the pressure on state governments to ensure sound local government finances. The state governments share responsibility for local government finances. 

27 In Germany, local governments are responsible for a large part of government investment. Why do the recommendations not include a secured borrowing framework for local government investment?

General scope for borrowing for local governments is not recommended. It is with good reason that budget rules for local governments tie their scope for borrowing to their financial capacity. And if this is secured, local governments have always been able to borrow to finance net investment, too. Local government finances fall under the state governments’ remit. These must ensure that local governments have sufficient financial resources to fulfil their tasks. They can do so, for example, by passing on investment grants received from central government to their local governments.

28 In the target zone, won’t changing the borrowing ceiling in response to debt ratios being above or below 60 % lead to erratic fiscal policy? 

In the Bundesbank’s proposal, the borrowing ceilings for central government and state governments change from 0.35 % of GDP for debt ratios below 60 % to 0.1 % for debt ratios above 60 %. However, this change should not result in a need for ad hoc – and potentially erratic – fiscal policy adjustment. This would hinder the steady fiscal governance that is desired. 

Fiscal policy can prevent this by factoring safety margins into the respective ceilings. This seems generally advisable. However, there is probably a strong incentive to regularly borrow more or less up to the borrowing ceilings.

The proposal addresses this risk by providing for an extended transition at the 60 % threshold: there is no “jump” in the borrowing ceiling even if the debt ratio is forecast to exceed 60 %. Instead, the borrowing ceiling is only reduced once the 60 % threshold of the previous year has been exceeded on balance and if the Federal Government’s forecast, which has been audited by an independent institution, does not indicate that borrowing will go below the threshold again in the coming year, either. This makes the transition to the lower borrowing ceiling easier to plan. Sound government finances are not jeopardised by the potentially somewhat delayed adjustment, as this all happens close to the 60 % threshold.

29 Cyclical adjustment is part of the proposal. Won’t revisions to estimates lead to erratic fiscal policy?

The cyclical adjustment framework proposed by the Bundesbank explicitly aims to significantly mitigate this problem. This is intended to support a steady fiscal policy. Specifically, the proposal adds a supplementary error component to the cyclical adjustment procedure (see Central government’s debt brake: options for stability-oriented further development). The supplementary component allows for a lagged adjustment to unexpected developments: any adjustment that needs to be made can be spread over a maximum of four years and therefore does not need to be achieved immediately. Frantic countermeasures can thus be avoided, and it is easier to maintain a steady fiscal policy. The procedure not only takes into account revised estimates of potential GDP, but also directly tackles unexpected developments in tax revenue. This applies especially to taxes on earnings: the revenue here can fluctuate erratically by significant amounts. The proposed procedure is not expected to conflict with the EU rules, which are implemented based on expenditure limits and feature a control account for certain deviations from the annual expenditure limits.

1. The EU requirements for Germany in the period up to 2029 probably even allow larger deficits; see Deutsche Bundesbank (2025), Public finances, Monthly Report, August 2025, Section “1.3 EU rules: Germany has submitted plan”.
2. See, for example, Table 5.2 in the August 2025 Monthly Report, to get a sense of this.
3. All construction work and acquisitions of non-financial assets (based on the budget classification table: main category 7 and groups 81 and 82) as well as investment grants to central government enterprises such as Deutsche Bahn and Autobahn GmbH (recorded via classification number 891) and to public institutions such as for the expansion of the mobile network (recorded via classification number 894). Excluded are financial transactions (capital injections and lending, groups 83 as well as 85 and 86 – also excluded in central government’s account), as well as calls on guarantees, investment grants under development aid, to private enterprises and other government authorities (classifications 87, 896, 892 and 88). Investment in the core budget that is financed out of borrowing for exempted spending is also excluded.