CUSCO, PERU — Recent weeks have been momentous for government budgets in the United States and Germany. In the US, both Houses of Congress passed versions of President Donald Trump’s “One Big Beautiful Bill,” which Trump signed on Independence Day, July 4. 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 health care 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. 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 that it will unlock a tsunami of productivity growth.

 

Moreover, the budget is fiscally irresponsible. The Congressional Budget Office, the country’s nonpartisan 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 per cent of GDP, a debt-to-GDP ratio of 120 per cent, and interest rates that are high and rising.

 

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 CBO has determined the current bill will do.

 

The 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.

 

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 per cent of GDP on a cyclically adjusted basis, was amended in March to exclude both military spending in excess of 1 per cent of GDP and a fixed package of infrastructure spending.

 

The rationale is clear and compelling. More defense spending 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.

 

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 abatemen, 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 per cent deficit ceiling include interest payments, even interest on debt incurred to increase defense 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 per cent limit.

 

This will automatically stabilise the debt-to-GDP ratio, albeit at a level closer to 100 per cent of GDP than the current 63 per cent. 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, of course. 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.

 

Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, is a former senior policy adviser at the International Monetary Fund. He is the author of many books, including In Defense of Public Debt (Oxford University Press, 2021).