Angela Merkel was said to enjoy doing expectation management. Those who make little promises do not have to fear criticism if nothing is achieved. The traffic light government acts differently. Your coalition agreement is ambitious. It wants to massively accelerate the digitization and decarbonization of the economy while preserving prosperity and inclusion. The charm of the plan lies in the fact that it is shaped by the will to shape the future. Beyond the core areas of digitization and climate protection, however, there are also topics where there is a lack of willingness to reform.
The strength of this coalition agreement lies not only in the willingness to take risks in order to seize opportunities. It is also due to the fact that many of the projects are well thought out and incorporate scientific concepts. This applies to important parts of climate policy. The CO2 price should play a central role. All sectors are to be subject to European certificate trading in the medium term.
One wants to dare to be more open to technology. The competitiveness of German industry is to be protected by solutions such as the CO2 border adjustment. Since climate protection only works globally, a climate club with other countries is sought. Investments in adaptation to climate change play an important role. It will take time to implement these plans and many questions remain unanswered. But the overall strategy is a step forward compared to the previous, rather small-scale, climate policy based on sector goals and dirigistic interventions.
In energy policy, the plan outlines the path to climate neutrality. Renewable energies are being expanded, as are power grids and hydrogen lines. In order to ensure security of supply, gas-fired power plants are to be used after the coal and nuclear phase-out, which will later be converted to hydrogen. However, it remains to be seen whether this is economically and technically feasible. In order for this conversion to work in the time available, the coalition wants to drastically shorten the planning process.
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The traffic light government rightly sees the second defining topic, digitization, as a cross-sectional task. The coalition partners promise investments in the digitization of public administration, schools and universities as well as the expansion of the digital infrastructure. Education and training in digital skills should be promoted, as well as data security and the development of key digital technologies.
Expenses should be reallocated
It is particularly important that access to public and private data for companies and citizens and the sharing of data are to be strengthened. This can trigger a surge in innovation and start-ups. State spending on research and development is expected to increase from 3.2 percent to 3.5 percent of gross domestic product. Funding is a critical point in all of these projects.
It is to be welcomed that the traffic light coalition does not limit itself to the easy way of debt financing, but rather wants to reallocate expenditure. However, it is unclear to what extent cuts in other areas can help finance the new projects. Such cuts are difficult in the short term, but more can be achieved in the medium term. Therefore one should provide for an increasing contribution from spending cuts over the years.
Financing through more national debt is limited by the debt brake anchored in the Basic Law. However, it is permitted to take out loans for secondary households, for example for public banks such as the Kreditanstalt für Wiederaufbau or for Deutsche Bahn. In addition, the debt brake will be suspended until 2022 due to the corona crisis. Until then, debt-financed reserve pots can be created to finance future investments.
Critics complain that the indebtedness in secondary households removes the financial policy from democratic control. That is why the coalition wants to expand parliamentary oversight and ensure more transparency towards the public. How convincing the financing package is will ultimately have to be measured by whether the promised reallocation of expenditure really makes a significant contribution.
Stronger incentives for second earners
The willingness to tackle complex economic problems in a scientifically sound manner is also evident in the plan to remove obstacles to gainful employment in the existing tax and transfer system. An expert commission is to propose reforms that ensure that people who earn a higher gross income through their own work also earn a higher net income. Today it can happen that your net income even falls due to the lack of transfers.
The taxation of spouses is to be reformed in such a way that stronger employment incentives are created for second earners. Strengthening the incentives to work is also important because in the coming years, as the population ages, workers will become scarcer. The coalition partners therefore want to keep older people in their working life longer, strengthen training and further education and lower the barriers to immigration into the labor market.
However, the coalition agreement also has weaknesses. Leaving the pay-as-you-go pension insurance as it is and excluding a higher retirement age is not sustainable. The aging of the population will force reforms. Saving a tax-financed capital stock for the pension cannot replace changes in the pay-as-you-go pension.
In terms of tax policy, it is to be welcomed that companies affected by the crisis are being supported by expanded loss carry-backs. Accelerated depreciation boosts growth. However, they should not be limited to the already heavily funded areas of climate protection and digitization. It would be better to stimulate investments more broadly, even if the funding intensity is then lower. What is missing is a willingness to undertake fundamental reform of income and corporate taxation, which is long overdue. The ideas of the coalition partners were probably too different here.
The beginning is encouraging
The further development of the European debt rules and the banking system also appears to be significant in terms of financial policy. It is right to demand that banks that hold large portfolios of domestic government bonds back them up with equity. The federal government should make this a condition for reforming the national debt rules. It is important to strengthen the ownership of the euro member states and the liability of their private creditors. Merely softening the indebtedness rules only increases the risk that the costs of over-indebtedness in individual countries will be passed on to taxpayers in other countries.
The traffic light coalition write that they “want something new”. This can be seen in your government program. Even if implementation will inevitably be difficult and the fourth wave of corona overshadows the change of government: The beginning of this government is encouraging.
The author: Clemens Fuest heads the Institute for Economic Research (Ifo) in Munich and teaches at the Ludwig Maximilians University there. His areas of expertise are economic, financial and tax policy as well as questions of European integration.
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