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Deficit order

2 July 2020 By Liam Proud

New habits take a while to stick. Germany’s recent willingness to spend and a focus on domestic consumption are a product of the coronavirus. The next job for Finance Minister Olaf Scholz is to ensure both outlast the pandemic.

His fiscal response to the crisis – 9.4% of GDP excluding loans and guarantees – is much bigger than Britain’s 6.2% and France’s 2.7% on comparable measures, International Monetary Fund calculations show. Ditching a long-standing commitment to balancing budgets will pay off: the economy will shrink by 7.8% this year, on IMF forecasts, compared with predicted contractions of 10.2% in Britain and 12.5% in France.

Scholz is handing families 300 euros per child, cutting sales taxes to 16% from 19% and doubling electric-vehicle purchase subsidies. By boosting demand, he’s charting a course away from Germany’s export-led model, which was already being called into question by trade tensions. There’s even more impetus now that the coronavirus will sharply depress global trade – by between 13% and 32% this year, on World Trade Organization forecasts.

But it will take more to shift away from exports, which were almost half of GDP in 2018, compared with less than one-third in Britain and France. Unions and successive governments have prized employment over wage growth. As a result, the bottom 30% of Germans saw no increase in disposable income in real terms between 2000 and 2016, according to the IMF. Boosting spending power is necessary if Germany wants to rely less on selling goods overseas.

Tax cuts could help. The average German worker takes home 61% of gross pay after deducting taxes and social security, according to the Organisation for Economic Co-operation and Development, compared with an OECD average of 74%. Since German debt was just 60% of GDP in 2019, Scholz has room for manoeuvre. He could also give municipalities more money to invest in roads and schools.

Granted, Scholz’s Social Democrats, the junior partner to Chancellor Angela Merkel’s Christian Democrats, may lose control of the finance ministry to a more fiscally conservative party after elections due next year. Still, Scholz’s big-spending ways have boosted his popularity and made him the front runner to lead his party. That would be a good platform to plug Germany’s new economic model.

 

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