After the election: How black and red could come together in economic policy

Migration and the crumbling ability to defend itself after the withdrawal of love by the USA pushed all other issues into the background in the election campaign. Even economic policy - even though Germany is in recession, businesses are closing and unemployment is rising. The designated Chancellor Friedrich Merz (CDU) wants, as he himself says, to get the economy going again. This is essential because without growth, without buoyant state and social income, his promise to reduce taxes and still comply with the debt brake will not work.

The big question is how these plans can be implemented with the Social Democrats if they enter the coalition as junior partners. As is usual when bourgeois and left-wing parties want to govern together, both sides will have to swallow some bitter pills. But that is necessary to move Germany forward, says Monika Schnitzer, the chairwoman of the German Council of Economic Experts. She is calling on the future government to take drastic reform steps. The new Chancellor must urgently tackle "a stability-oriented reform of the debt brake while at the same time bindingly stabilizing future-oriented spending, primarily infrastructure, defense and education," Schnitzer told the FAZ.

She is in favor of a new special fund for defense. The CDU/CSU and SPD do not have a two-thirds majority in the Bundestag for this, even with the Greens. But Schnitzer believes that political trade-offs are possible: "One could perhaps try to motivate the Left to agree to set up a special fund for infrastructure and thereby create leeway in the budget." Otherwise, one could only invoke an emergency situation for defense and use the exception rule. "But the AfD could sue against that in Karlsruhe," the economic expert points out.

How do Merz, the election winner from the not-so-strong Union, and Lars Klingbeil , the new strong man of the weak SPD, want to come together in terms of financial policy? The Union promised significant relief in order to create performance incentives and encourage investment. It wanted to reduce the income tax rate across the board, introduce the top tax rate later and abolish the remaining solidarity surcharge. The Social Democrats wanted to reduce the income tax burden on the bottom 95 percent and get the money back from the top five percent. And of course, to hold on to the solidarity surcharge.

The supposed conflict could become a consensus by integrating the tax surcharge into the tariff and shifting the income limits for the top tax rate and the tax on the rich. 42 percent would become 44 or 45 percent, 45 would become 47 or 48 percent. The financial politicians had already developed such a concept with Merz's approval. When protests arose, the party leadership quickly scrapped these ideas. Now the model could be revived. The SPD could then present a higher top and rich tax rate as evidence of successful negotiations.

The two parties have also differed on the taxation of companies: one wanted to gradually reduce the corporate tax in order to achieve an average total tax burden of around 25 percent with the trade tax. Partnerships should also be able to benefit from this. The SPD rejected these tax cuts as not being very targeted. Companies could use the tax payments saved to buy back shares or invest abroad. Instead, like the Greens, they campaigned for a ten percent premium for investments in their own country. Companies that make losses would also benefit from this. A compromise is difficult here, even if an investment premium is in many ways similar to a special depreciation allowance in tax law. But the signal associated with a lower income burden in international comparisons would be lost.

Tax policy decisions quickly have an impact on federal and state budgets. The question is whether to forego the reduction in VAT on food in restaurants (Union) or on food (SPD) or to finance it by increasing the normal rate. The latter is always attractive from the tax authorities' point of view. And the next government will certainly need more money.

The day after the federal election, there was a debate about whether the old Bundestag should meet again to initiate a reform of the debt brake . The centrist parties still have a majority there that would amend the constitution. The Greens, who have long been pushing for a relaxation, had proposed this. The parliamentary manager of the Union faction, Thorsten Frei, immediately rejected this, but Merz was fundamentally prepared to finance defense spending bypassing the debt rule with the help of extra loans. "We now have four weeks to think about it," he said when asked whether the old Bundestag could still pass a constitutional amendment to enshrine a new special fund for the Bundeswehr.

A key test for the economic policy orientation of the possible coalition partners is how to deal with the statutory pension: if the SPD prevails with its demand to deactivate the demographic or sustainability factor, this would effectively reduce the scope for private and public investment by up to 500 billion euros over the next 15 years. This is because such an amount would then be channeled into additional pension increases. It would be collected via additional social security contributions and taxes from employees and companies, and would therefore no longer be available for other purposes.

The Union has decided against such a position, at the expense of its social policy makers. It promised to ensure so much economic growth that pensions would rise more sharply as a result. The Council of Economic Experts, however, is calling for completely different steps to stabilize pensions: a "pension reform, with an increase in the retirement age," said Schnitzer on Monday. It seems unlikely that the Union and SPD will agree on this. There will be a struggle over whether and how much they will accelerate in the opposite direction.

When it comes to pensions, the question is whether or how much the increase in social contributions and taxes should be accelerated. In order to ease the burden on businesses and citizens and stimulate growth, these would have to fall or at least remain stable. In fact, labor income is particularly heavily taxed in Germany. Without limiting interventions, social contributions will rise to 45 percent of gross wages by the end of the new legislative period; the previous upper limit of 40 percent has long since been exceeded. Health and nursing care funds are heading for further deficits in the billions, even though their contributions have only just increased again.

The Union and SPD actually want to remedy the situation in a similar way: by having non-insurance benefits paid for from the federal budget and not from the social funds. This applies, for example, to pension contributions for caring relatives or health insurance contributions for citizens' allowance recipients. Both together would relieve the burden on the health insurance funds by 14 billion euros a year, which is almost as much as the current federal subsidy. The only question is where all this tax money is supposed to come from. It is unlikely that expenditure will fall as a result of benefit cuts, since 40 percent of eligible voters are over 60 years old. The Union can imagine private supplementary care insurance, while the SPD can imagine a reduction in private offers by introducing citizens' insurance. So there will be no agreement on this.

It will probably also be difficult to restructure the citizen's allowance, at least in terms of the Union's goal of saving six billion euros annually by "abolishing" it. Olaf Scholz (SPD) did appear in the election campaign as an advocate of tough sanctions against benefit recipients unwilling to work. But that is less the position of his party, which wanted to overcome its old "Hartz IV trauma" with the citizen's allowance reform of 2023. It is more flexible when it comes to sanctions than the left wing of the Greens was in the traffic light coalition. But when it comes to getting more able-bodied benefit recipients into self-sustaining employment, it too is not in favor of keeping cash benefits tight in order to increase work incentives. It is relying primarily on more support and thus more funding from the social budget.

And then there is the statutory minimum wage. During the election campaign, the SPD campaigned for a rapid increase to 15 euros per hour. The Union insists on the independence of the minimum wage commission, which will make its next decision in June. If the coalition is to be in place by Easter, the Matadors cannot wait for the result. On the other hand, it is foreseeable that after the many large wage increases due to inflation, the minimum wage will now also be increased significantly above the current 12.82 euros.

There is agreement between the CDU/CSU and SPD that energy costs must fall, especially for companies that consume a lot and are in international competition. The old government has already temporarily reduced the electricity tax to the EU minimum, from 1.5 to 0.05 cents per kilowatt hour. This relief could be made permanent under the black-red coalition.

Both factions want to stick to climate neutrality by 2045 and the energy transition with the expansion of renewable energies. At the same time, both recognize that cheaply generated green electricity alone is not enough. In addition, there are huge system costs, for example for controllable gas power plants as safety capacity during periods of low electricity production or for the expansion of the grid in a decentralized network of producers and consumers.

In order to keep grid fees and thus electricity costs in check, both potential government forces want to subsidize grid expansion. The Union wants to take the money from the CO ₂ revenues in the KTF. It also wants to reduce grid costs by allowing overhead lines to be laid again in the future instead of underground cables. The SPD is aiming for transmission grid fees of three cents per kilowatt hour instead of the current 6.65 cents. This target corresponds roughly to the level in 2023, when there was a subsidy from the Economic Stabilization Fund.

The SPD wants to finance the financial aid for electricity, heat, charging stations and hydrogen networks from a 100 billion euro "Germany Fund". This is also intended to promote housing construction. The fund is to be fed by state and private funds, such as insurance companies and pension funds. The public part will function "within the existing framework of the debt rule of our constitution", promises the election program.

The SPD is keeping quiet about the controversial building energy and heating law, which the SPD passed with the Greens and FDP. The Union wants to abolish the regulation. It is also continuing to rely on the "nuclear energy option", while the SPD rules out the continued or re-use of nuclear power.