ifo Institute: Stimulus Package Growth Incentive is Limited

The growth incentive in the German government’s stimulus package is expected to be limited. In 2020, the package is expected to increase the country’s economic output (GDP) by EUR 30 billion. The measures required to create this effect will cost EUR 88 billion. “Nonetheless, it is sensible for fiscal policy to support the economy in this critical situation,” writes ifo President Clemens Fuest in an article published in ifo Schnelldienst.t.

“With the national debt rising, policymakers must carefully weigh up whether the benefits of individual economic policy measures justify the cost,” Fuest warns. He points out that the temporary reduction in VAT is among the less convincing elements of the stimulus package. Florian Dorn, co-author of the article, says: “This creates a considerable administrative burden, and it’s doubtful whether companies are passing the full reduction on to consumers.” In the case of the temporary reduction in VAT, it is expected that the fiscal costs will be significantly higher than its positive economic stimulus.

He notes that the stimulus package also contains several compelling elements designed to help revive Germany’s economy. Florian Neumeier, who also co-authored the article, says: “Most laudable are the public investments in future technologies, infrastructure, and climate protection as well as measures to support communities and families.” In addition, the authors welcome the expedited tenders for capital goods and the expansion of tax relief in the form of loss compensation. Fuest concludes: “Whether or not the measures implemented to date will be enough to stabilize the economy depends on the further spread of the epidemic and how policymakers respond to it.”