On 16 May 2023 the IMF published a report following discussions with Germany under Article IV of the IMF’s articles of agreement.
German’s economy has been resilient despite the problems resulting from the Ukraine war and the reduction in energy supplies. The economy was helped by the mild winter and measures taken to mitigate the impact of higher energy prices. Financial conditions have however tightened as a result of measures to reduce inflation and the uncertainty in financial markets.
The IMF is expecting GDP growth to remain around zero in 2023, but to increase to 1% to 2% in the years 2024 to 2026 as the economy adjusts to the energy difficulties. In the long-term average GDP growth is likely to fall below 1% as a result of the effects of population aging, unless there are significant increases in productivity or the labour supply.
In 2023 the support spending in relation to gas and electricity is likely to be lower than budgeted as the energy prices are falling, and there may be greater than expected tax revenue. The IMF report notes that energy relief measures are well-designed, and Germany is maintaining strong incentives for households and small businesses to save energy. Relief measures for households are generally progressive as they are subject to income tax. The government has more scope for targeting the relief to where it is needed. The cost of providing energy price relief could be partly offset through temporary solidarity taxes on higher income households or greater clawback of relief from those households.
In the medium term more fiscal space may be required to allow greater investment. To fund digitalisation, measures to boost human capital and the green transition, Germany may need to carry out expenditure reforms, mobilize additional revenue, or adjust the debt brake rule. Possible measures include reforming property taxes and reducing distortionary or environmentally harmful subsidies.
The report notes that the green transition should be accelerated to achieve the climate goals, and the government should increase domestic carbon pricing in 2024 as planned. The electric vehicle charging stations and the smart grid network need to be expanded. Revenue-neutral feebate schemes (the use of fees and rebates to improve allocation of the costs of negative externalities) could accelerate the green transition. The EU Carbon Border Adjustment Mechanism can reduce carbon leakages and Germany has taken a leading role in creating the Climate Club, an inter-governmental forum for discussion and cooperation on climate-change mitigation policies.
Germany’s labour productivity growth has decreased in recent years, owing to lower ICT capital deepening and weaker multifactor productivity. Also, new business registrations have been decreasing. Productivity could be increased by enhancing incentives to undertake research and development (R&D) by expanding R&D tax credits, and by increasing the availability of qualified workers. Funding for innovative firms could be increased by reducing barriers to the participation of institutional investors in venture capital markets; and by aligning the tax treatment of stock-ownership option plans with international standards. Entry barriers to the market could be lowered for innovative firms by increasing use of digital government, reducing administrative procedures and strengthening the competition framework.
