ifo Institute Praises New German Economic Stimulus Package
The ifo President Clemens Fuest and ifo climate expert Karen Pittel have praised the German coalition government’s economic stimulus package. Fuest said on Thursday: “The stimulus package is broad-based and for the most part well thought out. It combines incentives to stimulate consumption in the short term with impetus for public and private investment and support for small and medium-sized enterprises. Pittel said: “It is to be welcomed that the package explicitly takes climate-friendly future technologies and infrastructure into account.”
Fuest went on to emphasize his support for the planned investments in the digitalization of public administration and the expansion of digital infrastructure. However, he would have liked to see more done with regard to loss carrybacks for companies, saying that the EUR 5 million limit is too restrictive. “The biggest surprise is the temporary reduction in VAT. Experience from other countries, such as the UK during the financial crisis, suggests that while this will indeed encourage consumers to spend more, they will reduce their spending significantly once the tax cut expires at the end of 2020. It’s unlikely the crisis will be over by then.”
Fuest welcomed the decision not to proceed with a general purchase incentive for cars. “The temporary reduction in VAT will itself also stimulate car purchases, while aid for the car industry will focus on investments for the future,” Fuest continued. “It is also right not to tackle municipal debt in the stimulus package.” The problem of highly indebted local authorities should be addressed in the context of a major reform of local government finances that would abolish trade tax. “The current slump in municipal finances shows that trade tax is unsuitable as a municipal tax and should be replaced by more steady revenue streams.”
Pittel went on to say that the decision against a scrappage scheme and the cap on the EEG levy should also be seen as positive from a climate policy perspective. “However, this was a missed opportunity to firmly establish compatibility with German and European climate targets as a cross-sectoral pillar of the economic stimulus package; as a result, climate protection will continue to be seen as industry- and sector-specific. Although the EU Green Deal requires Germany, too, to step up its climate protection efforts, the economic stimulus package does not enough to ensure that the upturn is compatible with that obligation.”
