What investment will be necessary by 2020?

Investment and consumption: economic policy options for action in mid-2020

The historically unique collapse in macroeconomic performance in the Corona crisis makes economic policy measures urgently necessary. If the measures are aimed at the demand side, they must be designed with the right timing, targeted and limited in time. The steering effect should take a back seat. A catalog of measures that ranges from tax cuts to direct payments makes sense.

The Corona crisis triggered a strong, historically unique slump in macroeconomic performance. According to the first estimate by the Federal Statistical Office, the gross domestic product (GDP) in the first quarter of 2020 shrank by 2.2% compared to the previous quarter, while a significantly stronger contraction of around 12% is to be expected for the second quarter at the current rate. All forecasts expect a recovery from the third quarter. It is assumed that essential blockades on the supply side have largely been loosened or no longer effective and that the demand side will start up again.

As a result of continued disruptions in supply chains and restrictions in the deployment of employees, production companies are likely to suffer from productivity losses for a longer period of time - until the end of the year. The demand problems are likely to have a more serious effect in the further course of the year. There is initially a lack of demand from many foreign markets. In addition, domestic demand is likely to have a negative impact in the second half of 2020, if the extent of job losses becomes tangible after the summer break and the employment risk generally increases significantly as a result. In addition, not a few private households suffer from short-time working benefits, but also the restrictions on earned income, a reduction in disposable income.

Requirements for a demand policy

If production stabilizes on the basis of these measures and then starts up again easily, then this, together with other mood-enhancers (such as vacation trips abroad), can create an environment in which demand policy instruments can make sense. With demand policy, you no longer run the risk of trying to stop a falling knife with an open hand. The loosening of the supply policy restrictions basically opens the space for effective demand policy intervention. This becomes necessary if an economically significant underutilization of domestic capacities is registered and if this is based on an income restriction of private households - either through actual income losses (short-time work and unemployment) and the new build-up of savings that is therefore considered necessary or through expected / feared income losses looming, threatened unemployment.

Demand policy must be “timely, targeted, temporary” and should not have any steering effect, at least not as a primary goal (Bardt et al., 2020). Insofar as this can be combined with progress in modernization without weakening the economic policy reaction, this potential should be used. In reality, it is probably more about keeping negative side effects (e.g. with regard to climate protection) as small as possible. Behind this is the Tinbergen idea that every goal is pursued by an instrument and that a dilution of the use of instruments by several goals or specifications at the same time reduces the effectiveness of the policy, drives up costs and in the end is neither timely nor targeted, and thus also in terms of the policy the duration is out of bounds. So if you want to act quickly and effectively in terms of demand policy, unlike a growth-oriented investment strategy, you have to largely and primarily forego additional targets.

A particular challenge arises under the conditions of a stability economy or even a deflation economy, because then consumers conserve their own financial resources even with measures to stimulate demand, since they are not exposed to price risk by waiting or can still hope that prices will fall and they will unite Achieve real income gain. It can therefore be helpful for the effectiveness of a demand policy if a transitory inflationary impulse arises beforehand due to supply problems or due to catch-up effects in retail and services to compensate for the loss of demand during the lockdown.

The leakage losses of a demand policy due to positive effects on import demand are discussed critically. This is put into perspective with a view to European seepage effects, as Germany can thus make an important stabilization contribution for Europe through its networking (Kolev and Obst, 2020). Indeed, European coordination of demand policy activities could increase overall efficiency. In the global financial crisis of 2009, this basically succeeded and is largely absent this time. After all, there are now various proposals for European action (Merkel-Macron, EU Commission). So far, the states have shown very different levels of crisis policy engagement in terms of level and structure (see Figure 1).

illustration 1
Fiscal Policy Responses to the COVID-19 Pandemic
in% of the national gross domestic product

Source: International Monetary Fund, German Economic Institute.

In spite of all of the European responsibility, it would of course be economically wasted if one were in fact to give particular support to those sectors that have a particularly high import share (finished goods and intermediate consumption). That is why domestic consumption in particular - as consumption of products with a high domestic added value or a low import share - should be promoted economically and politically. Figure 2 quantifies exactly that proportion based on the input-output tables. According to this, services and construction offer the greatest domestic effect with almost 90%, followed by industry, which has a domestic share of at least 55%. The sector-specific data show a considerable differentiation: the import shares for pharmaceutical products (66%), data processing equipment, optical and electronic devices (68%), electrical equipment (52%), also furniture (54%) are relatively high, for motor vehicles ( including parts) at 36% rather low (two thirds of which are advance payments).

Figure 2
Aggregated groups of goods, Germany 2016
in% of the total volume of goods, information based on input-output tables

Sources: Federal Statistical Office; Institute of the German Economy.

It becomes clear how fragmented the demand policy business becomes if one looks for differentiated funding logics. In addition, these added value shares still have to be mirrored with the value added and employment share of the respective industries and the importance of this industry for the value added chains. In fact, in the course of the lockdown it became clear that the automotive industry is of particular importance in this context as well and that it does justice to its role as a key industry. In mechanical engineering and in the chemical industry, production was able to be maintained with relatively stable capacity utilization in the past few weeks where it was not a matter of advance payments for the automotive sector.

A number of well-known and tried-and-tested instruments can be cited as well as theoretical concepts (cf. Table 1) in the sense of a temporal and objective accuracy as well as effectiveness in the case of time-limited intervention in demand policy. The triple conditioning - timely, targeted, temporary - is intended to ensure that the economic impulse comes into effect in a timely and powerful manner. The “targeted” condition conceals further criteria for a targeted effectiveness (Brügelmann, 2010): The relevant production potential is underutilized (affected); the measures address economic areas with a high level of network integration through value-added networks and supply chains (leverage effects); crowding out demand elsewhere is not plausible, and consumption-supporting measures do not only lead to increased savings (additionality). After all, one fights against windmills when factors strain general consumer confidence that cannot be addressed directly in terms of demand policy; Worrying about one's own job must therefore depend primarily on underutilization and a lack of demand.

Table 1
Selected demand impulses and criteria of effectiveness
Private consumptionSector AffectedLeverage effectAdditionality
VAT reduction (general rate)YesIn terms of distribution policy, yes, only private consumptionNot specifically on underutilized potential, but broad impactLoss of seepage is unavoidableUnsureYes
Consumer vouchersYesPrivate consumption onlyLimited focus on underutilized potentialLosses percolation can only be localized regionallyIn fact, "transfer in kind" (safer), possibly pull-forward effectsYes
Purchase bonusYesPrivate consumption onlyCan be focused on underutilized potentialLeverage if leakage can be limited in a sector-specific mannerIn fact, “transfer in kind” (safer), possibly pull-forward effectsYes
Helicopter fraudYesPrivate consumption onlyNot specific to underutilized potentialMacroeconomic yes, seepage losses are unavoidableUnsureYes
Lowering of the levy according to the Renewable Energy Sources Act (EEG)UnsureIn terms of distribution policy, yes, heterogeneous among companiesNot specific to underutilized potentialLoss of seepage is unavoidableUnsureYes
Reduction of social contributionsUnsureIn terms of distribution policy (because of the consumption rate), yesNot specific to underutilized potentialLoss of seepage is unavoidableUnsureYes
Preferring solos to be abolishedNoUnsureNot specific to underutilized potentialLoss of seepage is unavoidableUncertain, expectation effect of higher net incomeYes (pull-forward effect is temporary)
Basic income tax allowance & entry tax rateNoIn terms of distribution policy (because of the consumption rate), yesNot specific to underutilized potentialLoss of seepage is unavoidablePlausible, since households have a higher consumption rateNo
One-time child benefitUnsureIn terms of distribution policy (because of the consumption rate), yesNot specific to underutilized potentialLoss of seepage is unavoidablePlausible, since households have a higher consumption rateYes

Source: own compilation.

Model of the financial crisis

The experiences of crisis management during the financial crisis also provide important information. Firstly, it was remarkable how quickly the heads of state and government succeeded in developing a common understanding of the crisis as early as November 2008 through the new G20 format, formulating a framework for an appropriate economic policy response and thus achieving an international orchestration of crisis policy. Since all major economies acted in the same way, seepage effects through imports were not an argument against the effectiveness of the demand policy. Secondly, there was a lot of action at the time, already in autumn 2008 with the economic stimulus package I and in spring 2009 with the economic stimulus package II. It can be seen that these packages brought together an investment program with temporary economic stimuli; This combined a financial volume of 104 billion euros (Leibniz Institute for Economic Research Halle [IWH], 2015).

New paths have been taken with the one-time child benefit and the environmental bonus. On the one hand, households with a high consumption rate should be given additional leeway for spending, on the other hand, a special lever should be used via the key automotive sector. Ecological aspects were taken into account insofar as vehicle owners could apply for the environmental bonus for an end-of-life vehicle that was at least nine years old and registered for at least one year if it was scrapped and at the same time an environmentally friendly new or annual vehicle from the Euro 4 emissions standard was bought and approved. The premium was 2,500 euros and was granted for registrations up to December 31, 2009; the total volume of 5 billion euros was exhausted on September 2, 2009.

The effectiveness of the economic stimulus packages can be measured on the one hand by the fact that action was taken internationally and in good time, so that positive expectation effects were plausible, at least the traditional criticism of demand policy measures took a back seat (IWH, 2015). On the other hand, the design and, above all, the time limit suggest that the instruments had a quick effect - albeit sometimes mainly pull-forward effects. Overall, the criticism with regard to the usual delay was justified, although the subsequent symptoms of overheating could not be diagnosed.1 On the basis of dynamic stochastic macroeconomic equilibrium models, the overall assessment of the fiscal policy packages for 2008 and 2009 is quite positive

Demand policy recommendations

In view of the experiences outlined above and the categorical classification of demand policy instruments, the following indications can be derived:

Lower sales tax

In the case of underutilization of the economy as a whole, the idea of ​​a temporary reduction in VAT (only general rate, so that basic consumption would be excluded) seems obvious. Because of the strongly regressive effect of VAT, the consumption effect is likely to be particularly large here; in the bottom decile of income, value added tax burdens gross income three times as much as in the top decile; in the second decile it still has twice as much as in the second from the top, ninth decile (Beznoska, 2020). It must be ensured that the tax reduction is passed on to consumers in order to trigger the desired impetus in consumer demand; menu costs may stand in the way, but these can be reduced digitally. Basically, the problem remains that prices tend to be only incompletely adjusted when VAT is lowered; companies with higher profit margins tend to pass the reduction on to consumers (Benzarti et al., 2020). The settlement would be possible immediately, i. H. the purchase price can be reduced accordingly, so the retailer only has to pay lower VAT. In order to reliably relieve the burden on consumers, it should be checked whether a temporary input tax deduction of the value added tax on income tax or a direct reimbursement of the general value added tax paid can be requested from the tax office within a period of time.

Consumer vouchers

Appropriate suggestions are discussed in the form of a general voucher or as a consumption-related bonus. In this way, private households can be easily reached and consumption can be addressed directly, although the own resources saved can, of course, be used for savings. When thinking about purchase premiums or consumer vouchers, the macroeconomic leverage effect must be taken into account if sectors are addressed that combine high underutilization with high inventory levels due to the crisis. Here, by releasing the congestion in demand, a greater effect can be achieved.

  • Environmental bonus: Please refer to the leverage effect of the bonus from 2009. In fact, car purchases rose back then, albeit at the expense of other consumer segments. In 2009, the expenditure of private households for the purchase of motor vehicles increased by 20.5%, while private consumption excluding motor vehicles fell by 0.5%; overall, this led to an increase in private consumption of 0.4% (Federal Statistical Office, 2010). This is of course not a counter-argument, because this shift in consumption has increased the economic leverage effect. At that time, many customers preferred to buy a car, so that there was no corresponding demand in the following year. The market share of foreign car manufacturers jumped by almost eleven percentage points to around 55%; In view of an import quota in this branch of 36%, this is on the one hand not surprising, but on the other hand it opens up a glimpse of the European importance of the automotive sector; this is only a problem with national constrictions. In retrospect, the overall economic picture is positive (IWH, 2015).

This time there is already an environmental bonus, namely for cars with battery and fuel cell drives (6,000 euros) and hybrid electric vehicles (4,500 euros) up to 40,000 euros net price list (up to 65,000 euros the bonus is 5,000 euros). There are currently no capacity problems in these segments. It would be conceivable to expand the premium to include diesel engines (Euronorm 6d) and modern gasoline engines (3,000 euros) up to a net list price of 65,000 euros, so that the average CO2 emissions for the fleet would be reduced.

  • Digital helicopter money as Schwundgeld: Helicopter money originally had a different function: It was supposed to bring central bank money to the people and thus stimulate inflation.Fiscal (and not monetary policy) consumer vouchers could be designed as Schwundgeld, so that an attractiveness that declines in stages over time would lead to considerable pull-forward effects. Leakage effects through stimulation of imports cannot be avoided. In order for these vouchers to have an additional effect, one could request the proportional use of one's own funds, so that the savings are not favored.

Relief for lower and middle incomes

Relief for lower and middle incomes, who traditionally have a higher consumption rate and are currently possibly particularly affected by income worries and losses.

  • Temporary lowering of the surcharge according to the Renewable Energy Sources Act (EEG): This measure has the charm that it is particularly effective in households with low and medium incomes, where the consumption rate is high (see also Federal Environment Agency, 2020). In order to realize liquidity effects promptly, one would have to organize reimbursements through the electricity supplier. This proposal is interesting because the EEG surcharge rose again on January 1, 2020 (to 6.756 cents per kWh) and in the lower (second) income decile the gross income is four (three) times as heavily burdened as in the second uppermost (ninth) decile ( Beznoska, 2020).
  • Temporary lowering of social contributions: With this instrument, broader income ranges can also be targeted more precisely, the increase in disposable income would be visible on a monthly basis. The federal budget would have to provide for a subsidy to the Federal Employment Agency and to the health fund. Civil servants and the self-employed were left out, which can be justified with the lower level of concern or the targeted support.
  • One-off child benefit subsidy: This instrument was used in the economic stimulus package II. In the current situation, this is also supported by the particular burdens that families with children are exposed to due to the restriction of childcare facilities and schools. The consumption rate is likely to be high here, the timely effect is uncertain, but still to be expected. A leverage effect is not implausible because of its broad impact and additionality; in principle, the cyclical (short-term) effect of such calibrated transfers is greater than that of a general reduction in social contributions (Gechert et al., 2020). In addition, the greater needs-based justice of this child benefit subsidy - compared to a general transfer increase - should have a larger multiplier (Bayer et al., 2020).

Income tax cut

In view of the overall high tax rate - at 24% in 2019, this was significantly above the long-term average of 22.7% - a general reduction in income tax is fundamentally worth considering and is advisable in addition to targeted investment incentives and programs to strengthen the growth potential in the long term (Hüther , 2020). There is little to be hoped for in the short term or in terms of economic policy; the effects of expectations are unlikely to turn negative consumer sentiment.

  • Lowering the basic tax rate and increasing the basic tax allowance: Targeted relief for lower incomes is the most important thing to consider. However, these changes mean that the income tax rate as a whole is becoming less and less incentive-compatible, as the increasing compression in the rate profile increases the degree of progression.
  • Tax credit: The US is an example with the instrument of tax credits and currently tax refund checks. A reduction in income tax (permanent, but temporarily effective by bringing forward the solos) in combination with a one-off payment (minimum tax credit of 300 or 500 euros per person), which does not have to be repaid if the tax savings were actually less, would be conceivable. This also reached households that pay little income tax but have a high consumption rate.
  • Prefer the abolition of the solidarity surcharge: With a view to private consumer demand, it remains subordinate and not very targeted. However, this helps (with complete abolition) of the investment demand, because it relieves companies of a residual solos that has actually mutated into a corporate tax.

When designing an overall economic package, it should be noted that the degree of effectiveness increases with increasing international coordination. This applies to the G20, which can send an important signal if it succeeds, as in 2008/2009, in organizing an orchestration of crisis policy. In principle, this opens up the possibility of increasing the leverage effect of the national programs and could have a particular effect in the case of joint actions for specific sectors. This of course applies directly to the European Union, in which grants and loans are to be made available in the member states for expansive measures for crisis recovery through a European Recovery Fund; negotiations on this should be concluded before the summer break. This also includes coordinating efforts in the not implausible event that the increasing number of corporate insolvencies and loan defaults affect the banks in the second half of the year. The European Stability Mechanism (ESM) and the Single Resolution Fund (SRF) are available for this and must be able to act.

A German economic stimulus program

Against the background of the findings and arguments presented, the following measures appear to be recommendable for a German economic stimulus package, in which the stabilization of companies continues to have priority in order to avoid or eliminate supply problems and to prepare the ground for demand policy to be highly effective. Tax and levy increases - be it only as an announcement for future times - would of course be poison for the effectiveness of all parts of the program. Likewise, it must not happen that the expansionary measures of the federal and state governments are thwarted by massive budget cuts in the municipalities - where the focus of public investment is anyway responsible. The proposal by the Federal Minister of Finance that the federal government and the federal states compensate the municipalities for the loss of trade tax income this year is therefore to be welcomed.

  1. Set up an investment program (Dullien et al., 2020) with the following elements:

    a. Among other things: energetic building renovation, scrapping bonus for oil heating systems as well as a heat pump program, R&D funding for key technologies, old debt aid for municipalities, infrastructure company for electric and H2 mobility, various investments in human potential;

    b. Adjustment of the depreciation rules (degressive depreciation, special depreciation) and other tax measures in corporate tax law (Scientific Advisory Board, 2020): loss carry-back / negative tax, tax deductibility of the repayment for corona loans, suspension of minimum taxation, one-off tax-free reserve for 2019;

  2. Targeted, limited-time relief for private households through:

    a. Reduction of the EEG surcharge by 50% by the end of the year. With a planned revenue of 24 billion euros and a share of a third that is paid by private households, the fiscal costs would be around 4 billion euros.

    b. Subsidy as part of the child benefit according to the number of children: 300 euros for each child who lives in the parents' household, other regulation as in 2009 in the economic stimulus package II. The financial volume should be a good 3.5 billion euros.

  3. Targeted buying impulses with high macroeconomic leverage:

    a. Temporary reduction in VAT (general rate, if necessary reimbursement as input tax at the tax office). The reduction in the general VAT rate by one percentage point causes tax losses of around 1 billion euros per month. If the rate were to be reduced by 4 points for three months, that would be 12.4 billion euros, for four months 16.5 billion euros.

    b. In conjunction with the measures mentioned, an environmental bonus (e.g. in the amount of 3,000 euros) can be checked for all types of drive; also diesel (Euronorm 6d) and modern gasoline engines (up to 65,000 net list price), so that CO2 emissions would be reduced on average for the fleet: volume of EUR 5.0 billion available by the end of 2020 using the first-hand method; Scrapping scheme similar to ten years ago. Rising imports are seen as an expression of European integration; In order to increase its effectiveness, however, the premium should, if possible, be reflected in the neighboring European countries - as already decided in France.

Economic policy, which must be remembered again at the end, must first and foremost be seen from the point of view of the timing and factual accuracy of fit as well as the time limit, which "flash in the pan" and "seepage losses" consciously accepts. That is part of the essence of demand policy. It requires the willingness to be able to consider structural aspects only as a secondary consideration. At the same time, long-term thinking must be taken in order to strengthen the growth potential and put the financing of public budgets back on a sustainable basis. The package of measures adopted by the governing parties on June 3, 2020 to deal with the economy and the crisis, secure the future and international responsibility (BMF, 2020) largely follows the criteria and proposals outlined here. "

  • 1 “In 2009 a certain economic effect was achieved; the initial multiplier of the measures as a whole is likely to have been between 1.3 and 1.5; The environmental bonus and the economic fund Germany guarantee program played a major role in this. But the packages of measures did not take full effect until the 2010 and 2011 upswing. There are indications that the expectation of the stimulating effects of the expansionary financial policy in the following years also contributed to stabilizing the confidence of private households and companies and supported overall economic demand as early as 2009. However, this effect can hardly be quantified. ”(IWH, 2015, 103).
  • 2 "Our estimates hint at the overall positive effects of fi scal policy on German output in the years 2009 and 2010, most of which can be attributed to government consumption, investment, transfers and changes in labor tax rates including social security contributions" (Drygalla et al., 2017).


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Title: Investment and Consumption: Economic Policy Options in Mid-2020

Abstract: The historically unprecedented slump in overall economic output due to the coronavirus crisis creates an urgency for economic policy responses. Demandside measures must be timely, targeted, and temporary. Addressing policy objectives beyond the economic recovery should not be the focus right now. A package of measures ranging from tax cuts to direct payments is appropriate.

JEL Classification: E32, E62, H12