Clemens Fuest, president of the Munich-based Ifo Institute, has issued a cautionary statement regarding the proposed reforms to Germany's debt brake, particularly emphasizing the forthcoming coalition government's plans involving the Christian Democrats (CDU/CSU) and the Social Democrats (SPD).

Fuest urged that any substantial borrowing planned by the coalition be strictly allocated to critical areas such as defense and infrastructure, rather than be distributed as financial 'gifts'.

In an interview aired on ARD's 'Morgenmagazin', he emphasized the necessity of directing funds towards essential investments, advocating for budget cuts in areas deemed non-essential to accommodate these targeted expenditures.

Fuest criticized the coalition's current trajectory, suggesting it deviates from responsible fiscal practices.

He underscored the importance of ensuring that any new borrowing genuinely translates into supplementary investments rather than being absorbed into existing expenditure paradigms.

To enhance accountability in public spending, he proposed the introduction of an 'additionality clause', which would require that new expenditure surpass previously budgeted amounts.

Additionally, Fuest expressed concern regarding the proposed threshold for exempting defense spending from the debt brake, arguing it is insufficiently set at one percent of economic output.

He suggested that this threshold be elevated to at least 1.5 percent, if not higher.

To amend the constitution in order to facilitate the establishment of a special fund and reform the debt brake, the Union and SPD will need the backing of the Green Party, whose leaders have voiced their reservations about the coalition's approach to defense spending.

The Greens have called for an adjustment of the defense spending threshold to a minimum of 1.5 percent, while also stressing that a significant share of future infrastructure investments should focus on climate protection initiatives.

Furthermore, the Ifo Institute has assessed the likelihood of relaxing the debt brake across Germany's federal states as limited.

Their analysis indicated that only four states—Berlin, North Rhine-Westphalia, Thuringia, and Saarland—could potentially ease the debt brake through simple majority votes in their regional parliaments.

Other states would necessitate constitutional amendments that require two-thirds majorities, a challenging task according to Joachim Ragnitz of the Dresden branch of the Ifo Institute.

Ragnitz pointed out that securing such majorities is uncertain, with Schleswig-Holstein being the only region where governing parties currently maintain a constitutional majority.

In many other areas, outreach to opposition parties will be essential to garner the necessary votes, exemplified in Brandenburg, where approval would rely on at least one vote from the opposition AfD party.

Given these political dynamics, the Ifo Institute suggests that rapid changes to the debt brake at the state level are improbable, with meaningful reforms likely contingent on the outcomes of subsequent state elections.