Berlin Four days before the state elections in Christian Lindner’s home North Rhine-Westphalia, in which his FDP could be thrown out of the state government, the party leader reacts to the difficult situation for him. After the Liberals had done poorly in the last state elections in Saarland and Schleswig-Holstein, the Federal Minister of Finance presented a strategy paper on Wednesday entitled “Fiscal policy at a turning point”. In it, Lindner outlines his financial policy guidelines for the rest of the legislative period and thus tries to sharpen the liberal profile in a core area of the FDP.
In places, the paper reads like a departure from the coalition agreement concluded at the end of 2021. Lindner wants to strengthen growth, avoid inflationary impulses and return to the debt brake. While these goals are largely undisputed in the traffic light government, the coalition partners are likely to be upset about how Lindner wants to achieve these goals.
Lindner considers the tax burden on corporations to be too high in an international comparison. Germany still ranks behind France among the high-tax countries. “Lower production costs for companies, for example due to lower additional wage costs or lower taxes, can make the business location more attractive for private investments through increasing profit prospects,” says the paper.
Wanted: The right reaction to inflation
The second major topic Lindner addresses is inflation. There is a risk “that increased expectations of inflation in companies and unions will be incorporated into wage and other contract negotiations and that the currently high inflation will solidify in higher inflation rates in the medium term”.
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As an expression of heightened uncertainty, the risk premiums that governments would have to pay on new debt have already increased. If inflation were to solidify, this would also put pressure on riskier assets such as equities and corporate bonds and narrow corporate financing leeway.
The economist is Lindner’s chief financial advisor.
(Photo: imago/Jürgen Heinrich)
The state must therefore retain as much financial leeway as possible. Higher social spending is therefore counterproductive; instead, a “supply-oriented fiscal policy” is necessary. Lindner wants to comply with the currently suspended debt brake again from 2023 and reduce Germany’s debt ratio.
The FDP leader considers a business-friendly and cautious financial policy to be necessary due to the new economic framework. “The current environment should be seen as a signal for a strengthening of supply-side economic policy,” he writes.
Beware of an era of stagflation
So Lindner sees the danger that a new era of stagflation could threaten. There are a number of factors that will dampen growth and increase inflation in the medium term, such as low productivity growth, the aging of society or the climate-neutral restructuring of the economy.
Lindner hardly goes into detail in his paper, knowing full well that many of his proposals arouse little enthusiasm among the coalition partners. But even the few specific points that Lindner mentions in the paper are tough.
For example, the SPD, Greens and FDP agreed in the coalition negotiations not to touch corporate taxes. The SPD and the Greens are therefore unlikely to follow Lindner’s proposal to relieve companies, even if Lindner wants to start with the taxes. On the contrary: The Greens recently campaigned for an excess profit tax to put a heavier burden on companies that benefit from high energy prices. Lindner refuses.
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The SPD and the Greens will also resist putting agreed social reforms such as basic child security or the stabilization of pension levels on hold. And the SPD and the Greens also have different ideas about the debt brake. Recently, there have been increasing calls from both parties to suspend the debt rule again in 2023.
Lindner, on the other hand, had recently declared that he and his financial policy would be measured by whether he would comply with the debt rule again in 2023. The Federal Minister of Finance has therefore declared this goal to be the acid test of his financial policy.
Large relief packages launched
Lindner himself also finds the accusation unfair that he is continuing the financial policy course of his predecessor Olaf Scholz. The FDP boss repeatedly referred to the relief he was pushing for. These included increasing the basic allowance and the flat-rate employee allowance for income tax, lowering the energy tax for drivers, taxis and freight forwarders, as well as better depreciation conditions and a more generous loss carryback for companies.
After all, the two relief packages from the federal government add up to 30 billion euros. Lindner also promises to fully compensate for inflation-related tax increases at the end of the year. So far, however, these reliefs have not paid off politically for Lindner. Also because at the same time he has to support traffic light projects that go down badly in liberal circles.
For example, the traffic light wants to free the municipalities from their old debts, Lindner himself had announced this again just a few days ago. But even Lindner’s chief economic adviser, Lars Feld, the former head of economics, doesn’t think much of the proposal. Excusing the local authorities is originally a state matter, the federal government must stay out of it.
With his concept paper, Lindner also reacts to this criticism. According to his message, fiscal policy will bear a clear liberal signature. Incidentally, Lindner could well build on his predecessor.
Scholz, too, was initially accused as Federal Minister of Finance of only continuing the policies of his predecessor. Because he didn’t want to incur any new debts, Scholz was even mocked as a “red zero”. When the pandemic broke out, Scholz changed course, incurred record debts and launched large rescue packages – and the criticism fell silent.
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