Saturday 23 October 2021
Economists on billion-dollar plans
This is how the traffic light ideas can be financed
By Roland Lindenblatt
The traffic light coalition is planning major investments – including in infrastructure, digitization and climate protection. But the federal government’s financial position leaves little to no leeway for this. Economists are making suggestions on how to circumvent the debt brake.
Just three weeks after the general election, the three former political opponents are apparently more united than ever. At least that’s what it looked like when representatives of the party leaders of the SPD, Greens and FDP presented the results of their exploratory talks on Friday. It is agreed that “Germany needs a new departure” and feel together “committed to progress”, it says in the joint exploratory paper. Olaf Scholz has already spoken of the “largest industrial modernization project in probably over 100 years”.
These include a higher minimum wage, an unconditional commitment to the 1.5 degree target for Germany, a secure pension level and future investments in climate protection, digitization, education and research as well as the infrastructure.
This drives many economists to optimistic comments. Ifo boss Clemens Fuest called the paper remarkable in an interview with the “Handelsblatt”. “In almost all chapters of the paper, the clear priority of the explorers can be seen: climate protection, digitization and the promotion of private and public investments,” said Fuest. Marcel Fratzscher, President of the Berlin DIW, seconded: The exploratory paper is “a promising first step”, he calls the plans “clever and ambitious”.
Investments are necessary, but funding is unclear
It is not surprising that Fratzscher comments on the exploratory paper in this way. He was one of the first economists to call for more public investment in Germany years ago. The research colleagues Michael Hüther from the employer-affiliated Institute of the German Economy (IW) and Sebastian Dullien from the union-affiliated Hans Böckler Foundation then estimated the need for public investment at 450 billion euros in 2019, spread over ten years. There is almost unanimous agreement among economists that investments must increase.
But it is no longer just about crumbling motorway bridges, but also about investments in the charging infrastructure for e-cars, tax breaks for promoting green investments by companies and more. A current study by the Agora Energiewende think tank comes to the conclusion that the federal government would have to spend 30 billion euros in federal funds every year for the energy transition in order to achieve the target of 65 percent greenhouse gas reduction in 2030 compared to 1990.
It is unclear how all of this can be financed. Because the exploratory paper does not reveal where the SPD, Greens and FDP want to save elsewhere for the new expenditure. New taxes such as wealth tax are off the table, and much higher revenue from the tax authorities cannot be expected. The planned investments could either remain a mere promise – or the parties have to get creative to take on new debt.
Investments not possible with a debt brake
Because the debt brake actually does not allow new debts to finance the spending plans. It limits the structural new debt to 0.35 percent of the gross domestic product, which should be around 12 billion euros in 2022. In addition, the federal government’s financial position does not currently leave much room for maneuver. The corona crisis cost billions, and tax revenues were also low during the crisis. At the end of the year, the state’s debt level is likely to be 75 percent of the gross domestic product and must – as the debt brake wants – be reduced to 60 percent. As finance minister, Olaf Scholz has therefore committed himself to repay the corona debts in the coming years: from 2023 every year with 2 billion euros, from 2026 with 20.5 billion euros annually.
But spending more and saving money at the same time is contradicting each other. Economists are therefore skeptical of how the explorers’ plans could be financed if the future government wants to comply with the debt brake. Because that is also in the exploratory paper.
It must be clarified “how significantly more future investments can be made without tax increases and while adhering to the debt brake,” commented DIW President Fratzscher on Twitter. Ifo boss Fuest was also convinced to the “Handelsblatt” that the targeted expenditure could not be met with the debt brake.
The debt brake must be circumvented
In recent years, economists have argued intensely about whether the debt brake should be eased in order to finance investments. Sebastian Dullien and Michael Hüther have been campaigning for this measure for a long time in order to finance the investments they have calculated. After all, the federal government has been in debt for years, virtually in vain: interest rates are lower than economic growth. Many experts expect this to remain the case in the years to come. So more debt is not necessarily a burden for the German state – especially if it can be used to finance sensible expenditure.
The counter-argument, often put forward by Fuest and the former chairman of the so-called economic wise men, Lars Feld, is that the debt brake encourages politicians to budget better. Therefore, the brake should be applied even in times of low interest rates. So it’s best not to bypass it. But in view of the high pending expenditures and the lack of funds in the federal budget after the Corona crisis, Fuest and Feld, of all people, have now made initial proposals on how the debt brake could be circumvented.
In a joint contribution with Marcel Fratzscher in the “Zeit”, Feld called for a transformation fund to be set up that would put 200 billion euros in the budget for the coming year for the next four years, with specific requirements for their use. Since the fund would not be part of the federal budget directly, the debt brake could be avoided.
Fuest suggested a similar approach in an article for the “FAZ” last week. The fact that the debt brake will be suspended again in 2022 due to the corona pandemic can be used to raise money again, says Fuest. That could then be spent on investments in the coming years. So the plans of a traffic light coalition could be financed.
The negotiators in Berlin could be happy to use these levers to have so much financial policy leeway. However, it is still unclear whether the proposals mentioned are at all constitutional. If this is not the case, the SPD, Greens and FDP have to revise their plans again thoroughly. Because without new debt they will hardly be able to implement their resolutions.
This article first appeared at Capital.de.