Economists Examine the Traffic Light Coalition Agreement
Germany’s SPD, Bündnis 90/Die Grünen, and FDP political parties signed their coalition agreement on December 7, 2021, thus adhering to an ambitious schedule. The coalition negotiations went surprisingly smoothly. This is particularly surprising given the complexity of negotiations between three parties (or, more accurately, three parliamentary parties). Especially since similar efforts four years ago, namely the formation of a three-party government, had failed to bear fruit. More important than the negotiation process, however, is the end product. In this case, it is a 177-page paper entitled “Go for More Progress – Alliance for Freedom, Justice, and Sustainability.” The Economists Panel surveyed 150 professors at German universities on major aspects of the coalition agreement.
Majority of Economists Rate the Coalition Agreement Positively
Three-fifths of the participating economists rate the coalition agreement of the traffic light parties as “fairly positive” or “very positive,” pointing to its ambitious climate targets and expansion of digital infrastructure. In general, they feel it addresses topics for the future and tackles the modernization of infrastructure. The vague formulation of the goals and the lack of clarity about the measures required to achieve them come in for more criticism. This is what the 19 percent who rate the coalition agreement overall as “fairly negative” or “very negative” highlight in particular.
Economists Cautiously Optimistic about Overcoming Future Challenges
When asked how they thought the traffic light government will tackle the economic policy challenges of the coming legislative period, a good quarter of the participating economists answered “well” or “very well.” The main reasons cited are the broad economic base of the governing parties, the expertise of the parties and the ministers, and also the pragmatism already demonstrated. The views of the majority of respondents, on the other hand, are split. They say that although the agreement addresses important economic policy issues, demographic change and the shortage of skilled workers cannot be solved so easily. They also point out that the agreement creates additional tensions in the way measures are funded. Moreover, many problems cannot be solved at the national level. Meanwhile, 15 percent of the participating economists answer “poorly” or “very poorly,” citing a lack of sustainability, especially in financial and social policy.
Economists Expect Public Investment in Climate Action Measures Will Encourage Private Investment
A majority of the participating economists think that the additional public investment in climate action measures set out in the coalition agreement will have a positive effect on private investment in climate action measures. They put these crowding-in effects down to the state setting incentives, for example through targeted subsidies and depreciation rules for private investments, and to climate action generally receiving more attention, thereby increasing awareness of the problem. However, 15 percent do not expect any net effect on private investment in climate action measures, with opposing crowding-in and crowding-out effects balancing each other out. Only 4 percent expect crowding-out effects to predominate. The comparatively high proportion of “don’t know” answers (26 percent) indicates a high degree of uncertainty among the participating economists.
Economists Divided over Additional Funding for the Climate and Transformation Fund
On December 13, 2021, Germany’s Federal Cabinet approved the draft of a second supplement to the 2021 federal budget, which allocates EUR 60 billion from unused credit appropriations to the Climate and Transformation Fund. Almost 40 percent of the participating economists rated this as “fairly positive” or “very positive,” since financing these measures is a necessary step in solving key sociopolitical tasks. By contrast, 40 percent rate the budget supplement as “fairly negative” or “very negative,” since it circumvents the debt brake. Meanwhile, 16 percent rate the measure as “neutral” because of the risk that earmarked expenditure will be spent even in the absence of meaningful projects.
Economists Reject Circumvention of the Debt Brake
Almost two-thirds of the participating economists reject the idea of circumventing the debt brake, for example by means of extra budgets for the agreed investments in climate action and digitalization. They justify this by pointing to additional burdens in the future, losses in credibility, and the undermining of parliamentary control. Some of the economists, however, favor a relaxation of fiscal rules. This view is shared by one-third of the economists, who support a circumvention of the debt brake in the interests of investing in climate action and digitalization. They see a great need for these investments, which are simply not feasible with the debt brake as it currently stands. They, too, are in favor of more transparency.
Return to the Debt Brake in 2023 Viewed Positively
Four-tenths of the participating economists think the return to the debt brake starting in 2023 as planned in the coalition agreement is “just right.” They feel the coronavirus pandemic will continue to have negative effects on tax revenue and government spending in 2022. The economists expect the pandemic to be over by 2023. Just under one-quarter take a different view and also point to necessary and costly investments, especially in climate action. They see the planned return starting in 2023 as “too soon.” Just under another quarter see the return to the debt brake as “too late.” Some of them expect the consequences of the pandemic to be overcome as early as 2022 and are already calling for more timely consolidation measures.
Economists Are Fairly Positive about Limiting “Super Depreciation”
Almost half the participating economists consider plans to limit “super depreciation” to investments in climate action and digitalization for the years 2022 and 2023 “fairly positive” or “very positive.” They feel this focus is good and the instrument is suitable for stimulating private investment in these areas. A similar view is held by the 13 percent of the economists who give “neutral” as their answer, who point to the lack of selectivity and unclear consequences of “super depreciation.” A good fifth view limiting “super depreciation” as “fairly negative” or “very negative,” arguing that these are de facto tax cuts that will further increase the government deficit. In addition, they feel that such a demarcation makes no sense and that the incentive effect is too great.
Economists Divided on Raising the Minimum Wage
The planned increase in the minimum wage to EUR 12 per hour has a polarizing effect on the participants, as illustrated by the few “don’t know” and “neutral” answers (1 percent and 10 percent). Two-fifths view the increase as “fairly positive” or “very positive.” The reasons they give for this are that it counteracts social inequality, that wages are generally too low, and that there is no convincing empirical evidence to suggest negative effects on the labor market. Almost half the participating economists view planned increase in the minimum wage as “fairly negative” or “very negative.” They feel that the increase is too high, will spur a wage-price spiral, and will cost jobs. Moreover, they argue that it is an intervention in an institutional mechanism and should not be determined in election campaigns.
Economists Fairly Positive about Building New Publicly Subsidized Apartments
Almost half the participating economists assess the goal of building 100,000 publicly subsidized apartments per year as set out in the coalition agreement as “fairly positive” or “very positive.” This government intervention could be relied upon to get more housing built, they say, which would counteract the shortage in the real estate market. They view it as a more sensible tool than capping rents to create affordable housing, especially in cities. The goal is rated as “neutral” by 19 percent, who say it is laudable but difficult or even impossible to implement. Just under three-tenths rate the goal as “fairly negative” or “very negative,” pointing to the fact that this is not the responsibility of the state. Instead, private investment should be relied on for housing construction. Housing subsidies would also be a more appropriate means of supporting the socially disadvantaged.
Economists Keen on Setting the Budget for Research and Development
Almost two-thirds of participating economists view setting the budget for research and development at 3.5 percent of gross domestic product as “fairly positive” or “very positive.” They argue that investment in science and education has a significant positive impact on growth and a high long-term return. In addition, such investments would strengthen Germany’s comparative advantage in a field where Germany has some catching up to do. The answer was “neutral” for 17 percent, who say that what is important is not necessarily the amount of funding, but rather to put it to efficient use. The 9 percent of respondents who assess this measure as “fairly negative” or “very negative” offer similar arguments. They say this would set the wrong priorities for research and development, and that structures are outdated and inefficient.
Stabilization of Pension Level Does Not Go Down Well with Economists
Almost half the economists assess the agreement to stabilize the (minimum) pension level (ratio of the standard pension to the average earnings of all insured persons) at 48 percent as “fairly negative” or “very negative.” The reasons they give are that the measure is expensive and that this pushes the tax-funded portion of the pension ever higher. They add that demographic change will place a heavier burden on younger generations. One-fifth see the stabilization as “fairly positive” or “very positive,” as it alleviates fears about the future and limits poverty among the elderly. Just under one-quarter judge the measure to be “neutral,” arguing that a stabilization is fine, but that the retirement age should then also be increased. In addition, many economists expect that the measure will not have an effect in this legislative period, since wages will increase more strongly in the coming years, meaning that the pension level will also rise sharply.
Partial Capital Coverage of the Statutory Pension Insurance Is Not Sufficient
Almost three-quarters of the participating economists think that partial capital coverage of the statutory pension insurance is not sufficient to achieve the goal of stabilizing the pension level and pension contribution rate over the long term as set out in the coalition agreement. The portion for which capital coverage is planned is too small, they say, and comes too late. Moreover, there is no certainty that the capital markets will continue to develop as positively as they have in recent years. However, 7 percent see things differently, viewing the measure as an entry point to more comprehensive capital coverage in the future. Another 21 percent say they don’t know.
Economists Deeply Disappointed That the Coalition Agreement Does Not Provide for an Increase in the Retirement Age
Almost four-fifths of the participating economists consider it “fairly negative” or “very negative” that the coalition agreement does not provide for an increase in the retirement age. This does not fit in with people’s rising life expectancy, they say, adding that it further distorts intergenerational equity and places an excessive burden on contributors. Many even describe it as a denial of reality. “Fairly positive” or “very positive” is how just under 10 percent view the non-increase, pointing out that there is still plenty of time after 2025 to raise the age limit as of 2030. They add that the vast majority of citizens are against an increase.
A detailed presentation of the results of the December survey by the ifo and FAZ economists' panel will be published in the next issue of Schnelldienst.
