Germany: Fiscal policy to boost growth but also inflation concerns
|The coming German government managed to pass its’ large fiscal package through parliament with support from The Green party, leaving the German economy set to receive the largest fiscal boost in at least three decades. The package must also be passed in the Bundesrat on Friday, which is it likely to be. The three pillars of the package are:
1. An infrastructure fund of EUR 500 billion (12% of GDP) outside the ordinary budget. The fund is to run over 10 years and be used for additional investments in transport infrastructure, electricity grids, public housing, and digitalisation, of which EUR 100 bn are earmarked a fund for green initiatives.
2. A change to the "debt brake" that exempts both defence expenditures exceeding 1% of GDP (€ 45 billion) and support for Ukraine from the debt brake limits. Thereby setting no upper limit on defence spending, but which is expected to be around EUR 400 bn (10% of GDP) the coming 10 years.
3. A relaxation of the states' budget requirement "black zero" from a requirement of 0% deficit to 0.35% of GDP in deficit.
As lawmaker’s has had less than one month to negotiate the package there are no further details on what exactly the money will be spent on. When a new government is formed, which will likely take around one month, we will get to know more.
Significant boost to growth is expected
We expect the package to have a positive effect on Germany's economy, as the lack of public investments has been one of the main arguments for weak productivity and structural growth. The infrastructure fund is expected to be the part of the package that has the greatest impact on the economy, as the easing of regional states’ budget is minor and since defence equipment is mainly produced outside of Germany. Public investments in infrastructure are the part of fiscal policy that has the greatest impact on growth, and the German central bank assumes the fiscal multiplier to be around 1.0 in the first year in their forecasting model. This means that if investments equivalent to 1% of GDP are made, for example, in 2027, real GDP growth will also increase by 1% in 2027. In the longer term, investments in infrastructure can increase private sector productivity e.g. due to faster internet and better roads, leaving GDP to rise significantly more than 1 euro for each euro spent (see table to the right).
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