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Government Spending Programmes - Demand Stabilization

Essay 2009 5 Pages

Business economics - Economic Policy

Excerpt

1. Introduction

On the 5th of November 2008, Germany introduced its first government spending programme. The main purpose of this package was to actuate investments of companies, government, municipal governments and private households of about €50 billion. Moreover it was created to ensure further funding of companies. As there were a lot of voices criticizing it as too little to fight against the current crisis combined with a further escalation of the crisis, the government decided to announce a second spending programme in January 2009. Main points of this stimulus package were fostering private consumption, governmental investments and financial aids for firms. Both two-year spending programmes are worth of €82 billion.

2. Most important elements of the stimulus packages

Investments: €20 billion will be spent on investments. Two thirds are considered to rehabilitate kindergartens, schools and universities. The rest is intended to spend on new streets, town planning, rails and electronic infrastructure. Moreover the CO2 spending programme for modernizing insulation of buildings will be expanded. In addition the government will provide €10 billion for additional investments of municipal governments.

Tax reduction and premiums: The tax-exempt amount per person was raised from €7,664 to €7,834 at the beginning of 2009 and will be to €8,004 in 2010. Furthermore the minimum income tax will be lowered from 15% to 14% in 2010 and the fiscal drag will be eased.

There are also lowered premiums for both employees and employers. Since July 2009 the government compensates a reduction of the public health insurance premiums from 15.5% to 14.9%. This is because the government wants to reduce labour costs and dissuade companies from terminating employees. Write downs: There are extended possibilities of write downs for firms and private households. The digressive write down of 25% for companies have become revitalized in 2009. Furthermore households are able to write down higher amounts, for example, of handcraft costs or cleaning services.

Family: The child benefits have been raised for the first two children to 164€, for the third child to 170€ and for four children and more to 195€. In addition the child allowance goes up to €3.864 per child. Moreover parents received a singular child benefit worth of €100.

Labour: Employees whose working hours are cut will have state benefits extended from 12 to 18 months. This means that they get compensation from the government for their lower income due to the part time work. Furthermore the government will also pay the half of the social security contributions from the employers. Second there has been more money provided for qualification measures to help unemployed persons to gain ground on the labor market.

Industry: The car industry is suffering because of huge declines in car sales. To back it up the government introduced the “Abwrackprämie” (a car scrappage scheme). Private car holders will get a €2.500 bonus for their at least nine year old car if they buy a new car. It is required that the old car will get scraped.

Besides the government introduced the “Loan and Debt Guarantee Program” for firms whose have got into trouble. €100 billion are scheduled as guarantees to support further financing from banks. Moreover the state owned bank KfW provides credits for companies. The indispensable requirement for these measures is that the affected company is in trouble only because of the economic crisis.

Debt brake: Concerning the huge mountain of debts and the forecasted big increases in 2009 and 2010 the government installed a debt brake in the German Constitution to avoid further debts after the year 2015. However, there is an exceptional case if there are extreme conditions like a worldwide crisis.

3. Critical analysis

Concerning the investments there are some aspects to discuss. Placing money for improving kindergartens, schools etc. seems to be very effective. First of all there will be a higher demand for hand craft work which may lead to more employees in this sector. Second the rising standard of education will have long term developments. A better social distribution and superior quality of education will lead to a better educated workforce. This affair can lead to more prosperity and wealth. But there is another side to the coin. Actually, the bureaucratic system of Germany is taking a long time until new infrastructure projects get started. Until August 2009 only €200 million were taken by the municipal governments to invest. Hence there is the danger that the needed demand impact of these investments will come to late.

The German “Abwrackprämie” is a very populist action. It is true that it forced loads of car sales this year and did a great job in stabilizing the declining car sales in Germany. Because of that many politicians announced this concern as a success and argued furthermore it helps to keep jobs. Though, that is the half of the truth. Some German car companies like BMW, Mercedes and Porsche were not much affected because they sell premium cars. Actually it helped car sellers like Ford, Fiat, Honda, VW, Opel and so on. In addition the forced car sales might help in the short term. But the recession will go on next year and there will be no “Abwrackprämie” any more. Furthermore a lot of people pushed up there buying. Thus we will face a huge decline in car sales in 2010 with terrible followings for the car industry and all their suppliers. This market correction is not popular but it is necessary. Another facet is that many people who bought a new car will abdicate other consumption. Hence it is macroeconomic nonsense. Moreover this instrument is not ecological. Most scrapped cars would have been able to drive further years. Most of the new cars may have lower gasoline consumption but first of all these new cars have to be produced. This leads to between 11 and 22 tons of CO2 emission per car.

The “Loan and Debt Guarantee Program” of the government can be a helpful issue. As a consequence of the immense losses of banks loads of firms are suffering because they do not get further funding. Even if a company is healthy and is not affected of the current crisis it has difficulties to get new credits for the running business or needed investments. Is the requirement fulfilled that the company is suffering only because of the crisis and their followings it has good chances to get guarantees or even a credit from the state owned bank KfW. The main problem of this measure is the identification of the true cause. For example, there was a heavy debate in Germany if the warehousing chain and mail-order firm KarstadtQuelle should get public help. Their argument was that they are even bigger and employing more people in Germany than the rescued car company Opel AG. The absence of help and the following insolvency was not comprehensible for the employees. Conversely, KarstadtQuelle faced loads of problems since 2004 und their economic failure was because of structural problems and not a reason of the economic crisis. It is self-explanatory that the government can not help any business which faces problems. To keep in mind this could have caused a queue of other suffering firms. A very important task was the state benefit for cut working hours. Due to the interruption to worldwide demand, loads of export orientated firms received fewer orders. This affair led to an oversupply of employees. With this programme firms were not under constraint to fire employees in order to lower costs. They are able to introduce part time work for their employees.

Analysing the other measurements there are no incorrect decisions. It was necessary to raise support for families and to lower taxes plus dues. Moreover eased possibilities of write downs and lower non-wage labor costs can help businesses to overcome the crisis. In addition, the installed debt brake is a good intention. Germany has to stop further debt financing due to a current debt level of €1.7 trillion. These enormous debts can lead to less belief in the economy which can bring people saving their money and reducing their consumption. Furthermore it is an unfair development concerning next generations who will have to pay these large debts and all the interest.

4. Conclusion

All in all it can be stated that the German government dealt successfully with the economic downturn. The government is the only subject at the moment which is able to create a higher demand and therefore to absorb the economic crisis. Without these stimuli our economy would have been suffering a lot more. Though, it is very important that the determined infrastructure projects will go on as fast as possible. The only serious defect of the two spending programmes is the “Abwrackprämie” as discussed above. Furthermore it is a decisive factor if people will make use of the tax reductions. In times of crisis it is very likely that people will use these reductions to safe money or even to pay their open credits. In this case the effect of tax reductions would not have the needed short term impact. However, to overcome this crisis and setting up for the future there are still some issues and implications for the government which will be discussed in part three.

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Details

Pages
5
Year
2009
ISBN (eBook)
9783640850075
File size
374 KB
Language
English
Catalog Number
v168111
Grade
Tags
Demand stabilization government spending programme financial crisis stimulus package

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Title: Government Spending Programmes - Demand Stabilization