Inflation eats away at purchasing power: Based on private household consumption, it is expected that around 115 billion euros will be lost in purchasing power by Germans alone this year. Due to the devaluation of the euro, the real exchange rate (terms of trade) of export and import goods has deteriorated. Together with the high energy prices, this means that a considerable amount of income flows abroad.
German imports of crude oil and natural gas together had a value of 73 billion euros in 2021. If the import volumes were the same, doubling the prices would reduce the gross domestic product (GDP) by 2.3 percent. That would be a kind of sanctions/war tariff in favor of the energy-exporting countries.
In other words: the price increases amounting to 73 billion euros flow to the export countries Russia, the OPEC countries, Norway, the USA and the Netherlands/Belgium.
Germany is getting poorer. Compensating for inflation is a requirement of solidarity, especially for low-income, financially overwhelmed households. This is because they spend a relatively large proportion of their income on food and energy, which are affected to an above-average extent by the price increase.
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Compared to the same month of the previous year in July, with an inflation rate of 7.5 percent, electricity and gas were 43 percent more expensive, heating oil and fuel 37 percent and food 14 percent more expensive.
What is decisive here, however, is how the aid is designed. Social balance, incentives to save energy and the burden on the state budget must be reconciled.
In order to discover and take advantage of potential savings, it is important that the signal effect of high prices when there is a shortage is felt by everyone. In order to support low-income households in a targeted manner, lump sum payments graduated according to income or adjustments to the income tax rate would be preferable.
The tank rebate made fuel cheaper despite increasing shortages, which was one reason why demand fell less sharply. The agreed one-time payment of 300 euros to help with rising energy costs makes more economic sense, as it does not affect pricing.
The complete assumption of heating costs for Hartz IV recipients is problematic
In addition, the administrative effort is low. However, there is no need criterion and personal circumstances such as the living situation (area, insulation) and heating energy sources are not taken into account – a relatively expensive “watering can”.
The one-off heating subsidy for housing benefit recipients, which depends on the size of the household (one person 415 euros, two people 540 euros, for each additional person 100 euros) is a certain step forward.
The complete assumption of heating costs by the job center for Hartz IV recipients remains problematic, provided that consumption is still reasonable. A lump sum based on the flat rate for electricity costs would make more sense here.
Compensation for the additional costs could also be limited to 80 percent of a household’s past gas consumption so that savings incentives continue to exist. A gas price guarantee (price cap) for the basic needs of a household combines efficiency incentives and relief, provided that the basic consumption is set correspondingly low.
The billing data should be available to the gas suppliers, who in turn must present the subsidized basic quantity to the Federal Network Agency for the purpose of compensation payments.
Government aid drives inflation indirectly
However, inflation compensation in the event of supply bottlenecks automatically leads to further price increases. Even with the energy flat rate of 300 euros, with an average share of the income spent of 9.7 percent for food and 10.4 percent for combustibles/fuels, around 60 euros flow additionally into these uses, as long as no income tax is due.
In both cases, government payments indirectly drive prices up there. The more extensively the state relieves its citizens of inflation, the more purchasing power that has been regained meets crisis-related capacity bottlenecks as a result of the war and the shortage of workers.
As a result, all prices would rise until the purchasing power of the short-term limited supply of goods has fallen again accordingly. No one would be relieved, but an inflationary spiral would be set in motion.
That’s why it’s important to only support the really needy households – at the expense of the groups that are not taken into account. For these, in addition to the loss of purchasing power due to inflation, there is another one due to tax increases (less net than gross).
The knowledge remains that the state can only redistribute the burden of inflation, but is not in a position to eliminate it.
The state finances a large part of the aid with higher tax revenues due to inflation
What is also largely concealed: the state “gifts” are self-financed to a large extent. The Bundesbank’s latest forecast from June predicts 7.1 percent inflation and real economic growth of 1.9 percent for this year.
Our own calculations based on this assumption and updates for 2021 show inflation-related additional government revenue for value added tax of 22.8 billion euros and for wage/income tax of 22.6 billion euros. It has already been taken into account that the benchmark values in the income tax rate will be adjusted in order to prevent “cold progression”.
In addition, the state has been levying a CO2 tax since 2021, which has generated national revenue of 7.2 billion euros. With a 20 percent increase in the CO2 fixed price this year, the volume will again lead to an estimated additional income of around 1.4 billion euros compared to 2021.
Since excise taxes are mostly collected on a volume basis, inflation does not change this revenue significantly. In total, the “relief package” is self-financed to 46.8 billion euros in inflation-related tax payments.
After all, the government also knows that selective social transfers or tax waivers – “You’ll never walk alone” (Chancellor Scholz) – have a psychologically positive effect, while a tax that is not levied in the first place remains invisible with the same relief effect.
The author: Dirk Meyer is head of the Institute for Economics at the Helmut Schmidt University in Hamburg.
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