Economic Recovery Plan Should Focus on Tax Cuts and Infrastructure

In view of the impending recession the state ought to take measures to back the economy. Tax cuts and state investments in infrastructure are favourable in this context while supporting individual branches or subsidising the purchase of certain goods is considered less effective. These are the major findings of a study conducted by the Centre of European Economic Studies (ZEW) in Mannheim among roughly 300 analysts and institutional investors from banks, insurances and large industrial enterprises in November 2008.

Almost half of the financial market experts asked consider it right to launch a state-run economic recovery programme in order to counteract job cuts caused by the expected recession. Only about 17 per cent of the respondents reject an economic recovery plan. "The financial market crisis has worldwide interfered with the real economy, leading to the severe economic set back in Germany," explains Christian David Dick from the research department "International Finance and Financial Management" at the Centre for European Economic Studies (ZEW) in Mannheim. "Export, which is an important pillar of the German economy, is under threat. Therefore the financial market experts obviously recommend the state to react."

The study also shows that the content of the economic programme strongly influences the financial market experts’ opinion. 67 per cent of the experts consider tax cuts to be the most effective measure, as they are said to spur private consumption. Furthermore experts recommend staterun infrastructure programmes to secure jobs in times of recession. "It would be for example possible to prepone investments in road construction and in the railway network that are originally scheduled for the next years," says Dick.

However, 46 per cent of the financial market experts reject the targeted support of specific branches. Obviously they are of the opinion that such measures would hold back inevitable adjustment processes. Supporting private consumption by subsidising the acquisition of certain goods, for instance electrical devices that are of less electric power consumption, is also rejected by 50 per cent of the respondents as this measure is not considered reasonable.

Regarding the rescue plan for the financial sector, which was passed last month, the majority of the analysts asked stated that it is likely to restore confidence within the banking sector. However, opinions tend to be more cautious regarding the granting of loans. The majority of the respondents are convinced that the rescue plan will not motivate banks to increase private credit and lending to companies.

For further information please contact

Christian David Dick, Phone: +49/621/1235-305, E-mail: dick@zew.de