GroKo package falls short of possibilities
As good as the federal government's economic stimulus package may seem, more could have been achieved with the sum involved. An analysis by Sebastian Dullien.
PUBLISHED4. JUNE 2020
READING TIME4 MIN
It is gratifying that the German government has agreed on an economic stimulus package of considerable scope. The package contains a number of sensible elements, and at first glance it also appears to have an appropriate volume. On closer inspection, however, it falls short of what could have been achieved with the total sum indicated.
The individual items on investments, support for climate change, e-mobility and research and development, relief for companies in terms of electricity costs, and support for the cultural sector, for example, contain a great deal of useful information, often on a sensible scale. Many of the projects mentioned there can be found in the same or very similar form in the report that the IMK, together with the DIW, the FÖS and the IFSOE, prepared on behalf of the Federal Environment Ministry and presented in mid-May (for example, on energy-efficient building refurbishment, the promotion of hydrogen technologies and charging infrastructure, the Digital Pact or early childhood education). This is all good and sensible for the perspective social-ecological transformation of the German economy. However, a relevant part of these points is unlikely to have an economic impact until 2021 at the earliest.
In the area of local government, it is encouraging that the federal government will in future assume a larger share of the costs of housing in the basic social security system. Beyond that, however, the relief for the municipalities is not sufficient. The municipalities will only be relieved of the foreseeable loss of revenue from the trade tax in 2020. The additional costs from the Infection Protection Act and the revenue shortfalls in 2021 as well as the revenue shortfalls from other taxes will remain with the municipalities and are likely to weaken their financial and investment strength. Disappointingly, no agreement was reached on the long pressing issue of debt relief for municipalities with high levels of old debt. In the upswing, this problem was less pressing; in the downturn, the new social expenditures are likely to burden the municipalities to such an extent that many will have to curb their investment plans.
In the case of Deutsche Bahn, the package means that the federal government will only take over – as already promised – around half of the foreseeable losses of around 10 billion euros resulting from the Corona crisis. A loss of 5 billion euros is therefore likely to remain with Deutsche Bahn and lead to cuts in personnel and investments, thus setting back the transport turnaround.
The situation is similar for local public transport: €2.5 billion to support local public transport does not appear sufficient to avoid investment cuts in view of the major revenue losses from the first half of the year.
The package’s major weakness lies in its short-term support for demand. This is because, overall, the short-term demand stimulus from the package in particular is likely to be weak.
The three biggest items in the package are unlikely to have much of an impact on the economy and, above all, are unlikely to create much demand in the short term:
- Based on all experience and theoretical considerations on price setting and threshold prices, the temporary reduction in VAT (€20 billion) is likely to be passed on to consumers only to a limited extent. As a result, it is also likely to have rather little effect on demand. Instead, the tax cut improves the earnings situation of companies, irrespective of whether the companies are affected by the crisis (such as bricks-and-mortar retail) or are crisis winners anyway (such as online retail).
- This tax cut could have an effect on renovation services, whose prices are often shown and negotiated without VAT (i.e. net), and with restrictions on cars (although the high-priced models are, after all, mainly company cars – around 60% of new vehicles registered in Germany are commercial, and for them the cut will have no impact).
- The emergency aid for small and medium-sized enterprises in the particularly hard-hit sectors (€25 billion) may prevent insolvencies here, but it will not create any new demand either.
The stabilization of the EEG levy (€11 billion) will not take effect until Jan. 1, 2021. This prevents a higher increase in the levy, but the minimal reduction hardly creates any purchasing power and comes up short for a short-term stimulus. (After all, private households only bear about 40 percent of the levy).
- It should also be noted with regard to the emergency aid that this is not new funding, but merely expands the group of recipients and the modalities compared with the March 23, 2020 program.
On the author: Prof. Dr. Sebastian Dullien is Scientific Director at the Macroeconomic Policy Institute (IMK).