Les obsessions de la politique budgétaire allemande

www.boeckler.de

Les obsessions de la politique budgétaire allemande

Séminaire économie de la mondialisation

Achim Truger, IMK in der Hans-Böckler-Stiftung

www.boeckler.de

Tax cuts and budget consolidation The two fatal obsessions of German fiscal policy since 1998

Séminaire économie de la mondialisation, OFCE Paris, 7 December 2009

Achim Truger, IMK in der Hans-Böckler-Stiftung

3

Inform you about German fiscal policy and its economic and social effects including recent developments

Give you an insight into the – often very strange – debate on fiscal policy in Germany

Identify the two main driving forces („obsessions“) of German fiscal policy:

tax cuts + budget consolidation

Aims of the presentation

4

Introduction

Germany‘s poor economic and social performance over the last 10 years

Red-green tax reforms (1998-2005) and their consequences

Fiscal Policy under the Grand Coalition I (2005 to 2008) – some lessons learned?

Fiscal Policy under the Grand Coalition II (2008 to 2009) – a return to Keynesian fiscal policy?

Fiscal Policy under the new conservative-liberal government: Debt brake and aggressive further tax cuts

Contents

5

Introduction






Contents

6

Annual GDP-growth in %

Source: EU-Commission (2009)

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.01

99

2

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Germany EMU 12 France


7

Pro-cyclical fiscal policy

Figure 2: Government budget balance, cyclically adjusted budget balance and output gap: Germany 1991-2005 in % of (pot.) GDP

Source: OECD (2009)

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

budget balance budget balance (cycl. adj.) output gap

8

Total government expenditure (% of GDP)

42

44

46

48

50

52

54

56

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Germany EMU 12 France


9

(almost) world champion in expenditure restraint!


10

Government employment (% of total employment)

Source: ILO

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

36.0

38.0

1998 1999 2000 2001 2002 2003 2004 2005 2006

Canada Denmark Finland France Germany Norway Sweden UK USA

Source: ILO

11

Massive dismantling of the welfare state

pension cuts while at the same time subsidising private saving („Riester-Rente“)

cuts in unemployment benefits and duration („Hartz IV“), stricter enforcement

cuts in public health insurance

deregulation in employment protection and labour market laws

large-scale privatisations

12

Inequality on the rise

13

Unintended, but nevertheless bad

most of the decline occured under the red-green government

it was unintended, because the aims and hopes were to boost growth and emloyment and fight inequality

it resulted from deficiencies in (macro-)economic thinking in Germany

macroeconomics is irrelevant. Keynesianism is refuted and has to be fought against

structural reform is all that is needed to fight unemployment and small government to boost growth

14

Unintended, but nevertheless bad

The two „obsessions“:

growth policy is equated with tax cuts

fiscal policy is equated with budget consolidationmacroeconomic side effects are ignored

15

Introduction





Fiscal Policy under the new conservative-liberal government: Debt brake and aggressive further tax cuts?

Contents

16

Income Tax: in three major steps (2001, 2004 and 2005) marginal tax rates were substantially lowered

Business Taxation: In 2001 a major transition to a new system occured. The maximum marginal rate for profits decreased from 51.8 % to 38.6 % for corporations and 54.5 % to 45.7 % for non-incorporated business

Family taxation: child benefits / tax free allowances were increased

Ecological Tax Reform (almost revenue neutral)

Red Green Tax Cuts

17

Income Tax schedule: Marginal and average rates 1998 and 2005 in %

0

10

20

30

40

50

T 1998

T 1998T 2005

T 2005

18

Expensive reforms…

1999 2000 2001 2002 2003 2004 2005

Tax cuts (in % of GDP)

+3,0

(+0,2)

–1,3

(–0,1)

–23,2

(–1,1)

–25,3

(–1,2)

–22,9

(–1,1)

–38,0

(–1,7)

–44,6

(–2,0)

Child benefit –3,0 –4,9 –4,9 –8,0 –8,0 –8,0 –8,0

total (in % of GDP)

0,0

(–0,0)

–6,2

(–0,3)

–28,1

(–1,4)

–33,3

(–1,6)

–30,9

(–1,5)

–46,0

(–2,1)

–52,6

(–2,4)

relate to:

Budget balance in % of GDP -1.5 1.3 -2.8 -3.7 -4.0 -3.8 -3.3

Revenue effects of income, business and family tax reformin Bill. Euro as compared to 1998 tax law

19

…and their effectsdiscretionary fiscal stance 2001 to 2005

in % of GDP

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2001 2002 2003 2004 2005

revenue side expenditure side total

20

Overall revenue losses from red-green tax policy

Revenue Effects of tax reforms from 1998 to 2005 (2000-2010) in Mio Euro

-50000

-40000

-30000

-20000

-10000

0

21

..but the opposition has a brillant idea: More tax cuts !

Marginal Income Tax Rates of different Reform Proposals in %

10

15

20

25

30

35

40

45

50

55

taxable income in 1000 Euro

19982005CDUCSUUnionFDPKirchhofSVR

22

Revenue Effects of Tax Reform Proposals made in 2003 to 2005according to different estimates in Bill. Euro in 2005

CDU CSU FDP Kirch-hof

SVR CDU/CSU

Bach et al.

–26,2 –11,0 –27,8 –26,4 –1,5 –13,3

Financeministers (trans.)

–25,3(–

31,5)

–12,7(–

16,0)

–14,5(–

23,9)

–11,4(–42,9)

–4,0(–9,5)

––––

..but the opposition has a brillant idea: More tax cuts !!!

23

Introduction






Contents

24

recognised that further tax cuts were not possible if the budget was to be consolidated

switched to a more revenue sided consolidation strategy

Raised the value added tax by 3 points

Decided to postpone the tougher steps to 2007 and hope that by then the recovery would be strong enough

After the recovery expenditure growth on all federal levels was normalised

The Grand Coalition after 2005:some lessons learned…

25

Only partial compensation for red-green revenue losses


-60000

-40000

-20000

0

20000

40000

red-green Grand coalition balance

26

High risk strategydiscretionary fiscal stance 2001 to 2008

in % of GDP

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2001 2002 2003 2004 2005 2006 2007 2008


27

Given that nobody knew if the recovery was under way the negative fiscal stance for 2007 was extremely risky

the distributional effects of the tax measures were negative as there was only a compensation of 2/3 by lower contributions to unemployment insurance (from 6.5 to 4.2 %) and other social contributions were slightly increased

(by the way not very nice further move into the mercantilist direction…)

… with some serious drawbacks…

28

Public revenue was weakend from 2008 on by the next „big“ business tax reform (maximum statuatory rate down to 29.8 percent for all business profits)

Revenue of the unemployment insurance, the federal labour agency, was weakend by further aggressive cuts in the contribution rates: from 4.2 % to 3.3 % in 2008 and then to 2.8 % in 2009

the agency is deeply in deficit now and calls for expenditure cuts have been around…

… with some serious drawbacks…

29

Introduction






Contents

30

After some hesitation until November 2008: a tiny stimulus package…

31

…but then in January 2009: A substantial stimulus package

32

…plus some additional measures

33

discretionary fiscal stance 2001 to 2010

in % of GDP

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Unbelievable: conscious counter-cyclical action is back after 25 years…

34

Source: OECD (2009)

Not that bad in international comparison

35Source: OECD (2009)


36Source: OECD (2009)


37


Figure 2: Government budget balance, cyclically adjusted budget balance and output gap: Germany 1991-2005 in % of (pot.) GDP

Source: OECD (2009)

-11.0

-9.0

-7.0

-5.0

-3.0

-1.0

1.0

3.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

budget balance output gap budget balance cycl. adj.

38


Figure 2: Government budget balance, cyclically adjusted budget balance and output gap: Euro area 1991-2005 in % of (pot.) GDP

Source: OECD (2009)

-11.0

-9.0

-7.0

-5.0

-3.0

-1.0

1.0

3.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

budget balance budget balance (cycl. adj.) output gap

39


Figure 3: Government budget balance, cyclically adjusted budget balance and output gap: USA 1991-2005 in % of (pot.) GDP

Source: OECD (2009)

-11.0

-9.0

-7.0

-5.0

-3.0

-1.0

1.0

3.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

budget balance budget balance (cycl. Adj.) output gap

40

But no change of the general paradigm

Fiscal Policy:

important improvement compared with last recession

overall reaction slightly better than EMU-average

but again weaker than in the U.S.

and certainly not enough to counter the recession

German government prevented international co-ordination

41

But no change of the general paradigm

The serious drawbacks:

(Business as usual with respect to wages and monetary policy)

Tax cuts in the stimulus packages are permanent and will permanently weaken public revenue by about 1 percent of GDP

terrible medium term drawback: the „debt brake“ which will be gradually phased in from 2011 onwards

42

The grand coalition‘s revenue gains…


-60000

-40000

-20000

0

20000

40000

red-green Grand coalition balance

43


-60000

-40000

-20000

0

20000

40000

red-green Grand coalition Balance

… have already disappeared

44

The „debt brake“

‚structural‘ deficit < 0,35 % of GDP

Federal level 0.35 % ceiling from 2016

„Länder“ 0.0 % from 2020

cyclical deficit according to cyclical adjustment method by EU-Commission

discretionary policy only allowed in very special circumstances

transition period from 2011 to 2016/2020 when ‚structural‘ deficits have to meet the target

45

The „debt brake“: errors in construction…

relies almost completely on built-in stabilisers

but built-in stabilisers will be counteracted because cyclical deficit will be calculated according to technocratical cyclical adjustment method by EU-Commission serious procyclicalities

transition period from 2011 to 2016/2020 when ‚structural‘ deficits have to meet the target very dangerous

46

Dangerous transition to the „debt brake“

German fiscal policy will switch to restriction in 2011 irrespective of the economic situation

This may be to early for the recovery

(and it will certainly be wrong if European and global economic imbalances are to be tackled)

If there are no tax increases (which almost everybody has ruled out…) then expenditure restraint will have to be brutal again: nominal total expenditure growth not much higher than 1%

47

Dangerous transition to the „debt brake“

with good luck due to the endogeneity of „structural deficits“ prospects may brighten substantially if the recovery comes soon, is strong and lasts some years

With bad luck due to the endogeneity of „structural deficits“ prospects may darken even more if the recovery is weak and a period of stagnation follows

In the second case: If governments react with even more fiscal restriction to meet the then more ambitious deficit ceiling in 2016/20 then a viciuos circle might occur

48

Introduction






Contents

49

Believe it or not…

In this situation the new government announces

an immediate growth acceleration programme = further permanent tax cuts of about 8.5 bn. Euros..

Half of it goes into higher child benefits/allowances

2 bn go into lower business taxation

0.5 bn. to lower inheritance taxes

1 bn. to reduced vat rate for hotels

IMK estimate of one-off growth effect: 0.2 % of GDP

50

discretionary fiscal stance 2001 to 2010

in % of GDP

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


51

Believe it or not…

In this situation the new government announces

Further permanent tax cuts for the income tax of 20 bn. from 2011 onwards!

If really enacted in total public revenues will be permanently decreased by about 30 bn. Euros (1.2 % of GDP) per year.

52

3. Short-run economic policy reactions

53

Prospects for the future

The government would have to be extremely luckyto get through with this without dramatic further expenditure cuts on all federal levels and/or compensating tax increases and/or breaking the debt brake

There may be different scenarios. However, it is very likely that the poor German performance with respect to growth, welfare state and distribution will go on.

54

Is there a way out?

extreme luck…

getting rid of the debt brake….….but it‘s in the constitution!

But even given the debt brake there is a way out:

in general: increase taxes and restore the government‘s ability to act!!

consolidate the budget and

stop expenditure restraint. Drive up public investment in education, research, ecological and traditional infrastructure…

55

Once again: The two obsessions an obsession with budget consolidation

an obsession with tax cuts

Both obsessions are dangerous on their own

But in combination they are fatal and have proven to be so

If the obsession with budget consolidation cannot be cured …. then at least cure the obsession with tax cuts!

56

Merci beaucoup!

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Les obsessions de la politique budgétaire allemande

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