Investment Policy in Germany

The news that Germany's Minister for Economic Affairs, Sigmar Gabriel, had formed an expert commission to develop proposals for bolstering investment in German infrastructure is a welcome sign. While the size of Germany's investment shortfall is disputed, the significance of private and public investment for the country's economic future is obvious. Nevertheless, the commission's recently submitted report is disappointing for several reasons.

First, it seems the members of the commission were kept on a short leash. They failed to address central policy questions, in particular whether higher public investment should be funded by tax increases, additional government debt or fewer government expenditures. Furthermore, if the private sector is to be mobilized, as the commission recommends, then the infrastructure investment projects need to generate returns. Take roads, for example: There is widespread support among experts for peak and off-peak tolls for the autobahn. But the commission only recommends the expansion of already existing tolls for heavy trucks to include lighter cargos and trucks on Bundesstraßen (A-roads), and rules out fees for passenger car autobahn use. From the perspective of transportation and environmental policy, this exemption makes no sense. An important function of a peak toll is to prevent traffic congestion by levying higher prices when demand is highest. Tolls for motorists may be unpopular, but calling for more user financing while excepting the most important user group is not a convincing strategy.

Second, some proposals are problematic from a fiscal policy standpoint. While the commission rightly criticizes the often hasty and oversize cuts in investment when state coffers are low, which results in the deterioration of public infrastructure in the long run, the experts' proposal in that regard is counterproductive: To prevent such an outcome, the commission proposes a policy rule that channels "unanticipated" tax revenues into infrastructure investments. The effect would be to make fiscal policy procyclical, thereby strengthening economic fluctuations. This is because such "unanticipated" revenue occurs in strong economic climates, like the one Germany is experiencing today, while in periods of recession, tax receipts often fall off more sharply than expected. The intelligent move is to counteract the cycle: in economic crisis, governments should invest more; in boom times, when companies have plenty to do, the budgetary surplus should be used to reduce debt.

A third weakness of the report is that it neglects important tax obstacles to investment. It says almost nothing about loss-offset restrictions or tax discrimination against equity, for instance, and offers up oddly comical statements like this one: strengthening private demand is part of a reliable framework for private investment. These lapses bear the unmistaken signs of union pressure. Fortunately, the report does address some key areas of reform, such as giving young and innovative companies better access to the capital market.

What conclusions will politicians draw from the commission report? One danger certainly lies in the inclusion of private investors and infrastructure investments in semi-public companies. These measures can give rise to shadow budgets, where hidden public debt eludes parliamentary control and public debate. Moreover, private investors may be overpaid. The commission report calls for a clean separation between the private and the public area. Time will tell whether politicians decide to heed this advice. A positive effect of the commission report could be that it shifts the current epicentre of public debate in Germany from redistribution policies to increasing economic growth and prosperity.