German government agrees on a 130bn euro package to kickstart the economy.

It took two long days of negotiations but last night the German government presented the next phase of unprecedented fiscal stimulus. Up to now, the impressive fiscal stimulus had been mainly aimed at cushioning the imminent impact from the Covid-19 crisis and limiting the economic fallout. Last night’s fiscal stimulus package is now aimed at kickstarting the economy.

Details of the fiscal stimulus package

The 130bn euro (almost 4% of GDP) stimulus package includes more than 50 different measures. In our view the most relevant are the following:

• VAT will be temporarily cut from 19% to 16%, from 1 July until 31 December
• The lower VAT rate for hospitality will be reduced from 7% to 5% over the same period
• An additional one-off child allowance of 300 euro per child
• A 50bn euro fund to address climate change, innovation and digitization within the German economy. From this 50bn euro amount, a doubling of the financial incentive to buy electric cars from 3,000 euro to 6,000 euro will be financed.
• Social security contributions will be capped at 40%, at least until 2021, to stabilize net income. Additional costs for social security will be covered by the government.
• Tax loss carrybacks and faster depreciation rules for investments are intended to provide more liquidity and investment incentives for companies
• Another liquidity and loan support programme of 25bn euro for small and medium-sized companies for June to August. Eligible will be companies which saw sales dropping by 60% or more year-on-year in April and May.
• At least 10bn euro will be used to help municipalities struggling with lower tax receipts, with public spending on infrastructure and housing.

According to finance minister Olaf Scholz, the package will be partly financed by additional net new borrowing. Some 60bn euro of the 156bn euro in new debt approved in March had not been tapped, yet.

Since the start of the crisis, the German government had already agreed on fiscal support and stimulus measures amounting to more than 30% of GDP. Within these measures, cash-out fiscal stimulus had already amounted to more than 5% of GDP. Last night’s package adds another 4% of GDP and makes the German fiscal reaction to the crisis outstanding. It is not only the size of the packages which is remarkable but also the fact that the German government has made a complete u-turn in its approach to fiscal policy. This not only the case for Germany but also for Europe. From austerity champion to big spender - a few months months ago, concluding with such a comment on German fiscal policy would have been almost unthinkable.