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Output, prices and public debt under the new German fiscal consensus

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  • Ochsner, Christian
  • Zuber, Christopher

Abstract

Germany is undergoing a major shift in fiscal policy. In response to recent crises and long-term structural challenges, the federal government has introduced a debt-financed spending package that marks a significant departure from past fiscal orthodoxy. This paper investigates the macroeconomic implications of Germany's new fiscal consensus, focusing on how the composition of spending-investment versus consumption-affects inflation, growth, and debt sustainability. Using structural vector autoregressions, we estimate fiscal multipliers across key expenditure types and apply them in a scenario analysis. We focus on three scenarios in which policy makers focus either on consumption, constrained consumption or investment. Our results show that an investment-oriented strategy, particularly those targeting infrastructure and R&D, yields stronger and more sustained GDP growth with more favorable long-term debt outcomes than consumption-oriented approaches. These findings highlight the importance of fiscal quality over quantity. They suggest that strategic allocation of fiscal resources is essential for achieving long-term economic resilience and fiscal sustainability, offering important lessons for Germany and the broader EU as fiscal rules evolve.

Suggested Citation

  • Ochsner, Christian & Zuber, Christopher, 2025. "Output, prices and public debt under the new German fiscal consensus," Working Papers 01/2025, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    • Handle: RePEc:zbw:svrwwp:319647
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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