Countering the self-inflicted weakness in growth
BDA AGENDA 26/23 | COMMENT OF THE WEEK | December 14, 2023
Prof. Dr. Bert Rürup, Chief Economist of Handelsblatt and President of the Handelsblatt Research Institute
In the third quarter of this year, the overall economic performance of the German economy was at the same level as at the end of 2019. At that time, inflation was not an issue, Ukraine, where oligarchs were calling the shots, was a distant prospect, and coronavirus was at best a Mexican beer. The fact is that in recent years, no other eurozone country's economic development has been as weak as in Germany.
If the gross domestic product had increased by three percent during this period - as is the case on average in the eurozone - the state would have an estimated 25 to 30 billion euros more in tax revenue and almost as much in social security contributions. The country's current budget plight is therefore only superficially a consequence of the Federal Constitutional Court ruling of November 15, 2023, but primarily the result of a criminal neglect of growth policy over the past decade.
This is all the more worrying as the country is on the brink of a massive ageing spurt that has long been predicted but ignored for years. The German Council of Economic Experts estimates that the trend growth of around 1.4 percent in the past decade will be less than 0.5 percent per year by the end of this decade. Compared to the previous decade, this means that every year there will be a one percentage point shortfall in growth or an increase in income of around 40 billion euros.
A kind of religious war is currently raging as to whether the debt brake enshrined in the German Basic Law in 2009 should be retained under these conditions. The answer should be "yes", but a smarter one. Even liberal economists concede that government debt is not a bad thing per se. For example, it is undisputed that the state should use the lack of private demand in a massive economic slump to smooth the economic cycle in the short term through additional spending. However, it is not advisable to counteract persistently weak growth, as we are currently experiencing, with credit-financed expenditure as long as its supply-side causes are ignored.
Growth policies - specifically lower corporate taxes, modern depreciation rules or the digitalization of public administration - also cost money. The same applies to stimulating a higher labour supply, for example through a smarter citizen's income, the establishment of genuine all-day schools, better childcare facilities or the necessary education offensive - not to mention flanking the decarbonization of the economy with public investment.
A smart debt rule must not hinder a necessary growth offensive, but it must prevent subsidies to profitable global corporations, the guarantee of permanent structural aid for outdated industries or outdated benefits for well-off private households from encouraging an increase in public debt that does not stimulate growth.
The government would therefore be well advised to set up a commission as soon as possible in which all democratic parties and the most prominent economists and lawyers are involved in the search for a debt brake that is compatible with growth. Their recommendations could then be implemented at the beginning of the next legislative period to ensure the country's overdue prosperity.
