Economic forecast: Economic institutes criticize government relief packages – and warn of inflation
Berlin According to estimates by the five leading economic institutes, the high level of inflation in Germany will subside in the coming year. However, it is precisely the government relief measures planned because of the high energy prices that threaten the decline in inflation.
While the inflation rate in the current year is likely to reach its highest level in 40 years at 6.1 percent, the institutes are still forecasting an increase of 2.8 percent for Germany in 2023. The joint diagnosis was prepared by the RWI in Essen, the DIW in Berlin, the Ifo Institute in Munich, the IfW in Kiel and the IWH in Halle.
The high energy prices are now driving up the price level overall. For the core rate of inflation – i.e. excluding energy and food – the institutes forecast 3.9 percent for 2022 and 3.1 percent for 2023.
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They lowered their economic forecast overall because of the war in Ukraine and the ongoing corona pandemic. For this year, the researchers only expect growth in gross domestic product of 2.7 percent.
Harsh criticism of the tank discount and energy cost subsidy
The federal government has launched two relief packages for consumers and one for companies. In addition to credit programs and social transfers, the packages also include instruments that directly affect prices. These include tax cuts on fuel and the energy cost subsidy for certain companies.
In addition, some measures do not specifically relieve low-income households, which are particularly hard hit by high energy prices. Instead, some of the help is distributed across the board. This applies, for example, to the energy price flat rate and the one-off bonus for children.
The federal government justifies this approach primarily with the fact that it can implement the measures more quickly. However, the economists do not believe that this is the right way to go. “Overall, readjustment seems urgently needed here in order to increase target accuracy,” says the forecast.
It is evident that low-income households are being relieved to an above-average extent by the government’s measures. In addition to the targeted measures, this is due to the fact that some of the other aid has to be taxed.
The relief for the poorest ten percent of the population is 3.8 percent, according to the joint forecast, with reference to unpublished calculations by the DIW. The average relief is 1.3 percent.
But even this relationship is dubious, write the economists. The fact that aid would be granted at all for non-poor households “is problematic for reasons of stability policy”.
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In order to protect the state from the dilemma of having to choose between targeted help and rapid implementation, the institutes are proposing more flexible unemployment benefits. It should take into account rising living costs as soon as possible.
Tank discounts and energy cost subsidies are also counterproductive. Direct price reductions by the state send the wrong signal because they take away the incentive to save energy.
Going it alone in Europe could lead to a subsidy race
In addition, the economists warn against distortions of competition in Europe due to the aid for the economy. “Business aid should be coordinated across the EU in order to avoid a subsidy race,” said IfW Vice President Kooths.
So far, however, the opposite has been the case. Spain, for example, has already launched a relief package worth 16 billion euros. In relation to economic output, Madrid is reacting to inflation twice as strongly as Germany, although the Federal Republic has already introduced comparatively comprehensive measures compared to other EU countries.
Unfortunately, the European Commission gave the green light for such solo efforts, explained Kooths: “Rarely has a uniform EU anti-subsidy policy been as important as it is today.”
In the traffic light, the general criticism of the institutes met with little response. “The federal government is doing everything to ensure that the German economy, supported by smart macroeconomic policies and targeted aid programs, gets through these challenging times well,” said State Secretary for Economic Affairs Sven Giegold (Greens).
The economic policy spokesman for the FDP, Reinhard Houben, also spoke of “tailor-made” help for companies and consumers. His green colleague Dieter Janecek made a similar statement.
However, he sees the need for European coordination: “We must not fall into a subsidy competition that only drives inflation further and hinders necessary adjustments in the economy.”
More: 200 billion euros damage – energy embargo would drive Germany into recession.