Cyclical Adjustment of the Debt Brake in the Event of Surprisingly High Inflation

The recent high level of inflation temporarily eased government budgets. As a result, conventional estimation methods for cyclical adjustment are likely to temporarily paint an overly favourable picture of the underlying budgetary situation. This also applies to the cyclical adjustment in the German Federal Government’s debt brake, as we argue below. We compare this with our proposal for cyclical adjustment reform: it is likely to be too optimistic in the face of surprisingly high inflation. However, it is very unusual that inflation is underestimated so much. Overall, we continue to consider our proposed reform to be advantageous compared with the current approach.