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Page 3Economic policy All on one page
Fiscal policy will provide a major stimulus in 2019, amounting to 0.7% of GDP. This will primarily take the form of income tax relief and additional pension insurance benefits. Public sector investment will also continue to expand, albeit not as strongly as in 2018, when budgets for construction projects were increased by more than 10% in nominal terms. At 0.4%, the fiscal policy stimulus in 2020 will be much lower. The general government surplus will fall from last year’s 1.7% of GDP to 1.2% (2019) and 1.0% (2020). Calculated with the modified EU method and adjusting for cyclical and one-off effects, the surplus in relation to production potential will decline from 1.3% in 2018 to 1.1% (2019) and then to 0.8% (2020).
The economic slowdown raises the question of possible consequences for fiscal policy. So far, public debate has focused on balancing the federal budget – breaking even at what is known in Germany as the “black zero”. In addition, the debt brake anchored in the country’s constitution is again the subject of controversy. A clear distinction should be made between the two concepts: the debt brake relates to the structural deficit; the “black zero” relates to the nominal deficit. Politicians should let the automatic stabilisers do their job, rather than consciously saving for the sake of the “black zero”; after all, both the German debt brake and the European fiscal policy framework explicitly permit cyclical deficits.
While cyclically driven government surpluses will decline, structural surpluses will remain significant for the time being. However, in “fat” years of the past, politicians decided to extend pension benefits; as the legislation currently stands, these will eat into structural budget surpluses in the medium term. German economic policy is thus creating risks by placing a considerable burden on the long-term stability of the statutory pension insurance system inasmuch as the expansion of benefits cannot be financed from payments into the system. This raises expectations of tax increases that will adversely affect Germany as a location for investment. At the same time, expansions to these benefits reduce the room for manoeuvre elsewhere. Investments in research, education, and infrastructure are more urgent than ever in view of the increasingly fierce competition between countries to attract business. In addition, demographic change calls all the more for policymakers to take into account the impact of social policy measures on work incentives.
Major risks for the German economy have been coming from the international arena for some time now: trade conflicts driven by the US may escalate again in the near future, and there could be an unregulated withdrawal of the UK from the European Union. In both cases, political decisions would have a negative impact on international economic integration. The German economy would be particularly affected as the US and the UK are among its most important trading partners. In addition, current assessments of the economic situation in China – the biggest importer of German goods after the US and France – are especially uncertain.
International economic risks are affecting the automotive industry in particular. For example, threatened US tariff increases would have a considerable impact on German car exports, and both the British and the Chinese sales markets are of great importance for German manufacturers. The industry faces other risks as well: the sluggish recovery in production after the slump caused by the introduction of WLTP may indicate that the automotive industry is struggling with sales problems – and not just over the short term. Here, controversy surrounding the environmental friendliness of conventional vehicles may play a role. This could lead to a wait-and-see attitude on the part of customers and could also force changes to production processes – changes that will most likely not run smoothly. Because automotive manufacturing is so important to the German economy, these risks pose a threat not only to the industry, but to the economy as a whole. An upside risk for the forecast arises from the fact that the institutes may underestimate the extent of the recovery in the manufacturing sector, as the special factors make it difficult to diagnose the underlying economic trend. Should the drop in production be made up more quickly, GDP could temporarily expand at significantly higher rates than the institutes expect. Less dynamic economic development could result if production is hampered more than the institutes expect due to supply bottlenecks and a shortage of skilled workers. According to surveys, these production obstacles have diminished conspicuously since the middle of last year; however, the proportion of companies reporting them remains unusually high.