Download Red Green Tax Cuts

Les obsessions de la politique
budgétaire allemande
Séminaire économie de la mondialisation
Achim Truger, IMK in der Hans-Böckler-Stiftung
www.boeckler.de
Tax cuts and budget consolidation
The two fatal obsessions of German fiscal
policy since 1998
Séminaire économie de la mondialisation, OFCE Paris, 7
December 2009
Achim Truger, IMK in der Hans-Böckler-Stiftung
www.boeckler.de
Aims of the presentation
 Inform you about German fiscal policy and its economic
and social effects including recent developments
 Give you an insight into the – often very strange – debate
on fiscal policy in Germany
 Identify the two main driving forces („obsessions“) of
German fiscal policy:
tax cuts + budget consolidation
3
Contents
 Introduction
 Germany‘s poor economic and social performance over the last
10 years
 Red-green tax reforms (1998-2005) and their consequences
 Fiscal Policy under the Grand Coalition I (2005 to 2008) – some
lessons learned?
 Fiscal Policy under the Grand Coalition II (2008 to 2009)
– a return to Keynesian fiscal policy?
 Fiscal Policy under the new conservative-liberal government:
Debt brake and aggressive further tax cuts
4
Contents
 Introduction
 Germany‘s poor economic and social performance over the last
10 years
 Red-green tax reforms (1998-2005) and their consequences
 Fiscal Policy under the Grand Coalition I (2005 to 2008) – some
lessons learned?
 Fiscal Policy under the Grand Coalition II (2008 to 2009)
– a return to Keynesian fiscal policy?
 Fiscal Policy under the new conservative-liberal government:
Debt brake and aggressive further tax cuts
5
Annual GDP-growth in %
6.0
4.0
2.0
-2.0
Source: EU-Commission (2009)
-4.0
-6.0
Germany
6
EMU 12
France
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
0.0
Pro-cyclical fiscal policy
Figure 2: Government budget balance, cyclically adjusted budget balance
and output gap: Germany 1991-2005 in % of (pot.) GDP
Source: OECD (2009)
3.0
2.0
1.0
0.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
budget balance
7
budget balance (cycl. adj.)
output gap
Total government expenditure (% of GDP)
56
54
52
50
48
46
44
42
Source: EU-Commission (2009)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Germany
8
EMU 12
France
(almost) world champion
in expenditure restraint!
Source: EU-Commission (2009)
9
Government employment
(% of total employment)
38.0
36.0
34.0
32.0
30.0
28.0
26.0
24.0
22.0
20.0
18.0
16.0
14.0
Source: ILO
Source: ILO
12.0
10.0
1998
10
1999
Canada
2000
Denmark
2001
Finland
2002
France
Germany
2003
Norway
2004
Sweden
2005
UK
2006
USA
Massive dismantling
of the welfare state
 pension cuts while at the same time subsidising
private saving („Riester-Rente“)
 cuts in unemployment benefits and duration
(„Hartz IV“), stricter enforcement
 cuts in public health insurance
 deregulation in employment protection and labour
market laws
 large-scale privatisations
11
Inequality on the rise
12
Unintended, but nevertheless bad
 most of the decline occured under the red-green
government
 it was unintended, because the aims and hopes were
to boost growth and emloyment and fight inequality
 it resulted from deficiencies in (macro-)economic
thinking in Germany
13

macroeconomics is irrelevant. Keynesianism is
refuted and has to be fought against

structural reform is all that is needed to fight
unemployment and small government to boost
growth
Unintended, but nevertheless bad
The two „obsessions“:
 growth policy is equated with tax cuts
 fiscal policy is equated with budget consolidation
macroeconomic side effects are ignored
14
Contents
 Introduction
 Germany‘s poor economic and social performance over the last
10 years
 Red-green tax reforms (1998-2005) and their consequences
 Fiscal Policy under the Grand Coalition I (2005 to 2008) – some
lessons learned?
 Fiscal Policy under the Grand Coalition II (2008 to 2009)
– a return to Keynesian fiscal policy?
 Fiscal Policy under the new conservative-liberal government:
Debt brake and aggressive further tax cuts?
15
Red Green Tax Cuts
 Income Tax: in three major steps (2001, 2004 and
2005) marginal tax rates were substantially lowered
 Business Taxation: In 2001 a major transition to a
new system occured. The maximum marginal rate for
profits decreased from 51.8 % to 38.6 % for
corporations and 54.5 % to 45.7 % for nonincorporated business
 Family taxation: child benefits / tax free allowances
were increased
 Ecological Tax Reform (almost revenue neutral)
16
Income Tax schedule: Marginal and average rates
1998 and 2005 in %
T 1998
50
T 1998
T 2005
40
T 2005
30
20
10
17
00
15
0,0
00
14
0,0
00
13
0,0
00
12
0,0
00
11
0,0
00
10
0,0
0
90
,00
0
80
,00
0
70
,00
0
60
,00
0
50
,00
0
40
,00
0
30
,00
0
20
,00
0
10
,00
0
0
Expensive reforms…
Revenue effects of income, business and family tax reform
in Bill. Euro as compared to 1998 tax law
1999
2000
2001
2002
2003
2004
2005
Tax cuts
(in % of GDP)
+3,0
–1,3
–23,2
–25,3
–22,9
–38,0
–44,6
(+0,2)
(–0,1)
(–1,1)
(–1,2)
(–1,1)
(–1,7)
(–2,0)
Child benefit
–3,0
–4,9
–4,9
–8,0
–8,0
–8,0
–8,0
total
(in % of GDP)
0,0
–6,2
–28,1
–33,3
–30,9
–46,0
–52,6
(–0,0)
(–0,3)
(–1,4)
(–1,6)
(–1,5)
(–2,1)
(–2,4)
1.3
-2.8
-3.7
-4.0
-3.8
-3.3
relate to:
Budget balance
in % of GDP
-1.5
18
…and their effects
discretionary fiscal stance 2001 to 2005
in % of GDP
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2001
2002
revenue side
19
2003
2004
expenditure side
2005
total
Overall revenue losses from redgreen tax policy
Revenue Effects of tax reforms from 1998 to 2005
(2000-2010) in Mio Euro
0
-30000
-40000
-50000
20
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
-20000
20
01
20
00
-10000
..but the opposition has a brillant idea:
More tax cuts !
55
Marginal Income Tax Rates of different Reform Proposals in
50
%
1998
2005
CDU
CSU
Union
FDP
Kirchhof
SVR
45
40
35
30
25
20
15
taxable income in 1000 Euro
21
60
.0
55
.0
50
.0
45
.0
40
.0
35
.0
30
.0
25
.0
20
.0
15
.0
10
.0
5.
0
10
..but the opposition has a brillant idea:
More tax cuts !!!
Revenue Effects of Tax Reform Proposals made in 2003 to 2005
according to different estimates in Bill. Euro in 2005
Bach et
al.
CDU
CSU
FDP
Kirchhof
SVR
CDU/
CSU
–26,2
–11,0
–27,8
–26,4
–1,5
–13,3
–11,4
(–42,9)
–4,0
(–9,5)
––
––
Finance
–25,3 –12,7 –14,5
ministers (–31,5) (–16,0) (–23,9)
(trans.)
22
Contents
 Introduction
 Germany‘s poor economic and social performance over the last
10 years
 Red-green tax reforms (1998-2005) and their consequences
 Fiscal Policy under the Grand Coalition I (2005 to 2008) – some
lessons learned?
 Fiscal Policy under the Grand Coalition II (2008 to 2009)
– a return to Keynesian fiscal policy?
 Fiscal Policy under the new conservative-liberal government:
Debt brake and aggressive further tax cuts
23
The Grand Coalition after 2005:
some lessons learned…
 recognised that further tax cuts were not possible if
the budget was to be consolidated
 switched to a more revenue sided consolidation
strategy
 Raised the value added tax by 3 points
 Decided to postpone the tougher steps to 2007 and
hope that by then the recovery would be strong
enough
 After the recovery expenditure growth on all federal
levels was normalised
24
Only partial compensation
for red-green revenue losses
Revenue Effects of tax reforms from 1998 to 2008
(2000-2010) in Mio Euro
40000
20000
0
-60000
red-green
25
Grand coalition
balance
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
00
-40000
20
01
-20000
High risk strategy
discretionary fiscal stance 2001 to 2008
in % of GDP
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2001
2002
2003
2004
revenue side
26
2005
2006
expenditure side
2007
total
2008
… with some serious
drawbacks…
 Given that nobody knew if the recovery was under
way the negative fiscal stance for 2007 was
extremely risky
 the distributional effects of the tax measures were
negative as there was only a compensation of 2/3 by
lower contributions to unemployment insurance (from
6.5 to 4.2 %) and other social contributions were
slightly increased
 (by the way not very nice further move into the
mercantilist direction…)
27
… with some serious
drawbacks…
 Public revenue was weakend from 2008 on by the
next „big“ business tax reform (maximum statuatory
rate down to 29.8 percent for all business profits)
 Revenue of the unemployment insurance, the federal
labour agency, was weakend by further aggressive
cuts in the contribution rates: from 4.2 % to 3.3 % in
2008 and then to 2.8 % in 2009
 the agency is deeply in deficit now and calls for
expenditure cuts have been around…
28
Contents
 Introduction
 Germany‘s poor economic and social performance over the last
10 years
 Red-green tax reforms (1998-2005) and their consequences
 Fiscal Policy under the Grand Coalition I (2005 to 2008) – some
lessons learned?
 Fiscal Policy under the Grand Coalition II (2008 to 2009)
– a return to Keynesian fiscal policy?
 Fiscal Policy under the new conservative-liberal government:
Debt brake and aggressive further tax cuts
29
After some hesitation until November 2008:
a tiny stimulus package…
30
…but then in January 2009: A substantial
stimulus package
31
…plus some additional measures
32
Unbelievable: conscious counter-cyclical
action is back after 25 years…
discretionary fiscal stance 2001 to 2010
in % of GDP
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
revenue side
33
expenditure side
total
Not that bad in international comparison
Source: OECD (2009)
34
Not that bad in international comparison
Source: OECD (2009)
35
Not that bad in international comparison
Source: OECD (2009)
36
Not that bad in international comparison
Figure 2: Government budget balance, cyclically adjusted budget balance
and output gap: Germany 1991-2005 in % of (pot.) GDP
Source: OECD (2009)
3.0
1.0
-1.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-3.0
-5.0
-7.0
-9.0
-11.0
37
budget balance
output gap
budget balance cycl. adj.
Not that bad in international comparison
Figure 2: Government budget balance, cyclically adjusted budget balance
and output gap: Euro area 1991-2005 in % of (pot.) GDP
3.0
Source: OECD (2009
)
1.0
-1.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-3.0
-5.0
-7.0
-9.0
-11.0
38
budget balance
budget balance (cycl. adj.)
output gap
Not that bad in international comparison
Figure 3: Government budget balance, cyclically adjusted budget balance
and output gap: USA 1991-2005 in % of (pot.) GDP
Source: OECD (2009)
3.0
1.0
-1.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-3.0
-5.0
-7.0
-9.0
-11.0
39
budget balance
budget balance (cycl. Adj.)
output gap
But no change of the general paradigm
Fiscal Policy:
 important improvement compared with last recession
 overall reaction slightly better than EMU-average
 but again weaker than in the U.S.
 and certainly not enough to counter the recession
 German government prevented international co-ordination
40
But no change of the general paradigm
The serious drawbacks:
 (Business as usual with respect to wages and monetary policy)
 Tax cuts in the stimulus packages are permanent and will
permanently weaken public revenue by about 1 percent of GDP
 terrible medium term drawback: the „debt brake“ which will be
gradually phased in from 2011 onwards
41
The grand coalition‘s
revenue gains…
Revenue Effects of tax reforms from 1998 to 2008
(2000-2010) in Mio Euro
40000
20000
0
-60000
red-green
42
Grand coalition
balance
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
00
-40000
20
01
-20000
… have already disappeared
Revenue Effects of tax reforms from 1998 to 2009
(2000-2010) in Mio Euro
40000
20000
0
-60000
red-green
43
Grand coalition
Balance
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
00
-40000
20
01
-20000
The „debt brake“
 ‚structural‘ deficit < 0,35 % of GDP

Federal level 0.35 % ceiling from 2016

„Länder“ 0.0 % from 2020
 cyclical deficit according to cyclical adjustment
method by EU-Commission
 discretionary policy only allowed in very special
circumstances
 transition period from 2011 to 2016/2020 when
‚structural‘ deficits have to meet the target
44
The „debt brake“: errors in
construction…
 relies almost completely on built-in stabilisers
 but built-in stabilisers will be counteracted because
cyclical deficit will be calculated according to
technocratical cyclical adjustment method by EUCommission  serious procyclicalities
 transition period from 2011 to 2016/2020 when
‚structural‘ deficits have to meet the target very
dangerous
45
Dangerous transition to the
„debt brake“
 German fiscal policy will switch to restriction in 2011
irrespective of the economic situation
 This may be to early for the recovery
 (and it will certainly be wrong if European and global
economic imbalances are to be tackled)
 If there are no tax increases (which almost everybody
has ruled out…) then expenditure restraint will have
to be brutal again: nominal total expenditure growth
not much higher than 1%
46
Dangerous transition to the
„debt brake“
 with good luck due to the endogeneity of „structural
deficits“ prospects may brighten substantially if the
recovery comes soon, is strong and lasts some years
 With bad luck due to the endogeneity of „structural
deficits“ prospects may darken even more if the
recovery is weak and a period of stagnation follows
 In the second case: If governments react with even
more fiscal restriction to meet the then more
ambitious deficit ceiling in 2016/20 then a viciuos
circle might occur
47
Contents
 Introduction
 Germany‘s poor economic and social performance over the last
10 years
 Red-green tax reforms (1998-2005) and their consequences
 Fiscal Policy under the Grand Coalition I (2005 to 2008) – some
lessons learned?
 Fiscal Policy under the Grand Coalition II (2008 to 2009)
– a return to Keynesian fiscal policy?
 Fiscal Policy under the new conservative-liberal government:
Debt brake and aggressive further tax cuts
48
Believe it or not…
In this situation the new government announces
 an immediate growth acceleration programme =
further permanent tax cuts of about 8.5 bn. Euros..

Half of it goes into higher child
benefits/allowances

2 bn go into lower business taxation

0.5 bn. to lower inheritance taxes

1 bn. to reduced vat rate for hotels
 IMK estimate of one-off growth effect: 0.2 % of GDP
49
discretionary fiscal stance 2001 to 2010
in % of GDP
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
50
revenue side
expenditure side
total
Believe it or not…
In this situation the new government announces
 Further permanent tax cuts for the income tax of 20
bn. from 2011 onwards!
 If really enacted in total public revenues will be
permanently decreased by about 30 bn. Euros
(1.2 % of GDP) per year.
51
3. Short-run economic policy reactions
52
Prospects for the future
 The government would have to be extremely lucky
to get through with this without dramatic further
expenditure cuts on all federal levels and/or
compensating tax increases and/or breaking the debt
brake
 There may be different scenarios. However, it is very
likely that the poor German performance with respect
to growth, welfare state and distribution will go on.
53
Is there a way out?
 extreme luck…
 getting rid of the debt brake….
….but it‘s in the constitution!
But even given the debt brake there is a way out:
 in general: increase taxes and restore the
government‘s ability to act!!
 consolidate the budget and
 stop expenditure restraint. Drive up public investment
in education, research, ecological and traditional
infrastructure…
54
Once again:
The two obsessions
 an obsession with budget consolidation
 an obsession with tax cuts
 Both obsessions are dangerous on their own
 But in combination they are fatal and have proven
to be so
 If the obsession with budget consolidation
cannot be cured …. then at least cure the
obsession with tax cuts!
55
Merci beaucoup!
56