Abstract

Fiscal Policy 1976 to 1979 torn between Cyclical Stimulation and Budget Consolidation

In the years 1976 to 1979, the fiscal policy of the Federal Republic of Germany was faced with conflicting tasks; on the one hand, gradual reduction of the greatly increased new public debt, and on the other, support by demand-promoting measures of the recovery initiated in 1975 from the of the government deficits in the period under review was sufficient to cope with these objectives, which at least over the short run are divergent. The argumentation follows the line that the regional authorities - considered in retrospect - overstressed consolidation in 1976 and discontinued it in 1977 in favour of renewed expansive measures. In 1978, the public deficit had probably reached a volume appropriate to the requirements of credit market and demand policy, whereas in 1979 the opportunity of slightly reducing new borrowing was not taken advantage of. A further section investigates whether budget consolidation methods were consonant with the objective and the situation. Because from a realistic economic standpoint it is fundamentally impossible to diminish the restrictive effect of budget consolidation by restructuring public revenues and/or expenditures. As the actual trend of the various types of expenditure shows, however, a change of the expenditure structure failed to reduce the restrictive effect of the consolidation. Moreover, the tendency was rather to cut expenditures rather than increase taxes in order to reduce deficits, although the restrictive effects of expenditure cuts are probably greater than those of tax increases. The determining factor for this decision - apart from the danger of inflation which may arise from increases especially of indirect taxes - was probably the fact that, in view of the already higher wage and income tax burden caused by inflation and the tax progression, higher tax burdens could hardly have been carried through politically. From the monetary standpoint, public debt ought to have been converted from fairly long-term to shorter-term paper, choosing marketable and/or rediscountable types as far as possible and endeavouring to place them with private households to the greatest possible extent. On appraising actual developments, however, it proves that the debt policy action taken with respect to debt structure was in essence appropriate to satisfy the postulates, but with respect to volume had hardly any effect and was not sustained persistently. In a concluding section, the question is raised of the extent to which leeway for consolidating measures will be available in 1980 and 1981.