wealth tax

The global implications of Germany’s September elections | Article

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Economic policies according to the election manifestos

The pandemic has just been another reminder of Germany’s lack of digitalisation. Whether it is the digital infrastructure, the educational system, e-government or digital services, there is clearly plenty of upside potential for the economy in the years ahead. The U-turn of the incumbent government on fiscal policy, already ahead of the pandemic but in full swing during the pandemic, has prepared the ground for a more general acceptance of public spending and investment. Therefore, it does not come as a surprise that all parties have presented many plans on how and where to invest in the coming years. Climate change, demographic change with its impact on pensions and health care, digitalisation, energy transition and the structural change from manufacturing to services, just to mention a few hot topics, are all in the proposals. The financing of all these ideas, however, is not always very clear.

The pandemic has just been another reminder of Germany’s lack of digitalisation

What differentiates the four parties, with the highest likelihood to join the next government, is taxes. While the CDU/CSU and FDP advocate no tax increases but propose different forms of tax relief, the Greens and the SPD have proposed tax increases for the highest income bracket as well as the introduction of a wealth tax.

The discussion on the constitutional debt brake has somehow died down. CDU/CSU and FDP advocate a relatively swift return to fiscal policies in line with the debt brake, while the SDP remains silent on this issue and the Greens propose a reform. In our view, this discussion is mainly shadow boxing as it requires a two-thirds majority in parliament to change the constitutional debt brake. It looks very unlikely that any such majority could emerge after the elections. However, the CDU/CSU, Greens and also the SPD seem open to the idea of at least temporary workarounds, allowing for more investment and, in turn, higher debt in the coming years. This workaround could be a shadow household for investment in digitalisation, infrastructure or the fight against climate change.

All in all, there seems to be a broad consensus on the need for more investment and fiscal stimulus, obviously with widely differing views on the size and how to finance it. Regarding the eurozone level, however, views and proposals diverge much more. The Greens have the most ‘federal’ approach, while the CDU and FDP manifestos clearly put a brake on dreams of a fiscal union. Both parties would like to return to strict implementation of the fiscal rules. The CDU/CSU is keeping the door open to some changes in the fiscal rules but only if these changes lead to stricter rules.

The FDP is again advocating a mechanism for orderly sovereign default in the eurozone. While the SPD is keeping further reforms of the monetary union’s institutional framework in the air, the Greens are more precise with their ideas of eurozone fiscal capacity and changes to the fiscal rules. This demarcation line is also visible on other European fiscal issues with the Greens and SPD advocating own resources for the EU from a digital or carbon border tax, while the FDP rules out such own resources and the CDU remains rather vague.

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