ifo President Fuest: More Growth in Germany Requires Prioritizing Investments over Consumption Spending

With the recent pension reform package, however, politicians have shown that their focus is on expanding social spending. “The higher funding needed for pension insurance probably requires higher subsidies from the federal budget. As a result, less funding is available for public investment or for promoting private investment,” writes Fuest. In addition, higher pension insurance contributions would reduce the labor supply and exacerbate the labor shortage.

Fuest does not see relaxing the debt brake as a solution to the investment backlog, saying that although expanding the scope to take on debt for more investment should not be taboo, it cannot replace reallocation. “Calls for more public debt neglect the fact that in an economy with high production capacity utilization and labor shortages, it is not a straightforward matter to expand economic activity through debt-financed government spending. Existing activity is more likely to be displaced,” writes Fuest.