Presentation by Martin Kelleners, Germany, 8th Annual meeting of OECD-MENA Senior Budget Officials, Doha, Qatar, 14-15 December 2015.

1. Federal Ministry of Finance
Berlin
8th Annual Meeting of the
OECD-MENA Senior Budget Officials Network
Doha, 14-15 December 2015
Martin Kelleners
Deputy Director General
DG Budget
Federal Ministry of Finance,
Germany
The German “Debt Brake”

2. Federal Ministry of Finance
Berlin
Why a reform was needed:
Weaknesses of the previous constitutional rule
2
• “Golden rule” type: deficit allowed for investment
• Deficit also allowed for the prevention of economic
downturns – without any effective quantitative limitation
• No obligation to ensure a corresponding surplus in
“good times”
• Binding only for the budget plan, not for the budget execution
• Not compatible with the relevant EU rules (Stability and
Growth Pact)
• The result: continuous increase of public debt over decades

3. Federal Ministry of Finance
Berlin
3
0
10
20
30
40
50
60
70
80
90
Public budget debt
in % of GDP
Federal off-budget entities
Core federal budget
Länder (states)
Local authorities
1969: Old version of Article 115 of
the Basic Law ("golden rule")
enters into force.
2011 : New version of Article 115 of
the Basic Law ("debt brake") enters
into force.

4. Federal Ministry of Finance
Berlin
Key attributes of the new rule („debt brake“)
4
• Rule is enshrined in the constitution, principle of balanced
budgets binding for central state (Federation) and federal states
(Länder)
• Clear and calculable limits for deficits
• Symmetrical rule, cyclical adjustment throughout the entire
business cycle
• Very restricted exceptions for “emergency situations”
• Also binding during execution of the budget, deviations have
to be recorded and compensated for in subsequent years
• Gradual introduction of the new rule with a transition path
from 2011-2015

5. Federal Ministry of Finance
Berlin
The new federal “debt brake”:
The components of the permissible deficit
5
• Small structural deficit is permissible
(0,35 % of GDP)
• Cyclical component: additional permissible deficit during bad
times and obligation to achieve surpluses in good times
• Adjustment for financial transactions
• Obligation to compensate for deficit overruns from previous
years (if any)

6. Federal Ministry of Finance
Berlin
The permissible structural deficit
6
• Federations’ permissible structural deficit of 0,35 % of GDP
reflects the Federation’s share ofGermany’s Medium-Term
Objective (MTO) under the European Stability and Growth
pact, which is “close to balance or in surplus”, operationalized
as a maximum deficit of 0,5 % of GDP deficit for the general
government.
• The permissible structural deficit must not be misunderstood as
a minimum permissible deficit in all situations: in good
economic phases, when the cyclical component requires a
surplus (see below), this is offset against the permissible
structural deficit.

7. Federal Ministry of Finance
Berlin
Cyclical adjustment
7
• The goal: automatic stabilizers should be allowed to work -
purely cyclical effects on the budget should lead to an obligation
to achieve a surplus in good times or should allow
corresponding extra deficits in bad times,
but: no scope for additional discretionary spending programmes
in bad times!
• The mechanism, defined in a statutory instrument and
following the method applied in the European budget
surveillance processes:
- 1st step: calculation of the output gap
- 2nd step: multiplication of the output gap by budget
elasticities

8. Federal Ministry of Finance
Berlin
Adjustment for financial transactions
• The goals:
- Financial transactions that leave the Federation’s “asset
position” unaltered should be neutralized
- Achieving the closest possible alignment with European rules
- But: All problems relating to the definition of “one-offs”
should be avoided
• The mechanism:
- Defining financial transactions as transactions relating to
financial assets
- Operationalizing this by a clear reference to the respective
positions in the budget classification
8

9. Federal Ministry of Finance
Berlin
Making the rule binding for budget execution:
The control account
9
• The calculation of the permissible deficit is fully revised ex post on
the basis of the factual figures (e.g. GDP, real deficit), on a
preliminary basis in March of the year after the respective budget
year, and definitively in September of that year.
• All deviations from the revised permissible deficit are booked to a
control account. This is not a real account, but a controlling
instrument.
• If there is a negative balance of at least 1 % of GDP, the
permissible structural deficit for the next year has to be reduced
(at most reduced to zero). To avoid a negative economic impact,
this obligation only applies as long as the output gap is not
increasing.

10. Federal Ministry of Finance
Berlin
Flexibility (1): The rule for supplementary
budgets
10
• Problem:
− During budget execution, there might be unexpected
deviations from the planned figures.
− Such deviations might not be correctable in the very short
term of the running budget year.
• Solution:
− A supplementary budget is allowed to include an additional
permissible deficit up to a maximum of 3 % of the tax
revenue.
− To the extent that this deficit exceeds the definite
permissible deficit (as shown in the ex post calculation of the
debt brake), it is booked on the control account.

11. Federal Ministry of Finance
Berlin
Flexibility (2): The “emergency exception”
11
• Problem:
– Extreme situations may arise that are out of the control of
the government, but which require an immediate reaction
and additional fiscal space.
– However, allowing a generous exception – as in the old rule
– has proven to be uncontrollable.
• Solution:
– Exception for natural disasters, unusual emergency
situations and cyclical developments that deviate from
normal conditions (meaning crises like the GFC, it explicitly
does not mean usual recessions!).
– Needs to be approved by a majority of the members of
parliament and has to be combined with an amortisation
plan.

12. Federal Ministry of Finance
Berlin
Overall transparent calculations
12
• The calculation of the permissible deficit with all its steps is fully
published in the budget:
• Ex post calculation is published in Ministry of Finance’s Monthly
Report.

13. Federal Ministry of Finance
Berlin
Debt Brake and budget preparation cycle
negotiations
MoF
13
midterm
economic
projection
October
tax estimation
November
cabinet decision about
benchmark figures
(Top-Down)
March
estimates
from other
ministrys
May/June
June/
July
September
cabinet decision
about draft budget
and financial
plan
1. reading
Bundestag1. passage
Bundesrat
2./3. reading
Bundestag
2. passage
Bundesrat
promulgation
Federal Law
Gazette
November
December
tax
Estimation
(MoF)
annual
economic
report
January
April
May
October
Recalculation of
cyclical component
parliamentary process
midterm
economic
projection
midterm
economic
projection
tax estimation
tax
estimation

14. Federal Ministry of Finance
Berlin
Initial experiences with applying the rule
14
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
2010 2011 2012 2013 2014 2015 2016
planed structural deficit actual structural deficit permissible structural deficit
Structural deficit as a percentage of GDP

15. Federal Ministry of Finance
Berlin
Structural deficit and transition period
• The permissible structural deficit for the fiscal years from 2011
to 2015 (transition period) was too generous.
• Since 2012 the budget has complied with – and sometimes even
come in well under – the standard limit on structural net
borrowing of 0.35% of GDP.
• The cumulative balance of the control account for the period
encompassing the fiscal years from 2011 to 2015 will be
cancelled at the end of the transition period.
15

16. Federal Ministry of Finance
Berlin
Cyclical component
16
• The recalculation of the cyclical component is difficult for the
process of budget preparation. The expectations about the
difference between actual and potential GDP can vary greatly
during the process, which in turn requires short-term adjustments.
Financial transactions
• Operating via the budget classification works well.

17. Federal Ministry of Finance
Berlin
Scope for simplification?
17
• The former “golden rule” was simple but inefficient. In
Germany a strong and broad-based political will to create a
reliable rule without “back doors” led to the creation of the debt
brake.
• Applying the debt brake involves a lot of indispensable
preconditions (e.g reliable economic data, ex ante approval of
the budget, timely overview of budget execution).
• If those preconditions are given, there might be some room for
the customization of the rule.
• International economic institutions, for example, might have the
necessary expertise to carry out such a customization.
• However: a rule where back doors are closed firmly will never
be simple!

18. Do you require more information?
The Federal Ministry of Finance has published a comprehensive overview of the debt brake,
including explanatory text and all relevant legislation, which is available in English here:
http://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/Fiscal_p
olicy/Articles/federal-debt-brake-01-background-basic-structure.html
The debt brake and its role in the German budget procedures is extensively described in the
recent OECD review of the German budget system:
http://www.oecd.org/gov/budgeting/Budget-Review-Germany.pdf
Martin Kelleners
Deputy Director General
DG Budget
Federal Ministry of Finance,
Germany
martin.kelleners@bmf.bund.de