Barry Eichengreen: Germany's budget expansion makes sense while America's is reckless

Mint

15-07-2025

Recent weeks have been momentous for government budgets in the US and Germany. In the US, both Houses of Congress passed versions of President Donald Trump's One Big Beautiful Bill, which Trump signed on the US Independence Day, 4 July. In Germany, meanwhile, Chancellor Friedrich Merz's government agreed to the outlines of a 2025 budget and a spending path for the rest of the decade.
Both fiscal plans augur larger budget deficits and higher debt. But that is about all they have in common.
The US budget will make permanent Trump's 2017 tax cuts and add exemptions for tip income, overtime pay and loan interest on domestically assembled motor vehicles. It will 'pay' for these provisions—if that's the right word—by cutting healthcare and food assistance for low-income households and by eliminating a range of clean-energy-related tax credits.
There are so many negative things to say about Trump's Big Bad Bill that it's hard to know where to start.
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To begin with, the legislation is massively regressive, combining permanent tax cuts for corporations and the wealthy with reductions in support for the poorest families.
By phasing out tax credits for rooftop solar, electric vehicles and zero-emission electricity, it is a disaster for the environment.
Given reductions in science funding and the addition of new taxes on universities, it is hard to imagine how it will unlock a tsunami of productivity growth in America.
Moreover, the budget is fiscally irresponsible. The Congressional Budget Office, the country's non-partisan fiscal watchdog, estimates that it will increase the deficit by $3.5 trillion over the coming decade. This may not seem like a crushing burden for a $30 trillion economy. But it comes on top of a deficit that is already north of 6% of GDP, a debt-to-GDP ratio of 120% and interest rates that are high and rising.
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The US actually has a fiscal rule that is binding in cases of congressional reconciliation, the name for the legislative process that allowed bare majorities in the House and Senate to force through the final bill.
Known as the Byrd Rule, this provision prevents the use of reconciliation if the budget continues to increase the deficit, relative to the previous baseline, after the initial ten years—as the Congressional Budget Office has determined the current bill will do. The US Senate 'addressed' this problem by creatively redefining the baseline to include Trump's expiring tax cuts, making the residual increase look smaller. So much for the Republican Party's pious rhetoric about stabilizing the debt.
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Germany has also relaxed its fiscal rule, but only partially and—crucially—not in a manner that threatens debt sustainability. The country's 'debt brake,' the constitutional provision that limits borrowing to just 0.35% of GDP on a cyclically adjusted basis, was amended in March to exclude both military spending in excess of 1% of GDP and a fixed package of infrastructure spending.
The rationale is clear and compelling. More defence spending, for example, is needed for Germany's security, given a belligerent Russia on Europe's doorstep and the new reality that the US is no longer a trustworthy ally. Similarly, additional infrastructure investment is needed to make good on a long-standing shortfall that now threatens economic growth.
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Where the US budget includes $12.5 billion to upgrade air-traffic infrastructure, the German budget foresees €42 billion ($49 billion) a year over 12 years for investment in railways, roads, energy transmission and climate-change abatement—and this in an economy only a sixth of that of the US. It is not hard to see which country's fiscal strategy will have a larger impact on economic growth.
But while Germany has relaxed its debt brake, and government borrowing will now increase, the provisions that remain in place will prevent German public debt from rising without limit. Critically, items still subject to the 0.35% deficit ceiling include interest payments—even interest on debt incurred to increase defence spending and upgrade infrastructure. As more debt is issued for these purposes and more interest is paid, other spending will have to be cut, or taxes will have to be raised, to meet the 0.35% limit.
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This will automatically stabilize the debt-to-GDP ratio, albeit at a level closer to 100% of GDP than the current 63%. But if Germany doesn't abandon the debt brake entirely, there will be no crisis of debt sustainability in which the ratio rises without limit.
That's a big if. But anyone who knows Germany knows that Germans are committed, morally and politically, to debt sustainability. Relaxing budgetary austerity for good reasons such as security and long-term growth is one thing. Abandoning all fiscal common sense is quite another. Germans know the difference. Sadly, Trump's America does not. ©2025/Project Syndicate
The author is professor of economics and political science at the University of California, Berkeley, and the author, most recently, of 'In Defense of Public Debt'