Balanced Budget and Investment Rule: Two Sides of the Same Coin?! Analyzing the economic effects of a binding public investment commitment in Germany. Bertelsmann Stiftung Inclusive Growth for Germany|7

Böhmer, Michael and Hoch , Markus and Barišić , Manuela and Putzhammer, Fritz (2017) Balanced Budget and Investment Rule: Two Sides of the Same Coin?! Analyzing the economic effects of a binding public investment commitment in Germany. Bertelsmann Stiftung Inclusive Growth for Germany|7. UNSPECIFIED.

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Abstract

In their statement from December 2016, the independent commission of experts for strengthening investment in Germany, appointed by then-Federal Minister of Economics Sigmar Gabriel, calls for a significant expansion of investment dynamics in Germany. Along with proposed measures to strengthen private investments, the commission stresses the importance of creating the kind of institutional and political framework needed to push public investments so as to not endanger welfare and economic growth in Germany. In light of this, this study shows what effects an increase and stabilization of the public investment level in Germany would have. To do this, distinct investment scenarios have been created and their impact on a number of economic and politico-economic indicators up to the year 2025 was measured. The results clearly show that an increase in public investments in Germany would lead to a significant rise in German GDP growth over the following years. Factors like productivity, volume of work and the state’s capital stock similarly show higher increases in scenarios with more public investments relative to scenarios with a lower investment level. Another important result of the study is that such a proposed rule of investment would not have to be in conflict with the already existing debt rule of the federal government. Although scenarios with a higher level of public investment first lead to a lower budget balance, the differences between the individual scenarios become insignificant over time due to both the higher economic growth in those scenarios with more investments and the underlying assumptions regarding the counter-financing of these investments. In all five scenarios observed, the debt / GDP ratio swiftly falls below 50 percent in the year 2025. For the purpose of this study’s calculations, additional investments will be financed through an increase in taxes and a cut in spending on public consumption. The focus of this paper is purely macroeconomic, taking a look at the effects of different levels of public investment on the German economy.

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