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New German Study Makes the Case for Investment in Infrastructure, Refuting Schäuble's “Zero Deficit” Policy

A new report commissioned by the German Industry Ministry report shows that public investments in infrastructure have positive effects not only on productivity, employment and wealth, but also on tax revenues. Its conclusions deliver a severe blow to the absurd Maastricht parameters and to Wolfgang Schäuble’s “black zero” policy of a balanced budget, as it states explicitly that the improvements are achieved through government borrowing – i.e. deficit spending. The fact that the study was commissioned by the German Industry Ministry headed by Sigmar Gabriel, who is Deputy Chancellor and SPD chairman, reflects the split in the coalition government between the SPD and the CDU-CSU, which backs Schäuble's line.

The authors state that:

“public investments involve fiscal costs which are offset by tax returns due to reduced money transfers and higher tax revenues and social security contributions. When a public investment program generates sufficiently large tax revenues, it reduces the government debt ratio for the coming generations.”

The study considers a program of public investments in three areas: transportation and digitalized infrastructure, schooling and higher education. On transportation, it regrettably focuses only on roads, but even such a limited scope is enough to prove the point.

Thus, the study considers a program for roads involving a yearly investment of an additional 10 billion in the first five years and 6 billion in the following years, which would lead, in a prudent assessment, to an increase of productivity after 20 years, equivalent to a financial return of 10%.

The program would produce a budget surplus already after 9 years, and

“the positive effects of infrastructure investments on employment and wages will be evenly spread out among the various household groups. Additionally, long-term unemployment and short-employment both decrease.”

As for all-day schools and day care centers, the study calculates a lack of some 4 million places in full-time facilities for children aged 3 to 18. To provide such places would cost 6 billion per year and a one-shot investment of 20 billion. The government, it proposes, could budget the expense with 10 billion in the first five years and 6 billion in the following years.

The school and pre-school program would have two positive economic effects, according to the authors: first, a gradual increase in the percentage of the working population with a diploma, and second, the possibility for more parents to work if all-day facilities are provided for the children.

This program would increase the GDP by 0.30% in the first year, and reach an increase of 1.1% after 20 years. Jobs would also increase by 174.474 in the first year and by 522.075 in 20 years, as would wages, and the initial budget deficit would give way to budget surpluses after 6 years.

A similar, albeit more modest result, is achieved with the same amount of money invested in universities.

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