Federalism, Budget Deficits and Public Debt: On the Reform of Germany's Fiscal Constitution

In 2009, new debt restrictions in the Grundgesetz (the German constitution) and in federal legislation passed both chambers of the German parliament by two-thirds majorities, imposing a more rigid debt regime on federal and Länder (states’) fiscal policies than previous constitutional provisions entailed. In this paper, the new provisions are evaluated against the background of the problems of German fiscal federalism that they are supposed to solve, as well as the possible solutions discussed in constitutional economics. We thereby mainly draw on recent evidence from Switzerland. This reform is an important step to remedy the shortcomings of German fiscal federalism, but we argue that it needs to be complemented by tax autonomy for the German Länder.