Why the turnaround in supply policy is wrong

Christian Lindner

The Federal Minister of Finance wants a trend reversal in supply policy.

(Photo: Reuters)

On the basis of an internal paper from his ministry, Federal Finance Minister Christian Lindner (FDP) calls for a change in supply policy in a number of media articles, including one in the Handelsblatt on January 11. According to the paper, after a “decade of distribution policy and demand strengthening”, it is now necessary to risk a “regulatory trend reversal towards supply policy”.

Behind this required trend reversal are sensible measures such as reducing bureaucracy and accelerating planning processes. However, Lindner is also emphatically calling for income tax and corporate taxes to be reduced. A turning point in supply policy interpreted in this way would, however, be misguided.

Even the justification that there has been a decade of increased demand is wrong. In addition to the supply capacities, private demand was also stabilized during the corona crisis because the state brought more money into circulation through additional expenditure. In the pre-crisis years from 2010 to 2019, however, there was no increase in demand.

On the contrary, the budget deficits of the financial crisis were initially reduced by a restrictive and later a neutral financial policy. After that, the “black zero” prevailed with permanent budget surpluses. A decade of fiscal consolidation is not a decade of demand stimulus.

High need for public spending

The assertion of a decade of distribution policy is also incorrect. It is true that some pension benefits have been expanded and, at least after 2010, there have been no major social cuts. But the drastic increase in inequality from the mid-1990s to 2005 – not least caused by tax cuts, by the way – has by no means been reversed.

The author

Achim Truger is a member of the Advisory Council for the Assessment of Overall Economic Development and Professor of Government Activities and Public Finances at the University of Duisburg-Essen.

(Photo: University of Duisburg-Essen, Bettina Engel-Albustin)

Since 2010 there has been a further slight increase in inequality in net household income. The at-risk-of-poverty rate continued to rise almost unabated. The same applies to poverty in old age.

>> Read here: Lindner’s air number: The Minister of Finance expects his tax breaks to be large – a comment

The idea that the acute social and economic policy challenges could be met with significantly lower taxes and a smaller state is completely unrealistic. There may be savings potential for some existing expenses. But when viewed soberly, it is clear that the need for additional – also public – spending to manage the transformation towards climate neutrality, the investment backlog in the municipalities and for education as well as research and development is very high.

In addition, due to the Russian war of aggression, there was a considerable increase in the need for defense spending. All of this is likely to require additional public spending in the high double-digit billions per year over a longer period of time. Some, but not all, of this can be sensibly financed with loans.

In view of the acute challenges, Germany cannot afford a change in supply policy with general tax cuts and a smaller and weaker state. On the contrary: the state will have to play a greater role in the foreseeable future.

More: Federal government expects low growth for 2023.

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