What the grand coalition means

  • The relaunch of the grand coalition is about to happen – provided it is given the green light from the SPD rank-and-file. The negotiators from the Social Democrats were clearly able to use the conditional approval of the SPD members to their advantage. The SPD appears to have gained the upper hand in many areas, at both the policy level as well as in terms of key ministerial posts. At the same time it is difficult to find the hallmark of the CDU or identify any negotiating successes on their part.
  • We would like to provide a brief assessment of the most important negotiating results. In particular issues such as tax policy, pensions and Europe will dominate the political agenda in the years ahead. We have already stated our position on the theme of digitalisation in a recent publication (see Bielmeiers Welt „Digitalisation belongs right at the top of the political agenda!“ of 07.02.18).
  • As regards tax policy, the grand coalition has remained way behind expectations as well as behind requirements. The partial abolition of the solidarity surcharge, in the manner proposed, is a social policy measure. Higher income groups will have to continue bearing a large part of the tax burden.
  • The agreements on pension policy must be viewed as short-sighted and unsustainable. Promises of new payments to certain groups have been made, while a pension floor has been set and a ceiling for the contribution rate. All this is supposed to be guaranteed until 2025. The problem is, however, that the pension insurance system will only start experiencing the burdens from the demographic trend after 2025. A responsible pension policy should be given a far longer time horizon than just seven years.
  • Evidently European issues will probably be handled for the most part by the SPD which has managed to secure the finance and the foreign ministry. These two ministries – naturally alongside the Chancellery – define the guidelines of European policy. The consequences of this for Europe are already clear: (even) less budgetary discipline, fewer controls and in return more spending and the first step on the road to the transfer union.

Tax policy

As regards tax policy, the grand coalition has remained way behind expectations. The solidarity surcharge is to be only partially abolished. The ten percent of tax payers with the highest incomes are to continue paying the surcharge. A more extensive reform of personal income tax, for example in the form of relief in the “cold progression” bracket creep, has been called off. Nor have any provisions been made for relief in the area of corporation tax. All that has been planned here is that, together with France, solutions must be found for the „international changes and challenges – not least in the USA“.

The partial abolition of the solidarity surcharge, in the manner proposed, is a social policy measure. Higher income groups will have to continue bearing a large part of the tax burden. Despite an additional inflow of taxes into the public treasury of approx. EUR 30bn per year, the relief only amounts to around EUR 10bn.

Lower income groups for whom the solidarity surcharge will no longer apply, and families with children that will profit from the higher child benefit, can therefore expect to gain relief overall. On the other hand, higher income groups and companies will not experience any relief, and the tax policy plans have also made no provisions for structural simplifications. And all this, despite the fact that Germany, by international comparison, is one of the countries with the highest tax and social contribution burdens.

Pension policy

The agreements on pension policy must be viewed as short-sighted and unsustainable. Promises of new or additional payments have been made to certain groups. The so-called „Mütterrente“, or mothers’ pension, introduced under pressure from the CSU, has been extended: Women with three or more children born before 1992 are to receive a third pension point per child; this translates into annual costs of around four billion euros. A so-called “double stop” is also to be applied until 2025, the aim being to prevent the pension level from falling below 48 percent while at the same capping the contribution rates at 20 percent. Furthermore, a basic pension is to be introduced for low-income workers who have been paying insurance contributions over a long period.

By the time the year 2025 has been reached, as stated in the coalition agreement, the costs of these agreements will remain within bounds, at least if the economy continues ticking over at such a good pace until then. If, however, the economy were to weaken up and the contributions paid into the pension insurance decline, the costs could spin out of control before then. The approx. four billion euros for stabilising the pension level could then quickly turn into 15 billion.

After 2025, even greater problems will emerge. This is because, in the years after this, the baby boomers – i.e. the generation with high birth rates between 1960 and 1970 – will enter retirement. The demographic structure in Germany will then lastingly change, with the ratio of contribution payers to pension recipients deteriorating rapidly. As experience shows, it is always difficult to reverse benefits that have already been introduced. The baby boomers will therefore presumably also benefit from the additional payments. This could create huge costs.

This is not my idea of a responsible pension policy. It should be given a far longer time horizon than just seven years.

Europe

Evidently European issues will probably be handled for the most part by the SPD which has managed to secure the finance and the foreign ministry. These two ministries – naturally alongside the Chancellery – define the guidelines of European policy. The consequences of this for Europe are already clear: (even) less budgetary discipline, fewer controls and in return more spending and the first step on the road to the transfer union.

Plans to turn the ESM bailout fund into a European Monetary Fund (EMF) and to fully integrate it into EU law as sketched out in the coalition agreement mark a step into this direction: for, unlike the current status, the EMF would not be an intergovernmental institution based on an agreement between the euro countries. Even if, according to the coalition agreement, „the rights of national parliaments shall remain unaffected by this“, it is still questionable whether parliaments will be able to retain their control rights in full.

Mutualised „fiscal capacities“ constitute implied guarantees and render the mechanism of control through the financial markets redundant. Even now, the spreads of sovereign bonds are almost as narrow as they were before the crisis. Precisely this will promote fiscal disobedience instead of urging the euro countries with shaky foundations to do their homework. The key principle should be the individual accountability of the member states. This is the only way to keep up the necessary reform pressure.

After all, precisely the reform policies of past years can now be seen bearing fruit virtually everywhere in the EU. Higher tax-financed expenses of the kind currently being propagated in the Italian election campaign would be the wrong path to take, at least at this point in time. They risk vanishing into thin air and further bloating the already high public debt.

With his statements of recent days, the ardent EU fan and designated Foreign Minister Schulz has already set out the path of European policy: There are to be „more investments, an investment budget for the euro zone and an end to forced austerity“. Thus, for no reason and even before entering negotiations at EU level, the coalition has already departed the line taken by former Finance Minister Schäuble who had defended the principles of stability and regulatory policy.

This course of European policy can be expected to clearly lead in the direction of a transfer union, at the expense of tax payers in the member states of central and northern Europe maintaining a sound budgetary policy. No electoral mandate has been given for this in Germany, yet on this issue the CDU/CSU union seems to have cast all its principles to the wind.

Conclusion

While the coalition agreement does not contain enough structural reforms, it does make multiple promises at the expense of others. From the public purse of 45 billion euros additionally available to the government for policy measures for the entire legislative period, less than one quarter is to return to the taxpayers. Tax rates will increase further – this is not my idea of growth promotion and farsighted politics.

 

Rate this article


Thank you for your rating. Your vote:
There is no rating yet. Be the first! Current average rating: 0

Leave an answer

Your e-mail address will not be published. Required fields are marked *