In European and international economic policy discussions, Germany (also thanks to its finance minister Wolfgang Schaüble) is renowned for taking up the role of fiscal policy watchdog. Any call, such as the OECD’s proposal to escape low growth by having a coordinated fiscal policy impulse, in particular in an economy such as Germany with its huge savings surplus, is almost immediately put aside by local policy makers as contradicting their narrative of fiscal discipline.
The article that was published recently in the monthly publication of the German Ministry for Economic Affairs and Energy therefore comes as a bit of a surprise, even if this particular ministry is led by social democrat Sigmar Gabriel.).
First, it insists that there is a wide consensus in the economic literature that public investments do not just trigger a short-term demand effect but can also improve growth performance over the longer term. This then leads the authors to recognise that, because of the positive feedback effects on tax revenues, even (yes, even!) a deficit-financed public investment stimulus can result in improved public finances, certainly against the background of historically low interest rates.
To illustrate this positive potential, the article takes a standard private sector economic approach by expressing the impact of public investment on growth and fiscal revenue in terms of profitability. In other words, how the additional fiscal revenue relates to the initial sum invested.
It turns out that public investment in childcare and education generates the highest rates of profitability: 14% per year with the capital investment being recovered in just 11 years. Training measures to address the lack of qualified staff would obtain a rate of 13%. Meanwhile, investment in research and development is rewarded by an 8.5% rate while that in infrastructure is around 6%.
The economic logic of these numbers is clear: With long-term interest rates now at or even below zero, it makes good sense for the German government to borrow at this cheap rate and invest the proceeds in smart projects that can generate rates of return as high as 14%. Running a higher deficit in this way will improve, not worsen, the state of public finances over the longer term as well as the performance of the economy itself (growth, incomes and jobs).
Moreover, there is also a ‘cherry on the cake”: While previous estimates are based on several existing studies, the ministry also conducted its own research report where the impact of an annual investment of €10 billion (during the first five years) and of €6billion (in the following years) is simulated, corresponding respectively to about 0.3 to 0.2% of German GDP.
The results are striking. Over the long term (20 years), both GDP and jobs are pushed higher (see table). If such investment is channelled into childcare and ensuring all-day school attendance of pupils, half a million more (full-time) jobs would be created. Moreover, the study also delves into the quality of jobs and finds that precarious work would be seriously scaled back by making a 219,000 dent (in term of full-time equivalents) in a-typical jobs such as part-time jobs or mini-jobs. Female workers, in other words, would no longer be forced to take up such jobs as the de facto single option on offer to combine work and family care.
|Infrastructure investment||All day school/childcare||College|
|Of which a typical jobs*||-4.000||-219.000||-8.000|
|Fiscal Profitability Rate||7%||14.3%||8.7%|
|Number of years to earn back initial capital||20 years||11 years||18 years|
* In terms of full time equivalents
This makes perfect sense, from an economic as well as from a social point of view. And, with elections in Germany coming up, it is a good basis for a progressive policy program, showing workers that their concerns about more but also better jobs are being taken seriously.