Which field has a good margin in the future?

Black zero

Lukas Haffert

To person

is a political economist and senior assistant at the Chair of Comparative Political Economy at the University of Zurich. [email protected]

For the first time in seven years, the German state will close another year with a budget deficit in 2020, with by far the largest deficit of all time. A high two- or even three-digit billion deficit can be expected in the federal budget alone in 2021. The general government debt ratio is likely to reach a new record level next year. Red numbers as far as the eye can see.

So does the "black zero" remain a mere episode, which was due to special circumstances such as a long export boom and historically low interest rates, but which does not have any lasting effects on public finances? Or does it mark a fundamental turning point in the history of German public finances that will remain in effect beyond the Corona crisis?

The answer to this question will not depend solely on how deep the economic slump triggered by the pandemic is and how big the rescue packages put together in response will be. At least as important is how much the "black zero" is now one of the basic fiscal policy coordinates of the Federal Republic. Is it already so deeply anchored that it will not be permanently called into question even in the face of the worst economic crisis of the post-war period? Or was it already vulnerable before Corona and is now experiencing its overdue end?

The possibility of completely different developments indicates that crises do not interpret themselves, but political wrangling over their interpretation. The pandemic can be interpreted as evidence of how necessary a permanent change in fiscal policy is. But it can also be interpreted in such a way that it shows how correct and important the policy of budget balancing has been and continues to be. Which of these interpretations will prevail politically depends not least on which argumentative resources the respective sides can fall back on in this struggle.

Against this background, the following first reconstructs which political function the "black zero" fulfilled before the outbreak of the pandemic. How did it come about that a financial statistics key figure was loaded with such an enormous symbolic meaning? And what criticism of the "black zero" was already formulated before the beginning of the Corona crisis? On the basis of this reconstruction, the question is then asked which interpretation of the connection between the corona crisis and "black zero" has the best chance of prevailing, and on what this will depend.

When answering these questions, it is helpful to take an explicitly comparative perspective and to compare German developments and debates with those in other countries. Multi-year budget surpluses are by no means a German peculiarity, but a well-known phenomenon from other countries. From the way other "surplus countries" dealt with, albeit smaller, economic shocks, certain conclusions can be drawn for the German corona reaction. In addition, the experience of these countries shows to what extent the German surplus was only a largely common form of budgetary policy in times of economic upswing - and what is really special about the "black zero" and therefore requires special analysis.

Popularity factors

If one looks for the reasons for the great political success of the "black zero", three sources can be identified: first an ultimately psychologically determined popularity of balanced households; Secondly a deficit discourse practiced over decades, whose interpretation of recent German economic history forms the contrast to the "black zero"; third Finally, the specific political constellation of two people's parties, emaciated in terms of content, but bound together by a grand coalition.

psychology
First of all, it is not a German peculiarity that balanced households are very popular. This was particularly noticeable around the turn of the millennium, when a number of Western democracies ran multi-year budget surpluses. In these countries, too, the politicians responsible for the surplus successfully presented themselves as guarantors of a particularly sustainable, generational or growth-promoting policy. It was no different with US President Bill Clinton, who had budget surpluses in the last few years of his tenure, than with Swedish Prime Minister Göran Persson or his Canadian counterpart Paul Martin. The examples also show that balanced budgets are by no means just a conservative issue: Persson was a Social Democrat, Clinton and Martin also belonged to left-of-center parties. They all managed to integrate budget surpluses into a narrative of modern, progressive economic policy.

This staging of surpluses makes use of the widespread "household analogy", i.e. the equation of public budgets with private households, which has become popular in Germany above all through the image of the Swabian housewife: [1] As little as private persons permanently "about their circumstances" could live, so little is a state allowed to do so. In addition, zero is an important psychological reference point. It does not simply separate positive from negative numbers, but also symbolically delimits the area of ​​fiscal policy success from that fiscal policy failure. Therefore, surpluses enable a strategy of "credit claiming" in which a government can aggressively emphasize the successes of its budgetary policy, while deficits force a strategy of "blame avoidance" [2] in which they hide their failures and ascribe them to other actors or circumstances got to.

In contrast to what the economic theory of politics expects, according to which deficits are politically attractive because they allow state benefits to be distributed without having to ask taxpayers to pay for it - a temptation that must be stopped by strict fiscal rules - So a permanent surplus policy can be hugely popular. [3] In fact, governments that turn a deficit into a surplus are almost always re-elected. And finance ministers, who turn a deficit into a surplus, often lay the foundation for a later rise to the top of the government.

Nevertheless, despite this general popularity of surpluses, public debt has risen steadily in most countries since around 1970. The German surplus is not unique - on average over the past few decades, western industrialized countries spent about a fifth of the time in surplus [4] - but it is rare enough to require further explanation.

Deficit Discourse
The dominant discourse on the negative consequences of national debt, which has developed in Germany over the past few decades, plays an important role in this explanation. The flood of red numbers, which is regularly invoked in this discourse, forms the contrast film in front of which the "black zero" appears as the only serious form of budgetary policy.

This focus on the negative consequences of national debt is initially not specific to the German discourse either. In other countries with surpluses, too, these were regularly staged as a salutary contrast to national experiences with national debt - be it in contrast to the Swedish banking crisis of the 1990s or the "double deficit" in the national budget and trade balance of the Reagan administration in the USA in the 1980s Years.

However, the German discourse is special in that this historical contrast film goes back particularly far, namely to the experiences of the Weimar Republic with its barely veiled national bankruptcy in the course of hyperinflation in 1923. The thesis that high national debt inevitably leads to high inflation is still used today regularly backed up with a reference to Weimar and is also booming again in the context of the Corona crisis. [5] In the historically not very precise memory of many Germans, memories of hyperinflation and the mass unemployment of the Great Depression in the early 1930s are mixed up in a single, all-encompassing Weimar crisis narrative. [6] What is completely missing in this narrative is the fact that the global economic crisis was not an inflationary but a deflationary crisis that was fueled by the austerity policy of the Briining government. In the meantime it is established in the scientific literature that precisely this austerity policy played a decisive role in the rise of the NSDAP. [7] In the public debate, however, these facts are at a losing position compared to the plausible link between national debt and hyperinflation and hyperinflation with Hitler.

Probably more important for the success of the "black zero" than the supposed lessons from the 1920s, however, were the fiscal policy debates of the past 40 years. It is characteristic of these debates that national debt is judged primarily according to moral standards and not according to economic expediency. The diagnosis that the state is living "beyond its means" is always accompanied by a moral reproach. It is less a question of whether debt is a suitable instrument for achieving certain economic policy goals, but rather of whether this instrument is legitimate. Long before the "black zero", balanced budgets were established as a permanent fiscal policy goal by the conservative finance ministers Gerhard Stoltenberg and Theo Waigel, but also by their social democratic successors Hans Eichel and Peer Steinbrück.

With the introduction of the debt brake, which was adopted by all parties in 2009, the goal of structurally balanced budgets finally made its way into the Basic Law. This constitutional amendment was not so much a cause as it was itself the result of a further intensification of the deficit discourse: only after the SPD and the Greens had given up a competitive, more positive interpretation of deficits, the fear of debt acquired constitutional status.

The constitutionalization of details of household technology - Article 115 of the Basic Law stipulates, among other things, the use of a cyclical adjustment procedure, with the help of which the structural part of the budget balance, for which political decisions are responsible, is to be isolated from fluctuations solely caused by cyclical fluctuations - is an expression of a very German idea Fiscal policy is primarily a question of formal rules and less of a political majority. This idea is also evident in the German insistence on countering the euro crisis with a multitude of new fiscal rules at the European level. This belief in the power of better fiscal policy rules is not only widespread among the supporters of the debt brake: the proponents of a more expansive fiscal policy are also working with great energy on this constitutional rule, as if its reform would naturally also result in a change in fiscal policy .

Political Opportunities
The general popularity of budget surpluses and the problematization of deficits that have been practiced over many decades have thus created the prerequisites for the success of the "black zero" in Germany. Nevertheless, these prerequisites would probably not have been used so eagerly if the "black zero" had not fitted perfectly into the political era and symbolized the politics of the grand coalitions of the Merkel era. First of all, this affects the Union parties themselves: the "black zero" is the ideal political project of conservatism exhausted in terms of content, because it declares a political instrument, the budget balance, to be the actual political goal. [8] If you limit yourself to not spending more than you earn, you save yourself uncomfortable debates about what the money is actually being spent on and whether it shouldn't be spent on completely different things. In times of stable growth and falling interest rates, the "black zero" ennobles a lack of ideas as a political concept.

However, this policy became even more attractive for grand coalitions, which do not define themselves through a common political project, but rather through the promise of stability and state political responsibility. For such governments, the "black zero" is the ideal political glue because it allows content-related disputes to be transferred to financing issues and thus to ignore: The SPD is demanding higher government spending? Not affordable! The Union wants tax cuts? That would put the "black zero" at risk! The fact that balanced budgets can be the result of a fiscal policy stalemate is also nothing new: In the USA, the Clinton surpluses were already explained by the fact that the democratically run White House and the Republican-controlled House of Representatives blocked each other. [9]

In this respect, too, German fiscal policy cannot claim to be truly unique. Where it can do that is, of all things, when marketing the budget surplus. No one had ever thought of the ingenious trick of charging the accounting fact of budget balancing with the powerful symbol of the "black zero". While the expression of the "black zero" originally had a questionable image - in the 1990s it was still considered a synonym for somewhat dodgy accounting tricks of actually loss-making companies - it was possible after 2010 to create a symbol with a clearly positive connotation. [10] The German Treasury Department thus proved to be much more innovative than its American, Australian or Canadian counterparts, who were also looking for catchy formulas for their surplus policy - "In the Black", "Balance or Better" - but did not come across any slogan with comparable marketing potential . A formula like "Balance or Better" can perhaps still be printed on posters - hanging under the ceiling of ministry foyers or as a living sculpture of ministerial officials in black suits you can only form the "black zero".

Corona criticism

The "black zero" draws from psychological, historical and party-political sources of popularity. Nevertheless, criticism of this policy has often been formulated from the start. It was pointed out again and again that state savings contribute to the German foreign trade surplus and thus to economic imbalances in Europe and the world. It was also criticized that the state unnecessarily refrains from benefiting from historically favorable financing conditions, although it is foreseeable that interest rates will remain at this low level for a very long time.

In terms of content, the most serious and politically most influential criticism was that the "black zero" policy was jointly responsible for the public investment backlog. The structural condition of the public schools, the permanent closings of motorway bridges, the punctuality crisis of Deutsche Bahn or the slow broadband expansion are visible expressions of a lack of public investments for years, for which the focus on budget discipline is partly responsible. This lack of investment can even lead to the fact that the state net wealth continues to decline despite falling public debt, because the investments are not enough to even compensate for the wear and tear. [11]

This link between budget surpluses and a lack of public investment cannot be taken for granted. The debt brake was actually made palatable to skeptical Greens and Social Democrats with the exact opposite promise: a reduction in public debt would make it possible to resolve the investment backlog that already existed at the time, because it would open up new fiscal leeway for the state. [12] In fact, the federal government attests to "record investments" every year in the past few years. According to the federal budget, federal investments increased from 29.3 billion euros to 38.9 billion euros between 2014 and 2019. [13] However, if one does not consider the nominal sum, but rather the share of investments in total federal expenditure, this has hardly increased. In addition, the majority of public investments in Germany are not made by the federal government at all, but by the municipalities, whose financial situation is still very heterogeneous, despite national surpluses. [14] A federal program for public investments should therefore actually begin to put the cities in the Ruhr region in a position to invest more heavily in the first place.

Advocates of the "black zero" counter that this mixed investment balance is not the result of budget balancing policies, but rather a problematic setting of priorities. [15] It is just a political decision to spend the budget surpluses on pension gifts instead of on schools and universities. Nothing prevents the proponents of higher investment from organizing political majorities to set other priorities.

The experience of other countries with budget surpluses shows, however, that the German development is by no means an isolated case and that such surpluses are quite regularly associated with only subdued development in public investment. [16] In this respect, this development does not appear to be merely an expression of the political priorities of certain majority relationships, but is structurally linked to the generation of surpluses. Ultimately, the reason for this is that certain fiscal priorities are not created in excess, but precede it. The use of budget surpluses cannot therefore be understood without an analysis of how they arise.

This connection becomes very clear if one looks at the argument of a lack of planning capacities, which is often used to explain why public investments are not growing faster: even if the state wants to invest more, it takes a while until the necessary investments are made Conditions are created. The reduction in planning capacities was, of course, part of the policy that made surpluses possible in the first place - and is now continuing to affect the surplus. A long-term austerity policy does not just turn off the proverbial money tap on certain policy fields for a certain period of time, but also changes the entire pipeline system through which state money can flow. The simultaneity of surpluses and a slow increase in public investment is therefore no accident. One is closely related to the other.

Will Corona change everything?

But maybe all of this is already history? Perhaps the "new normal" brought about by Corona will also affect state finances and restore the "old normal" of budget deficits and growing national debt that has been used for a long time? After all, Corona has not only led to a collapse in tax revenues, but possibly also triggered a general renaissance of public services of general interest, which is correspondingly expensive.

Predictions that "everything will change" due to a crisis naturally boom in crisis situations. How short the half-life of such forecasts can be was only shown by the global financial crisis of 2008. The renaissance of the state announced at the time lasted less than two years. At best, crises open up a window of opportunity in which a fundamental change in policy is possible, but they do not bring about it themselves.

Political paradigm shifts must therefore also be fought for politically in crises - by well-organized actors with clear goals who take advantage of this opportunity. Against the background of the analysis so far, however, it seems unlikely that such actors exist in Germany and that the criticism of the "black zero" that arose before Corona provides the basis for such a paradigm shift.

The most important reason for this is that a paradigm shift not only requires a negative criticism of the previous paradigm, but also a positively formulated draft for a new paradigm. However, such a "coherent and well-developed alternative" [17] to the "black zero" has not yet been identified. The group of critics of the surplus policy is also too heterogeneous to be able to agree on such an alternative paradigm in the shortest possible time. While some of the critics would already be satisfied with a noticeable increase in the government investment rate, others are aiming for a much more fundamental readjustment of the role of the state in the economy.

Another argument against a permanent change of course in fiscal policy is the fact that the powerful reaction of the German state to the economic consequences of the pandemic seems to prove how correct and important the policy of debt reduction was. The budgetary policy of the past few years has only created the leeway that has now made it possible to react so forcefully to Corona. The debt brake, which has recently been so heavily criticized, can be rehabilitated with this argument. After all, the pandemic has shown that the constitutional rule is flexible enough to enable an appropriate handling of crisis situations. [18] Whether this flexibility is really sufficient will only be shown when the debts taken on during the crisis have to be repaid from 2023 onwards. [19]

If you look at the sources described above for the popularity of the "black zero", at least two of these three sources are likely to regain strength in the post-pandemic period. The enormous budget deficits will put the traditional deficit discourse back on the political agenda. From this point of view, the sharp rise in the debt ratio appears to be a permanent warning to return to "fiscal policy common sense". How strong this discourse is can already be seen from the fact that the federal government has decided to repay the corona debt required by the debt brake within just 20 years.

With this, the psychological mechanisms behind the success of the "black zero", which had increasingly lost strength with their normalization, come back into play. A government that is responsible for deficits even after the end of the pandemic will therefore attract very considerable accusations, while overcoming these deficits should give rise to renewed "credit claiming". Which finance minister would not like to announce that the return to balanced budgets shows that Germany has now also overcome the corona crisis economically?

Against this background, the corona crisis could even help to strengthen the "black zero" in the long term. This does not mean that Germany will return to balanced budgets as early as 2022 or 2023. However, the then incumbent federal government will undoubtedly face strong expectations of drafting a plan for a return to the surplus. As a reference point for what a responsible fiscal policy is, the "black zero" will continue to shape the German financial policy discourse.

The extent to which this discourse influences actual fiscal policy is likely to depend not least on the party political constellation and thus on the outcome of the 2021 federal election. Unlike the grand coalitions of the years from 2013 onwards, the coming federal government will not be able to balance the budget with a steadfast financial policy. Instead, it would have to take politically painful measures on the revenue or expenditure side to get closer to another surplus.

Paradoxically, a federal government in which the CDU / CSU are involved could find it easier to forego such measures. Because it is easy to calculate what fundamental opposition resistance would be met by a left government alliance that would break permanently with the "black zero" policy. The Union, which to a certain extent holds the political copyright to this symbol, on the other hand, could argue with much greater credibility that further deficits are simply necessary.

The experience of other countries with budget surpluses does not seem to offer a clear answer to the question of whether crises are more likely to induce the departure of surplus policies or whether they even strengthen them. Examples can be found for both constellations. For example, the recession of 2001 and the terrorist attacks of September 11th provided valuable arguments for US President George W. Bush, for whom a large tax cut package was anyway more important than balanced budgets, to forego surpluses in favor of tax cuts. At the same time, his Canadian neighbor Paul Martin, on the other hand, insisted on sticking to his previous budget policy despite an economic downturn and returning to the surplus as quickly as possible. The experience of other countries clearly shows, however, that governments that have a budget deficit after the economy has recovered are under very strong pressure to correct it. In Australia, for example, the goal of an early budget equalization became a politically dominant issue in the years following the global financial crisis.

Crises do not interpret themselves automatically, not even in terms of fiscal policy. The conclusions to be drawn from them are rather the subject of political conflicts in which those who already have a political agenda that can be easily linked to the crisis have better cards. The corona crisis can be used both as a justification for saying goodbye to the "black zero" and for revitalizing it. One thing is certain: Whoever prevails will claim afterwards that Corona proves the correctness of their own strategy.