Germany just announced a plan to cut taxes in order to stimulate their economy. The worlds third largest economy is in a small patch of quicksand right now. It has already hit recession and forcasts are that it will contract around 3% more this year.
Exports are not doing too well as demand for German products fall along with global spending power. Germany was the world’s largest exporter of goods last year. Unemployment is set to increase as the current boom in German employment tops off. This will consequently increase government expenditure in terms of social benefits and welfare.
Reducing taxes at a time like this is a controversial decision. Angela Merkel, the German Chancellor has come under fire because the new policy will lose the government around 15 billion Euros and risk reducing GDP by a further 6% this year.
That is quite a significant amount for a massive economy like Germany. Also with the new tax breaks, the giovernment will be funding a budget deficit. Though Keynesian economic theory states that funding a deficit by reducing taxes can be good for an economy in trouble, as it stimulates inflation, the long term outlook is grim because the any additional cash people recieve will probably be saved instead of spent.
Still, it’s a start. As money is saved this will increase the amount of cash in the economy and stimulate capital investment, which will in turn provide jobs and then create a less uncertain environment and aggregate demand will increase as a consequnece of this. But that takes a long time to happen. And Germany may go through some tough times before it gets to more solid ground.
Meanwhile, though markets are changing and demand for some German exports such as Automobiles, electronics, machinery, foodstuffs etc may be effected by changing market trends or if there is a major change in the geo-political landscape. This seems unlikely in the near future. Though competition like Chinese exports could have posed a threat, they would only do so if not for the tightly bound Eurozone regulations, which Germany is extremely particular about. So any threat to their main exports right now, seems minimal; ensuring a strong core economy into the near future at least.