25 Years IWH

The medium-term economic development in Germany from 2017 to 2022 and opportunities for fiscal policies of a new federal government

Due to the cyclical upswing in Germany, in case of unaltered legislation, the general government would achieve considerable budget surpluses in the years ahead. As a consequence, there is large fiscal scope for a new federal government. With the fiscal policy simulation model of the Halle Institute for Economic Research (IWH) – Member of the Leibniz Association, the macroeconomic effects of various fiscal policy measures are analysed. The results show that additional government expenditures, like the expansion of social benefits, do have a stronger effect on GDP than revenue cuts, like for instance tax reliefs. „Due to the already high capacity utilisation, revenue cuts seem to be advantageous from a business cycle perspective. Moreover, a reduction of the high taxes and charges on labour would, in contrast to an expansion of social benefits, have a positive effect on potential output“, says Oliver Holtemöller, head of the Department of Macroeconomics and IWH vice president.

Authors Oliver Holtemöller

The German economy is in a strong cyclical upswing.* The cyclical position contributes to a surplus in the balance of the general government that is likely to rise to almost 45 billion euros in 2017. If laws stayed as they are and the fiscal stance were, from 2019 onward, neutral, this surplus would as well be more or less constant in the coming years (see Table 1). The structural balance, i.e. the balance that is cyclically and for one-off effects adjusted, would, starting from about 30 billion euros in 2018, increase even further.

* See IWH Press Release39/2017 „Cyclical upswing in Germany and in the world“ of December 14, 2017.

This gives a future government considerable scope for lowering revenues or ex­panding spending. Using the IWH model for simulating effects of fiscal policy, we simulate three scenarios: one with a programme that lowers revenues, one with a spending programme, and a third that is a combination of the former two pro­grammes (see Table 2).

Since coming to a political decision about such a bunch of policy measures and thereafter implementing them will take some time, the fiscal stimuli are assumed to be quite limited in 2019. In 2022, however, they are as high as 33 or 34 billion euros. The simulations show that additional GDP is higher if caused by the spend­ing programme than in the case of lower revenues (see Table 3).

Thus in the present cyclical situation a revenue programme is more appealing since its pro-cyclical effects are smaller than those of a spending programme. A further aspect in favour of a revenue programme is that the share of general government revenues in GDP has increased in recent time. Reversing this trend makes sense. Lowering the tax- and social security-burden on labour could raise potential output and contribute to stabilising the financial position of the state in the long run, preserving its fiscal scope for future times.

Long Version:
Bershadskyy, Dmitri; Brautzsch, Hans-Ulrich; Drygalla, Andrej; Heinisch, Katja; Holtemöller, Oliver; Lindner, Axel; Wieschemeyer, Matthias; Zeddies, Götz: Die mittelfristige wirtschaftliche Entwicklung in Deutschland für die Jahre 2017 bis 2022 und finanzpolitische Optionen einer neuen Bundesregierung. IWH-Pressemit­teilung 40/2017 (Langfassung).

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