A German economics expert, Clemens Fuest, has warned against solely relying on debt to finance necessary additional expenses. Fuest, the head of the IfO, stated on Thursday that it would be dangerous if the next government were to follow the path of least resistance. He emphasized that without structural changes, expenditure cuts and growth-oriented reforms, a sustainable recovery of the economy is not possible.
During the election campaign, Fuest believes that it is correctly pointed out that the federal budget’s urgent need for additional expenses for defense will quickly lead to a growing gap between income and outgoings. The deficit could quickly exceed 100 billion euros.
However, he strongly disagrees with the election promises of some parties, which suggest that this gap can be closed solely with higher debt. “Debt allows for the decision of who bears the burden to be postponed into the future, but that’s all” Fuest warned. He added that higher public debt would lead to rising interest rates, crowd out private investments and potentially result in higher inflation, as long as monetary policy allows it.
Moreover, Fuest warned that the displacement and inflation effects would become even larger the more unused production capacities are low. He therefore advises an immediate and multi-year, step-by-step realignment of state expenses, which would significantly contribute to the financing of the new priorities. This would involve a reduction of subsidies, but also reforms of the social security systems with the aim of limiting the growth of expenses.
According to Fuest, it is of central importance to complement the fiscal policy measures with a broader growth agenda. In particular, unnecessary regulations should be abolished and the bureaucracy should be sustainably reduced.
A recent study by the IfO shows that the German economic performance of the year would have been 146 billion euros higher by 2022 if similar reforms had been implemented in 2015, as they were in Sweden at the time. This would grant the state at least 30 billion euros in additional tax revenue each year. Although such reforms may not have an immediate effect, their decision is urgently necessary, according to Fuest.