Vol. 16 No. 2 (2025): (Regular Issue in Progress)
Research Article

The R-G Differential: A Policy Instrument for German Federal States to Explore Fiscal Policy Potentials?

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Christopher Meyer
Hochschule Wismar, University of Applied Sciences: Technology, Business Design, Philipp-Müller-Str. 14, 23966 Wismar, Germany
Bio
Hans-Eggert Reimers
Hochschule Wismar, University of Applied Sciences: Technology, Business Design, Philipp-Müller-Str. 14, 23966 Wismar, Germany
Bio
Laima Gerlitz
Hochschule Wismar, University of Applied Sciences: Technology, Business Design, Philipp-Müller-Str. 14, 23966 Wismar, Germany
Bio
Cumulated R-G Differential of each German Federal State within the analysed time-period 2013 to 2023 (compiled by authors).
DOI: https://doi.org/10.48088/ejg.c.mey.16.2.349.357
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Published 2025-10-24

Keywords

  • Fiscal Policy,
  • Sustainable Debt,
  • Stability Council,
  • Primary Balances,
  • Domar-Model,
  • German Federalism
    • ...More
    Less

How to Cite

Meyer, Christopher, Hans-Eggert Reimers, and Laima Gerlitz. 2025. “The R-G Differential: A Policy Instrument for German Federal States to Explore Fiscal Policy Potentials?”. European Journal of Geography 16 (2):349-57. https://doi.org/10.48088/ejg.c.mey.16.2.349.357.

Copyright (c) 2025 Christopher Meyer, Hans-Eggert Reimers, Laima Gerlitz

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Received 2025-06-19
Accepted 2025-10-18
Published 2025-10-24

Abstract

This paper examines the role of the R–G Differential—the gap between interest rates (R) and economic growth (G)—as a fiscal policy instrument for Germany’s Federal States. While widely studied at the national level, its implications for subnational fiscal sustainability remain underexplored. Building on Domar’s debt dynamics framework, the study calculates state-level R–G Differentials using official budget data from 2013–2023 and classifies states into three distinct fiscal groups. Results show that most Federal States (Länder) experienced periods of r < g, indicating favourable conditions for debt sustainability, yet this potential has not been systematically integrated into fiscal planning. The findings suggest that the R–G Differential could serve as a complementary benchmark to existing fiscal rules, enhancing medium-term planning and resilience under the constraints of Germany’s debt brake and EU fiscal framework. The paper concludes that incorporating R–G monitoring into Federal State-level reporting would not only improve transparency and comparability but also support a more nuanced, forward-looking approach to fiscal policy.

Highlights:

  • Demonstrates that favourable R–G conditions allow higher expenditures, including for growth-oriented policies, without necessarily conflicting with debt brakes or fiscal sustainability.
  • Positions the R–G Differential as a practical monitoring tool, offering early warnings on the sustainability of fiscal paths and the justification for debt-financed investments.
  • Highlights the value of embedding rolling R–G projections into annual budgets to anticipate fiscal pressures and seize policy opportunities.
  • Proposes forecast-based integration of r and g estimates into ex-ante budget planning, enabling a probabilistic and adaptive fiscal framework towards sustainable public households.
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