Germany is set to invigorate its economy with the largest fiscal boost in at least thirty years, following the passage of a comprehensive fiscal package through parliament. Passed with the support of The Green party, this package represents a significant shift in Germany's economic policy. It comprises three main pillars: an infrastructure fund, a relaxation of states' budget requirements, and a modification to the "debt brake" policy. The robust measures are anticipated to stimulate economic growth and address long-standing concerns about weak productivity and structural growth.
The centerpiece of this fiscal package is an ambitious infrastructure fund, valued at EUR 500 billion, equivalent to 12% of Germany's GDP. This substantial investment will be directed towards enhancing transport infrastructure, electricity grids, public housing, and digitalisation over the next decade. A notable EUR 100 billion of the fund is specifically earmarked for green initiatives, aligning with Germany’s commitment to sustainable development.
The relaxation of budget requirements allows states to operate with a deficit of up to 0.35% of GDP, compared to the previous requirement of maintaining a balanced budget. This change is expected to provide states with the flexibility needed to invest in essential public services and infrastructure projects.
Additionally, significant modifications to Germany's "debt brake" policy have been introduced. The changes exempt both defence expenditures exceeding 1% of GDP, amounting to €45 billion, and financial support for Ukraine from debt brake limits. Over the next decade, defence spending is projected to reach EUR 400 billion, representing 10% of GDP. These adjustments aim to ensure sufficient funding for national security and international commitments without breaching fiscal constraints.
The German central bank has incorporated these changes into its forecasting model, assuming a fiscal multiplier of around 1.0 in the first year. This suggests that each euro spent through the fiscal package is expected to generate an equivalent increase in GDP, underscoring the potential positive impact on economic growth.
Public investments in infrastructure are recognized as having the most significant effect on economic growth. For years, the lack of such investments has been cited as a primary reason for Germany's sluggish productivity and structural growth. By prioritizing infrastructure development, the government aims to lay the groundwork for a more robust and resilient economy.
The fiscal package now awaits approval from the Bundesrat on Friday, a procedural step that is expected to pass smoothly. Once enacted, the package is anticipated to deliver a much-needed boost to Germany’s economy, contributing to job creation and enhanced competitiveness on the global stage.