Will Germany's fiscal Big Bertha boost growth or inflation?

A huge fiscal impulse

The financial package agreed this week provides for an additional 500 billion euros in infrastructure spending over the next twelve years, with 100 billion going to the climate and transformation fund and 100 billion to the federal states. In addition, the changes to the debt brake are likely to lead to a medium-term increase in defense spending from the current 2% of GDP to 3.5%, which, at today's prices over twelve years, would lead to additional spending totaling 750 billion euros. All in all, depending on inflation, we are talking about significantly more than €1,200 billion, which corresponds to around 21/4% of GDP per year. This is therefore a huge fiscal stimulus.

Low capacity utilization...

Whether the massively expansionary fiscal policy boosts the economy in the coming years or fizzles out in higher prices depends, first of all, on whether the debt-financed increase in aggregate demand is met with an economy with plenty of spare capacity or one with little. At first glance, the capacity utilization in the German manufacturing sector is well below the average of the past 30 years, according to the relevant surveys conducted by the Ifo Institute.

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