Les obsessions de la politique budgtaire allemande

1
Les obsessions de la politique budgétaire
allemande

• Séminaire économie de la mondialisation
• Achim Truger, IMK in der Hans-Böckler-Stiftung

2
Tax cuts and budget consolidation The two fatal
obsessions of German fiscal policy since 1998

• Séminaire économie de la mondialisation, OFCE
  Paris, 7 December 2009
• Achim Truger, IMK in der Hans-Böckler-Stiftung

3
Aims of the presentation

• Inform you about German fiscal policy and its
  economic and social effects including recent
  developments
• Give you an insight into the often very strange
  debate on fiscal policy in Germany
• Identify the two main driving forces
  (obsessions) of German fiscal policy tax
  cuts budget consolidation

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Contents

• Introduction
• Germanys poor economic and social performance
  over the last 10 years
• Red-green tax reforms (1998-2005) and their
  consequences
• Fiscal Policy under the Grand Coalition I (2005
  to 2008) some lessons learned?
• Fiscal Policy under the Grand Coalition II (2008
  to 2009) a return to Keynesian fiscal policy?
• Fiscal Policy under the new conservative-liberal
  government Debt brake and aggressive further tax
  cuts

5
Contents

• Introduction
• Germanys poor economic and social performance
  over the last 10 years
• Red-green tax reforms (1998-2005) and their
  consequences
• Fiscal Policy under the Grand Coalition I (2005
  to 2008) some lessons learned?
• Fiscal Policy under the Grand Coalition II (2008
  to 2009) a return to Keynesian fiscal policy?
• Fiscal Policy under the new conservative-liberal
  government Debt brake and aggressive further tax
  cuts

6
Annual GDP-growth in
Source EU-Commission (2009)
Source EU-Commission (2009)
7
Pro-cyclical fiscal policy
8
Total government expenditure ( of GDP)
Source EU-Commission (2009)
9
(almost) world champion in expenditure restraint!
Source EU-Commission (2009)
10
Government employment ( of total employment)
Source ILO
Source ILO
11
Massive dismantling of the welfare state

• pension cuts while at the same time subsidising
  private saving (Riester-Rente)
• cuts in unemployment benefits and duration
  (Hartz IV), stricter enforcement
• cuts in public health insurance
• deregulation in employment protection and labour
  market laws
• large-scale privatisations

12
Inequality on the rise
13
Unintended, but nevertheless bad

• most of the decline occured under the red-green
  government
• it was unintended, because the aims and hopes
  were to boost growth and emloyment and fight
  inequality
• it resulted from deficiencies in (macro-)economic
  thinking in Germany
• macroeconomics is irrelevant. Keynesianism is
  refuted and has to be fought against
• structural reform is all that is needed to fight
  unemployment and small government to boost growth

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Unintended, but nevertheless bad

• The two obsessions
• growth policy is equated with tax cuts
• fiscal policy is equated with budget
  consolidationmacroeconomic side effects are
  ignored

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Contents

• Introduction
• Germanys poor economic and social performance
  over the last 10 years
• Red-green tax reforms (1998-2005) and their
  consequences
• Fiscal Policy under the Grand Coalition I (2005
  to 2008) some lessons learned?
• Fiscal Policy under the Grand Coalition II (2008
  to 2009) a return to Keynesian fiscal policy?
• Fiscal Policy under the new conservative-liberal
  government Debt brake and aggressive further tax
  cuts?

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Red Green Tax Cuts

• Income Tax in three major steps (2001, 2004 and
  2005) marginal tax rates were substantially
  lowered
• Business Taxation In 2001 a major transition to
  a new system occured. The maximum marginal rate
  for profits decreased from 51.8 to 38.6 for
  corporations and 54.5 to 45.7 for
  non-incorporated business
• Family taxation child benefits / tax free
  allowances were increased
• Ecological Tax Reform (almost revenue neutral)

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Income Tax schedule Marginal and average rates
1998 and 2005 in
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Expensive reforms
Revenue effects of income, business and family
tax reformin Bill. Euro as compared to 1998 tax
law
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and their effects
20
Overall revenue losses from red-green tax policy
21

..but the opposition has a brillant idea More
tax cuts !
22

..but the opposition has a brillant idea More
tax cuts !!!

• Revenue Effects of Tax Reform Proposals made
  in 2003 to 2005according to different estimates
  in Bill. Euro in 2005

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Contents

• Introduction
• Germanys poor economic and social performance
  over the last 10 years
• Red-green tax reforms (1998-2005) and their
  consequences
• Fiscal Policy under the Grand Coalition I (2005
  to 2008) some lessons learned?
• Fiscal Policy under the Grand Coalition II (2008
  to 2009) a return to Keynesian fiscal policy?
• Fiscal Policy under the new conservative-liberal
  government Debt brake and aggressive further tax
  cuts

24
The Grand Coalition after 2005some lessons
learned

• recognised that further tax cuts were not
  possible if the budget was to be consolidated
• switched to a more revenue sided consolidation
  strategy
• Raised the value added tax by 3 points
• Decided to postpone the tougher steps to 2007 and
  hope that by then the recovery would be strong
  enough
• After the recovery expenditure growth on all
  federal levels was normalised

25
Only partial compensation for red-green revenue
losses
26
High risk strategy
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with some serious drawbacks

• Given that nobody knew if the recovery was under
  way the negative fiscal stance for 2007 was
  extremely risky
• the distributional effects of the tax measures
  were negative as there was only a compensation of
  2/3 by lower contributions to unemployment
  insurance (from 6.5 to 4.2 ) and other social
  contributions were slightly increased
• (by the way not very nice further move into the
  mercantilist direction)

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with some serious drawbacks

• Public revenue was weakend from 2008 on by the
  next big business tax reform (maximum
  statuatory rate down to 29.8 percent for all
  business profits)
• Revenue of the unemployment insurance, the
  federal labour agency, was weakend by further
  aggressive cuts in the contribution rates from
  4.2 to 3.3 in 2008 and then to 2.8 in
  2009? the agency is deeply in deficit now and
  calls for expenditure cuts have been around

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Contents

• Introduction
• Germanys poor economic and social performance
  over the last 10 years
• Red-green tax reforms (1998-2005) and their
  consequences
• Fiscal Policy under the Grand Coalition I (2005
  to 2008) some lessons learned?
• Fiscal Policy under the Grand Coalition II (2008
  to 2009) a return to Keynesian fiscal policy?
• Fiscal Policy under the new conservative-liberal
  government Debt brake and aggressive further tax
  cuts

30
After some hesitation until November 2008 a tiny
stimulus package
31
but then in January 2009 A substantial stimulus
package
32
plus some additional measures
33
Unbelievable conscious counter-cyclical action
is back after 25 years
34
Not that bad in international comparison
Source OECD (2009)
35
Not that bad in international comparison
Source OECD (2009)
36
Not that bad in international comparison
Source OECD (2009)
37
Not that bad in international comparison
38
Not that bad in international comparison
39
Not that bad in international comparison
40
But no change of the general paradigm

• Fiscal Policy
• important improvement compared with last
  recession
• overall reaction slightly better than EMU-average
• but again weaker than in the U.S.
• and certainly not enough to counter the
  recession
• German government prevented international
  co-ordination

41
But no change of the general paradigmThe
serious drawbacks

• (Business as usual with respect to wages and
  monetary policy)
• Tax cuts in the stimulus packages are permanent
  and will permanently weaken public revenue by
  about 1 percent of GDP
• terrible medium term drawback the debt brake
  which will be gradually phased in from 2011
  onwards

42
The grand coalitions revenue gains
43
have already disappeared
44
The debt brake

• structural deficit lt 0,35 of GDP
• Federal level 0.35 ceiling from 2016
• Länder 0.0 from 2020
• cyclical deficit according to cyclical
  adjustment method by EU-Commission
• discretionary policy only allowed in very special
  circumstances
• transition period from 2011 to 2016/2020 when
  structural deficits have to meet the target

45
The debt brake errors in construction

• relies almost completely on built-in stabilisers
• but built-in stabilisers will be counteracted
  because cyclical deficit will be calculated
  according to technocratical cyclical adjustment
  method by EU-Commission ? serious
  procyclicalities
• transition period from 2011 to 2016/2020 when
  structural deficits have to meet the target
  very dangerous

46
Dangerous transition to the debt brake

• German fiscal policy will switch to restriction
  in 2011 irrespective of the economic situation
• This may be to early for the recovery
• (and it will certainly be wrong if European and
  global economic imbalances are to be tackled)
• If there are no tax increases (which almost
  everybody has ruled out) then expenditure
  restraint will have to be brutal again nominal
  total expenditure growth not much higher than 1

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Dangerous transition to the debt brake

• with good luck due to the endogeneity of
  structural deficits prospects may brighten
  substantially if the recovery comes soon, is
  strong and lasts some years
• With bad luck due to the endogeneity of
  structural deficits prospects may darken even
  more if the recovery is weak and a period of
  stagnation follows
• In the second case If governments react with
  even more fiscal restriction to meet the then
  more ambitious deficit ceiling in 2016/20 then a
  viciuos circle might occur

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Contents

• Introduction
• Germanys poor economic and social performance
  over the last 10 years
• Red-green tax reforms (1998-2005) and their
  consequences
• Fiscal Policy under the Grand Coalition I (2005
  to 2008) some lessons learned?
• Fiscal Policy under the Grand Coalition II (2008
  to 2009) a return to Keynesian fiscal policy?
• Fiscal Policy under the new conservative-liberal
  government Debt brake and aggressive further tax
  cuts

49
Believe it or not

• In this situation the new government announces
• an immediate growth acceleration programme
  further permanent tax cuts of about 8.5 bn.
  Euros..
• Half of it goes into higher child
  benefits/allowances
• 2 bn go into lower business taxation
• 0.5 bn. to lower inheritance taxes
• 1 bn. to reduced vat rate for hotels
• ? IMK estimate of one-off growth effect 0.2 of
  GDP

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(No Transcript)
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Believe it or not

• In this situation the new government announces
• Further permanent tax cuts for the income tax of
  20 bn. from 2011 onwards!
• If really enacted in total public revenues will
  be permanently decreased by about 30 bn. Euros
  (1.2 of GDP) per year.

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3. Short-run economic policy reactions
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Prospects for the future

• The government would have to be extremely
  luckyto get through with this without dramatic
  further expenditure cuts on all federal levels
  and/or compensating tax increases and/or breaking
  the debt brake
• There may be different scenarios. However, it is
  very likely that the poor German performance with
  respect to growth, welfare state and distribution
  will go on.

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Is there a way out?

• extreme luck
• getting rid of the debt brake..but its in the
  constitution!
• But even given the debt brake there is a way out
• in general increase taxes and restore the
  governments ability to act!!
• consolidate the budget and
• stop expenditure restraint. Drive up public
  investment in education, research, ecological and
  traditional infrastructure

55
Once again The two obsessions

• an obsession with budget consolidation
• an obsession with tax cuts
• Both obsessions are dangerous on their own
• But in combination they are fatal and have proven
  to be so
• ? If the obsession with budget consolidation
  cannot be cured . then at least cure the
  obsession with tax cuts!

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• Merci beaucoup!