Economy & Politics

State aidWhere the stimulus package really helps

Just to illustrate the dimensions: The total output of the entire German economy was 3436 billion euros, the gross domestic product (GDP) last year. As a result of the Corona crisis, the deepest economic downturn in post-war history, the Federal Government estimates that GDP will decrease by around 216 billion euros this year, or 6.3 percent.

The measures that the grand coalition packed into the economic stimulus package yesterday should have a volume of 130 billion euros, according to Chancellor Angela Merkel. If one assumes that the effect of targeted economic stimulus packages can be a multiple of the original expenditure, the billions in the package are purely mathematically sufficient to cushion the economic crisis or even compensate for the feared drop in GDP. But it is not that simple in this case. The economic impact of the most important of the more than 60 points and sub-points of the package in a single check:

VAT reduction

The coalition plans to cut costs of 20 billion euros in the form of lost revenue for the temporary reduction in VAT from 19 to 16 percent for the normal rate and from seven to five percent for the reduced rate.

Advantages: The tax reduction can be implemented quickly. It is due to enter into force on July 1st. Then it has an immediate and targeted effect on consumption, which is supposed to be boosted. Almost all industries can benefit. The two or three percentage points can relieve a family with several thousand euros in expenditure in the next six months by a few hundred euros. Poorer people, especially families with little money, spend a comparatively large part of their income on consumption, and they will feel the reduction in VAT particularly clearly. At the same time, they are very likely that the savings will flow into additional consumption. “Experience from other countries such as Great Britain during the financial crisis suggests that this will increase consumer spending,” says Clemens Fuest, head of the Ifo Institute.

Disadvantage: The state cannot force retailers or service providers to pass on the full reduction in VAT to customers. Instead, individual providers could increase their net prices. In addition, hangover mood for trade threatens after the regulation expires in early 2021. Many consumers may prefer to make larger purchases to still benefit from the reduced tax rate. After that, the demand for many goods and services is likely to decrease for now.

Child bonus

Families receive a one-time bonus of 300 euros per child. The government parties estimate the costs for this at 4.3 billion euros.

Advantages: The implementation is straightforward, the bonuses can be paid out quickly. In a joint paper, economists from numerous economic research institutes specified two conditions so that a child bonus actually has an economic impact and is not simply parked in the savings accounts of wealthy families: the payment is subject to income tax, but is not counted towards social benefits such as Hartz IV. The coalitioners implemented this in their decision. Low-income families who are particularly likely to put additional money into additional consumer spending will benefit particularly.

Disadvantage: The effect is unique and the volume is comparatively limited.

Social guarantee

More than five billion euros are planned in the stimulus package for a so-called social guarantee. The federal government is to use this money to subsidize social insurance, the expenditure of which will increase as a result of record short-time work and rising unemployment, while revenues will collapse with the economy. For example, an increase in contributions for unemployment, health, nursing and pension insurance should be limited to a maximum of 40 percent of wage costs.

Advantages: It is less a matter of relief than the prevention of additional burdens on workers and employers. The social guarantee specifically protects middle-income people who might have restricted their consumption simply because of the fear of sharply rising social security contributions. The guaranteed guarantee gives planning security at least for the coming year.

Disadvantage: People with very low incomes, such as Hartz IV recipients, do not benefit.

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