Overturning years of fiscal orthodoxy, Germany has become the first big European country to announce a post-coronavirus stimulus, setting out a bold package of extra spending, tax cuts and help for business, worth €130bn.
The centrepiece is a surprise three percentage-point reduction in value added tax designed to soften the blow of what is expected to be the worst recession in Germany’s postwar history.
Olaf Scholz, finance minister, said the aim was to bring Germany out of the crisis “with a ka-boom”.
The move marks a sea change in German fiscal policy. Prior to the coronavirus pandemic, Berlin had continually resisted pressure from international organisations such as the IMF to abandon its balanced budget rule — the so-called “black zero” policy — and boost economic growth by increasing public investment and cutting taxes.
It has now changed its tune in spectacular fashion. The measures announced late on Wednesday make Germany an outlier in Europe: none of its neighbours has yet moved from emergency aid programmes to fiscal policies aimed at hastening a post-pandemic recovery and stimulating consumer demand.
In a TV interview, Angela Merkel, chancellor, said she was pleased that Germany had “withstood all the criticism” of its adherence to the black zero, “because that means that we can act now”.
“I’m glad that in the years when we were doing well, when we didn’t have a virus like this, we didn’t just spend money but reduced our debts,” she told ZDF TV.
Economists echoed that view, saying the stimulus vindicated Germany’s prudent fiscal stance of the past few years. “Following five years of fiscal surpluses and a decline in the German public debt ratio from 82.4 per cent of GDP in 2010 to 59.8 per cent in 2019, the package shows once again that Germany is ready and able to spend when it matters,” said Holger Schmieding, chief economist at Berenberg Bank.
Peter Altmaier, economy minister, described the package of measures as the “biggest stimulus programme of all time”. Carsten Brzeski, chief economist for Germany at ING, said taken together, all the government’s economic aid measures during the pandemic were equivalent to 10 per cent of Germany’s GDP. “I don’t think they can do much more than that,” he said.
Clemens Fuest, head of the Ifo economic think-tank, welcomed the package, saying it “combines incentives to revive consumption in the short-term, with impulses for public and private investments as well as support for small and medium-sized enterprises”.
But he warned that the effect of the VAT reduction might be shortlived. “When the tax cut expires at the end of 2020, spending will decline significantly,” he said. “And we can’t expect the crisis to be over by then.”
The package disappointed the German auto industry, which had hoped it would include cash incentives for buyers of conventional cars. In the end, the government increased subsidies for electric vehicles — premiums will be raised from €3,000 to €6,000 for a car that costs up to €40,000 — but not for those fitted with diesel and petrol engines.
The package was a result of 21 hours of often tough negotiations between the three members of Germany’s grand coalition government — Angela Merkel’s Christian Democratic Union, its Bavarian sister party the CSU, and the left-of-centre Social Democrats.
Each partner was forced to make painful concessions. Mr Scholz had gone into the talks wanting the federal government to take on the legacy debts of Germany’s most cash-strapped municipalities. Markus Söder, the CSU leader and prime minister of Bavaria — home to BMW — wanted to see cash incentives for buyers of petrol and diesel cars. In the end, both proposals fell by the wayside.
Instead, the partners agreed to the VAT reduction — an idea that had been championed by CDU leader Annegret Kramp-Karrenbauer and Helge Braun, Ms Merkel’s chief of staff. From July 1 until the end of 2020, the standard rate of VAT will be reduced from 19 to 16 per cent, and the lower band cut from 7 to 5 per cent — a measure that will cost €20bn. Mr Söder called it the “biggest tax cut of the last few decades”.
There was consolation for Mr Scholz, however. The federal government agreed to take on more of the cost of housing benefit for welfare recipients from the municipalities. It will also compensate them for up to half of the loss of corporate taxes as a result of the coronavirus crisis.
German businesses welcomed a measure to cap social security contributions at 40 per cent of wages for the coming years, and the creation of a €25bn fund for the months of June to August to help companies hard hit by the pandemic, particularly those in the hotel and hospitality sector. Companies will be able to set more of their 2020 losses against taxable income for 2018 and 2019. Families will receive a one-off bonus of €300 per child — a measure that will cost €4.3bn.
In addition, the coalition partners signed off on a €50bn “future package” of investment, with a focus on the transition to a greener economy, and research in areas such as artificial intelligence and quantum computing. Huge sums will be spent on expanding Germany’s charging infrastructure for electric cars.
Speaking on ARD TV on Thursday evening, Ms Merkel said the pandemic had come at a time when “digitisation and climate change are changing our economy”. That’s why, she said, the stimulus package must not only boost the economy and help it recover from the crisis, but also “chart our course for the future”.
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