Potent pact, powerful act: stimulus package for the coronavirus aftermath
Executive Education / 2 July 2020
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Senior Programme Manager Executive Education
Thomas Kohrs is head of Asset & Wealth Management in Executive Education at Frankfurt School. He is a qualified banker and focuses on the areas of securities and sales. He has more than 25 years of practical experience as a consultant, trainer and lecturer at Frankfurt School.

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Well, Keynes would be pleased. In fact, he’d be delighted to hear what the German government is planning – both domestically, in partnership with France, and while holding the Presidency of the European Council. A gigantic support and economic stimulus package on a truly unprecedented scale. The sums involved are huge, significantly exceeding the trillion-euro mark. At first glance, the economic stimulus package looks like an arbitrarily cobbled-together “surprise present”. Although much of it seems to make sense (the digital subsidy, relief funding for local authorities), what are we to think of the one-off payment of EUR 300 per child to families – including “rich” families, as the tabloid headlines put it?

Incentives: lower VAT, higher child benefits and rebates – but no buyers’ premiums

Of particular note are the decisions to reduce VAT to 16% or 5%, and the abolition of buyers’ premiums for cars with combustion engines. Yes, the government is bidding farewell – at least, in part – to its earlier policy for car buyers, previously applied without a qualm. It would, after all, be retrogressive to use buyers’ premiums to support precisely those companies which were recently given an – albeit limited – legal slap on the wrist by the Federal Court of Justice. Plaintiffs “entered unintentionally into a contractual obligation on the basis of immoral conduct on the part of the defendant, effectively equivalent to fraudulent deception,” was the FCJ’s ruling on May 25, 2020 (VI ZR 252/19). A verdict that deliberately echoes the wording of paragraph 263 of the German Criminal Code, which deals with fraud – although those responsible have not yet been held criminally accountable to any meaningful extent. So those executives who are loudly demanding government support without showing any signs of remorse, or willingness to forego their salaries or bonuses, should scarcely be surprised by this refusal. In the eyes of the general public, anything else would be unjustifiable, not least because buyers were swapping relatively fuel-efficient – because less powerful – cars for fuel-guzzling SUVs simply because the latter were several thousand euros cheaper once the premium had been applied. That fact that the government is now subsidising electric mobility instead is very welcome. Clearly it has decided to stop flogging a dead horse and has finally dismounted – hopefully once and for all, before we find ourselves stuck in a rut again. The decision to abolish ICE premiums won’t make any difference to consumers: In view of the (very) low demand and huge oversupply, automakers will be falling over themselves to offer competitive discounts.

But what about VAT? The reduction will be visible immediately in all invoices that show separate gross and net amounts, such as bills from tradesmen and (ironically) car dealerships. As far as all other bills are concerned, only alert consumers will notice whether prices have really gone down. But shelves are well-stocked in almost all sectors (except supermarkets and DIY stores), and thanks to enormous discounts offered even earlier than usual, people are already showing interest in fast-moving goods in the clothing industry, before departing on their summer holidays. Prices have definitely plummeted there.

So what’s all this about tax giveaways for “rich” people in the form of this one-off EUR 300 boost to child benefits? Well, when the wealthy file their tax returns (at the latest), the tax office will carry out the usual assessments – and won’t adjust their tax allowances. So in this sense, “high earners” will see this extra money flow in, only to watch it flow straight out again as soon as they submit their tax returns. In this case, low earners really will be the ones to benefit.

What the stimulus package means in terms of economic policy

From an economic standpoint, however, one might raise two objections to the new package. First, to point out the “crowding-out” effect when public-sector demand crowds out private-sector initiatives. Second, while the package aims to stimulate precisely this private-sector demand, consumers must be willing and able to take advantage of this stimulus. If they fail to do so – by, for example, anticipating that prices will continue to fall, so deferring their buying decisions – the result will be deflation, causing the “surprise present” to burn up like a firework on New Year’s Eve. So let’s make the most of this opportunity to consume sensibly, sustainably and with an eye to the future. After all, this stimulus package is not something we’ll see again in a hurry. We hope!