Tax discounts, financial aid, government entry: year after year, the German state subsidizes certain professional groups, industries or individual companies with billions in taxes. The protest is almost knee-jerk when politicians even think out loud about cutting subsidies.
Farmers are organizing tractor blockades nationwide because the federal government no longer wants to keep the price of agricultural diesel artificially low. The hotel and restaurant association warns like a mantra of a wave of bankruptcies in the catering industry because the regular 19 percent VAT has been due again for schnitzel in restaurants since January and the special Corona regulation of 7 percent has not been extended.
“Many people are calling for a reduction in subsidies, but no one voluntarily raises their hand to offer cuts to themselves,” said the chairwoman of “Wirtschaftsweise”, Monika Schnitzer, recently describing the dilemma in the “Rheinische Post” (“RP”). Every spending cut triggers protests from those affected.
Politics does not always remain tough, as was the case with the reduction in the VAT rate in the catering industry, which was limited from the outset due to the pandemic. In the case of the farmers, the traffic light coalition withdrew part of its cuts plans shortly after they were announced.
The discussion about the pros and cons of the state’s billions for agricultural diesel is not new. Ifo President Clemens Fuest, for example, said in an interview at the beginning of 2018: “We have very different subsidies, some even environmentally harmful, such as the agricultural diesel subsidy.” From his point of view, there are “a lot of expenses that could be addressed.”
Politics is having a hard time abolishing subsidies
But for decades, federal governments – regardless of their composition – have found it difficult to abolish state aid that has been granted and in some cases expressly provided for a transitional phase. “Those in charge of politics repeatedly emphasize the need to sustainably cut subsidies. Nevertheless, the declarations of intent are hardly followed by action,” stated the Kiel Institute for the World Economy (IfW) back in 1998.
Political competition in a democracy causes politicians to “take into account the (assumed) will of voters”: “They will only decide on subsidy cuts and tax cuts if they can expect that this will be rewarded by voters in future elections.” , wrote the IfW a good 25 years ago.
The SPD, for example, experienced how ruthless the electorate can be after the “Agenda 2010” pushed forward by the then SPD Chancellor Gerhard Schröder: the Social Democrats were responsible for the cuts in the social system (“Hartz IV”) that were praised by economists but were unpopular among the people was repeatedly punished in the following state elections, and in 2005 Schröder ultimately lost the federal election.
Less subsidies are not automatically better than more
Economists are fundamentally critical of government subsidies. From their point of view, there is, among other things, the risk of habituation effects, and uncompetitive companies could be artificially kept alive at the expense of taxpayers.
The targeted support of individual companies is controversial. The most recent example is the planned ten billion euros for the establishment of a chip factory by the US manufacturer Intel in Magdeburg. “We want to continue to modernize our economy, and this includes semiconductors and the semiconductor industry,” argued Chancellor Olaf Scholz (SPD).
The President of the Leibniz Institute for Economic Research Halle (IWH), Reint Gropp, is critical of the billions spent on semiconductor factories in Germany. Gropp advocates promoting research and development at universities and research institutions as well as in companies instead.
So it depends on what the tax authorities spend money on. “Less subsidies are not automatically better than more subsidies,” said Tobias Hentze from the employer-related Institute for the German Economy (IW/Cologne) in a 2022 interview. “It’s all about what goals are being pursued,” said Hentze. “A subsidy should provide incentives to do something specific, but you shouldn’t get money for something you would have basically done anyway. That’s a fine line.”
Subsidies increased in times of crisis
The state spent billions during the Corona crisis and after Russia’s war of aggression on Ukraine to prevent a wave of bankruptcies and to relieve companies and consumers. “Targeted financial support from the federal budget made it possible to limit the negative economic consequences of the Russian war of aggression on Ukraine in Germany,” the federal government summarizes in its latest subsidy report.
The subsidies that have been increasing for years jumped up during the crises, as can be seen from the annual subsidy reports from the Kiel IfW. Accordingly, federal financial aid for companies increased from around 36.6 billion euros in 2000 to a good 40.7 billion in the pre-Corona year of 2019. According to the plan, in 2022 it would be more than 80 billion euros. The picture is similar for tax breaks for companies, which increased from a good 31.1 billion euros in 2000 to around 38.9 billion euros in 2019. Just over 44.7 billion were planned for 2022.
There are also other sources such as funds from the state development bank KfW, financial aid from states and municipalities or EU agricultural market subsidies worth billions. In addition, unlike the federal government’s subsidy report, the IfW also takes financial aid and tax breaks into non-profit institutions such as statutory health insurance, hospitals or daycare centers into account. According to Kiel estimates, total subsidies from the Federal Republic amounted to a good 148 billion euros in 2000, 19 years later it was around 199.7 billion euros, and in 2022 a good 252.1 billion euros.
“Lawnmower” principle when reducing state financial injections
More than 360 billion euros were planned for last year because the traffic light government wants to promote digital and ecological change. “Subsidies with a focus on climate protection, energy transition, mobility and digitalization also serve this purpose,” says the government’s subsidy report.
But after the latest budget ruling by the Federal Constitutional Court, the federal government has to save money – and is targeting subsidies. The chairwoman of the Advisory Council for the Assessment of Overall Economic Development, Schnitzer, also recommended blanket solutions for reducing subsidies: for example, a percentage reduction in all grants. So: Lawnmower principle – just according to the taste of the IfW subsidy researchers: Some subsidies are more harmful than others. When it comes to making cuts, however, the path of “equal suffering for all” appears to be the more viable option.
