German Economists Want More Aid for the Economy: Deferral and Reduction of Tax Payments – Early Abolition of Solidarity Surcharge – Acceptance of Deviation from Black Zero

The economists consider the measures that the coalition committee has already adopted – which facilitate access to the short-time allowance and foresee the associated reimbursement of social security contributions by the Federal Employment Agency – to be particularly expedient and effective. These measures help companies to retain employees and thus limit harmful second-round effects on consumption. If this is enough to prevent bankruptcies and layoffs, the economists argue, then the chances are good that the economy can quickly recover after the wave of infection subsides and that lost production will be recovered.

However, everything possible must be done to avoid liquidity bottlenecks for companies that either suffer a drop in sales or have to cope with production interruptions due to missing parts. Expedient instruments in this endeavor would be the general interest-free deferral of advance and back payments of income tax, corporation tax, and VAT. In addition, the economists recommend improved depreciation conditions, generosity in the granting of investment deductions, and a more generous approach to loss carrybacks. For instance, if the EUR 1 million threshold were raised, medium-sized and large companies would be able to participate in this measure in an appropriate manner.

An earlier date for the partial abolition of the solidarity surcharge – the authors propose July 1 – would also have a positive psychological impact, as it would lead to a direct increase in disposable income for large parts of the population. This would be a relatively low-cost way to strengthen confidence both in the ability of politicians to act and in a speedy economic recovery once the crisis has subsided. With trade fairs, travel plans, and events being canceled through May and industry experiencing production losses, the ongoing industrial recession of recent years is likely to turn into a macroeconomic recession in the first half of 2020.

The economists consider liquidity support, for example through loans from the KfW, to be sensible, but possibly insufficient. “If efforts to stem the spread of these economic shock waves are not successful, and corporate insolvencies ensue on a larger scale, the last resort would be for the state to take equity stakes in companies.” This would be analogous to the bank rescues in the crisis of 2008 and 2009. However, compared to the banking system, the real economy has a far greater number of small and medium-sized enterprises, so that implementation would require enormous administrative effort.

The economists stress that it is important for all measures initiated to be timely, targeted, and temporary. They also point out that the German state has sufficient fiscal leeway for the proposed measures. There is “plenty of potential for German fiscal policy to stabilize the economy, not least in light of its low debt ratio by international standards.” Neither the debt brake nor European fiscal rules stand in the way of this. “The debt brake has an explicit exception for crisis situations,” they write. The same applies to the Stability and Growth Pact.

Since the coronavirus shock has long since become a global shock, all these measures will also require coordination at the European and global level, the paper states. “The main difficulty arises from the fact that the coronavirus is triggering both a supply shock and a demand shock.” The collapse of the stock markets could trigger further shocks and intensify the downward dynamic in the real economy, the economists add.

The authors include the former “wise man of economics” Peter Bofinger, the Scientific Director of the IMK Sebastian Dullien, the President of the Kiel Institute for the World Economy Gabriel Felbermayr, ifo President Clemens Fuest, the Director of the German Economic Institute Michael Hüther, Düsseldorf economics professor Jens Südekum, and the President of the Center for European Policy Research (CEPR) Beatrice Weder di Mauro.