Already ridiculed as the “king of debts”, the head of the FDP, Christian Lindner, committed himself to a supply-oriented economic policy and financial stability in a strategy paper. It remains to be seen how much of this he will be able to bring into the lowlands of day-to-day politics.
Federal Minister of Finance Christian Lindner (FDP, left) explains his financial guidelines under the watchful eye of his adviser Lars Feld.
According to the liberal German Finance Minister Christian Lindner, the country is not only experiencing a turning point in terms of security and foreign policy, but also an economic turning point. The Russian war of aggression against Ukraine, supply chain problems and production bottlenecks have caused the prices of many goods and services to rise at a rate not seen in four decades, he told the media on Wednesday. There is an increasing risk that the German economy will experience stagflation, a period of persistently low growth and rising inflation.
Plea for supply policy
In response, Lindner hailed a strategy paper entitled «Fiscal policy at a turning point», which his ministry drew up with external advice from the liberal Freiburg economist and former “economic wise man” Lars Feld, and which he presented to the media together with Feld. It is intended to be the Ministry’s guideline for financial and budgetary policy in the near future; a cabinet decision on this is not planned.
The paper explains three basic pillars of fiscal policy. The first is short-term stabilization in the crisis. This includes the measures already decided by the traffic light government, namely the two relief packages to stabilize citizens’ incomes, aid for companies and the “special fund” of 100 billion euros for the Bundeswehr. After all, the strategy paper points out that – in order not to burden public finances in the long term – the loss of income cannot be fully and permanently compensated. Also, only companies whose long-term profitability is secured could be supported in the short term.
The second pillar is a supply-side policy to boost economic growth. In an environment of intact demand, high inflation and enormous capacity utilization, growth can only be achieved by increasing overall economic supply and productivity, argues Lindner. On the other hand, government economic stimulus programs to increase demand beyond short-term stabilization would currently not be effective. The increasing demand would meet a short-term rigid supply, so that only the prices would rise even more.
A top tax country
Instead, the paper refers to measures to improve the framework conditions such as investments in (energy) infrastructure, education and innovation as well as halving the planning and approval procedures. So far it corresponds to the coalition plans.
But it also addresses issues where the coalition partners, the SPD and the Greens, are unlikely to follow Linder. For example, the strategy highlights that Germany is in the group of top tax countries internationally, after France in terms of effective average tax rates for corporations. Therefore, the tax burden should “tend to decrease” in the future, whereby the right time for an additional fiscal stimulus should be observed. Lower additional wage costs or lower taxes could also make the business location more attractive, it is said.
lower the debt ratio
Potential coalition explosives are also hidden in the third pillar, fiscal resilience and financial policy stability. On the debt brake, which requires an almost balanced state budget over the course of the economic cycle, Lindner said: “At some point you have to find an exit from the crisis mode, depending on the situation, this may be possible in the coming year.” In plain language: From 2023 he wants to comply with the currently suspended deficit limit again.
A credible reduction in the debt ratio and adherence to the debt brake are all the more important as the turnaround in interest rates has already set in and higher spending on interest on government debt could restrict the fiscal policy leeway in the coming years. Lindner emphasized that priorities had to be set and that not all spending requests could be met.
The paper also addresses an area where the coalition agreement has remained very timid: the burden on social security systems of aging society will not be addressed through reforms such as longer working lives, skilled immigration or a funded pillar (“share pension”) , these would have to be offset by grants from the federal budget. On the other hand, the coalition agreement does mention the “stock pension”, but it explicitly states that the retirement age will not be increased.
FDP on the defensive
It is perhaps not entirely coincidental that Lindner presented his strategy four days before the state elections in his home state of North Rhine-Westphalia. His party, the FDP, did poorly in last weekend’s elections in Schleswig-Holstein. Party leader Lindner, who appeared as a fiscal hawk, tax cut and defender of the debt brake, has so far appeared primarily with budget drafts with high levels of new debt. He also lent a hand in all sorts of maneuvers that will formally make it easier to comply with the debt brake from 2023, but at the same time contribute to debt.
Opposition Union politicians and media commentators have therefore mocked him as a “debt king”. Now the strategy paper reveals liberal, regulatory accents without going into detail. It remains to be seen how much of this will remain in the day-to-day political vote among the three coalition partners.
You can contact the Berlin business correspondent René Höltschi Twitter follow.