Who will govern Germany from September is more uncertain than ever, at least based on the current election polls. Laschet's CDU/CSU's lead over the social democrats is lost, with the SPD now being the party with the highest polls. The Greens remain in third place behind the CDU/CSU while the liberal FDP is on an upward trend. Currently, the Left Party clears the 5-percent hurdle[1] in almost all polls.
The major shifts shortly before the election are compounded by another peculiarity: The new coalition government will almost certainly consist of three or four parties[2], which makes forecasts for the outcome even more difficult. At the latest since the failure of the Jamaica coalition (of CDU/CSU, Greens and FDP) agreement four years ago, we have known the dynamics that coalition negotiations can unleash.
In this blog, we want to take a closer look at how the election outcome could affect fiscal policy. After all, public debt in Germany and Europe has risen dramatically as a result of the Covid crisis. The parties have very different ideas on how to address this problem.
There are three variables in the federal budget: revenues, expenditures and new debt.
At the latest since the failure of the Jamaica coalition (of CDU/CSU, Greens and FDP) agreement four years ago, we have known the dynamics that coalition negotiations can unleash.
All parties[3] have presented detailed reform proposals for the taxation of private households and transfer payments by the state. All parties are concerned with easing the burden for low-income taxpayers. However, the CDU/CSU and, in particular, the FDP also want to reduce the tax burden on higher incomes, while the Left Party (and to a lesser extent the Greens and the SPD) want to impose a very progressive tax rate on high-income earners in order to increase government revenues and reduce income inequality.
The ZEW[4] has analyzed the impact on public finances in a brief report. Figure 1 shows how heavily public budgets would be burdened by the tax plans of the various parties according to this expertise.
Fig. 1 Election programs of the parties: Burdens (+) and relief (-) on public finances*
At the same time, all parties are aiming for significantly higher investment spending in Germany. While the CDU/CSU and FDP are focusing primarily on the private sector, the SPD, Greens and the Left are thinking mainly in terms of government investment.
This results in different ideas for new borrowing. For the CDU/CSU and FDP, the consolidation of public finances is paramount, while the more left-wing parties consider government investment and, in the case of the Left, social benefits to be more important.
Dramatic shifts in the national budget should therefore not be expected from such coalitions.
What can be imagined in concrete terms?
- A coalition of CDU/CSU and FDP is likely to strive to comply with the debt brake, to return as quickly as possible to a balanced budget (the so-called "black zero") at the national level and to the Maastricht criteria at the European level. At the same time, the FDP has ruled out forming a coalition with a party that seeks tax increases. On the contrary, the FDP wants to achieve significant relief for private households – not only in the lower-income bracket, but across all income strata. In effect, this would leave very little room for government investment. After all, the private sector is given priority in dealing with the tasks at hand anyway. The reduction of public debt is also to be achieved primarily through growth in the real economy. On the (European) bond markets, such an election result could cause unrest, at least for a short time. Ultimately, however, we think that even a conservative coalition will not want to turn back the clock. The stock markets are likely to welcome the rather growth-friendly orientation of such a coalition.
- A "left-wing"-coalition of the Greens, SPD and Left Party is likely to take the opposite course. The Left Party wants to significantly increase government revenues, primarily through significant tax increases for high-income earners, the introduction of a wealth tax and a significant increase in gift and inheritance taxes. In this form, however, the plans would be likely to fail due to opposition from the SPD and probably also from the Greens. All three parties, however, assign the state a more active role in solving the problems at hand. Therefore, a significant increase in government spending can be expected in the event of such a coalition. For example, the Greens want to increase federal investment spending by 500 billion euros over the next ten years. This is roughly double the current level of investment spending (Fig. 2). The Left Party wants to invest 10 billion euros in broadband expansion alone. However, the spending budgeted in the election programs far exceeds the planned (and, in many experts’ view, unrealistically high) additional government revenue, so that government debt is ultimately likely to rise further. Therefore, such a coalition will do everything in its power to replace the debt brake[5]. Even if it succeeds, however, this is likely to take years, as it is enshrined in the Basic Law[6]. Until then, attempts will likely be made to test the limits of what is constitutionally possible. At the European level, we expect efforts to be made to soften the debt limits. The foreseeable higher level of debt could possibly cause unease among some investors. However, the "anti-austerity policy" of such a government should be positively received on the European bond markets overall. In our view, it is likely to weigh on the German stock markets, though, given the foreseeable higher tax burden on companies together with regulation that is not very market-friendly.
- Most realistic coalitions are likely to lie between these two extremes. In the case of a Jamaica coalition (CDU/CSU, Greens and FDP), the wishes of the Greens and the FDP are likely to largely neutralize each other. The same applies to a so-called "Germany coalition" of CDU/CSU, SPD and FDP. A traffic-light coalition (SPD, Greens and FDP) would have a somewhat higher weight on the left, but the FDP is also likely to agree to such a coalition only if the negotiated coalition agreement is not diametrically opposed to its own political convictions. Dramatic shifts in the national budget should therefore not be expected from such coalitions.
