Germany’s new federal minister of finance, Olaf Scholz, has unveiled his first budget, including his medium-term fiscal planning up to 2021. But there is scant sign of any new hallmark compared to his predecessor Wolfgang Schäuble.
On the one hand, this is a good thing as Schäuble stood for a solid financial policy, in Germany as well as in Europe. On the other hand, it is not such a good thing as there is a lack of any recognisable strategy as to how the German government aims to meet the major challenges of the next few years and decades.
Scholz is budgeting with a “black zero,” i.e. he does not intend to spend more than he takes in. Initially, this makes sense and is necessary. After all, revenues have increased steeply in the last few years thanks to the good economy and a strong tax-take. It has even been possible to increase spending and nevertheless achieve an ample surplus.
This is a very comfortable situation for every finance minister. Nevertheless, it leads to a situation in which the public sector’s share of GDP, at any rate when measured in terms of the revenue side, rises continuously. In other words, the state takes an ever bigger slice of the cake every year. Last year general government revenue as a percentage of gross domestic product increased to 45.2 per cent, which was the highest level since 2000.
Nevertheless, it requires steadfastness to say no to at least some of the demands of colleagues from other government departments. At the moment the defence and development ministers are apparently particularly dissatisfied. In light of the increasingly insecure global situation one may well doubt whether it is wise to be especially thrifty as regards these two government departments.
It is also conspicuous that the new government places the emphasis on the distribution of goodies. Welfare spending is to increase steeply, above all expenditure for pensioners. Although the bulk of the higher pension payments is not at the expense of the federal budget but of the contributors, they nevertheless increase the overall level of social security contributions. This may be tolerable in the coming 4-5 years. But at the latest in the 2030s, when the large baby boomer generation draws its pension, this policy will become a substantial stability risk.
One of fiscal policy’s central goals should be to prepare for foreseeable demographic changes by way of higher investments, above all in education, and a forward-looking pension policy.
These long-term challenges, which are the result of demographic developments in Germany and the growing international challenges and the increased geopolitical risks, should also be the focal point for German fiscal policy.