Germany’s Next Federal Government Should Focus on Economic Growth and Avoid Tax Increases

The next German federal government should focus on growth and economic recovery. At the same time, it must keep public debt under control, write ifo President Clemens Fuest and Prof. Niklas Potrafke, Director of the ifo Center for Public Finance, in an article for ifo Schnelldienst. “This calls for an expansion of public investment as well as improved tax conditions for private investment, innovation, and employment,” Fuest says. There is also a need to reexamine subsidies and government spending that are not geared toward public investment.

Tax increases for companies or the introduction of a net wealth tax would stand in the way of an economic recovery. A net wealth tax would be a clear signal to investors at home and abroad not to build new factories and apartments in Germany and not to create jobs here,” Fuest says.

Potrafke says that the next German federal government should stick with the debt brake for the long term. “In the current situation, though, it makes sense to manage the return to balanced public budgets in a way that doesn’t jeopardize economic recovery.” He goes on to say: “But that doesn’t mean in any way the debt brake is obsolete. While it may remain suspended in 2022 until the economy recovers from the coronavirus crisis, a complete abolition or permanent suspension of the debt brake would send the completely wrong signal.”

Potrafke adds that there is no need at this time for conventional economic stimulus programs to support overall economic demand. “Household savings went up during the coronavirus crisis. This means that once areas of the economy that are currently closed open up, we can in any case expect strong consumer demand.”