HomeLatest newsThe German tax obsession is ill-timed and unsustainable

The German tax obsession is ill-timed and unsustainable

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Berlin’s position is even more absurd considering that germany has room to spend more, even after two years of crisis

Germany is back at it. Finance Minister Christian Lindner is determined to reinstate the so-called debt brake, a strict fiscal rule that was suspended at the start of the pandemic to allow the government to spend more to support the economy. Lindner wants to restore the norm next year despite the war in Ukraine and the economic slowdown. This is an untimely and unsustainable decision.

The debt brake forces the Government to limit its budget deficit, adjusted for the economic cycle, to 0.35% of GDP, and was included in the Constitution in 2009. It was already a damaging straitjacket before the pandemic, that prevented Berlin from taking advantage of record low interest rates to borrow more and finance vital public investments. And the pandemic proved it was not fit for purpose during a major economic crisis. In addition, spending needed to reduce Germany’s energy dependency on Russia and cushion the impact of inflation on households and businesses will make it difficult to limit the deficit to 0.35% of GDP next year.

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Lindner’s position is even more absurd considering that Germany has room to spend more, even after two years of crisis. Public debt of 70% of GDP is below the euro zone average. And the council of German economic advisers forecasts a budget deficit of 2.6% this year, and 2.2% in 2023, well below the monetary union’s theoretical limit of 3%.

What’s more, the country can spend more without increasing its overall debt load. Although the German 10-year bond yield has risen to its highest level since the beginning of 2014, it is still very negative after adjusting for inflation, which stands at 7.4% per year. That allows for a few percentage points of GDP of additional spending. Germany will be one of the slowest growing European economies this year, and government advisers have lowered their GDP growth forecast to 1.8%. In this context, the last thing the country needs is to put on a fiscal hair shirt.

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