Wolfgang Schäuble has a problem his counterparts elsewhere would kill for: Germany’s finance minister has too much money.
In 2016, the federal government ran a surplus of €6.2 billion, around $6.6 billion. Now the country’s two main coalition parties are arguing over how best to spend it. The center-left Social Democrats, or SPD, would like to see it go on increased public investment, while the center-right Christian Democrats — to which both Mr. Schäuble and chancellor Angela Merkel belong — want to pay down debt.
The SPD accuses Mr. Schäuble, who has long insisted on the importance of balanced budgets, of fetishizing government saving.
Neither public investment nor taxes and spending should be set by short-term public finances. Clemens Fuest, President of ifo, German economic research institute
But Mr. Schäuble has the support of many leading economists. “Unexpected one-year budget surpluses should be used to pay down public debt,” Clemens Fuest, head of the prestigious German economic research institute Ifo, told Handelsblatt. “Neither the level of public investment nor taxes and spending should be set by the short-term state of the public finances,” he added.
Achim Wambach, president of the Centre for European Economic Research, or ZEW, agreed: “Temporary surpluses are not appropriate for long-term spending aims. That means extra income should be used to pay down the country’s debt burden.”
Lars Feld, a member of the German Council of Economic Experts, a team of advisors tasked by the government to report publicly on the country’s economy, gave another reason why extra money should not go on tax cuts or increased spending: an overheating economy. The German economy was already “moderately overstretched,” he said.
“Tax cuts or increased public spending would work pro-cyclically and would therefore be counter-productive. Given economic trends, the surplus should be used to pay debt,” he added.
According to the federal finance ministry, the government has anyway little choice other than to use the money to pay off debt. There would be barely enough legislative time to cut taxes ahead of this year’s federal election, expected for September or October. In addition, tax cuts are a structural question and cannot be made dependent on unexpected short-term surpluses.
This leaves Mr. Schäuble with just two options: paying debt or spending on new public investment. If he went for the latter option, the government could use the money to boost the reserve set aside to deal with refugees. Or it could boost its existing investment funds. Unfortunately, these fund are already so flush that they are short of infrastructure projects to spend the money on. The uptake of existing funds from state and local governments is already considerably less than the cash available.
Marcel Fratzscher, the head of the German Institute for Economic Research, or DIW Berlin, one of the country’s leading economic research institutes, has suggested placing the surplus money in an investment fund, if it cannot be spent immediately because of a shortage of available projects. The resources could be used when the construction industry was in a better position to absorb expanded infrastructure investment, he said.
Some elements of the Christian Democratic Union, or CDU, Mr. Schäuble’s party, want to see the funds directed to small tax cuts ahead of the federal elections. “It is true we need to pay down debt, but we also urgently need to ease our tax burden. This can start before the elections,” said Michael Fuchs, the deputy parliamentary leader of the CDU. For example, he wants to see an immediate change to tax regulations on writing off “low-value assets.” “The level at which these can be written off has not been changed in 50 years. It is completely not appropriate today,” he said.
Martin Greive is a correspondent for Handelsblatt based in Berlin. To contact the author: [email protected].